The road to grown-up government, tax and spend

9 Apr 2021 Nick Garbutt    Last updated: 9 Apr 2021

https://commons.wikimedia.org/wiki/File:Stormont_Estate_-150956_(33625273538).jpg#filelinks
Pic: William Murphy, Wiki Commons

Away from the headlines, the talk shows and the increasingly hysterical public discourse, work is underway that may ultimately lead to more grown-up government in Northern Ireland.

Last month Finance Minister Conor Murphy announced the setting up of a Fiscal Council and Fiscal Commission.

The establishment of the Fiscal Council fulfils a commitment made in the New Decade New Approach agreement. Its main role will be to “assess and report on the sustainability of the Executive’s finances and spending proposals.”

This brings Northern Ireland into the ever-increasing fold of governments who have established Independent Fiscal Institutions (IFIs) to promote sound and sustainable finances.

Many of them, including the UK’s Office of Budgetary Responsibility (OBR) were introduced in the aftermath of the financial crash of 2008 in order to re-build trust in how government’s handle their budgets.

Former Chancellor George Osborne introduced the office in 2010, telling the House of Commons: “I am the first chancellor to remove the temptation to fiddle the figures by giving up control over the economic and fiscal forecast,” he said, promising to “change the way that budgets are made forever.”

That should not be taken to mean that the OBR can or Northern Ireland’s Fiscal Council will be able to either shape or advise on policy. The role is more about speaking truth to power. And over the past 10 years the OBR has established itself as a respected organisation whose judgements can have profound political implications.

So much so that there have been calls from the Labour Party for it to audit party political manifestos.

Meanwhile in Northern Ireland the most positive thing we can say about our government is that it exists at all.  This is no mean feat – and the recent absence of government and current ructions around Brexit and policing are reminders of its continuing fragility.

Yet public confidence in it is low, it has shown little appetite for making difficult decisions and the RHI scandal raised troubling questions around competence, financial prudence and responsibility.

Introducing a Fiscal Council could be one important element in both encouraging more effective and sustainable spending and increasing public confidence in the institutions of government.

It will, however, require strong, independent leadership, which is why the appointment of  Sir Robert Chote as its inaugural chair is so significant. Until last October Chote was chair of the OBR which he led for 10 years, establishing the organisation’s formidable reputation.

Sadly he will only be around for the set up period – but he will stay long enough to help appoint his successor. Given the opacity of public finance that person will have to be good at words as well as numbers. Chote is a former FT and Independent journalist who both speaks and writes as well as his background suggests which has helped build the OBR’s standing and profile.

This will be every bit as important in Northern Ireland because much of what needs to be said will not be what politicians want to hear. For example if we want better public services we have to pay for them.

And that’s where the Fiscal Commission comes in.

To date the powers that be in Northern Ireland have shown themselves to be enthusiastic about spending but have had no appetite for contributing to the  revenues required to support it.

Indeed potential sources of income have been explicitly rejected: water charges, prescription charges, higher university fees. There’s even been a long-standing campaign with all-party support to reduce Corporation Tax.

And there are currently no powers to levy a local income tax. Such is the general lack of trust in our institutions many will be relieved rather than disappointed that that is the case.

This means that apart from the rates the Northern Ireland is entirely dependent on the British government for what it has to spend via the Barnett formula. And if the government in Britain happens to be ruled by a party which is disinclined to invest in health and other public services then there’s not all that much that local politicians can do about it no matter what they might say.

All this could change. The Fiscal Commission has the task of carrying out a comprehensive formal review of all the options for further fiscal devolution. It is being led by another big hitter: Paul Johnson, Director of the Institute for Fiscal Studies (IFS). The IFS is an economic research body which specialises in UK taxation and public policy. Before Mr Johnson its director was Robert Chope.

Similar reviews in Scotland and Wales have led to new revenue generating powers in those countries.

Scotland now has its own income tax regime. It is more complicated but fairer than the General UK scheme with five bands and a lower threshold (£41,000) for higher rate tax. It has provided the Scottish government with more money to spend – an estimated £456 million more for 2020-21.

However slower earnings growth in Scotland is likely to reduce that figure over time.

Scotland is bigger than Northern Ireland and has a different economy. Johnson and his colleagues will doubtless be examining not just how additional revenues might be raised but how much they might bring in.

Essential background reading for the Commission will be a previous study, commissioned by NICVA into the potential for Northern Ireland acquiring new fiscal powers. It is now several years old but still worth a read.

It concluded that some devolution of Income Tax would have the most potential, not so much as a game changer, but as a supplement to economic policy, also increasing local  accountability over spending.

But there are obvious risks as well. Currently Northern Ireland runs the biggest tax deficit per head of any region in Northern Ireland whilst simultaneously spending the most per head. Thanks to the Barnett principle we are currently subsidised by taxpayers in the south east of England.

So devolving Income Tax successfully would mean using new rates to supplement, not replace existing funding and thereafter create a dependency on future tax takes in Northern Ireland, which would be dependent in turn on the strength of the local economy. Scotland is currently facing up to precisely that issue.

There may be other options too – a dedicated local tax to transform health and social care, for example. Given our shared experience of pandemic that might be a runner.

Sir Robert Chote recently pointed out that tax increases equivalent to 1 or 2 per cent of GDP could be needed to fund increasingly expensive health and care services. This would amount to around £25-£50bn a year, or the equivalent of approximately 5-10p on income tax.

The UK government may introduce the necessary measures to do this. It may not. If it doesn’t there’s very little that local politicians can do about it. Unless of course they were to introduce their own tax.

Whatever the commission concludes this is an important, necessary and timely debate, which should focus minds on grown-up politics, at last.

 

 

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