George Osborne will signal his backing this week for the devolution of corporation tax to Northern Ireland, in a politically significant move which would allow the province to compete with super-low business taxes in the Republic of Ireland.
The commitment will be part of the chancellor’s Autumn Statement on Wednesday, with Mr Osborne struggling to find good news against a backdrop of very tight public finances and a deficit which is barely falling.
Ahead of the statement, ministers will set out on Tuesday support for flood defences, a new garden city and funding for an elite cultural and research centre at London’s Olympic park.
Meanwhile Danny Alexander, Liberal Democrat Treasury chief secretary, has warned that devolving corporation tax to Belfast now would be seized upon by the Scottish National party, which wants to exercise the same powers in Holyrood.
Nicola Sturgeon, Scotland’s first minister, has described as “inadequate” the powers offered to Scotland by the main Westminster parties last week.
But Mr Osborne believes that Northern Ireland is a different case to Scotland, because it does not share a land border with the rest of the UK.
David Cameron said this month that the chancellor would set out “a path” to giving Stormont more powers over business taxes to allow it to compete with the 12.5 per cent corporation tax in the Republic of Ireland; in the UK the rate is 21pc.
The prime minister said he also wanted to create the conditions for Northern Ireland to break from its dependence on the public sector. “We need to find ways to regenerate the private sector,” he said.
The devolution of corporation tax is supported by all the Stormont parties but could be politically significant; Tory officials are already discreetly sounding out the eight Democratic Unionist party MPs about the possibility of an electoral pact in 2015.
Mr Osborne’s Autumn Statement will contain an unusual mix of economic news, with growth forecasts for 2014 and 2015 being revised upwards but also with warnings that the cyclical upswing is not feeding through into improved borrowing figures.
This has forced the independent Office for Budget Responsibilty to tell Mr Osborne that more of the deficit is persistent and will not go away with catch-up growth.
Under the new national accounting definitions, the deficit is likely to exceed £90bn this year, down slightly but still more than 5 per cent of national income and higher than France and Italy.
Mr Osborne’s room for manouevre has been constrained by weaker than expected income tax, property taxes and oil revenues, while higher EU contributions are also increasing borrowing.
The OBR will show the government’s target measure of the current budget, excluding net investment, to be more than £50bn higher in 2014-15 than it had hoped at the time of the emergency Budget in 2010.