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Fiscal Commission NI Chair Paul Johnson
More fiscal devolution for Northern Ireland?
Fiscal Commision NI Chair Paul Johnson with Finance Minister Conor Murphy MLA.
Chair of the independent Fiscal Commission NI, Paul Johnson, talks to David Whelan about the case for the partial devolution of income tax powers to Northern Ireland, the full devolution of other taxes, and the risks associated with greater responsibility.
The Commission was tasked in March 2021 by Finance Minister Conor Murphy MLA to examine the case for increasing the fiscal powers of the Northern Ireland Assembly and making recommendations on powers which could enhance the Assembly’s fiscal responsibilities. The Fiscal Commission’s report, in May 2022, returned 23 recommendations and established a strong case for devolving certain tax powers to go alongside the extensive powers the Executive already has over public spending.
Somewhat ironically, the report, which also looks at political and public sector capacity and capability to manage additional tax powers, has landed at a time when the Northern Ireland Assembly cannot meet, and Executive ministers are limited in what they can progress.
Johnson explains that the work carried out contains parallels with similar ‘technical’ commissions previously established in Scotland and Wales, and where these regions subsequently progressed more political-focused commissions to agree a final package of change with the UK Government. The Northern Ireland Executive is currently in no position to do so.
However, the Chair of the Fiscal Commission NI is confident that the analysis provided will stand the test of a considerable piece of time, explaining that the Commission delivered a “deliberately technocratic” report.
“Tax devolution will not happen overnight. It will require time to consider, to build consensus and to plan carefully. It is our hope that all the parties will take the opportunity to consider our report as they prepare for the resumption of devolved government,” he says.
The context of the report is that while the Northern Ireland Executive enjoys control over almost all spending on public services (£9 in every £10 of
‘identifiable’ public spending), beyond business and household rates, it has little power to vary taxes and raises less than £1 in every £20 of the region’s tax revenue.
Economy
Northern Ireland’s economic performance is poor, with income per head some 25 per cent below the UK average and lower again than the Republic of Ireland. On many economic metrics, it is among the worst performing UK regions and around 90 per cent of the Executive’s public spending is financed from the block grant. While some believe devolution of taxes could help change the economic and political fortunes of the region, others point to the level of risk associated with aligning the Executive’s budget more closely to the raising of taxes within the region.
Johnson explains that full understanding of the Northern Ireland economy, a prerequisite of the Commission’s work, quickly highlighted the unfeasibility of full fiscal devolution.
“The Northern Ireland economy is very different to that of England’s, in particular, in that incomes are lower, employment rates are lower, GDP per head is lower and economic inactivity is dramatically higher. Importantly for the tax system, relative to the UK, there are very few wealthy or high-income people, with only a fraction of higher rate or additional tax rate payers, when compared to England. I think all of these things, coupled with the large fiscal subvention, immediately lead to the conclusion that full fiscal autonomy, where Northern Ireland is in complete control of all tax and spend without any subvention, is for the birds.
“However, given appropriate equalisation through the block grant, those differences need not actually impede the devolution of some tax powers. It does mean, however, that it would be highly important to get the block grant adjustments, which come with devolution and which compensate the UK Government for any tax revenues devolved to Northern Ireland, right.
“Another perspective is that with a relatively poorly performing economy, there is an opportunity for additional powers to make a real difference to that performance. We were very clear that devolving tax powers should be as much about reforming or reducing taxes in order to promote economic growth as it is about politicians potentially raising money for public services. And it is absolutely possible to design models of tax devolution that would suit the unique makeup of Northern Ireland’s economy.”
The Commission recommends the partial devolution of income tax, where the Assembly would have a degree of control over the rates, and potentially bands of income tax, but stresses the need for administration to continue to be carried out centrally by HMRC. In addition, it says that if the devolution of income tax should happen, then the devolution of the apprenticeship levy should happen in parallel – given the policy responsibility of the Executive in this area and the operational synergies that can be had alongside the devolution of income tax. The Commission also recommends that smaller taxes such as stamp duty, landfill tax, and air passenger duty could be devolved and in full.
Johnson is clear that while the recommendations are for incremental and limited tax devolution, the Commission’s research highlighted that there are a lot of current taxes that are, in principle, devolvable. “A substantial fraction of taxation could, at least technically, be devolved to Northern Ireland, if that was the desire of local and national politicians,” he states.
