While the UK’s devolved nations have control over most of their public spending, their revenue raising powers are much more limited, particularly in Northern Ireland. Potential changes to improve the sustainability of its public finances – such as an increase in rates – are likely to be unpopular.
The devolved nations of the UK have control over most of their public spending but limited revenue raising powers, either through taxes or borrowing. This is particularly the case in Northern Ireland, which is at a much earlier stage of its fiscal devolution journey than Scotland and Wales.
In March 2021, the then finance minister, Conor Murphy, announced in the Northern Ireland Assembly that a Fiscal Council and Fiscal Commission were to be convened as per agreements set out in the New Decade, New Approach Agreement (2020).
The remit of the Fiscal Council is to ensure accountability and transparency for the Northern Ireland Executive’s finances. The Fiscal Commission was to report on possibilities for devolving further fiscal levers – related to public spending and taxes – to Northern Ireland in a similar vein to reviews that were carried out some time ago in Scotland and Wales. It was noted that no comprehensive formal review had ever been carried out on all the fiscal options that are available to Northern Ireland.
The Calman Commission in Scotland in 2009 and the Holtham Commission in Wales a year later, as well as subsequent reports in both jurisdictions, led to greater fiscal devolution – that is, giving more powers to the governments in Edinburgh and Cardiff. Currently, 9% of tax revenue in Northern Ireland is devolved compared with 20% in Wales and 31% in Scotland (Institute for Government, 2020).
What powers are currently devolved to Northern Ireland?
The Executive has control over approximately 90% of public spending in Northern Ireland but it raises only 9% of tax revenue. The main powers for raising revenue are currently the rates system (council tax) and air passenger duty (APD) on direct long-haul flights (of which there aren’t many).
The legislation for corporation tax devolution has been passed but is yet to be commenced. That is, work has not been completed to use this fiscal power, with the UK Treasury raising issues around the sustainability of Northern Ireland’s finances.
Devolution of corporation tax in 2015 had the support of the five main political parties in Northern Ireland, but since the Corporation Tax (NI) Act 2015 was legislated for, there has been considerable political instability. The Executive was collapsed between January 2017 and January 2020 as well as from May 2022 with no sign of any resolution on the horizon.
In the aftermath of Brexit, corporation tax devolution may again become a topical issue in Northern Ireland. Should the Protocol be kept intact, Northern Ireland may be in a ‘best of both worlds’ situation with access to the UK and the European Union’s (EU) single market for goods. In such a scenario, it may mean that lowering the corporation tax rate to compete with the Republic of Ireland would be a pragmatic decision.
Where could fiscal devolution go in the future?
Around 90% of income taxpayers in Northern Ireland pay the basic rate. In Wales, Scotland and England, the figures are 92%, 84% and 86% respectively.
Given lower wages and a lower cost of living in Northern Ireland, there may be room either to alter income tax rates or to adjust the bands at which different rates apply. The median wage (of all employees) is £24,400 in Northern Ireland, less than half of the upper limit for the basic rate income tax band (Annual Survey of Hours and Earnings, ASHE, 2021).
At the same time, the cost of living in Northern Ireland is lower than the UK average. The relative regional consumer price level shows that the prices of goods and services are 2.3% lower in Northern Ireland than in the rest of the UK (Office for National Statistics, ONS, 2016).
As such, adjusting income tax rates as well as income tax bands may be a potential fiscal lever option for Northern Ireland (see Table 1). It would not only allow for revenue to be raised but would also enable the system to be more progressive – in other words, based on an individual’s ability to pay. This is particularly important in Northern Ireland given the higher levels of poverty and deprivation.
Table 1: Comparison of basic rate taxpayers and median wages in UK nations
Source: Annual Survey of Hours and Earnings, ASHE, 2021
While not one of the ‘big taxes’, there is scope within Northern Ireland to also make the rates system more progressive. Figure 1 shows the average household annual cost of rates/council tax in the four nations of the UK.
Rates in Northern Ireland are considered comparable to council tax plus water charges in England, Scotland and Wales. Using these figures, average household spend per year is 88% higher in Wales than in Northern Ireland – a region that has a similar economy and levels of poverty. The Northern Irish Fiscal Commission found that the absence of water charges costs the Executive £345 million per year.
Figure 1: Average household bill for rates/council tax and water charges
Source: Fiscal Commission NI, 2022
Looking at these amounts, it would be easy to argue for higher rates in Northern Ireland, particularly given that public spending per capita is so much higher. But in reality, any substantial increases are unlikely to be introduced.
A rise in rates could be met with considerable public discontent, much like what happened in the Republic of Ireland when water charges were introduced. In 2014, when the Irish government – in a bid to recoup money following the global financial crisis of 2007-09 – introduced these charges, the Irish public refused to pay bills and marched on the streets in their thousands.
The charges were then overturned in 2016 and, despite calls from the OECD to introduce them on environmental grounds, there does not seem to be any political will to do so (OECD, 2021).
Who makes the decisions in a politically volatile Northern Ireland?
As mentioned, political instability in Northern Ireland is a significant issue. It has been exacerbated by Brexit and objections from some within the Unionist community to the Northern Ireland Protocol.
Whether taxes should be further devolved to Northern Ireland is made more complicated by the fact that there isn’t currently an Executive in place. This is particularly important at a time when the economy faces considerable unknowns, from the Covid-19 pandemic and the war in Ukraine to the energy and cost of living crises.
It is probable that the Fiscal Council would advise the Executive on the fiscal levers to pull, such as altering taxes or levels of public spending. But decision-making and policy changes would be the responsibility of elected representatives.
One benefit of devolution is to enable policy-makers to react to changes and shifts in the economic climate to meet certain goals at a local level. But if no decision-makers are in place, opportunities may be missed, which could even be detrimental to the economy if fiscal policy needs to be changed and isn’t.
What are the other hurdles to further devolution?
Decision-making in this area is severely hampered by a lack of data. The Fiscal Commission notes this in their report, but it is a longstanding problem that many economists face when researching Northern Ireland. Often, when data do exist, they can be limited, which reduces usability and reliability.
This lack of robust economic data means that, at present, evidence-based policy-making is limited. Before any further devolution is introduced, this is one area that should be looked at. Improvements in the availability and quality of data could have benefits not just for fiscal devolution but in many areas related to the economy and society more generally.
Where can I find out more?
- For more information on fiscal devolution in Northern Ireland, see the Fiscal Commission’s final report here.
- For the Fiscal Council’s 2022 assessment of the sustainability of Northern Ireland’s finances, see NI Fiscal Council, 2022.
Who are experts on this question?
- Robert Chote, Chair of Fiscal Council
- David Jordan, QUB
- Lisa Wilson, NERI