UK Government responses to Parliamentary Select Committee reports aren’t often particularly interesting documents. They usually involve the Government welcoming those parts of its policy that are endorsed by the committee and side-stepping or pooh-poohing criticisms. Few reach quite the level of disdain that the Treasury reached for the report of the Lords Barnett Formula Committee, but a warm and broad welcome is a rare experience.
Even by those not-very-high standards, the UK Government’s response to the Commons Northern Ireland Affairs Committee’s report on Corporation Tax in Northern Ireland is interesting. The Committee’s report was published in May 2011 and is available here. (My post discussing the report is HERE, and my evidence to the Committee is HERE). It gave a pretty warm welcome to the proposed devolution of corporation tax, which has attracted widespread support in Northern Ireland. The UK Government’s position has remained rather ambivalent. In its response to the ‘Rebalancing the Northern Ireland Economy’ consultation in March 2011 (available here), it said it had taken no final decision. A joint ministerial working group started work in December 2011, to try to resolve the practical issues devolution might present, and implying that a decision in principle had in fact been made. There has still been no clear statement of what UK Government policy is on corporation tax devolution, however.
The Government response to the NIAC report, published on Monday and available here, clarifies that there still is no clear policy. The UK Government emphasises at the outset, ‘No decision has yet been made on whether to devolve corporation tax. A decision will be taken following the conclusion of work developed by the joint ministerial working group, which is expected in summer next year.’ Overall, the UK Government is much less warm about the advantages of devolving corporation tax than NIAC was, stressing the complexity of the issue. The UK Government is clearly happy to accept that Northern Ireland is a special case and to distinguish arguments for devolving corporation tax there but not in Scotland, though it is also concerned to maintain the single UK economy. In that sense, its position could be seen as a step back from the go-ahead that was implicit in the formation of the ministerial working party.
The economic effects of devolving corporation tax are one side of the equation, and there remains considerable debate about its value. Even at best, however, those effects will take some time to materialise. The other side of the equation – which will have a much more immediate and direct impact – is its effect on the block grant, however. To calculate the cut in the block grant, two things are needed: the amount of revenue actually generated by the tax, ideally over several years so there’s some evidence for how it varies in different economic conditions, and a decision about the methodology for deciding how the cut will be adjusted in subsequent years. The latter is a tricky issue, and it remains a major omission from the UK Government’s Scotland bill. There’s a very good analysis of this in chapter 5 of the Holtham Commission’s final report; in essence, either the cut can be indexed to changes in the devolved or the relevant UK tax base, or assessed as a nominal amount and then uprated proportionately or by an inflation deflator. Whichever approach is taken, the starting point has to be the current revenues from the tax in question.
However, in the case of corporation tax in Northern Ireland, we have no real information at all. Worse, not only does the Government admit its ignorance about how much corporation tax might be attributable to Northern Ireland, it adds that ‘while this would be needed for a devolved system, the administrative burden [ascertaining this] would create would not be justifiable unless the Government were committed to devolution’.
This is circular reasoning taken to an absurd limit. That information is exactly what is needed for policy-makers to be able to understand the impact of devolving corporation tax. A sensible decision can only be taken when the amount of tax generated in Northern Ireland is known and the likely impact on the block grant can be assessed. To proceed with work on devolving the tax without making that the first priority shows a fatal lack of seriousness, either by those who advocate devolution – who are inviting Northern Ireland to buy a pig in a poke – or those who may be opposed, who are ensuring that the effects of fiscal decentralisation cannot be understood.
We have quite a serious problem in the UK in understanding how our system of financing works; we simply lack many of the most basic data we need to make informed decisions. (For an earlier discussion of this, see HERE.) This is one of the points where that turns from being an academic problem into a sharply practical one (and it’s an issue I highlighted in my evidence to the Committee). For the debate about devolving the tax to have reached this stage without any serious effort to obtain the most fundamental piece of information that is needed shows how dysfunctional that discussion has been. The gap needs to be filled fast, or the idea of devolving corporation tax abandoned. Groping around blindfolded in the dark as a decision looms is no way to make policy of this significance.