An emerging fiscal debate in Northern Ireland

It has been quite easy to miss from Great Britain, but over the last few months there have been the beginnings of a serious debate about devolution finance in Northern Ireland.  Until now, this debate has been largely absent there, with the (major) exception of the debate about devolving corporation tax.

I’ve argued before that the corporation tax debate has been rather an unreal one, rooted in a serious absence of basic information and misapprehensions about both the benefits and problems of tax devolution (see HERE and HERE).  With the UK Government’s decision in March 2013 to put the issue on hold at least until after the Scottish independence referendum, that debate has at least paused. There still seems to be a belief there, however, that corporation tax devolution is not only viable and practicable but some sort of holy grail for the invigoration of the Northern Ireland economy.  (A separate part of the Northern Ireland debate has led to devolution of air passenger duty for long-haul flights, set at a lower level for 2012-13 and passing APD to Stormont’s control from the start of 2013.  In practice, there’s only one such flight – a daily one from Belfast International to Newark, New Jersey, in the US.)

The first step in the newer debate is a report from Dr Esmond Birnie, chief economist of PwC in Northern Ireland, commissioned by the Centre for Economic Empowerment at the Northern Ireland Council for Voluntary Action.  The NICVA paper – available here – notes the absence of debate in Northern Ireland, and makes the case for a form of fiscal devolution.  One interesting feature is that it resists the logic of the ‘Calman’ model of partial income tax devolution plus land taxes and argues that income tax (alone of the major taxes) is a candidate for early devolution.

My own contribution so far has been in the form of a ‘Knowledge Exchange’ seminar at Parliament Buildings in Stormont at the beginning of October, where I talked about the debate as it has developed in Scotland and Wales, and how Northern Ireland’s failure to engage in such a debate does it few favours. A policy briefing I wrote is here,  my PowerPoint slides are here, and there’s even a video here.  I understand that the Assembly’s Finance and Personnel Committee is going to launch an inquiry into the Barnett formula and related matters quite soon.

One key but under-appreciated reason for Northern Ireland to join the wider debate is what is going on with the Barnett formula.  Part of the reason for the unrealistic nature of the debate so far is a belief that the financial status quo was both to Northern Ireland’s advantage and would continue to serve Northern Ireland well indefinitely.  Historically, Barnett has generously funded Northern Ireland, to the tune of about one-third more per capita public spending than the UK average.  A lot of this was justifiable given the poor state of the economy there, during and immediately after the Troubles – and indeed that level of spending has declined significantly since the late 1990s, not just as a result of reduced security and police spending but also as the economy has somewhat recovered.  Northern Ireland unquestionably has a high level of relative need, though.  The Holtham Commission’s recommended method came up with a relative need figure for Northern Ireland of 121 per cent of average UK per capita spending.  But Northern Ireland is in fact not far from that level of spending already; according to PESA, public spending there is already at 121.  If one strips out ‘social protection’ spending (which isn’t part of the block grant), current spending is 127 per cent of the UK average.  That means Northern Ireland is not far from the point at which ‘Barnett convergence’ becomes a material issue, and risks taking Northern Ireland’s block grant below the level of relative need.  It is unlikely to be able to maintain that status quo indefinitely, and if it continues to avoid engaging in the financial debate it is likely to find itself simply faced with the consequences of decisions taken elsewhere.

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Filed under Devolution finance, Events, N Ireland corporation tax devolution, Northern Ireland

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