Gradual
Outlining the Commission’s reasons for recommending a gradual approach, Johnson points to the pragmatism of needing to build up administrative capacity in Northern Ireland, to reduce risk. Additionally, he suggests that the transfer of much larger volumes of revenue in the short term and to an administration which is significantly dependent on the block grant could be destabilising.
It is for these reasons, as well as potentially high administrative costs, that the Commission recommends that any devolution of income tax continues to be managed from HMRC, learning from Scotland and Wales where such systems are already in place. However, the Commission does see value in local administrations having full powers and full administrative control over the smaller taxes such as stamp, APD, and landfill. They believe local administration of these taxes will allow greater scope for flexibility and innovation and improve public understanding of taxes. It will also increase accountability of the local administration and build that institutional capability.
Fiscal frameworks
Both Scotland and Wales have negotiated ‘fiscal frameworks’ with the UK Government, essentially the mechanics of how any new powers are practically operated. These frameworks include, for example, how the block grant is adjusted, any new borrowing powers, how disputes are resolved, and tax forecasts made, given that particular taxes are devolved. The Commission’s Chair notes: “The agreement between the Northern Ireland Executive and UK Government on how fiscal devolution is actually 4
Calman (2009) in Scotland and Holtham (2010) in Wales were similar technical Commissions to the Johnson Commission (2022) for Northern Ireland.
managed is the bedrock for success. Being clear on precisely how the block grant is impacted, and the tools to help the Executive manage any new powers will be key.”
Corporation tax
The devolution of corporation tax ratesetting powers to Northern Ireland was legislated for in the UK Parliament in 2015, but there is little prospect of it happening on the ground any time soon. A push for devolution had been long-standing, with cross-party consensus secured a number of years ago. However, the current appetite is less clear. Additionally, the UK Government has yet to outline what it means by the Executive’s finances being ‘sustainable’ – a key condition it set before commencing the powers.
Northern Ireland is uniquely positioned, whereby, the other jurisdiction on the island enjoys a 12.5 per cent corporation tax rate. Some have argued that the current case for devolution has been strengthened by the UK Government’s Spring Budget 2021 announcement that the UK corporation tax rate will rise to 25 per cent from April 2023. Even in the face of an increase in the Republic’s rate to 15 per cent, for larger firms, a big difference exists between north and south.
Johnson admits that of the over 20 taxes examined by the Commission, corporation tax was amongst the most difficult. “Our key conclusion is that there is value in the Executive seeking to complete the devolution of corporation tax. However, there is little value in the Executive simply calling for it in isolation. It needs to be agreed in lockstep with the UK Government. The only plausible reason for wanting corporation tax devolved is to lower the rate, which at least in the short run will lead to a significant loss of revenue.”
Practically, he states, UK Government approval could require quite radical promises from the Executive to either cut spending, raise other taxes to increase revenue or borrow. However, in principle, he agrees there is a case for having different corporation tax rates for poorer regions of the UK.
The Commission states in its report that there “is a case for lower rates of corporation tax in poorer regions of the UK in general and, given the proximity of the Republic of Ireland, Northern Ireland in particular”.
Johnson explains that an economic case exists but also recognises the uncertainty around the scale of impact. Johnson says: “We noted that the lower rate had clearly played a role in the economic development of the Republic of Ireland over time, but how much of a role it continues to play is unclear. What is clear is that cutting corporation tax is not in itself a basis for economic growth and would need to be part of a much wider economic strategy and package for Northern Ireland.”
Conclusion
Johnson concludes: “Our Commission has been clear from the beginning. While there are benefits to be had from fiscal devolution in terms of political accountability and tailoring local policies for local needs, increased fiscal devolution comes with risks. If revenues were to grow more slowly than in the rest of the UK then Northern Ireland could lose out, and it is possible to make policy mistakes.
“While it must be remembered that Northern Ireland is only at the beginning of a potential fiscal devolution journey, it is our view that the constituent parts could be put in place to realise significant increased fiscal devolution to Northern Ireland by 2027/28, as per the framework outlined in our final report.
“Ultimately, whether devolution happens or not remains a choice for politicians both in Northern Ireland and the UK, but it is our view that some tax devolution could be an important step towards a more accountable devolved government for the people of Northern Ireland.”
