By Tim Montgomerie
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We sometimes talk about the subsidy that Scotland receives from the rest of the UK via the Barnett formula*. But the part of the UK that receives by far the most public sector intervention is Northern Ireland. Public spending accounts for over three quarters of the economy in Northern Ireland (in large part for many obvious historical reasons). In a speech last night, in Belfast, Owen Paterson, Secretary of State for Northern Ireland, put the figure at a Soviet 77.6%.
Mr Paterson spent most of his speech arguing that the province should embrace the same kind of welfare reforms that Iain Duncan Smith is enacting over here, in London. He made a robust case for paying off Labour's debts. A smaller welfare state and reduced borrowing can only be part of the solution to Northern Ireland's unbalanced economy, however. It's at least as important that Northern Ireland's private sector grows.
In pursuing this aim Owen Paterson has convinced George Osborne to establish a ministerial working party to examine whether the NI Executive and Assembly should have freedom over the rate of its corporation tax. This isn't a small matter. Businesses have flooded into southern Ireland in recent years because it has a much lower corporation tax rate than in the 'Six Counties'/ Ulster. NI has a big enough handicap because of the legacy of the Troubles. A high corporation tax makes it extra hard to compete with the south.
'GROW NI' has been established by the NI Chamber of Commerce to argue for the implementation of Owen Paterson's policy. The group supported by KPMG estimate that a corporation tax rate of 12.5% would attract many new companies to NI and create tens of thousands of private sector jobs. The group says that the policy would soon pay for itself. This is essential to making the policy acceptable to the Treasury and the NI Executive. Under EU law corporation tax can only be cut within a nation if the block grant from the ministry of finance is also cut by a proportionate amount. 'GROW NI' argue that "the upfront cost of reducing corporation tax is anticipated to pay for itself many times over during the next couple of decades." They continue: "In effect the upfront initial costs should be seen as an investment into Northern Ireland’s future rather than as an irrecoverable cost."
The rest of the UK can't pay for Northern Ireland forever. Owen Paterson's corporation tax policy might not only be good for the unemployed of Armagh, Lisburn and Newry but, in due course, might become a model for Edinburgh and Cardiff and initiate tax competition across the UK.
* Iain Stewart MP recently argued that the talk of the subsidy might be misplaced.