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Should more revenue now be sourced from Northern Ireland rates system?

Paul MacFlynn


Economy Watch

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First Minister Arlene Foster (right) and Deputy First Minister Michelle O’Neill with (back, from left), Tanaiste Simon Coveney, Taoiseach Leo Varadkar, Prime Minister Boris Johnson and Secretary of State Julian Smith

First Minister Arlene Foster (right) and Deputy First Minister Michelle O’Neill with (back, from left), Tanaiste Simon Coveney, Taoiseach Leo Varadkar, Prime Minister Boris Johnson and Secretary of State Julian Smith

PA

First Minister Arlene Foster (right) and Deputy First Minister Michelle O’Neill with (back, from left), Tanaiste Simon Coveney, Taoiseach Leo Varadkar, Prime Minister Boris Johnson and Secretary of State Julian Smith

The return of a Northern Ireland Executive earlier this month was greeted as a big step forward and a chance to tackle some serious policy issues that have festered over the last three years.

However, the expectations regarding the financial package that would greet the incoming Executive have proved to be overly optimistic.

The details of the financial package are still somewhat opaque, but we know that up to £1bn is to be provided for specific projects and policies, not least the recent industrial dispute in the public sector.

There is purportedly another “£1bn Barnett-based investment guarantee” from the UK government, though quite what that means exactly is still rather unclear.

The press release also included a paragraph on Northern Ireland seeking to raise its own revenues.

This would be an issue for the Executive but it was quite clear that the UK government believe this should be on the agenda.

Every time Northern Ireland’s finances have hit the buffers, the issue of revenue generation rears its head, and every time it does, it is firmly smacked down.

On the face of it, the prospect of Northern Ireland raising additional revenue requires more thoughtful discussion.

Such discussion is usually hampered by someone bringing up the issue of water charges. Water charges have been a political no-go area in Northern Ireland for some years and, as the recent experience south of the border shows, our antipathy toward charging for water is not unique.

Anyone who wishes to advance a discussion about revenue raising in Northern Ireland would do themselves a favour by dropping any mention of water charges.

This is not just because of their political toxicity but also because water charges are a terrible way of raising revenue.

Water charges are a deeply regressive form of taxation and any attempts to make them more progressive or to add an environmental dimension to them introduces massive complications.

The core principles of good taxation are equity, efficiency and, most importantly, simplicity.

For many other people, their objection to water charges is based on the notion that water provision is already funded through the domestic rates system already.

If we need more money for water and other services, should Northern Ireland then seek to add to its revenue through the rates system?

The short answer is yes. The rates system is well overdue for overhaul and the last NI Executive began this task.

However, even if that reform is brought to completion, the system of rates at present, both domestic and commercial, only raises about £600m each for local councils and the NI Executive. There are limits to how much more can be raised from a property value-based tax.

Many people point out that council tax, the equivalent of the rating system in Great Britain, is substantially higher than the average rates bill in Northern Ireland.

This is true, the average council tax bill in England in 2019 was £1,746. The average domestic rates bill in Northern Ireland in 2019 was almost half that.

However, there is a good reason for this. Local government in Northern Ireland provides significantly less services than their equivalents in Great Britain.

Councils there provide services related to transport, housing, education and most importantly social care.

It is true that half of our rates bill, the Regional Rate, goes to the Executive so maybe there is an argument that it should increase. However, the experience of local councils in England should point us to the danger of this strategy.

Over the last 10 years, the UK government has removed central funding and left local councils in England almost entirely dependent of council tax revenues to provide an increasing range of public services.

This has led to some drastic cuts in provision across many services.

There is a limit to how much money can be raised through domestic rates or council tax that are based on property values.

There have been arguments in Great Britain that a local income tax is a more progressive way of raising the revenue required for local services.

A local income tax sounds like a good idea, but in practice it is bedevilled with difficulty. The most obvious problem is that any variation in local income taxes among council areas could lead to large numbers of people shifting incomes about in order to seek a lower rate.

There is already evidence of this kind of problem with devolved governments too. Scotland exercised its right to vary income tax rates in 2017 and since then it has encountered difficulty in predicting revenues.

The evidence from other countries suggests that local and regional governments can play a part in generating revenue but there is a limit and that national governments are best placed to level progressive income taxation.

For Northern Ireland, we should seek to have a fair and progressive rates system for both local government and the Executive.

However, imagining that this is a silver bullet for the Northern Ireland public finances would be a grave error.

Paul MacFlynn is a senior economist at Neri

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