Profile: Paul Johnson, Director of the Institute for Fiscal Studies (IFS)
Paul Johnson has been Director of the IFS since January 2011. He is also currently visiting professor in the Department of Economics at University College London and is a member of the Climate Change Committee. He has previously worked in Treasury as Director of Public Services and from 2004 to 2007 he was the Deputy Head of the Government Economic Service.
Northern Ireland’s productivity gap
Northern Ireland’s economy currently faces several challenges. The effects of the pandemic are still being felt, with households facing double digit inflation, and a recession expected by the end of the year. Meanwhile, the situation surrounding the Northern Ireland Protocol continues to create uncertainty for local businesses.
Yet the biggest challenge facing the local economy is low productivity.
Productivity measures the total value of output produced for a given amount of work. It is a key driver of higher wages and living standards. The UK’s productivity growth has stagnated since the 2007-2008 financial crisis. This problem is even more pronounced in Northern Ireland, where productivity is 17 per cent below the UK average, and consistently the worst of any UK region (Figure 1).
At the Northern Ireland Productivity Forum, based at Queen’s Management School, we have been looking at the reasons for Northern Ireland’s productivity gap. It is not a new phenomenon, as the gap existed prior to the 2007-2008 financial crisis, the Troubles, and even partition. Examining the evidence suggests a combination of factors is to blame.
Northern Ireland’s higher concentration in low productivity sectors, such as agriculture and retail, is often presented as the main reason for low productivity. Yet, if Northern Ireland had the same economic structure as Great Britain, this would reduce the productivity gap by less than half. While increasing employment in high productivity sectors is beneficial, policymakers equally need to address the ‘long tail’ of low productivity firms which lag behind their peers.
Geographic peripherality is sometimes blamed for Northern Ireland’s low productivity, due to local producers potentially facing higher transport costs, and a small domestic market. However, transport costs have been shown to be only marginally higher. Instead, it is distance from networks and knowledge which creates a barrier to productivity growth.
During the 20th century, local policymakers focused on raising levels of capital to try and address low productivity. Today, the amount of capital per worker is around the UK average, but the productivity gap remains. Attention has instead turned to levels of innovation. Northern Ireland is one of the UK regions with the lowest R&D intensity, with it being concentrated in a small number of large firms.
Skills and training are strongly linked to productivity; this is an area where Northern Ireland has persistently underperformed. A skills deficit exists, with Northern Ireland having the highest proportion of individuals with no or low skills of any UK region. The brain drain of tertiary educated individuals is not as severe as it once was, but this has yet to be translated into improved productivity.
Northern Ireland’s infrastructure gap has been linked to low productivity. Public expenditure on infrastructure lags behind the rest of the UK, particularly in transport and the water network, and reflects a long-run pattern of underinvestment. This makes it more difficult to attract new investment, and limits opportunities for existing firms to grow.
Research Fellow with the Northern Ireland Productivity Forum at Queen’s University Belfast, David Jordan outlines the key causes of Northern Ireland’s large productivity gap.
Figure 1: Value of output per hour worked (UK=100)
Policymakers have long been aware of the productivity gap, but policy interventions have a poor track record. In the past, high levels of unemployment, particularly in manufacturing, saw generous financial support provided to firms. But this led to a low-skilled workforce producing low-value goods, and allowed low-productivity firms to survive. Recent policy has focused on entrepreneurship and innovation, but the productivity gap has persisted.
Several potential reasons exist for the failure of policy. Past problems were often misdiagnosed, while policy interventions have not been sufficiently joined-up to address areas of weakness. Tackling low productivity is often stated as an aspiration of policymakers, but it is rarely used to measure the outcome of interventions. Northern Ireland’s large public sector has been suggested as contributing to the productivity gap, by absorbing skilled labour and crowding out private investment. The alternative view is that the effectiveness of public policy in building a successful private sector is more important for competitiveness.
Institutions and governance may best explain past policy failures. Productivity has often been subordinate to other institutional priorities, such as political stability. During ‘the Troubles’, public expenditure was used to stabilise the economy, with policymakers balancing economic and non-economic considerations. Today, the legacy of a divided society has been linked to the emigration of skilled labour, and long-term health problems affecting the productivity of those in work.
The evidence demonstrates that Northern Ireland’s problem of low productivity is complex, with no single cause. While economic structure, geographic peripherality, and levels of capital were important in the past, today’s biggest barriers to productivity growth can be found in low levels of R&D, skills, and infrastructure. But closing the productivity gap is not an insurmountable challenge. The ability to do so will depend on whether local institutions can overcome their past failings, and improve the quality and effectiveness of policy interventions, so that the local economy can reach its full potential.
