A partial devolution of income tax to the Northern Ireland Executive would avoid “disproportionate complexity” while still delivering new revenue raising methods, enable the reduction of citizen taxes and vary the progressivity of its tax system, the Fiscal Commission has recommended.
Briefing the Finance Minister prior to the publication of its final report examining the Executive’s responsibility for tax and spending in May 2022, the Commission indicated that while Northern Ireland could benefit from the devolution of some tax powers, full powers over allowances such as the personal allowance and reliefs, as well as local administration of income tax, are not required “to reap the main benefits of devolution”.
“Rather, partial devolution with powers over income tax rates and, potentially, bands would be effective in giving the Northern Ireland Assembly a major new way to raise revenues, reduce taxes for its citizens or vary the progressivity of its tax system,” says the Commission Chair Paul Johnson.
“This is possible without the disproportionate complexity and the large administration and compliance burden that full devolution of such a big tax would bring.”
Rather than considering full fiscal devolution, under which Northern Ireland would then be responsible for funding all of its spending from its own revenues and a prospect deemed to be unfeasible given current levels of notional deficit, the Commission instead assessed the case for devolving powers over individual taxes.
While the Executive has a high level of spending autonomy and controls most of the spending on public services, currently, its only significant revenue raising powers lie in regional rates, a property tax paid by businesses and households which raises less than £1 in every £20 of Northern Ireland tax revenue.
The case for Northern Ireland to have greater devolution of tax powers has been long-standing in the context that the region is significantly poorer than the UK as a whole and amongst the bottom performing UK regions. Responsibility for tax raising also brings with it greater autonomy in spending decisions, allowing different degrees of redistribution to spur economic activity, which are currently not afforded through existing tax policies.
However, countering this call has always been the risk associated with greater fiscal devolution. Around 90 per cent of the Executive’s public service spending is currently financed by the block grant, meaning those funds are not at risk of devolved policy. Allowing the budget to be determined by raised tax in Northern Ireland could bring with it increased volatility and even potentially a reduced budget if tax revenues grow slower than expected.
In fact, the Fiscal Commission report demonstrates that such some degree of risk awareness is justified. Analysing the hypothetical scenario whereby Northern Ireland devolved income tax 20 years ago, the Commission highlights that the budget would have been favourably impacted in the early years, but then adversely affected by poorer income growth in Northern Ireland relative to the rest of the UK, following the financial crash.
“While not a measure of what will happen in the future, this drives home the message that devolution comes with both risks and rewards,” states Johnson.
However, while acknowledging that such a decision ultimately rests with politicians, and despite the associated risk, the Commission takes the view that “there is no reason in principle why a substantial fraction of current taxes could not be devolved”, but does stress that any taking on of additional powers should be done in a gradual fashion “to ensure administrative systems and the block grant adjustments essential to fiscal stability and sustainability are properly in place and functioning”.
The Commission’s final report is also set to include recommendations that any devolution of income tax should be accompanied by a devolution of the Apprenticeship Levy, given that policy responsibility for skills lies locally.
The Commission also confirmed a case for the full devolution of a number of smaller taxes, not least stamp duty land tax, air passenger duty and landfill tax.
“We pointed out that, if these taxes are devolved, it is our view that the Executive should establish a local revenue authority to administer them. This will increase the accountability of local politicians in respect of these taxes and provide for greater policy flexibility and innovation, while also building institutional capacity,” explains Johnson.
Ultimately, it will be up to the next Executive to decide whether to pursue further devolution, once the Commission’s final report has been assessed, however, following the briefing Finance Minister Conor Murphy MLA welcomed the Commission’s recommendations.
“If we are to realise the benefits of devolution it is important that the appropriate financial and administrative arrangements are in place. Getting the practicalities right is vital if we are to take full advantage of more taxation powers and I’m glad that the Commission will consider these practicalities in more detail,” said Murphy.
“I look forward to seeing the Commission’s final report which will be made available to the department and ministerial colleagues when it is published in May. At that point the report can be comprehensively considered and taken forward.”
The Commission’s final report is expected to contain a detailed analysis of the various budgetary management tools and safeguards needed to ensure that the risks of fiscal devolution can be managed effectively.