Official Report: Minutes of Evidence

The Chairperson (Dr Aiken): The evidence session is with the Northern Ireland Council for Voluntary Action (NICVA) and Ulster University and is about fiscal powers for Northern Ireland. We will receive oral evidence from Seamus McAleavey, whom we all know, and Dr Esmond Birnie, whom we also know.

I do not know who wants to go first, but it is over to you.

Mr Seamus McAleavey (Northern Ireland Council for Voluntary Action): I will give a brief introduction to set the context and then pass over to Esmond. We commissioned this piece of work from PricewaterhouseCoopers (PwC). Esmond was the author of the report. It is part of a wider range of research reports that we carried out, which were generally commissioned from other experts.

Quite often, we were trying to find policy differences that might improve the situation with the economy in Northern Ireland. We quite often did not have a fixed view prior to the reports being published and were not trying to find the evidence to prove something. Instead, we were very much about trying to inform ourselves, in the voluntary and community sector, and the debate at large in Northern Ireland.

You will remember that back then the focus was on the devolution of corporation tax powers and whether we should reduce the rate of corporation tax. We, like everyone else, were taxed thinking about the issue. Our attitude in general was that we were willing to explore anything that might make a reasonable difference. The main thing for us was trying to get the evidence before making decisions for or against something. That is why we commissioned the work. I pass over to Esmond.

Dr Esmond Birnie (Ulster University Economic Policy Centre): Thank you very much, Seamus, and thank you, Chair, for having us, as it were.

I will make some remarks by way of context. There are three main arguments for saying that Stormont should either use to a greater extent the fiscal powers that it has or think about extending those powers. First, there is an accountability argument. In other words, there should be a stronger connection between decisions about spending more money on a type of policy and how you raise the revenue for that. Secondly, there is an argument about incentives. Taxes and charges can be raised or lowered, according to whether you want to encourage or discourage a type of behaviour or type of economic or social action that you think is good or bad for society. The third reason for considering fiscal powers and their use is that the likelihood post-COVID — the rest of the decade, in other words — is that the growth of the block grant coming into Northern Ireland, which makes up the bulk of the funding for the Assembly and the Executive, will be limited at the UK-wide level and hence in the Barnett consequentials and the read across to Northern Ireland. Therefore, to some extent, you will have to be more reliant on Northern Ireland's own fiscal resources.

I am not arguing, and nor did the report in 2013, that fiscal powers are some sort of miracle cure for the economy. Instead, I argue that they might be helpful in giving more options and levers to policymakers. It is not about an agenda of cutting all taxes or indeed the reverse, which is increasing all taxes. You need to look at it on a tax-by-tax, case-by-case or charge-by-charge basis. Nothing in the report in any way denies the importance of value for money; in other words, getting as much effectiveness and efficiency out of our spending.

I will make a few other remarks before I shut up and we move to the questions and answers. There are comparisons with Scotland and Wales, and you had a session earlier with the Scottish Fiscal Commission. It is interesting that back in 1999, which is when the current period of devolution began, the two other devolved Assemblies in the UK had weaker or more limited fiscal powers than the Northern Ireland Assembly. They have since leapfrogged the Assembly and now have a wider range of powers. Scotland controls land and buildings transaction tax, landfill tax and most of the issues around earned income tax. In Wales, the powers are broadly similar but are less extensive for income tax.

I will mention three broad principles for fiscal devolution. First, you should attempt to keep your tax base as wide as possible so that you can keep the rates of each tax as low as possible. I say that because the record of devolution in Northern Ireland hitherto demonstrates that the Assembly has gone in the opposite direction by, for example, extending wider reliefs such as with non-domestic rating. The second broad principle is that, if you wish to promote accountability, you will be thinking about the devolution of the bigger taxes. In a moment, I will say that there are certain problems with devolving at least two of the three really big taxes. The third and last broad point goes back to question of using taxes and charges to either incentivise or disincentivise behaviour. There is a lot of scope for doing that at the devolved level. The Assembly has already moved into that territory with, for example, the plastic bag tax. There will be more environmental-related taxing in the future. There is no doubt about that.

I will say a little bit about which particular taxes and charges might get the greatest attention. I am going to start with domestic water charges. Why? I start there because that is feasible — it certainly could be done — and the amount of revenue that is being foregone — up to £280 million per annum — is by far the largest area of revenue raising that Stormont is excluding itself from. It is often said that we should not have domestic water charges because they would be damaging to low-income households, but there would be ways of managing that through, for example, means-testing, as was proposed in the Hillyard report in 2007. Furthermore, the current position is itself inequitable, because £280 million is taken out of the block grant to subsidise Northern Ireland Water to cover its operations. That is money that is not available for schools, the health service, employment and industrial generation and so forth, which are all areas where increased investment would probably benefit lower-income groups. The status quo is the inequitable situation rather than a move to domestic water charges. It is also sometimes argued that we already pay for our water through our rates. That is an unconvincing argument, because, if you look at the combination of council tax and water charges in Great Britain, you see that the totality is much higher than the average level of rates in Northern Ireland.

