While the two major parties in the UK are engulfed in fractious contests over their leaderships key decisions may already have been taken with decisive implications for British-Irish and British-Irish-US economic relations.
The British Chancellor, the equivalent of the Treasury Secretary, has announced he plans to cut the UK’s corporation tax from 20 percent to less than 15 percent to attract business currently deterred from investing in a post-Brexit Britain.
This move, yet to be publicly endorsed by any of the Conservative candidates, but unlikely to have been taken without consultation with some of them, would take the British corporate tax rate very close to the 12.5 percent rate that applies in Ireland.
The announcement strongly suggests that Ireland and the UK will become strong inward investment policy rivals rather than friends—even before Article 50 of the EU Treaty of Lisbon is invoked to trigger the UK’s secession from the EU.
Osborne’s declaration will oblige Ireland’s Government to update its contingency plans—to defend its existing low corporate tax policy within the EU, but now without its previous UK ally.
Dublin now has to reconsider how to use its bargaining power over the terms of any secession agreement the EU will reach with the UK.
The necessary shift in policy orientation may jeopardize the staying power of the recently installed Fine Gael minority government in Dublin. The political beneficiaries in independent Ireland may be Fianna Fail and Sinn Fein—as seen in the first public opinion poll held in the South after the UK referendum.
The major loser from Osborne’s announcement is Northern Ireland. The power-sharing Northern Ireland Executive had agreed to cut the region’s corporate tax rate to the same as Ireland’s, by 2018, and with considerable pain had accepted London’s recent austerity terms (major cuts in grants) in order to achieve this goal.
Belfast’s new inward investment strategy now lies in ruins.
Northern Ireland now finds itself no better placed in competition with Great Britain, and about to lose its inside the EU status, with which it had hoped to increase US investment.
Arlene Foster and the leaders of the Democratic Unionist Party have questions to answer.. They backed the vote to leave the UK, against the majority of the population in the North, who voted 56-44 to remain in the EU.
Sinn Fein also faces difficulties, but unlike its DUP partner it firmly supported remaining within the EU—not least because it fears the re-erection of a customs, immigration and security border between the South and North.
Osborne’s decision has wider ramifications. One touted future for the UK outside the EU has been the Norwegian option—in which the UK would have access to the single market, pay a membership fee, but accept its market regulations—including the freedom of movement of all EU citizens.
The corporate tax-rate in Norway stands at 27 percent, so one question is whether Osborne’s announcement now preempts the Norwegian option.
Since all the Conservative candidates to be Prime Minister have signaled opposition to free movement, while all EU institutions have declared that free movement is a precondition for access to the single market, Osborne’s move may signal the end of the Norwegian option.
Perhaps Osborne’s maneuver is just a short-term panicked measure, intended to stop capital flight, and to shore up the UK’s bargaining posture?
But if Osborne’s corporate tax cut becomes embedded in UK policy it suggests becoming a tax-haven will be London’s new policy. If so, that will certainly affect bargaining with its former EU partners, and how the next US President and Congress will regard the UK.
Osborne’s move will win no French or Irish friends and may damage the UK’s relations with other EU states (and those who wish to ensure US corporations pay tax in the US).
It has likely weakened the attractiveness of all the other tax havens within the UK’s power—Jersey, Guernsey, the Isle of Man, Bermuda and the Caribbean Crown dependencies.
Will the EU’s member-states coordinate on a common counter-response, or will Osborne’s move accelerate beggar-my-neighbor corporate tax competition?
Fast, hectic, and irresponsible decision-making now haunts policy-making in London.
Relations with all the UK’s devolved governments have been destabilized—none are run by Conservative administrations.
Scotland’s Government’s request to stay in the EU has been stiff-armed—even though 62 percent of its public voted to remain. The Welsh Government, whose people voted to leave, has demanded an immediate revision of the Barnett formula—through which the devolved governments are funded.
Multiple proposals are being advanced to calm the deepening constitutional crises.
Some counsel delay in invoking Article 50; others have called for a second referendum; and yet others have called for distinct referendums in Scotland and Northern Ireland. I have proposed a compromise in which Scotland and Northern Ireland would stay within the EU inside the UK, in accordance with the wishes of their respective publics (see link), while England and Wales would leave the EU, i.e., a constitutional salvage operation.
But while all these potential responses are contemplated, the leadership crises in the two major UK parties, which have a radically diminished presence in Scotland and Northern Ireland, will not be resolved until September.
Until Article 50 is invoked, and UK policy preferences becomes clear, it seems unlikely that prudent US investors will embark on new commitments in Great Britain, despite Osborne’s fresh enticement.
Who would trust a government that has thrown its policy and budgetary framework into chaos by losing a referendum it did not need to hold, and when it is manifest that neither the remainers nor the leavers has anything resembling a costed plan to cope with the consequences?
Some British Conservatives and their supporters have proved histrionic, vague, emotional, romantic, and oblivious of long-run or strategic rationality—exactly the condemnations they once applied to the Irish.
* Professor Brendan O’Leary, an Irish and US citizen, is Lauder Professor of Political Science at the University of Pennsylvania, a Member of the US Council of Foreign Relations, and advised parties and governments during and after the making of the Good Friday Agreement.