How the Scottish play for fiscal freedom affects Northern Ireland
Scotland and Northern Ireland are on course to live with very different forms of fiscal devolution. Scotland has a major new agreement with the UK Government transferring a large range of tax and spending responsibilities to Holyrood.
Northern Ireland has not been asking for similar changes. There is now a policy question: should Northern Ireland now seek some of the changes agreed for Scotland?
The existing Barnett formula arrangements for Northern Ireland have been varied - but only marginally - within the recent Fresh Start agreement with the UK Government. The largest local variations in Budget decisions are illustrated by the local decision not to have water charges. In parallel, we have kept the bill for property rates (aka council charges) well below the average in Great Britain.
Overall, the province is going in a different direction to the changes planned for Scotland and on a completely different scale.
Northern Ireland is implementing a scheme to administer a local rate of corporation tax on the trading profits of businesses. Barnett rules mean that the budget must take account of reduced tax revenue of possibly up to £250m pa.
Scotland expects to introduce major changes in the devolution of fiscal responsibilities in 2017. Two critical changes are that Scotland will have the fiscal freedom to vary the rate of personal income tax on earned income (not including unearned income), including the setting of tax thresholds, and Scotland will have attributed to Scotland about half of VAT revenue (based on the equivalent of the first 10p of the standard rate).
Smaller sums are involved in the other changes which include the full devolution of responsibility for air passenger duty and the aggregates levy.
Additionally, a defined part of welfare security payments will be devolved. This will include, inter alia, a range of services linked to disabled people including disability living allowances (DLA) and personal independence payments (PIPs).
The Scottish Government will soon have a major role to play in determining large parts of its Government revenue as well as introducing Scottish variations in public sector spending.
A further important extension to the finances of devolution comes in a formal agreement about the scale of borrowing permitted for the Scottish Government which, in the next years, will authorise borrowing of £450m pa either from the Treasury or, interestingly, from commercial sources or the issue of bonds.
Borrowing will usually be for a 10-year period but the Treasury has agreed that the terms of loans may be negotiated, where appropriate, for longer or shorter periods.
The Scottish Government has also persuaded Westminster to build in a mechanism to soften any fiscal strain in an economic downturn, or unplanned deficit on normal annual spending, by allowing a temporary compensating adjustment to the Budget balance (if for example the Scottish economy is hit hard by short-term recessionary changes). This precautionary provision might provide loans of up to £600m.
The deal between the Scottish Government and the Treasury also provides an important extension of the supervisory arrangements relating to the public sector finances in Scotland. A Scottish Fiscal Commission has been established and will have authority to supervise and comment on the overall fiscal framework.
The fiscal commission will have reciprocal information arrangements with the Office of Budget Responsibility (OBR) to allow a more integrated oversight to help the planning and economic forecasting for both the Edinburgh and London authorities.
In a return to an arrangement of many years ago, the outworking of this Scottish agreement will be governed by a joint exchequer committee.
These arrangements will be used until 2021 when there will be a further review.
Almost every topic in the new agreement poses parallel questions for Northern Ireland. Does Northern Ireland want the greater local discipline of managing more of the local Budget or do the present softer Barnett arrangements make Government decision-making easier but less positive?