That leads on to looking at domestic rates. Our level of rates in Northern Ireland is approximately half the level in England and Wales. Bearing in mind that Wales has very similar socio-economic characteristics to Northern Ireland, that is a situation that is hard to either explain or defend. In fact, that points to the wider issue of super parity, because, in so many regards, charging in Northern Ireland is at a much lower level than it is for our counterparts in Great Britain.

I keep talking about big taxes in terms of the total amount of revenue raised. The three biggest taxes, going back to the Scottish Fiscal Commission's discussion earlier, apportioned in Northern Ireland are income tax, value added tax and national insurance contributions. It would be very difficult, in fact it would probably be impossible, to devolve powers over national insurance contributions and value added tax. I can explain that if you wish, but, for national insurance, it is basically to do with the integration of Northern Ireland's welfare system with the rest of the UK. With respect to VAT, Northern Ireland is still subject to European Union single market competition law, which excludes subregional variations in value added tax.

It is feasible to devolve income tax powers, because it has already happened in Scotland and Wales, but the Assembly has to ask itself very carefully what it would do with that power in advance of pushing for it, because there are options, dilemmas and trade-offs. If you were aiming for a greater equality of outcome, you would presumably wish to raise the 40% and 45% rates of tax, as has been done in Scotland by one percentage point. However, there is some evidence, based on the American and UK experiences, that, if you raise the top rates of income tax, the additional amounts of revenue raised can be disappointing, because high-income earners have various means of changing their behaviour to avoid paying much of the extra tax. At the subregional level, the most extreme behaviour that could be adopted is moving from Northern Ireland to Great Britain or the Republic of Ireland in order to enjoy a lower top rate of tax. An alternative approach to income tax might be to cut the higher rates, if you favour the promotion of entrepreneurship, but that leads to a dilemma: do you raise or lower the top rate? If the Assembly is aiming to raise revenues from income tax, serious consideration would have to be given to increasing the amount of income tax paid by people who currently pay the basic rate of 20%. That may well be a strategy that you do not wish to adopt, but it is interesting to note that it has been adopted by the Scottish Government, to some extent.

There is an argument for the devolution of air passenger duty (APD) in its entirety. At the moment, only long-haul flights are included. Of course, we have not had any long-haul flights for several years. There are negative environmental considerations. APD was never a well-designed tax from the point of view of reducing carbon.

Stamp duty could be devolved. It has been devolved in Wales and Scotland, but you need to think carefully about the consequences. If you cut the duty in order to promote purchases by lower-income and first-time buyers, for example, which might seem to be highly desirable, you might fuel an increased level of demand in the property market, and prices would rise and the benefits would be compensated out. There would not be any benefits or not many.

Landfill tax could also be devolved. You could raise the amount paid per ton in order to discourage landfill. You would need to think about the possible negative consequences of an incentivisation towards the illegal export of waste to the Republic of Ireland.

I will finish with corporation tax. It is interesting, because, since 2016, the Assembly has had the power to cut it and to vary from the UK average rate. That power has not been used. It is subject to having an overall fiscal balance and sustainability. The plans announced by Chancellor Sunak in the UK's March Budget to raise the UK rate to 25% puts a new perspective on the issue, as do the proposals to raise the United States federal corporation tax rate to 28%. There may be an argument for Northern Ireland not following or tracking the increase in the UK rate in 2023, but there would be a cost to that in the block grant.

Thanks very much. I have spoken for too long. There is a need for public debate in all those areas. That is why the creation of the fiscal commission — led by Paul Johnson — to consider them is very welcome. It will be the first time that Northern Ireland will have an independent and comprehensive consideration of the issues, and the role of the Committee is strategic and vital in the context of such a debate.

The Chairperson (Dr Aiken): Seamus and Esmond, as usual, that was excellent evidence. Thanks very much indeed. I have a couple of questions before I open it up to the team. Before we start to look at revenue-raising requirements, how would you assess our ability to spend efficiently the money that we have, if you were to mark our homework?

Dr Birnie: I will start, but I am sure that Seamus will have a view. That is not the issue that you asked me to talk about and which the report covers. There are questions of concern: I do not think that that can be denied.

It was interesting that, in the session with the Scottish Fiscal Commission, the Committee — it may have been you, Chair — referred to that 2016 OECD report on governance in Northern Ireland. The OECD attempted to address some of those issues. As you said, it is not entirely clear to what extent change was brought into effect after 2016. The renewable heat incentive (RHI) inquiry has come to light since then.

