On the conflicting uses of tax varying powers…

Somewhere in our A Long Peace? document we argued that “there should be as close a connection as possible between representation, taxation, and the delivery of services.” It’s one hallmark of strong links between government and its electorate. Interestingly, Jennifer McCann initiated a private members debate on Monday which proposed: “That this Assembly supports the transfer of tax varying powers to the Executive, along with the establishment of an Executive borrowing facility.” One of the most interesting aspects (apart from noting that RRI – the reinvestment and reform Initiative – already offers the Executive a route to cheap public borrowing) was Robinson’s observation that such powers could be used in a number of conflicting ways:

I am not clear what the true intention behind the call for tax-varying powers is, or whether there is any agreement on it. As I see it, broadly speaking, there are four alternatives. The Member for North Down Peter Weir mentioned two of them.

First, if the purpose for having tax-varying powers is to increase tax, Members must recognise that. Increasing direct taxation would further undermine the region’s competitiveness. At a time when we are making economic growth a key priority for the Assembly, it would be wrong to increase the burden on the workforce.

During discussions before I came to the Chamber, I had decided not to mention the details of the Laffer curve, because I was sure that no one would mention it in the Assembly, but it seems to be the centre of our debate. [Laughter.]

However, we must take into account the fact that, in the most narrow terms, if one were to increase the tax on anyone in the workforce in Northern Ireland, the automatic response would be that they would seek an increase in wages to make up for the loss that they have borne in taxation. One needs only to look at the repercussive effects of that, particularly in the public sector, and the reduction there would, therefore, be in spend and resources.

Secondly, however, if the purpose is to reduce taxation, it would almost certainly have to be self-financed by the Executive, if my reading of the recent Azores case is correct. It would also be, at best, unlikely, in circumstances where there is a fiscal deficit of around £7 billion a year, that the UK Government would pay for extra tax cuts for Northern Ireland alone. I regard higher taxes in Northern Ireland than in other parts of the United Kingdom as politically unacceptable, and lower taxes, when we already have a £7 billion fiscal deficit each year, as unrealistic.

Thirdly, we may wish to have tax-varying powers without ever actually deciding to use them. That is not a cost-free option either.

The Administration in Scotland pay approximately £8 million a year to keep the necessary systems in place to allow the option to be used. However, it will cost them about £10 million to activate those systems, and that is money that could be spent on front-line services.

The fourth option is for a local Executive to use the tax-varying powers to replace the regional rate. I suspect that that is the main thrust of the Alliance Party’s argument. However, the impact of increasing income tax and reducing property taxes would be the expectation that those who are in work will pay for those who are not. Although we may not always approve of the details of UK-wide fiscal policy, Northern Ireland benefits enormously from being part of the United Kingdom.

By the end he notes:

We are operating within a complex public expenditure framework, and unfavourable consequences are often associated with what might seem a simplistic policy action. As well as my concerns about the principle behind tax-varying powers, I do not believe that the timing is right. It is prudent to await the outcome of certain exercises, such as the rating review, before considering a motion as complex as this. If the motion is pushed to the vote — and I hope that it will not be — I will oppose it for those reasons. I urge Members to do the same.