Meanwhile just as the Assembly has broken up for the summer (apart from the recall to debate Housing- gate) the Northern Ireland Council of Voluntary Associations announces that the time is right for a debate on tax raising powers and has commissioned a report from PWC. That should keep them all busy for what’s left of the marching season. Nevertheless full marks to an important part of civil society for raising a real policy issue. The deadline of 2014 for a UK decision on differential corporation tax gives a time frame for the wider debate. In the Bel Tel economist John Simpson sets the terms.
The present arrangements emphasise the dependence of Northern Ireland on UK Exchequer discretion. A subvention of nearly £10bn sustains a public sector spending arrangement which allows public sector spending to be some 20% per head above the UK average.
80% of the current revenue raised in Northern Ireland comes from five sources. In descending order, according to the Department of Finance and Personnel, they are Vat £2.9bn, income tax £2.6bn, national insurance £1.9bn, fuel duties £0.9bn and corporation tax £0.8bn.
Business and domestic rates are currently the largest revenue -raising taxes devolved to Stormont. Because of the complexities of any suggested further devolution, in practical terms it is unlikely that Vat, national insurance and fuel duties would be devolved. Consequently, the real debate, about the further devolution of major tax revenue, centres on income tax. If Stormont held devolved authority for the raising of income tax, how would this authority be used? Would income tax be increased to raise extra revenue? If decreased, what public services would be reduced?
It’s not John’s style to spell it out too brutally. But note that corporation tax raises only £800m (corrected). Is this an argument for keeping it or reducing it? In the NICVA video my colleague the devolution expert Alan Trench makes the interesting point that if we want a different sort of welfare state from the kind the Tories are trying to implement in England, we will need tax raising powers.
Income tax then, is the one to home in on. But the report says:
There is considerable uncertainty about the extent of responsiveness on the part of employees to tax rates and the elasticity of labour supply. This is both in general terms and amongst Basic and Higher Rate.. but there are indications form the external evidence that if the Assembly wished to maximise revenue it would increase the Basic Rate by a small amount and hold the Higher Rate at current levels..
it is much less clear, based on the past performance of the Northern Ireland economy, that Northern Ireland would be able to grow its regional Income Tax base above the UK average.
This boils down to a view that there aren’t enough higher tax payers to raise significant revenue and the only choice would be to raise the basic rate. ( This by the way running alongside a separate ” debate” about differential public sector pay in lower cost regions like NI ). Even then, would it be worth raising income tax when faced with the corresponding cut in the block grant?
Bearing in mind the political consensus over water charges and rates, who in Stormont is up for ending “the dependency culture?” ( “a very, very brave decision, minister! Perhaps more study needed?”).
But let’s not closed down the debate before it starts. Now then. Who’s opening?