There are issues of effectiveness and efficiency of public spending to consider, but, allowing for that, there is an argument for fiscal variation. If Stormont had to raise its own revenues to a greater extent, that might incentivise more care in the use of the money that it had.

Mr McAleavey: I will follow that. There is an issue of annual budgets in Northern Ireland that we have seen over the last six years in particular. For a variety of reasons, we have not prioritised our spending very well. I am concerned that we degraded all services equally. When things were tight under the pressure of austerity, it would have been much better if we had had a strong set of priorities to focus on.

I support Esmond's point about the discipline that is added when you have to raise the income as well as spend it. That interested us as we were doing this work. The discipline that goes with that is important. As politicians, you know that, for your manifestos, you have to think hard about the balance between how much money you are going to try to raise from the population and how you want to spend it. If you get either end of the equation badly wrong, you can find that you have difficulty with the electorate. We support that idea. A lot more could be done on public spending priorities in Northern Ireland.

The Chairperson (Dr Aiken): The next question is about Northern Ireland Water. Many of us looked at — I looked at it when I was Deputy Chairperson of the Economy Committee — how government-owned companies (Go-cos) were set up in the rest of the UK. Northern Ireland Water, under its infrastructure, is supposed to be a Go-co, but it is not. For a variety of reasons, it is a strange hybrid. It was explained to us that Northern Ireland Water could not go down the Welsh Water mutualisation route for a model because of its structure and how its relationship was going. How is that interrelated with discussion about domestic water charges? Has Northern Ireland Water already been given the flexibility that it needs in order to address the significant waste water problem, or are we being forced down that route to try to achieve that?

Mr McAleavey: I will start on that one. When that debate was taking place, we in NICVA and voluntary and community organisations got heavily involved and explored that. We probably shifted our position during the discussion. We opposed the privatisation of Northern Ireland Water but favoured the mutual option. The Welsh Water option was favoured. We recognise the point that you are getting at, Chair. Sewage disposal and the production of water in Northern Ireland needed a major investment, and, with the best will in the world, they did not get it.

Esmond referred to work carried out by Paddy Hillyard that we took part in. We were concerned that, for people on low incomes, it was not simply an equation for water that prevented them paying anything else; they were getting big losses in other areas because of the subsidy that had to be put into it.

We think that a lot more careful, informed debate in that area was important then, and that it is important now, because this is about where you set priorities in Northern Ireland to do the best job for people.

The Chairperson (Dr Aiken): I have a final question before I hand over to the team. Esmond, you mentioned issues relating to VAT rules. Am I correct that, because we are seen as an EU region, due to our wonderful protocol, we are not in a position to vary VAT, even if we want to? How can we explain that?

Dr Birnie: That is my understanding. I have pursued that question with various authorities that are considered experts. The answer that I have received is that one aspect of Northern Ireland de facto remaining within the single market and within the competition rules and so forth established by the European Court of Justice over the years is that, by implication, the situation that existed prior to Brexit still applies.

The Chairperson (Dr Aiken): Will there also be implications for competition on any variations in corporation tax?

Dr Birnie: I am glad that you raised that, because the same point arises there. Again, I have asked that question of authorities, as it were, who should know the answer. They have come back to say that the situation prior to Brexit still applies. We are still subject to the Azores judgement. That was a ruling from the European Court of Justice from some years back that, if a subregion within the European Union reduces a tax rate relative to its national rate, which in this case is corporation tax, the central Government, which in our case is the UK Government, have to deduct an equivalent to that revenue loss from the fiscal transfer to the region. In other words, if corporation tax were to be reduced in Northern Ireland, the London Government would have to deduct a block grant adjustment.

Of course, it could be argued, and may well be the case, that the Treasury would have a role in this even without the protocol or the Azores judgement being in place. I think that the Treasury would take a very strong view that its fiscal generosity to Northern Ireland will not be unbounded. Therefore, if Northern Ireland opts to have a lower corporation tax rate than the UK in 2023, sticking to the current 19%, when, according to Chancellor Sunak, it will be 25%, the Treasury may take the view that there has to be a quid pro quo. That would mean that there would be a reduction of x amount to compensate for that, be that £150 million or £200 million; it would have to be worked out precisely.

The Chairperson (Dr Aiken): Do you have any good news, Esmond?

Dr Birnie: I am sure that something will come to light

but those are the realities. We need to bear those points in mind.

The Chairperson (Dr Aiken): Matthew, do you want to come in with a very short question before I go to Jim?

