Belfast Telegraph

Stalling on 'tap tax' is going to get us nowhere

The Stormont Executive's dithering over water rates is having dire consequences on our public services, says Robin Wilson

This week the finance and personnel committee at Stormont heard from three experts from across the water on the Barnett formula. So far, so uninteresting, some might think.

But how public finance operates in Northern Ireland tells us a great deal about the maturity of our current political class in discharging the responsibilities devolution has placed upon it.

The Barnett formula - named after the then chief secretary to the Treasury, Joel Barnett - was conceived in 1978 as a short-term solution to the challenge of allocating budgets to the devolved administrations envisaged for Scotland and Wales.

Devolution was stillborn and the Labour government of the day did not survive, but Barnett's formula - much to his surprise - acquired a life of its own.

As befitted its limited ambition, it does not determine the levels of public expenditure in Scotland, Wales and indeed, Northern Ireland. Rather it merely provides a way of calculating the changes in spending from year to year in those jurisdictions, in line with the Budget set by the Chancellor in London.

This means there is no necessary relationship between expenditure and need. Northern Ireland currently receives about 21% more than the UK average per head.

For mathematical reasons owing to the working of the formula, there has been a substantial convergence towards the average in recent years, diminishing Northern Ireland's excess.

More significantly, the formula dealt only with the expenditure, but not the equally important revenue side of the accounts.

And since devolution was successfully pursued following the re-election of a Labour government in 1997, this has become a matter of increasing concern in Scotland and Wales.

For if public expenditure is almost entirely financed by a block grant from London, how accountable can politicians in Edinburgh or Cardiff really be in their key role of setting budgets?

This question was at the heart of independent reviews of the settlements in Scotland and Wales established in the wake of the third devolved elections in 2007.

These commissions, chaired by Sir Kenneth Calman and Gerard Holtham respectively, were initiated by the Scottish parliament (though with the endorsement of London) and the Welsh assembly.

Calman and Holtham came up with the same answer: elected politicians should be made to address the revenue issue.

The mechanism would be that the UK's rate of income tax would be reduced by 10 percentage points in the devolved jurisdiction. A 'Scottish' and 'Welsh' income tax would be simultaneously introduced, which it would be up to the parliament/assembly to levy.

Scotland has, since the outset of devolution, had the power to vary UK income tax by 3% on the basic rate, but this has never been used.

The Calman and Holtham proposal would affect all income tax bands. It would mean that, if Holyrood, for example, decided to set the 'Scottish' income tax at 5%, overall income tax would be cut, but the parliament would have to cut its expenditure in equal measure. Conversely, if it was set at 15%, Edinburgh could elect to reverse spending cuts decided in London.

The Calman proposal has found its way into a Scotland Bill currently winding its way through Parliament. And since the Westminster election, the UK government has set up a 'son of Calman', the Silk commission, to develop the proposition for Wales.

All this is very germane to the work of the finance committee at Stormont. One of the visiting experts was Gerald Holtham. A second was Professor Iain McLean, who has advocated an objective method of determining the level of block grant based on need, so that the lower their gross domestic product (regional income from economic activity), the higher would be their grant from Westminster. The third was Alan Trench, a devolution expert.

None of this wider debate has been engaged at Stormont.

Northern Ireland politicians have often complained about the convergence effect of the Barnett formula, but they have had nothing to offer about whether a UK-wide, needs-based alternative should replace it.

They have been even less willing to address Northern Ireland's weak fiscal efforts on the revenue side. The refusal to levy water charges has denied the administration around £200m a year, which could have been raised progressively by ensuring the regional rate - the only discretionary revenue available - fully covered the cost of water, as with council tax in England and Wales.

That could have been spent on the modernisation of the infrastructure to prevent such an embarrassing scenario as in the winter of 2010, when water had to be imported from Scotland as the system in Northern Ireland collapsed.

Equally, the decision by the Executive, after the 2007 renewal of devolution, to freeze in cash terms (and so cut in real terms) the regional rate, and then to raise the rate only by inflation in its current budget, has left it unable to stem rising hospital waiting lists, which had been brought down under direct rule.

Northern Ireland desperately needs a Calman or a Holtham. Whether it gets one will tell us a lot about how meaningful devolution really is.

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