Tasked with examining the case for increased fiscal devolution, we at the Independent Fiscal Commission NI have just published our interim report.
The Executive is currently responsible for most public spending, but it has barely any powers to raise or alter taxes. Should the Executive have the freedom to alter rates and structures of tax in the same way as, or perhaps more extensively than, the administrations in Edinburgh and Cardiff?
There are obvious advantages to devolving powers over tax policy. A devolved administration with such power can alter taxes to respond to local circumstances and the preferences of the local population. It can use them to effect redistribution, to boost the economy, to raise additional revenues for public services, or to support other policy priorities.
If the Executive had some control over one of the three big taxes — income tax, VAT and National Insurance — which account for about two-thirds of all tax paid here, then it could either raise significant sums for local services or make cuts to reduce the overall tax burden. If it had control over corporation tax it could cut the main rate to compete for investment. If it had control of alcohol taxation it could use that to support policy on public health.
So why wouldn’t the Executive just have control of all, or at least most, taxes? Well, there are risks and costs as well as benefits to devolution. There is the obvious cost and difficulty of setting up the institutions needed to manage tax collection and tax policy. Some taxes are also really hard to disentangle within the UK. And, if lots of tax revenue is devolved, then the Executive would end up bearing a great deal of risk if revenues fell.
So, our view is that, while in principle most taxes could eventually be devolved, it makes sense for the Executive, if it wants more fiscal powers, to prioritise. And that’s what we are doing. Having looked in some detail at more than 20 different taxes (yes, there are a lot of them) we will now go on to look at just a few in more detail before we make final recommendations.
We are going to look further at income tax. This has been successfully devolved, in part at least, to Scotland and Wales. It raises a lot of money, it is easily understood by citizens and it can be used to redistribute resources. We will look, too, at stamp duty land tax, air passenger duty and landfill tax, as well as the apprenticeship levy.
Excise duties on alcohol, tobacco and petrol are also worth a look. They were ruled out for the other devolved nations partly because of rules within the EU and partly because of dangers of increased cross border shopping in England. Neither of those constraints applies here in the same way. Indeed, the border with the Republic means different rates might be appropriate here and control over alcohol and tobacco in particular would complement other devolved powers.
One tax we are not going to look at further is corporation tax. Devolution is already legislated for but not ’commenced’. There are particular complexities here, over and above those for other taxes, both in terms of administration and the assessment of cost and how that would be allocated between NI and the rest of UK. For this tax in particular these issues are much more difficult to resolve. That said, in our view there is a case for devolving this tax, but it is for the Executive to take this forward in conjunction and partnership with the UK Government if it wants to make progress.
Finally, a word of warning. The Scottish Fiscal Commission (confusingly the counterpart of the NI Fiscal Council, not of us) reported last week. The Scottish Government has increased income tax rates in an attempt to generate more than £500 million in additional revenue for public spending. It has gained nothing from doing so because incomes in Scotland have increased more slowly than incomes in the rest of the UK, which, given how the UK and Scottish Governments adjust their revenues for devolution, has wiped out the potential benefits.
Devolution brings opportunities, but it also comes with responsibilities and risks.
Paul Johnson is chairman of the Independent Fiscal Commission for Northern Ireland