Mr O'Toole: So that I am clear, does the point about the protocol relate to only a theoretical differentiation? The assumption, Dr Birnie, is that the Azores judgement will continue to apply to Northern Ireland under the protocol. That has to be confirmed. Also, as you said, that would require action from the UK Government. Speaking as a former Treasury official, I see little cultural evidence that the UK Government will suddenly waive the principle of the block grant adjustment for devolved taxation, as you said. There would need to be both devolution of VAT to Northern Ireland and a judgement made to lower the rate or, for the sake of argument, to increase it. The UK Government, specifically the Treasury, would have to say that their new approach was to not have a block grant adjustment and instead to allow devolved regions to do that. That is the only point at which the protocol could stop that happening.

Dr Birnie: I agree with the logic of what Mr O'Toole said, but, on occasion, the Treasury has extended a bit of forbearance to Northern Ireland, and I suppose that, in theory, it might do something. What I am saying — I have checked this with a reputable source — is that the implication for the protocol is that the Azores judgement still applies to Northern Ireland. Even if the Treasury and the UK Government wish to be generous, their hands will be tied. As Mr O'Toole said, they may not wish to be very generous in any case, but they will not have the scope to do that.

The Chairperson (Dr Aiken): Jim.

Mr Wells: Esmond, welcome back. There is an oil painting here — oh, sorry.

Mr Allister: No, go ahead. It is all right.

The Chairperson (Dr Aiken): No, Jim, you go first.

Mr Wells: There is an oil painting on the wall here of the Members of the Assembly in 2000, and you are still on it along with me. I think that I am the only person in the Chamber who can remember you walking the corridors of this institution.

Mr O'Toole: I would say that you are no oil painting, Jim, but that would be unfair. [Laughter.]

Mr Wells: I walked into that one.

Esmond, I have been following your stellar career ever since you left this institution. You certainly have the ability to articulate complex economic issues in a very clear way that ordinary folk like me can understand, but you still have not cracked the holy grail. I want you to tell me whether this has happened in Scotland or Wales: what is to stop the UK Treasury, if we get extra fiscal powers, from saying, "They're getting these powers. They're going to raise an extra £300 million from water charging", which is not, perhaps, a popular way to raise money, I can assure you, and the Treasury simply deducts that from the block grant because it will assume that it is extra money arising in the Northern Ireland exchequer, as it were?

Why should we inflict pain on our community when we do not get extra money? It is simply taken off what we would have got anyway. In your analysis of the situation in Wales and Scotland, is there any evidence of that having happened?

Dr Birnie: Thank you very much, Jim, if I may. You are flattering me with those remarks.

That is a good question, but the example of water charges is fairly clear-cut. The Assembly and the Executive could make an excellent case to the Treasury, which, I suspect, the Treasury would accept, that, if water charges were introduced to Northern Ireland, that would bring us into line with the situation in England, Scotland and Wales, where charges are paid. Therefore, I would be very confident that the Executive would win that battle with the Treasury. I do not see that as being an argument against going down that route. You have to be careful about that lest, if you impose higher taxes in the region, as you say, the Treasury, with another hand, simply takes it away.

As to your question about whether this has happened in Scotland and Wales, you could probably have put that question to the previous set of witnesses. I do not know whether you asked that of the Scottish Fiscal Commission. In principle, when a tax is devolved, and when it has been devolved in the case of Wales and Scotland, the deduction is made. It is worked out. That is a difficult process, and there will be a bit of controversy, and economists and economic modellers will come up with different answers. There will have to be an element of political agreement, but, eventually, agreement would be reached between the devolved Administration and the Treasury, and a sum would be deducted.

When you devolve a tax, the hope is always that the economy in the region will prosper in such a way that the revenues raised will exceed the deduction. That raises an interesting question of whether that always is the case. There is some evidence in the case of Scotland — for example, in the policies that it has pursued for devolving income tax — that it has not gained that much extra revenue because the tax base in Scotland did not grow as rapidly as perhaps they had hoped. There is an element of risk in such policies, and we need to be aware of that.

Mr Wells: May I suggest, Esmond, that you return to this Building and take up the role of junior Minister to sell water charging to the community? I think that you would find that quite a challenging role. In 2007, we suggested it, and it was very interesting going round the doors during that election campaign when there was only a hint of water charging coming in, never mind it actually happening, and I have never seen such opposition to any policy in my very long time here.

Dr Birnie: You may be right that this will be an unpopular policy. It will require an element of political courage to move in that direction, but Northern Ireland is seriously out of line with the rest of the UK in this regard. As I was trying to explain in my opening remarks, the status quo is inequitable because it involves the deduction of up to £280 million from the amount of money that Stormont has available from its funds. That has to be diverted into running Northern Ireland Water, covering what would otherwise be its operating loss. That is money that is not available to improve schools, the health service, industrial development, employment creation and transport improvement.

