John FitzGerald: The potentially poisoned chalice of fiscal autonomy in Northern Ireland

The North is treated very generously under the formula for allocating resources from London, with a level of public expenditure per head about 120 per cent of the UK average.

Early last year the North’s Minister for Finance, Conor Murphy, established a Fiscal Commission to look at the implications of devolving more tax-raising powers to Northern Ireland. The commission is chaired by the respected head of the UK Institute for Fiscal Studies, Paul Johnston.

Its interim report, published last month, represents a valuable assessment of how Northern Ireland might obtain additional scope for fiscal action. However, the commission also highlights how easily such increased powers could become a poisoned chalice.

Devolving additional taxing powers to the North could allow it to adjust its taxation regime to encourage more rapid economic development. Alternatively, the Northern Ireland Executive might choose to raise additional revenue to fund higher levels of public expenditure.

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The Scottish experience

Scotland, which has greater taxing powers than Northern Ireland, has implemented a higher rate of income tax to fund better services. However, the Scottish experience illustrates some of the pitfalls of greater independence in taxation.

Northern Ireland was given the right to reduce the tax on passengers travelling on direct flights to North America, with a corresponding reduction, albeit small, in the subvention from London

In return for greater fiscal autonomy, Scotland agreed to substitute the revenue from income tax raised in Scotland, for an equivalent reduction in the subvention from London, leaving Edinburgh’s fiscal resources unchanged.

However, as the Scottish economy grew more slowly than the rest of the UK, its income-tax revenues also grew more slowly than the UK’s as a whole.

A bigger tax take in London, under the old system, would have brought higher transfers from London to Edinburgh.

So, when Scotland raised income taxes, effectively a lot of the additional revenue went to plug the emerging gap in revenue from London.

Northern Ireland was given the right to reduce the tax on passengers travelling on direct flights to North America, with a corresponding reduction, albeit small, in the subvention from London.

Stormont abolished this passenger tax, hoping it would encourage direct links to Belfast. However, no such air links emerged pre-Covid, or since. So Belfast has foregone some revenue from London, with no commensurate benefit in terms of enhanced economic activity.

In the mid-1990s, retired civil servant Sir George Quigley argued that if the North could set its own low rate of corporation tax, like the Republic it could benefit from a major inflow of foreign investment.

Such a devolved power would see corporation tax revenue from the North accrue to Stormont, with the transfer from London to the North being reduced by the same amount. In the Stormont House Agreement of 2014, it was accepted by London that this option should be seriously considered.

However, this proposal has not been implemented because the UK treasury believes that Northern Ireland has no plan on how to make such devolution work, and timing of revenue flows would be a key issue.

Ultimate outcome

If a fiscally autonomous Northern Ireland chose to cut corporation tax in half, the immediate result would be a fall in revenue. Even if the ultimate outcome were a major pick-up in economic activity, this would take many years to mature. In the meantime, the North would have to cut public expenditure to live within its reduced income.

One conclusion of the interim Fiscal Commission report is that Northern Ireland already has very wide powers to choose how it spends its revenue

Thirty years ago, a cut in corporation tax in Northern Ireland would probably have resulted in more jobs there, through relocation of industries. However, in today’s world, the best case would potentially be a migration of brass-plate HQs from London to the North to avail of the new regime, with relatively little additional to show for it in terms of new jobs.

However, the treasury has made clear it will not permit such fiscal competition from Belfast, weakening central Government revenue in London.

The EU Protocol probably offers a more sustainable inducement for manufacturing businesses to migrate to Northern Ireland to maintain access to both the British market and to the EU’s single market. But opposition from some in the Executive is making it difficult to exploit this potential opportunity.

Very wide powers

One conclusion of the interim Fiscal Commission report is that Northern Ireland already has very wide powers to choose how it spends its revenue. This raises the question as to how wise the Northern Ireland Executive has been over the last decade in choosing its expenditure priorities.

As I’ve previously indicated in this column, underinvestment in education has been a major factor in sluggish Northern economic performance. Cash for Ash also exposed serious governance failings. With any fiscal autonomy comes fiscal responsibility, where cohesive government, sound administration and economic competence will be essential.