Devolving income tax powers to Stormont pointless amid political dysfunction

For those interested in the success of the Northern Irish economy, an important report was published last week by the Independent Fiscal Commission Northern Ireland. It examines how best Northern Ireland could develop its own sources of revenue to give greater independence in decision-making to the Executive. However, with all the attention on the protocol and constitutional issues, there seems to be little interest at present among Northern Ireland’s politicians to pursue the new opportunities the commission suggests.

The members of the commission, appointed last year by Minister for Finance Conor Murphy, were truly independent and expert in their field. They produced a model analytical and objective report. As a result, its analysis and conclusions cannot be dismissed by any of the parties in the new Assembly as being partisan.

Chairman of the commission Paul Johnston, of the Institute for Fiscal Studies in London, noted at the launch that the Northern Ireland administration already had control over a very high share of public expenditure by European standards. This includes expenditure on health, education and social services. The devolved administration also has power to modify the welfare system. Over the period since the Belfast Agreement, the Northern Ireland administration could have made major changes in expenditure priorities in a way that would have significantly improved the standard of living in Northern Ireland. However, to date very limited use has been made of these powers.

Take education reform, for example. Recent research by the ESRI, echoing earlier findings by Prof Vani Borooah, shows the need for major changes in Northern Ireland’s educational system, which features high numbers of early school leavers, and the lack of educational opportunities for children from disadvantaged backgrounds. So far, successive devolved administrations have shied away from tackling these issues. The financial obstacle is not a lack of control over revenue but rather an unwillingness to reprioritise expenditure.

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If Stormont is reluctant to use the financial powers and fiscal elbow room it already has, further tax devolution would not be an easy recipe for success.

The commission looked at the three big tax revenue sources: income tax, social insurance and VAT. It recommended that Northern Ireland should initially only seek devolution of one of these, and that income tax would be the best option. This would mean that from a particular date, all future tax revenue from income tax would go to Northern Ireland, and the annual transfer from London would be reduced by the amount of the revenue received in the first year.

Initially, the change would have a neutral impact on Northern Ireland’s budget. Whether the North would be better or worse off from making the change would depend on whether Northern Ireland’s economy and income tax base would grow faster or slower than Britain’s over the coming years.

Scotland, where tax revenue has already been devolved, did worse from its changeover, as its economy grew more slowly than the rest of the UK. The commission’s report shows that the disappointing performance of the Northern Irish economy since 2010 would have cost it £2 billion had income tax revenue been devolved at that time.

Devolution of income tax revenue to Northern Ireland makes sense only if the administration there can use the new powers to grow the economy — and thus future tax revenue — significantly. That requires a competent well-functioning Executive with the skills and vision to make that happen. Exploiting the dual membership of the EU and UK markets offers a unique opportunity.

Greater fiscal autonomy carries risks — the fiscal commission suggests some kind of insurance against events outside Stormont’s control adversely affecting its revenue. Choosing investments with a longer-term pay-off — like investment in improving the education system — could lead to a short-term squeeze on revenues, but ultimately higher returns.

In its consultation with the wider community in Northern Ireland, the commission found a degree of pessimism about the ability of Northern Ireland to make good use of enhanced powers. This reflects the current political stalemate.

It remains to be seen whether a well-functioning Executive can be formed, and can tap into a shared commitment across the political divide to make Northern Ireland a better place for those who live there. The recent election showed that most voters prioritised bread-and-butter issues such as living standards, prices and the health service over constitutional questions or the protocol. The public want a Stormont administration that will pull together on the practical issues. More fiscal autonomy will only bring benefits if it’s built on a foundation of good government.