Is Stormont ready for tough calls and responsibilities tax powers would bring?
Would the quality of Government in Northern Ireland be better if there was a greater degree of devolution of tax-raising powers from Westminster to Stormont? What aspects of Government policy might be delivered more effectively if income tax, corporation tax and/or land and property taxes were devolved alongside the existing devolution of business rates?
The debate on these questions has been stimulated by a new report published by the Northern Ireland Council for Voluntary Action (Nicva) and researched extensively for Nicva by PwC.
Two separate arguments have stimulated a wide-ranging debate.
First, the fiscal position of the Scottish and Welsh administrations has been carefully reviewed by special commissions. Proposals have been examined that would give those devolved administrations more local leverage and accountability, focusing heavily on devolving authority for income tax.
Second, there are concerns that the degree of fiscal devolution to Northern Ireland (and Scotland and Wales) is so constrained that, effectively, devolution focuses mainly on spending decisions. Most funding for the devolved administrations comes in the block grant determined under the Barnett formula.
This fosters a political climate where there is continuing pressure to ask Westminster to be more generous. Alternatively, the defence is that the existing balance between Westminster and Stormont is well fitted to support a less affluent region within a stronger UK economy.
If there was a greater degree of devolution of tax-raising responsibility, how might it be used either to help the economy, tackle social inequalities or improve the quality of lifestyles?
How would the Barnett formula be affected by a radical rethink? An effective transfer of greater responsibility to the devolved administration might have the effect of making an updated Barnett formula more rigid and shift more fiscal pain on to the local administration.
There is a choice between maintaining the present arrangements, based on an updated Barnett formula, and switching more emphasis to local responsibility to balance revenue raising and expenditure. The present arrangements emphasise the dependence of Northern Ireland on UK Exchequer discretion. A subvention of nearly £10bn sustains a public sector spending arrangement which allows public sector spending to be some 20% per head above the UK average.
Devolving more revenue-raising responsibility to Stormont would emphasise greater internal responsibility to balance the Northern Ireland accounts, although a large (but less flexible) subvention would still be needed.
The debate can be seen either as a method of making Stormont more accountable for the management of revenue and expenditure in the public sector, or as a method of emphasising a standalone responsibility and breaking away from the dependency culture which tends to underpin the Barnett formula. 80% of the current revenue raised in Northern Ireland comes from five sources. In descending order, according to the Department of Finance and Personnel, they are Vat £2.9bn, income tax £2.6bn, national insurance £1.9bn, fuel duties £0.9bn and corporation tax £0.8bn.
The merits and complications of devolving corporation tax have already been argued and there is a promise of a decision in 2014. Any reduction in revenue from lower corporation tax will be used to reduce the allocation to Northern Ireland through the Barnett formula.
Business and domestic rates are currently the largest revenue -raising taxes devolved to Stormont. Because of the complexities of any suggested further devolution, in practical terms it is unlikely that Vat, national insurance and fuel duties would be devolved. Consequently, the real debate, about the further devolution of major tax revenue, centres on income tax. If Stormont held devolved authority for the raising of income tax, how would this authority be used? Would income tax be increased to raise extra revenue? If decreased, what public services would be reduced?
The real debate is not whether there might be greater devolution: clearly it is possible. The real debate must ask, how would greater devolved authority work?