Taxation:A British government review of business taxation arrangements for the North has recommended no major change to the levels of corporation tax.

Political and business leaders had pressed for the North's 30 per cent rate to be lowered towards the 12.5 per cent rate levelled in the Republic to provide the northern economy, which is dominated by the public sector, with a greater competitive edge.

The report, produced by former head of the Inland Revenue Sir David Varney, at the request of Gordon Brown, concluded a dramatic cut in corporation tax levels would damage the rest of the UK.

Lowering business taxes to the Republic's levels "would certainly come at a long-term cost in reduced resources to be shared by the UK regions or in the financing of public services", Sir David reported.

"The policy would result in a net cost of about £2.2 billion over 10 years, with no prospect of full cost recovery over the long run."

The review highlighted the North's strong economic performance relative to other UK regions since 1989. Strong growth and low unemployment levels led the UK league table, the report added. However, this growth also served to mask structural economic problems, including the scale of the North's public sector.

Rather than looking to a "silver bullet" of a corporation tax cut, the report suggested instead the region's economic prospects should be seen in the context of "general global opportunities and challenges, which include: the rising flows of goods, services and capital; increased international specialisation; greater rewards from innovation; and higher levels of demand for skills".

Sir David added that these trends have "significant long-term implications for an economy which has traditionally been dominated by heavy industry - most notably in shipbuilding, rope manufacture and textiles".

Over the last 30 years, he said, "most heavy industry has been replaced by services, including the public sector. Equally, the opportunities from globalisation are evident in the creation of new markets in other sectors such as information and communication technologies (ICT) and financial services."

Recognising the clamour for a business tax cut, he questioned the potential benefit in terms of foreign direct investment that would flow from such a corporation tax cut.

"The academic evidence is that skills, rule of law, industrial relations, the potential for innovation and the quality of infrastructure are more important in determining the 'business fit' of potential investment," the report said.

Following UK budget policy, the corporation tax rate is due to be lowered towards 28 per cent early next year. The British government has always stressed that the bulk of Northern Ireland's 60,000 companies pay a lower rate of 19 per cent tax. However, this is due to be raised to 22 per cent in 2009.

Sir David is to start work on a second report examining methods of expanding the private sector in advance of an investment conference next spring.