That status quo disproportionately impacts lower-income groups, whereas not having water charges benefits all households across Northern Ireland — that is true — but it benefits average and above average income households. In effect, they receive a subsidy that arguably, in social terms, cannot be justified and is out of line, as I said, with policy and practice elsewhere.

Mr Allister: Thanks, Esmond. Just remind me: what is the estimated income tax take in Northern Ireland?

Dr Birnie: The figure is approximately £3 billion in 2018-19, according to HMRC. You discussed the issue of apportioning revenues across the UK in the previous evidence session. The most up-to-date figure that I have is £2·9 billion. It is the second-largest source of tax. VAT at that time was £3·4 billion, and National Insurance contributions were £2·7 billion. There will have been some variations since 2018-19. Presumably, the next year, it increased, but, last year, with the COVID recession, it will have fallen quite dramatically. I think that it is in order of £3 billion per annum.

Mr Allister: What is the approximate estimate of the running costs of Northern Ireland?

Dr Birnie: What do you mean by that? Do you mean the administrative costs of the devolved Departments, or do you mean the costs of the [Inaudible.]

Mr Allister: No, I mean the entirety of spend vis-à-vis Northern Ireland.

Dr Birnie: I have not seen an estimate or certainly not an official figure. Sometimes, figures are published by Departments of what they deem to be their administrative costs, but I do not have up-to-date figures like that to hand. Indeed, I am not absolutely certain how far they have been published in recent years. A global sum figure for how much money it costs to administer central government in Northern Ireland — you might wish to include local government, arm's-length bodies and public agencies — would, no doubt, be a considerable figure of hundreds of millions of pounds, but I do not have an actual sum.

Mr Allister: Do we know how much the block grant is, for example?

Dr Birnie: Yes, we do. DEL, which is the cash to Departments where they have discretion about spending, is in the order of £12 billion per annum.

Mr Allister: And the annually managed expenditure (AME)?

Dr Birnie: It is roughly the same. It is about another £12 billion. That is mostly taken up with benefits and pensions, and I think that student loans are in there as well.

The Chairperson (Dr Aiken): Jim, just to cut through, the last set of figures that we saw that had been peer-reviewed indicated that it costs £23 billion to run Northern Ireland plc with AME and DEL.

Mr Allister: That is before you get to contributions to national services.

The Chairperson (Dr Aiken): Yes.

Mr Allister: It is heading towards £30 billion a year, presumably, to keep Northern Ireland afloat.

Dr Birnie: I am not sure, Mr Allister, what you mean by the word "afloat", but the total level of expenditure is made up of DEL, AME, and the further category of so-called non-identifiable spending, which is the apportioned-out benefit that Northern Ireland is deemed to get from UK central spending such as defence spending, the interest payment on national debt and various central services such as overseas aid and overseas representation. For 2018-19, that total expenditure was of the order of £27 billion to £28 billion. Obviously, in the most recent year, 2020-21, the financial year that has just passed, the figure will be well above £30 billion because of the additional COVID spending. We know that Northern Ireland received Barnett consequentials of over £3 billion and additional AME money because of COVID, so you are talking about well above £30 billion for the totality of spending.

Sorry, I misunderstood your initial question, Mr Allister. I thought that you were asking how much it costs to administer the various Departments. That is a very interesting question and a very hard one to answer.

Mr Allister: We got there. The approximate figures are £30 billion, and, of that, in income tax, we raise 10%.

Dr Birnie: Yes, but, of course, bear in mind the fact that there are other forms of taxation as well.

Mr Allister: Yes. I said income tax. At the end of the day, all of that accumulates to a significant subvention. Yes?

Dr Birnie: Yes, there is a significant, as you term it, subvention, or, as the Office for National Statistics (ONS) calls it, a fiscal transfer. The most recent figure for 2018-19 was £9·4 billion. That included the so-called non-identifiable spending that I talked about earlier. If you removed that, that would take maybe £3 billion off the amount, but it would still be a considerable sum of money and a considerable sum of money per person or per family.

Mr Allister: If we follow the Scottish example of transferring social security to Stormont, have we any idea what the resulting administration costs would be? At the moment, they are simply paid by Westminster.

Dr Birnie: There would be considerable administrative costs. I have not seen an estimate for the figure. The situation with social security is very interesting because, strictly speaking, it is a devolved matter, but, by and large, with the notable exception over the recent set of years of the welfare reform mitigation measures, Northern Ireland traditionally, at least until very recently, adopts step-by-step parity with the UK or GB position. Of course, when welfare reform is introduced — for example, with respect to the so-called sole occupancy room or bedroom tax and some other issues such as the household absolute cap or limit — Northern Ireland has deviated from that. To an extent, we have begun to use that devolved social security power, albeit to a limited extent.