Horizon Europe: ‘Plan B’
Northern Ireland is at risk of being excluded from the world’s largest international research programme as a result of the UK Government’s unilateral action to alter the Protocol.
The UK Government’s domestic legislative efforts to unilaterally remove parts of the Northern Ireland Protocol, which the EU has warned could endanger the wider trade deal, also means that the UK’s initial plans to be an associate member of the over €95 billion Horizon Europe programme has yet to be secured.
Horizon Europe is a seven-year programme, with funding available over the seven years from 20212027. It is the successor programme of Horizon 2020, which saw researchers and businesses in Northern Ireland draw down almost €100 million for the local economy.
Almost 300 participants in Northern Ireland were successful in drawing funds from Horizon 2020, with an estimated €323,469 available for each successful application, however, despite an even greater tranche of funding being made available under the new Horizon Europe programme, concerns are growing that UK participants, including those in Northern Ireland, could be locked out of accessing funding.
Participation in the programme is not limited to EU member states, a point of critical importance for those researchers and scientists collaborating internationally, but all previous non-member states to associate with the programme have all had a wider trade deal with the bloc.
The European Commission has published all work programmes for Horizon Europe and a new incorporation of research and innovation “missions” are designed to increase the effectiveness of funding by pursuing clearly defined targets in the areas of: adaptation to climate change including societal transformation; cancer research; climate-neutral and smart cities; healthy oceans, seas, coastal and inland waters; and soil health and food.
The UK Government states that it still intends to associate with the programme, as agreed as part of the 2020 Brexit agreement, and encourages potential beneficiaries to “bid for funding opportunities on the same terms as EUbased applicants”, even though the association has not been formalised.
However, despite consistent reassurances, association with the programme may be in jeopardy which highlighted in November 2021 when the UK’s then-Science, Research and Innovation Minister George Freeman MP announced a ‘plan B’ “safety net for Horizon Europe applicants” stating that successful applicants for Horizon Europe grant awards will be guaranteed funding regardless of the outcome of the UK’s efforts to associate to Horizon Europe.
Only 17 of the 125 eligible proposals submitted by Horizon Europe by Northern Ireland researchers have been considered successful to date.
Although initially guaranteeing funding for the first wave of eligible and successful applicants to Horizon Europe who have been unable to sign grant agreements, it is understood that the UK Government is prepared to redistribute funding
earmarked to buy in to Horizon Europe to UK government R&D programmes.
In July 2022, the UK Government set out a new package of transitional measures which it says will “ensure the stability and continuity of funding for researchers and businesses”, and will come into force if the UK is not able to associate to Horizon Europe.
Criticism levelled at this approach is that financial backing alone will not cover the collaborative opportunities offered through Horizon Europe which have been so successful to date.
Writing in the Financial Times science commentator Anjana Ahuja said: “Losing connections forged over four decades to the world’s leading collaborative research programme through poor statecraft is worse than bad. It makes a mockery of the Government’s self-proclaimed ambition to turn the UK into a global science superpower.”
It is understood that over 100 successful applicants from the UK have not been able to secure final sign off for funding, with some choosing to move their work to a European institution to do so.
What the proposed distribution of R&D funding by the UK Government will mean for Northern Ireland’s scientists and researchers is unclear, however, in a separate audit of UK Research and Innovation (UKRI), the body responsible for delivering the initial cover for the first wave of funding, it was found that the UK’s largest public funder of research and innovation allocated less than 1 per cent of purse to Northern Ireland in 2020/21. Overall, Northern Ireland received £48 million out of around £5.3 billion spent by UKRI's research councils and Innovate UK in 2020/21.
The Department for the Economy says: “Despite the UK not yet having formally associated to the programme, Northern Ireland researchers and businesses have been able to apply to Horizon
Europe calls since the start of the programme. The latest available figures show that Northern Ireland researchers across academia, the private and public sectors have submitted 125 eligible proposals to Horizon Europe. Seventeen of those proposals have been considered successful with associated funding of €6.17 million.
“Northern Ireland Government officials continue to engage with UK Government officials to stay abreast of UK-EU engagement and contribute to the development of UK transition and alternative plans if required, to ensure that Northern Ireland’s unique position is considered and that any alternatives best meet the needs of Northern Ireland.”
