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UK government’s Xmas gift: A double Northern Irish?

British finance minister George Osborne
Dan Kitwood / Staff | Getty Images News | Getty Images

George Osborne, the U.K's Chancellor of the Exchequer, might be about to help Northern Ireland compete with its southern neighbor on tax – but he risks angering Scotland.

Politicians in Northern Ireland, which is part of the U.K., have long protested that independent Ireland's low corporation tax rate of 12.5 percent, together with the opportunity to exploit tax loopholes like the soon-to-be abolished Double Irish, has helped attract big-name companies like Apple and Facebook.

Ahead of Osborne's traditional winter statement to Parliament on the state of the U.K. economy, there have been reports in the media of a devolution of tax powers to Northern Ireland. This has been seen as an attempt to to ensure support from Northern Ireland's Democratic Unionist MPs, in the event that the Conservative Party has to form a minority government post-election.

Yet the devolution of tax powers to Northern Ireland could anger another regional player, the Scottish National Party, just after a referendum resulted in the Scottish people voting narrowly to stay within the U.K.

The Chancellor's Autumn Statement, as it is known, which is announced on Wednesday, is one of the biggest milestones in the U.K.'s economic year. With just five months to go before an expected General Election, it should be his opportunity to lure the electorate with a few headline-grabbing measures.

However, his budget is particularly tight at the moment. The government is expected to miss its targets for reducing the U.K.'s deficit, the amount the government has to borrow to meet the difference between its tax take and public expenditure.

"Back in 2010 the Chancellor was planning for austerity to be almost over by now, with borrowing down to under £40 billion ($62 billion) a year and the structural deficit all but eliminated," Rob Wood, chief U.K. economist at Berenberg Bank, wrote in a research note.

"But the spending restraint will now have to continue for probably all of the next parliament."

When he took over as Chancellor of the Exchequer in 2010, Osborne had hoped to reduce the deficit to close to £40 billion in the 2014-15 financial year, and eliminate the U.K.'s underlying deficit by now.

Yet tax receipts have been weaker than forecast, despite one of the healthiest growth figures in the developed world, and public borrowing is likely to come in closer to £100 billion for the year, more than £10 billion than more recent forecasts.

The definition of the U.K. deficit has changed since his targets were first set, as it now does not include the U.K.'s stakes in its banks – but this is still a hefty gap. The problem appears to be that income tax has not risen as much as hoped. While employment figures have been better than hoped, many of the jobs appear to be part-time or less well-paid, and wage growth has lagged behind inflation for some time.

"Spending is, broadly speaking, not the problem: it has risen roughly in line with forecasts made by the Office for Budget Responsibility in March. It is revenues that have fallen short," Liz Martins, UK economist at HSBC, wrote in a research note.

Otherwise, the mini-budget looks to be, in the main, a recycling exercise. Other measures expected include a £15 billion road building programme, much of which has already been announced by Prime Minister David Cameron, a further £2 billion for the National Health Service, which was announced at the weekend, and more funding to commercialize research, which has long been an aim of the government.