David Gauke, the Exchequer Secretary to the Treasury, has written an article for the Scotsman detailing the UK Government’s approach to estimating how much it would cost to reduce corporation tax rates in Scotland to 12.5%. This comes after the Secretary of State for Scotland presented an HMRC paper on the subject at his recent appearance before the Scottish Affairs Committee on 13 July.
The article is reproduced below:
There has been a great deal said and written recently, much of it on the pages of this newspaper, about the devolution of corporation tax from Westminster to Holyrood. And while the Scottish Government has stated its intention to pursue this, it has yet to offer an analysis of the impact such a move would have: what the costs would be, and the economic advantages and disadvantages.
Clearly this is an important and contentious issue, and one which merits an informed public debate. As the Treasury Minister with responsibility for the UK’s tax system, I am keen to help that happen. Last week I published a preliminary estimate of the magnitude of the costs Scotland would face were the Scottish Government to reduce corporation tax rate to 12.5%. These figures, based on early analysis by HM Revenue & Customs (HMRC), show that the costs could be as much as £2.6 billion per year. I am pleased that this has generated much interest and comment, and is contributing to the debate.
The UK Government has been clear from the outset that HMRC’s analysis was an estimate of the potential costs, and one that is based on certain assumptions. Of course, it is impossible to estimate costs with 100% accuracy; that is why they are called estimates. In this context, we must use the best estimates available to inform the debate, and have done so by building on methods used, and previously approved, by the Office for Budget Responsibility for costing UK-wide reductions in corporation tax. I fully stand by the approach taken in HMRC’s analysis.
What is certain is the magnitude of the costs that would be involved - in the order of billions of pounds. This would be the case regardless of the precise assumptions used and when the devolution of corporation tax might take place.
It has been suggested that HMRC’s analysis is focused on the cost to the Exchequer, rather than to Scotland, and that it does not take account of the benefits to the Scottish economy of a corporation tax cut. But the costs to the Exchequer are the costs to Scotland: under European law, Scotland would have to bear the costs to the UK of a reduction in corporation tax. How to cover these costs would, of course, be a decision for the Scottish Government. This would involve reducing public spending or increasing the rates of other devolved taxes, or a combination of the two.
That is not to say that cutting Corporation Tax - done to the appropriate degree and at the appropriate level - does not bring economic advantages. The UK Government recognises the benefits of lower corporation tax rates and we have committed to reducing them across the UK to 23% by 2014-15, (which, contrary to some claims, is taken into account in the estimates set out for Scotland.)
But we must be realistic about the costs that will be involved in Scotland. Surely the most important question is: Would the benefits justify the costs? These benefits need to be measured against the costs.
To pretend that there are no costs and that cuts in corporation tax will be self-funding is simply wrong.
I believe it is important to have an open discussion on both costs and benefits - that is why we have set out these estimates.
The Scottish Government is also due to publish a paper setting out its proposals for corporation tax - we will welcome this and will consider it fully. I hope that it will not only set out plans for minimising cost but will also suggest how this would be funded, and how the potential impact on the rest of the UK would be minimised. As the UK Government, we need to consider the impact that separate regimes would have on businesses operating in the UK, the efficiency of the tax system and the attractiveness of the UK as a whole to new investors.
As a Government, we recognise the arguments for lower corporation tax rates. But if the Scottish Government wants to go beyond the reductions for the UK as a whole, there has to be an understanding of the full consequences that the devolution of corporation tax would have, both on the Scottish budget and on the rest of the UK.
This is why the UK Government has shared its analysis with the Scottish Government. If we are going to debate the devolution of corporation tax to Scotland, there has to be an acknowledgement that it is a policy that has costs.
And it is for the advocates of the policy to answer the question: how are they going to pay for it?