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Balancing the books: a taxing issue and revenue raising

Revenue raising and the push to lower corporation tax and cut air passenger duty here just got a bit more complicated. John Mulgrew looks at the case for and against, and speaks to the experts about what’s needed to ensure NI has the necessary resources to prosper

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The newly formed Northern Ireland Assembly

The newly formed Northern Ireland Assembly

PA

The newly formed Northern Ireland Assembly

There are a lot of “uncomfortable choices” ahead for newly-appointed decision makers on the Hill, according to one economist and academic.

In the days following the establishment of the Executive, early indications were that the Finance Minister Conor Murphy and Economy Minister Diane Dodds appeared somewhat divided on the prospect of returning to the issue of devolving corporation tax to the Assembly.

But things have also gotten more complicated from a national perspective. The plan to reduce the rate to 12.5% – lower than the current 19% across the UK – was due to incentivise foreign direct investment (FDI) and bring us in line with the Republic. But it would also mean a cut in our block grant to reflect the tax shortfall.

Now, it’s been reported the UK Government is being urged to increase the rate by 2%, throwing more complexity over the rate’s reduction here.

And, a written answer from the First Minister and deputy First Minister, said “(the) immediate focus is to ensure that we can fund basic public services which are clearly under significant pressure. Consequently, the devolution of corporation tax is not something that I am actively pursuing at this time”.

“Plotting our way through these challenges raises a number of uncomfortable choices,” Gareth Hetherington, director of the Ulster University Economic Policy Centre, told Ulster Business.

“Either taxes and charges need to be increased or we as a society tolerate the continued degradation of public services. Alternatively, we finally bite the bullet and accept the need for fundamental reform across the public sector.

“Although reform is the only long term solution, a lack of political will is often cited as the reason for delaying that much needed reform. However, that deflects attention from where responsibility really lies, in truth it is the electorate that lacks the will to embrace change. When we change, political decisions will change.”

Richard Gillan is chairman of Chartered Accountants Ulster Society and partner in charge at Grant Thornton in Belfast.

He said that “within days of the new Executive forming, it was clear that the various initiatives and funding requirements were adding up to a cost that is well beyond our means, and one which will not be funded by the Exchequer”.

“Consequently, ideas were being floated in the media about various revenue raising options such as water charges and increases in tuition fees. Many of these revenue raising ideas were immediately dismissed, as was the long-planned reduction in corporation tax.

“There is no doubt that the Executive needs to undertake a significant programme of investment to deliver a Northern Ireland economy that is fit for purpose.

“Seeking to raise revenues is certainly an option and may well be required but I would urge caution here – the recent rates revaluation, for example, has left many businesses with increased costs that they will find difficult to bear. It is a similar situation for individuals – the average household in NI does not have the luxury of a significant level of discretionary income every month.”

He reiterates the suggestion that “public services could be run more efficiently and effectively”. “Perhaps now is the time for a forensic examination of all the various programmes funded through public expenditure to determine whether scarce financial resources are being deployed to achieve priority policy objectives. Where they aren’t, we have to stop doing them,” he said.

“This approach was taken in the Republic of Ireland during the recession, where an independent commission supported the government in identifying annual savings. When our businesses and individuals are confident that our money is being used wisely, the conversation around raising new revenues might get a fairer wind.

“Whatever they decide, our members will be wishing the political parties well and hoping that the newly restored institutions can deliver for Northern Ireland.”

According to Gareth Hetherington, following the absence of a devolved administration for three years “… it is now clear that the priorities of the newly formed Executive have shifted significantly”.

“Waiting lists in the health service, nurses striking over pay and safe staffing levels, and calls for funding from every other area of government have completely changed the tax and spend dynamics for our politicians. 

“Previously, the rationale for devolving taxes was with the aim of reducing them to bolster economic growth, even if that meant a reduction to the block grant. We wanted lower corporation tax, lower air passenger duty and lower VAT for the hospitality and tourism sectors. Fast forward to 2020 and the discussion has turned 180 degrees towards devolving taxes with a view to increasing them.

“With the primary focus now on raising revenue, in particular to meet the priorities set out in the New Decade, New Approach deal, the first source of funding appears to be Westminster. Initial indications would suggest that some additional money is being made available, but will be significantly less than the cost of all the commitments made.”

He says that “meeting this revenue deficit in the short term would require ministers to focus on locally devolved taxes (for example rates), and charges (such as for the use of domestic water and increasing tuition fees)”.

“Of course, this creates another problem. These measures would be very unpopular with the electorate when the politicians already have one eye on the next Assembly elections which are only two years away.”

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