Grim up north, puzzling down south

 

For a Scot watching the evolution of this United Kingdom, one of the more persistently puzzling questions is why northern England appears so content to be ruled from London.

John Prescott's prolonged botching of the Labour government's devolution plans within England came to an abrupt end seven years ago, when the north-east's voters flatly rejected plans that were seen either as too much government or so weak as to be useless.

The coalition government seemed, at least in its early months, to be more interested in addressing the contrasting fortunes of north and south, though without much resource with which to do so.

Today, from the think tank, Institute of Public Policy Research (IPPR) North, based on Tyneside, comes a new push for the north of England to get more powers. It highlights strong stories of regeneration in the pre-crunch decade for Manchester, Leeds, Newcastle, York and Sheffield.

But it argues that the north-south divide continues to widen because the drivers for growth remain concentrated in the south. The analysis highlights the relatively poorer performance of the north-west, north-east and Yorkshire and Humberside regions in business birthrates, research and development spending, and with too many people lacking any qualifications.

And it points out that London and Scotland have more control over their economic affairs, leaving the north of England even further behind.

Of course, Scotland is all too familiar with the problems of business birthrate, R&D spend and the long tail of those who leave school with nothing. But at least it has some powers - and it's getting more - that give it a chance to seek alternative solutions to those imposed from Westminster, even at the risk of those solutions being wrong-headed.

Yet it's a long way from mainstream thinking in northern England for IPPR North to be pushing for anything similar. Following the coalition government's abolition of regional development agencies, the think tank is launching a new commission, with an impressive range of members, to set out a 10-year strategy for economic growth.

Let down

Inevitably, one of the options it will consider is the appeal of lower business tax, nudged in that direction by Northern Ireland and Scotland, where powers over corporation tax has widespread support.

And that's one of the main arguments being deployed against devolution of corporation tax - if devolved to one part to the UK, leading to pressure for others to have the same powers, you can expect tax rates to be lowered competitively. End result: much lower corporation tax around the country, but stalemate over where the advantage lies, and far less tax revenue from big business.

I'm told Stormont is sure to be let down in its cross-party hope of being able to compete with the Republic's 12% tax rate. It may be offered other means of competing with Dublin's tax regime.

And the UK Government last week hinted strongly that the Scottish government could expect to find some unintended consequences from devolution of corporation tax.

£1bn penalty

Michael Moore's Scotland Office issued a Treasury calculation of the impact of Scotland lowering its corporation tax rate to the Republic of Ireland's level.

The headline finding was a gap of, very roughly, £2.6bn in a single year - more than a twelfth of Holyrood's current budget.

That's being used as a warning, with Mr Moore saying "£2.6bn could be removed from the Scottish budget in a single year".

But the numbers are worth picking apart a bit, as the headline figure is not really a gap in Holyrood's budget at all.

The calculation assumes implementation of the tax cut in Scotland this year, and by 2015-16, there would be a £1.66bn gap - the straight-forward reduced tax take resulting directly from the lower rate.

The rest of the headline-grabbing gap is made up of £1bn less tax revenue going to the Treasury as a result of the assumed move of business activity by tax efficient companies from the UK tax base to the lower-tax-rate Scottish tax jurisdiction.

So that's not money lost to Scotland, as the figures seem to imply.

That's tax revenue lost to the Treasury.

It only becomes relevant to Scottish budgeting if the Treasury fully includes the assumed loss of its revenue when it re-calculates the block grant to Holyrood - applying a £1bn penalty for a Scottish corporation tax rate going its own way.

 
Douglas Fraser, Business and economy editor, Scotland Article written by Douglas Fraser Douglas Fraser Business and economy editor, Scotland

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