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Autumn Statement: Comment

Will business relocate to a low-tax Northern Ireland and will oil tax cuts save the North Sea?

Help for the oil industry, airline passengers and homebuyers, even something for hard-pressed savers. This Autumn Statement was never billed as a give-away mini-budget, but the Chancellor threw us more titbits than we might have expected.

The Chancellor’s statement also contained the usual smoke and mirrors tactics: his targets on cutting the public deficit will be achieved by a continuation of the austerity programme.

Cuts outlined in the small print public spending as a proportion of GDP will fall from 21.2% to 12.6% over ten years from 2009 to 2019. Of course, the still substantial cuts to come were largely brushed over.

Aside from the above, the big talking point in Scotland, as I revealed last Friday, was the conditional approval of corporation tax powers for Northern Ireland. If discussions at Stormont prove that the tax can be managed in the province, then legislation will be pushed through during this parliament.

This was always going to be a contentious issue in Scotland given that the SNP wanted the ability to vary corporation tax among a number of others that would give it greater control over the economy.

John Swinney, the Finance Secretary, yesterday disputed the arguments that Northern Ireland is a special case because of its political history and the fact that it shares a border with a competing nation that has a far lower rate of tax (12.5% against the UK’s 21%).

Swinney, who had complained about the omission of this power in the Smith report, was unimpressed, stating: “I see no good reason not to devolve the tax to Scotland”.

Others share his view, and with some justification. There is some concern about the impact of a sharply lower tax in one part of the UK. It somewhat undermines the argument put forward by the unionists that the UK single market needs to be kept intact.

Businesses, however, have shown a willingness to let Northern Ireland break the tie for the reasons stated above, while strongly arguing that Scotland needs to share the same rate of tax as the rest of Britain because of the issues that bind them.

Scotland has powerful energy and financial services sectors which are umbilically linked to the rest of Britain. It is also a big exporter. Northern Ireland, on the other hand, has no standout sector and is, what one of the province’s economists described as a “hopeless importer”.

Businesses in Scotland told the Smith Commission that they regarded retention of a unified corporation tax as a “red line” issue. There was a fear that in a “race to the bottom”, companies would relocate their taxable profits to the lowest tax regime. Strangely, this same argument does not seem to apply to Northern Ireland even though ome companies in England, Wales and Scotland may see Northern Ireland as a handy place to relocate their head office.

Labour’s Margaret Curran tried to argue that they could already take advantage of the Republic’s lower corporation tax rate, but she rather naively ignores the fact that it is a foreign country with its own legal, fiscal, regulatory and currency arrangements. The North does away with these cost and bureaucratic concerns and offers the same operating structures as the rest of the UK.

Assistance for the oil and gas industry to offset the effects of the falling price of a barrel was an early victory for Aberdeen and Grampian Chamber of Commerce which only recently called for action to prevent a slump in exploration and production. The Chancellor has been commended for listening. He may also be mindful of the awful error he made in 2011 when he hiked oil industry taxes and prompted a devastating collapse in activity.

Even so, critics say he has failed to map out a long-term strategy for the sector or understood how much the fall in the oil price will impact on development. Some wanted a bolder and more simplified restructuring of oil taxes, including significant relief for developing new fields that risk being abandoned.

The autumn statement promised to be more of a Budget than the Budget itself and Osborne certainly delivered a range of changes that will be difficult to exceed in the Spring. Of course, he has an election to fight and was clearly in the mood to offer a few winter warmers  in the run-up to Christmas and beyond. The lift in income tax thresholds was a surprise, but clearly aimed at softening up the electorate.

Rather cutely, and whether deliberate or not, he wrong-footed the Scottish government with his announcements on air passenger duty and stamp duty. He knows APD may be devolved to Holyrood, but by announcing a cut of his own he has thrown down a challenge as to how Scottish ministers may respond. Likewise on stamp duty. This was already devolved and Swinney has unveiled his alternative – the land and buildings transaction tax – and his own bandings.

It was also likely that the English would not hang about on APD as Westminster knew that the English airports would not tolerate a lower rate in Scotland.

This tit-for-tat style of politics is likely to become something of a feature as more powers move north.

 

 

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