Stormont cannot afford to sit idle while others move tax issue forward
What devolution of taxation powers to Wales, or Scotland, or Northern Ireland would be politically and economically desirable?
Each of the UK territorial administrations is now considering asking for authority to vary either income tax or corporation tax, or possibly in Scotland as a version of ‘devo max’, all major taxes.
Northern Ireland has made a case for partial devolution of corporation tax rates and possibly the tax allowances. The exact terms of the bid have not been made public.
There has been no bid from Northern Ireland for a transfer of any responsibility in the setting of the rates of other major taxes such as income tax, national insurance charges, VAT, capital gains taxes and inheritance taxes.
Scottish and Welsh devolution has reawakened a debate about the merits of greater devolution of taxation. Indeed, as has been evidenced in Scotland, the ambition for maximum devolution by the Scottish National Party (SNP) leads on to a search for independence. From a UK government perspective, the current arrangements to finance devolution are far from ideal.
Two features stand out. First, currently the Scottish, Welsh and Northern Ireland administrations are essentially organisations to deal with government spending: not raise revenue. The devolved administrations have a continuing plea, where services seem underfunded, simply to ask the UK to provide more.
Second, and an extension of the former argument, the allocation methods, using the Barnett formula, takes little account of any objective assessment of need in each area.
A possible consequence of the growing debate about taxation devolution is that the UK Government will think it necessary to revisit and change the Barnett formula. Northern Ireland would have reason to be concerned if the Barnett formula is reconsidered since, relative to need, Northern Ireland is generously treated and could lose out, Wales is not generously treated and could gain, whilst a judgment for Scotland depends on how North Sea oil revenues are allocated.
Both of these arguments point to a conclusion that the devolved governments should be put into a position where each of them has a stronger set of incentives to make balanced judgements choosing between extra revenue and extra spending wishes.
The Calman Commission in Scotland commended a split in income tax with authority for income tax of 10p/£ passed to the Scottish administration and, if varied up or down, would make extra funds available or call for spending reductions.
The recently approved Scotland Bill has put a version of this into law. From 2016, there will be a defined rate of Scottish income tax, devolution of landfill tax and stamp duty land tax, a power to create new taxes, and new borrowing powers for the Scottish budget of £5bn pa. These Scottish arrangements are of course provisional, depending on the result of the Scottish referendum.
If Scottish independence, or a wide-ranging ‘devo max’, is implemented, Scotland would be a separate neighbouring economy in similar relationships to those with the Republic of Ireland. Whether in or out of the EU, using the euro or sterling, or agreeing on some shared functions, is to be determined.
In Wales, the Holtham Commission has asked for a new Barnett formula calculated, initially, on the basis of need, and then has added a proposal to attribute 10p/£ income tax to the Welsh administration with flexibility to vary this, matching the variations with spending changes.
The debates on devolving powers of taxation in Wales and Scotland have focused initially on varying personal (income) taxation. Until recently, there have been no definitive moves to devolve corporation tax, although the Scottish National Party now advocate this idea, possibly as an aspect of ‘devo max’.
The diverging ideas on taxation powers to make devolution work better are, implicitly, showing contrasting theories on what the political parties think would be desirable. At Stormont, assumptions of a continuing status quo may be too complacent.