THE ANNOUNCEMENT by the British government that it is willing to allow Northen Ireland to reduce its corporation tax rate to the level of that pertaining in the Republic is a moment not just of fiscal significance, but of some constitutional importance.
The possibility is outlined in a Treasury consultation paper, Rebalancing the Northern Ireland Economy, which sets out the likely advantages and costs of a reduction in the North's 28 per cent rate to the Republic's 12.5 per cent. The paper, whose main emphasis is on shifting the North's state-dependency to private-sector-driven growth, suggests the effect would be to boost foreign direct investment to the North by a hardly overwhelming 6 per cent a year and to enhance growth prospects.
EU state aid rules, established by the European Court of Justice in the "Azores Case", require that regions within member states cannot enjoy specially favourable tax regimes unless these are introduced by devolved assemblies which enjoy the right and duty to vary and raise tax. Any corporation tax reduction must therefore be accompanied by a signifcant transfer of powers over taxation from Westminster to Belfast, a process of fiscal devolution that is arguably comparable in its effect on the jurisdictions and characters of both Assembly and Executive to the earlier devolution of police and justice powers. A direct link between the political responsibilities for taxing andspending elevates mere administration to the level of government.
Not surprisingly, the prospect of such privileged treatment for the North has angered Scottish parties. They are engaged in discussions over the Scotland Bill’s proposals for more limited devolution of the power to raise and spend a third of income tax locally. Corporation tax as well as enhanced borrowing powers are part of their wish list.
But although the initiative has been broadly welcomed in the North, long jealous of the Republic’s regime, discussions about implementation are likely to prove difficult. The British Treasury, in line with the Azores judgment, will also require that the resulting cost of any devolved fiscal measures be contributed locally. The paper puts the inevitable cut in the Westminster block grant to the North at up to £300 million a year, a hole that will have to be bridged either by further public service cutbacks or new local taxes. Such challenges will be a test of the real limits of power-sharing.