Mr Allister: Of course, the result of that was a reduction in the block grant.

Dr Birnie: Strictly speaking, it is not a reduction in the block grant; it is part of the block grant. It is a bit like the argument about Northern Ireland Water and not having domestic water charges. You, as the Assembly or the Executive, ultimately have the absolute right, as it were, to decide how to divide up and use the block grant.

As an economist, I am trying to argue that, in the case of water charges, because we do not have charges, some of that funding has been pre-empted in a certain direction. Whether you agree or disagree with that, a similar sort of logic applies in the case of the welfare mitigation measures. A certain sum now has to be spent on those measures, and, obviously, that money cannot be spent on other things, such as education, health, industrial promotion or whatever. Ultimately, that is a policy decision, and it is one that the Executive have taken.

Mr Allister: A fiscal commission looking at extra fiscal powers for Northern Ireland will be in the context of the figures that I have discussed with you, and what it comes down to is that the only option that you have put forward and articulated is that we introduce water charges for consumers.

Dr Birnie: It is not the only option that I said was feasible. You could look at stamp duty, landfill tax and air passenger duty, and I think that the case for corporation tax may be becoming stronger again than it was several years ago.

It is important to hold in mind two points that may seem in contradiction, but they are not. First, we have to recognise that Northern Ireland has this large subvention, as you called it, or transfer from the UK Exchequer, and that will remain the case. Alongside that, we can still strive for the situation where, at the margin, when Stormont is thinking about other policymaking decisions and spending an extra £100 million or £200 million on a policy, there is some connection, to a greater extent that hitherto, between that decision to raise spending and raising the revenue regionally to fully or partly pay for that. There would be benefits to strengthening that connection. It goes back to the point about accountability and trying to deal with the "free money" mindset or mentality, if I may call it that, evidenced in the renewable heat incentive inquiry.

Mr Allister: All that flexibility under the protocol is restrained by the Azores judgment.

Dr Birnie: It is restrained, but there still may be a case for devolving a tax, if you have confidence. That involves an element of risk. However, in making decisions about the economy, calculated risks sometimes have to be taken. For example, you might feel that varying corporation tax compared with the UK average would cause a sufficient boost to the Northern Ireland economy. Indeed, in some sense, in the revenues collected, you would gain back the deduction and more, but it is a risk. As I said, the Scottish experience of devolving income tax has not been all that favourable. Sometimes, taking on extra tax-raising powers can turn out badly for the devolved Administration.

Mr Allister: Thank you.

Mr McGuigan: Thank you to Dr Birnie and Seamus for the presentation. I want to follow on from Esmond's last point about the experience of Scotland. He indicates that Scotland's experience of devolving income tax was not that positive, but it has ensured a fair tax system. Although Scotland may not have raised more revenue, it has instigated a fair tax system. Hopefully, he agrees with that.

Secondly, on his point about corporation tax, we have the option of keeping the rate at 19%, rather than following the UK, which is to return to a rate of 25%. Has any work been done on the additional revenue that could be raised were we not to follow the UK's suit?

Dr Birnie: OK. Thank you very much, Mr McGuigan. It is certainly true that the Scottish system of income tax has become, to use the technical language, more "progressive". Many people who had paid 20% income tax now pay 21%, and those who had paid 40% now pay 41%. In the rest of the UK, those who had paid 45% now pay 46%. The point of income at which you start to pay 41%, as it now is in Scotland, is, at around £44,000, considerably lower than in the rest of the UK, where it starts at around £50,000. How you judge that is in the eye of the beholder. It has moved in a progressive direction and towards greater equality of outcome. Of course, if you are, say, a school principal in Edinburgh and earn £50,000 per annum, the monthly income tax that you pay is now roughly £100 higher than that paid by your counterparts in England or Northern Ireland. The extra income tax from people who are higher up the income scale is appreciable. You can judge that to be good or bad, depending on your political preferences.

On the corporation tax point — maybe the Committee will have that debate in the future — we need to ask whether Northern Ireland wishes to stick at the current 19% when GB goes up to 25%. In other words, does Northern Ireland wish to create a six percentage point divergence? How much would be deducted by the Treasury? You are back to the Azores question, which applies in some shape or form, whether through the protocol or through lack of Treasury forbearance. We do not know how much the deduction might be because the question has not yet been asked, and the calculations have not been made, but I suspect that it might be considerable and possibly between £150 million and £300 million per annum.

Finally — again, this work has not been done yet — you have to ask what impact a 19% rate here, compared with 25% in England, Scotland and Wales, would have on the Northern Ireland economy: for example, on the promotion of inward investment or the development of indigenous companies. I am sorry that I cannot give you a definite answer. The work has not yet been done because the Chancellor announced the change only in March. In a sense, policymakers in Belfast have to work out what position they should adopt in light of that situation and in light of changes that are happening in America and, no doubt, in other parts of the world.

