The Beginning of a Regional Tax Policy?

I've just read this post on Dylan Jones-Evans' blog in which he raises the possibility of a regional tax policy.

One of the promises in the Tories' manifesto was:

... for the first two years of a Conservative government any new business will pay no Employers National Insurance on the first ten employees it hires during its first year.

2010 Conservative Manifesto, p16

However yesterday's Observer reported that this would now not be applied to London, south east England or eastern England. Putting this alongside the tantalizing prospect of Northern Ireland getting a different rate of Corporation Tax on p84 of the same manifesto:

We will produce a government paper examining the mechanism for changing the corporation tax rate in Northern Ireland, in order to attract significant new investment.

... it is little wonder that DJE senses that we might be on the verge of something that could have very far-reaching consequences for decentralizing the UK economy.

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My first comment is that the Tories are probably not as well-organized as that. Certainly the mechanism of applying the NI holiday to only some of the nations and regions of the UK had not been thought about a couple of months ago, and this suggests that the Tories are doing nothing more than making it up as they go along. If I were a Tory businessman in one of those regions in the south east corner of England, I might well be pretty angry that my party had not only gone back on its promise, but done so in a selective, arbitrary way.

Yet it is undoubtedly a good decision, because the UK has a much greater inequality of wealth between its richest and poorest parts than any other EU member, as we can see on this map. As I have said on many occasions, this is a structural problem with the UK economy (indeed the UK as a whole, for over-centralization of the economy goes hand-in-hand with political over-centralization) and therefore needs to be addressed in more radical ways than have been attempted up to now. This will be the first time—so far as I'm aware—that different tax rules will apply to different regions of the UK. It will be a ground-breaking departure from previous policy.

Now I suspect the decision has much more to do with saving a bit of money than being done out of principle (for if it were a matter of principle, it would surely have been in their manifesto) but what the Tories lack in principle, they often make up for in pragmatism. I think the Tories might well find themselves amazed by how well such simple tools can work, and start looking at using them on a wider basis.

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Turning to Corporation Tax, it isn't really clear what the Tories have in mind for Northern Ireland. There have been calls for NI to have a lower rate for years, closer to the Republic's 12.5%. The wording of the manifesto seems to suggest that they would like NI to have a lower rate if only they can find a mechanism by which to do it.

If so, that is a very welcome move away from what happened under Labour, who refused to contemplate it on the grounds that:

From a UK-wide perspective, the overall case against a reduction in the corporation tax rate in Northern Ireland is more marked. The likely displacement of both capital and profits from the rest of the UK, and the fact that this would be subject to a lower rate of corporation tax, mean that a reduced rate of corporation tax for Northern Ireland would certainly come at a long-term cost in reduced resources to be shared by the UK regions or in the financing of public services.

Varney Report, December 2007

For those of us who are concerned about the negative effects of over-centralization, the "displacement of both capital and profits from the rest of the UK" is precisely what is so urgently needed. So the Tories' position on this is welcome ... but if the Tories now consider it appropriate for NI, why should it not be considered equally appropriate for Wales and Scotland?

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The two decisions are linked in this way: both appear to be examples of Tory pragmatism without principle. It isn't right to treat Northern Ireland as a one-off special case for Corporation Tax purposes, nor is it right to treat the three south eastern regions of England as a special case over National Insurance. Instead, what is needed is an over-arching framework within which such variations can operate.

And this is where the Tories get it all wrong. They are seeking to make these decisions centrally and impose them on the nations and regions concerned. They might be good decisions, but that's not the point. The point is that variations in tax rates need to be decided by the nations and regions concerned, not imposed by central government at Westminster.

The point is that Northern Ireland shouldn't have to go to Westminster and ask them to set a lower rate of Corporation Tax, but for the Northern Ireland Assembly to be given the power to decide the rate for itself ... and vary it from year to year as it sees fit. But the necessary corollary is that Northern Ireland must bear the fiscal responsibility of getting more or less money as a result of their decision. If this doesn't happen, simply giving them a reduced rate of CT will be an unfair subsidy ... and therefore against EU rules. The Varney Report identified these three criteria (p43) for regional tax variation as a result of the Azores judgement:

•  the region must have the political and administrative authority to introduce its own tax rate;

•  the national government must have no authority to influence such a decision; and

•  the region must bear the full fiscal consequences of introducing its own tax rate and in particular must not be compensated by the national authorities for a loss of tax revenue.

But it is wider than that. The whole point of reducing CT in NI would be to make NI a more attractive place to do business; employing more people who would pay tax and taking people out of unemployment. Therefore if CT were reduced, some mechanism would need to be set up to reflect any increased tax take and reduced benefits spending.

In short, managing the economy is rather like flying a plane. The pilot has all sorts of levers on the control panel, but if one is adjusted it almost certainly means that others have to be adjusted to keep the plane in the air. Devolving control of one lever without allowing the devolved administrations any control over the other levers is worse than useless.

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So yes, like Dylan Jones-Evans I too am excited by the possibility that a UK government might finally allow some regional variation of taxation. But the implications are much wider than they appear at first sight. The fundamental principle is that such decisions cannot be imposed by Westminster on the nations and regions of the UK, even if we happen to agree with them. These decisions can only be made by the nations and regions themselves. It is the power to make these decisions for ourselves—and of course accept the consequences of them—that needs to be devolved.