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Dublin-style tax cut for Belfast a risky ploy

Northern Ireland has picked an awkward time to revisit its sectarian past. Rioting in Belfast rekindles memories of the province's bitter struggles between those who want to be a part of a united Ireland and those who want to remain part of the United Kingdom. A local council decision to limit when the British flag can fly above Belfast City Hall has provided the spark. But the effect of austerity on an underpowered and heavily subsidized economy is probably providing the fuel.

Spending cuts levied by London hit Northern Ireland disproportionately, because the economy relies heavily on Westminster for financial support. The €12-billion ($19-billion) of domestic annual tax revenue only covers about half of Northern Irish spending, according to Oxford Economics. The rest comes from other U.K. taxpayers. Almost a third of jobs in Northern Ireland are in the public sector, against a fifth on average for the U.K.

Radical solutions may well be required. Quite apart from anything else, Northern Ireland's consumers and businesses have a huge leverage problem following a 50-per-cent fall in property prices. Transferring loans to some kind of state-funded bad bank could help.

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It would also help if Northern Ireland had a larger private sector. In pursuit of that, one idea is to cut the corporate tax rate from 23 per cent to the 12.5 per cent paid south of the border, in the Republic of Ireland. If Northern Ireland became a haven for foreign direct investment, more jobs and tax might ease sectarian tensions and please London.

But turning Belfast into a tax haven carries big, probably unbearable, dangers. Ireland's success attracting foreign investment has had a lot to do with other tax goodies, such as its treatment of dividend income from foreign subsidiaries. Meanwhile, other relatively impoverished U.K. areas would hardly take kindly if their firms and workers decamped to Northern Ireland.

Most of all, EU state aid rules may also require Belfast to reimburse London for lost tax receipts, which could cost as much as £500-million. If the corporate tax cut failed to generate additional revenue, Westminster's block grant might have to be slashed. And in a volatile social environment, that could worsen the levels of unrest.

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