There are big changes in the OECD's approach to corporate taxation and, at a global level, to how digital companies are taxed. Many things are fluid. That is likely to have a big impact on the Republic of Ireland's 12·5% rate in the future. Northern Ireland is a small region, and we need to be fleet-footed and think about how we position ourselves in that broader, shifting international tax context.

Mr McGuigan: OK, fair enough. You mentioned some taxes that are unlikely to be devolved. Scotland and Wales, as you said, have devolved stamp duty, landfill tax and income tax. Are there likely to be particular barriers to those three taxes, for example, being devolved to the North? If so, what are they?

Dr Birnie: There are not necessarily any very strong practical impediments. I am thinking back to Mr Allister's question about administrative costs. The issue of administering taxes has to be factored into the equation when you work out whether devolved taxes are worthwhile. If Northern Ireland devolved stamp duty or landfill tax, there would be an administrative cost. It might be several million pounds per annum. The Scottish experience suggests that having those taxes devolved and administering them in the region can cost in that order of magnitude. You need to ask whether you wish to pay for that. You would be collecting revenue but paying for the admin, whereas, at the moment, it all comes out of HMRC and the central costs of running the UK Government.

Another thing to bear in mind is the stamp duty threshold — at least, the threshold as it was prior to COVID. At the moment, we are in the unusual situation of having a stamp duty holiday, COVID measures and so forth. Hopefully, with improved public health, stamp duty will probably return in the summer. Obviously, it is not good news in that sense, but the improvement in public health is, of course, good news. The threshold was £125,000. House prices in Northern Ireland are, on average, lower than the UK average. The most recent figure from Land and Property Services (LPS) suggests that, at the end of last year, the average house price in Northern Ireland was about £147,000. I think that I put the figure in the written note that I sent. We are not very far above £125,000 in any case. The benefit from raising the threshold in Northern Ireland might be quite small because so many houses in Northern Ireland already sell at below the threshold or not much above it. Therefore, in practice, prior to March 2020, most house purchasers in Northern Ireland were not paying a huge amount of stamp duty, although there are obvious exceptions at the top end of the market.

Mr McGuigan: You talked about the positive example of the plastic bag tax: it changes people's behaviour and raises additional revenue. There are likely to be further environmental and healthy lifestyle taxes. Do you have any sense of potential taxes along those lines, where they have worked or problems that they may encounter?

Dr Birnie: That is a fascinating question. There is scope, and, to some degree, certainly at the UK-wide level, let alone what happens at the Northern Ireland devolved level, certain changes will be necessary. The point is often made that very considerable revenue — I think that, in total, it amounts to nearly £40 billion per annum — is raised in the UK from taxation on vehicles, be it vehicle excise duty or, of course, the considerable duty paid every time you buy a litre of petrol or diesel. If we are moving to a situation where fossil fuel-based cars and lorries will, over the next decade, 15 years or 20 years, gradually be phased out, that revenue stream will gradually trickle away. Indeed, it might, if other policies move with reasonable speed, start to decline quite rapidly. As we move to less carbon-based transport — electric vehicles etc — the challenge will be how to tax that. Again, this goes back to Mr Wells's question about how much political courage you want to have. At some point, we need to think about road pricing policies. In other words, at the moment, we charge people for the amount of petrol that they put into their car, and there is annual car tax, be it £100, £300 or whatever, depending on the car. Instead, it seems fairer — we probably have to move down this route — to use microchips in the bonnet, cameras and so on so that people are charged according to the number of miles that they drive and hence the amount of pollution or congestion that they add.

That is the agenda in the long run. Politically, it is challenging, but it is entirely feasible. It has been done in other parts of the world. The technology exists, so it can be done, and, arguably, it will have to be done as fossil fuel usage, particularly in transport, declines.

Mr McGuigan: That was very interesting. Thank you.

The Chairperson (Dr Aiken): I have put LPS off until just after 4.00 pm. I have given extra time because this is important.

Mr O'Toole: Thanks for your evidence. Esmond's, in particular, has been very useful and thorough. The ex-Treasury official in me is nodding along when you talk about revenue-raising possibilities; the politician in me is telling me to stop nodding.

I agree that the fiscal commission is a good thing. On Monday, we debated the regional rates order in the Assembly. It is clear that that is, basically, the only revenue source that is used and managed actively by the Executive. Locally, together, the regional and district rates total over £1 billion of revenue. I strongly agree that there is lots of potential for additional fiscal devolution. However, given that we do not yet know what will happen to the structural nature of commercial property generally or how economic behaviour has shifted, are you concerned that the one area of substantive revenue raising that we have might already be at risk?

