Should Northern Ireland set its own income tax?

Risk is a slippery word. Evaluating it depends on several factors. What could be gained, what could be lost, the relative odds of given outcomes.

Northern Ireland’s economy has been stuck in a rut for decades. Economic performance relative to the rest of the UK has changed very little since the Good Friday Agreement and the establishment of the modern Assembly. This relative performance has been bad.

What if we could roll the dice? Try something different? Should we, or are we happy as things are?

Humans put more weight in what might be lost rather than what could be gained. We look at what we have and, often, we don’t want to put it in peril.

However, while economics is an imprecise science, it is not a matter of blind chance. Calculated risks are not the same as blowing on your hands and praying for a double six.

In March, Finance Minister Conor Murphy announced the creation of a Fiscal Council and Fiscal Commission. This could lead to fundamental changes in how Northern Ireland is governed – and how much say people here have in how both local society and (in particular) the local economy are shaped.

The Fiscal Council will be an independent body that scrutinises the financial work of the Executive, and aids with transparency. It should allow the public to better track and understand the work of Stormont.

Unlike the council – which will be permanent – the Fiscal Commission’s job will be to examine the revenue-raising powers available to Stormont, and those that could become available by altering the terms of devolution.

That is where the potential for real change lies. If Stormont had the power to vary income tax, say, it could provide itself with a lot more flexibility in terms of policies. Right now, few fiscal policies are devolved. This leaves Stormont’s broad spending power in the hands of Westminster (even if there is more flexibility in where the available money is spent).

The scope for change is enormous. Currently, NI is undergoing one economic revolution – weaving environmental sustainability into the fabric of the region, one way or another – so why not supplement that with another? Why not embrace the ability to tailor our own future to a greater degree, with the flexibility that brings and the responsibility that comes as part of the package.

Such reform brings risk, and opportunity.

NICVA

In 2013, as part of its Centre for Economic Empowerment, NICVA produced a report looking at the revenue-raising powers of the Assembly.

Fiscal powers: a review of the fiscal powers of the Northern Ireland Assembly was prepared by PwC and is a discursive and analytical paper, rather than something making clear and simple recommendations.

It is crucial to note that “the question of whether the power to vary a tax should be devolved (the subject of this report) is in principle separate from the question of how such a power might be used.” The Fiscal Commission is very likely to make the same distinction, even if it makes recommendations on both key questions.

Last week, NICVA CEO Seamus McAleavey and economist Esmond Birnie (author of the report) appeared before the Finance Committee to discuss the paper’s contents.

Mr McAleavey told the committee: “The focus of the work was twofold. The first was to help voluntary and community organisations to become better informed about economic issues and to take part more effectively in economic policy debates…

“The second aspect centred on researching issues that might improve the lives of people in Northern Ireland if policies were adapted or new policies developed that might improve the economy of Northern Ireland. NICVA believed in informing the debate and much of the research was commissioned to explore the options rather than to find evidence to support a position.

“That was the basis for commissioning this research report. We wanted to explore the possible benefits, or not, of devolving more fiscal powers to Northern Ireland. We wanted to shed light on which powers may be useful to have or not but mostly we wanted an informed debate.

“NICVA tried to have an open mind on all the issues believing they were worth exploring and examining before we should take a view for or against any change in policy.”

This reinforces that the report was about creating an intelligent and knowledgeable framing for discussions about how NI might expand its tax powers, rather than something that comes to conclusions that are specific.

Findings

The NICVA report covers many intertwined complications. Some of what it points out, however, is more clear cut. The former concerns what might be done in future. The latter deals with NI’s ongoing economic performance, including:

• The success of previous attempts to agree and implement a vision for the Northern Ireland economy has been limited.
• There has been little progress towards closing the prosperity gap between Northern Ireland and the rest of the UK.
• Maintaining the status quo in economic strategy is unlikely to significantly improve Northern Ireland’s economic performance, relative to the rest of the UK.
• The current macroeconomic climate and the absence of public spending growth is likely to further disadvantage the region for the foreseeable future. (Note that 2013 was in the middle of Cameron/Osborne austerity – and, while much has changed since then, for a variety of reasons the public spending outlook remains bleak).
• Northern Ireland is the only devolved region that has not been subject to a comprehensive review of fiscal policy and legislation/proposals to devolve a variety of fiscal powers.

But what about the more complex bits, the context and consequences of greater fiscal powers?

The report identifies several taxes that would be suitable candidates for devolution. Examples include stamp duties, air-passenger duty, landfill tax – and, perhaps most significantly, income tax.

Per the report: “[I]t is helpful to define taxes as “major” and “minor” in terms of the size of the revenues raised. Devolving a major tax will potentially make a greater contribution to increasing the revenue stream, autonomy and accountability of a devolved assembly. Having said that, it might still be decided to devolve certain minor taxes because of their potential contribution to particular economic, social or environmental policy agendas.

“In terms of the scale of revenues collected three taxes stand out as major: Income Tax, National Insurance Contributions and VAT. In practice, only Income Tax is a strong candidate for devolution, as has been identified in both Scotland and Wales. Devolving and thus potentially varying the rate of National Insurance Contributions from that of the rest of the UK would in practical terms be hard to reconcile with welfare and benefits policy commitments.”

The paper lays out several questions that should be asked about any possible devolution, including:

1. Would devolution improve accountability?
2. Is devolution possible without creating significant economic distortions?
3. Is devolution possible without imposing significant costs (either administrative or compliance)?
4. Could devolution promote various policy objectives; economic, social, health or environmental?
5. Is devolution possible without a major negative effect on the tax base in the rest of the UK?

In terms of any changes to income tax, the NICVA report says that any adjustment should try and anticipate the effect this adjustment will have.

When trying to anticipate any new tax take, economic effects need to be accounted for – as do any changes to the block grant. If NI wants to have more money to spend, it needs to make sure its own revenue raising more than offsets any losses from Westminster’s lump sum.

Moreover, tax devolution would come with several different policy objectives which may conflict with each other, at the very least in the short term. That means choices would need to be made about what to prioritise at any given time.

“If Income Tax was devolved policy makers must balance the respective priorities of revenue maximisation, the promotion of entrepreneurship amongst high earners and distributional objectives.”

Altogether, the paper is keen to stress that fiscal reform could provide Stormont will huge powers – but is not an economic silver bullet.

“Fiscal variation should be seen as a supplement to other policy emphases and not as a solution in its own right.”

The Fiscal Commission – and, ultimately, the Assembly if it chooses to pursue more fiscal independence – will be wrestling with similar concerns.

What’s next

Within the UK, Northern Ireland is an economic minnow. The block grant is effectively subsidised by London and the South East of England.

However, subsidy is a misleading word. London takes as well as gives. For instance, it has high-paying jobs, and many well-qualified people move there from other parts of the UK. The outflow from Northern Ireland – the brain drain – is huge. The block grant means tax money flows into NI, but plenty leaves in return.

If Stormont wants to devolve tax powers and is trying to negotiate terms, including the effect on the block grant, this point should be made again and again.

Should we seek more fiscal power in Northern Ireland? That’s not an easy question, but it’s worth noting that no, the answer representing the status quo, is a straitjacket of an answer. It is uniform and certain and an end in itself.

Yes, on the other hand, leads to other questions. What powers should we seek and how should we use them? Answering yes to the first question provides Northern Ireland with more say in its own governance, and provides wider options – and opportunities, and questions, and risks – in perpetuity.

Ultimately, however, fear of risk, and of change, cannot hamstring our decisions. If we choose not to wield greater powers that should be because it is the best-available choice under the best-available analysis.