Dr Birnie: Thank you, Mr O'Toole. You are, of course, right that there has been a huge shock to the commercial property market. There are a lot of unknowns, and that creates an element of uncertainty. It is worrisome because, as you say, the regional rate is one of the few existing tax and charge-varying powers that Stormont exercises.

In my opening comments, I mentioned the extent to which there are reliefs from non-domestic rates in Northern Ireland. Those reliefs are considerable. In 2015 and 2019, the Department of Finance, or its predecessor, reckoned that they came to over £200 million per annum. Some of that is a revenue loss to councils; some a loss to Stormont. Those reliefs need to be looked at. There is a tension. I am not convinced that it is right that Northern Ireland has a much stronger relief for empty property than England, Scotland and Wales, for example. Given the shock that we have had over the past year, before hitting the economy with another tax impost, as it were, you might wish to see where things settle when it emerges from COVID. In the long run, it is hard to justify the extent of reliefs. In fact, they have been extended during devolution. That is contrary to wise taxation policy, which aims to widen the base but reduce the average rate at which every tax is paid to avoid an excessive impact on the efficiency and cost structure of businesses.

Mr O'Toole: I know that you will be involved in the fiscal council, so you might not comment on this, but, if there were to be further devolution of tax powers, in whatever area, would there be a case for having some mechanism to do a proper horizon forecast of the potential revenue raised and the economic impact of it? In conjunction with the Office for Budget Responsibility (OBR), the Treasury forecasts receipts on every tax that is levied. Should we have the power to do that here, or could we just get the OBR to do it?

Dr Birnie: The Committee has invited the fiscal council to appear before it on 9 June or thereabouts, so you will have a chance to ask that question of it then. [Laughter.]

I will not pre-empt the answer now. This is an important question, but who should do the forecasts? At the moment, a number of university, independent and commercially based forecasting models of the Northern Ireland economy, to varying extents, may or may not be able to forecast revenues from a certain tax. The question that then arises is this: do we rely on that in future, or, as you say, do we go down the route of the OBR in London or, more recently, the Scottish Fiscal Commission — it has just given evidence — which does that for Scotland? We will return to that question on another day. Sorry.

Mr O'Toole: I agree very strongly with the case for at least examining areas of further fiscal devolution. I am also strongly critical of one notable area of fiscal devolution that was mentioned earlier, which is APD. It is, effectively, now a subsidy, not just for non-existent flights but for flights that, with the best will in the world, appear very unlikely to return to Northern Ireland, given the state of global aviation. The block grant adjustment that was constructed at that time came from a forecast of forgone revenue, which, presumably, came from, bluntly, the Treasury. It was in the Treasury's interests not necessarily to take a maximalist approach but not to skimp when it came to the forecast of forgone revenue, and that has worked in its favour. That is a statement rather than a question. Is that an unfair depiction of what has happened?

Dr Birnie: I would not necessarily say that the Treasury's behaviour was malign —

Mr O'Toole: No, I do not think that at all.

Dr Birnie: — or unreasonable. At that time, it was hard to forecast the commercial robustness of continental airlines and, in particular, their Belfast routes. Subsequently, Norwegian operated a route to Boston for a number of years. It illustrates the point that there will always be risks. In that case, the risk came down badly for Northern Ireland, but I would not necessarily blame anybody for that. The deduction is somewhere between £2 million and £3 million per annum.

There remains the question of whether, with the remainder of flights that we have — air traffic is still very low; hopefully, we will have those flights as we open up post COVID — we should move towards a blanket devolution of the entirety of APD.

Mr O'Toole: Including short-haul APD.

Dr Birnie: Obviously, the strong view from the tourism sector and some parts of the broader business community will be that the catalytic effects on the economy could be considerable. You have to weigh that against the carbon produced by air travel. As I said — various evidence backs up this point — APD was never a genuine environmental tax. It was not well designed, and it is possible, with intellectual consistency, to argue that, yes, we could devolve, reduce or, indeed, scrap it, but there should be some broader system of taxing or charging for carbon in the round.

Mr O'Toole: This is, I promise, my final question, and it is on the subject of borrowing. Clearly, there is a significant subvention/fiscal transfer to Northern Ireland. In a sense, at the moment, that applies to most developed countries. Very few countries currently raise what they spend, and they are borrowing.

We have not used our reinvestment and reform initiative (RRI) borrowing headroom for a while. Do you think that we should do more of that, and are you satisfied with the way that we used it in the past? Has it actually been used for investment rather than for slightly less value-added things?

Dr Birnie: There are some very good and deep questions there. They are hard to answer. I have not seen data that would allow one to examine how much of the money that was borrowed through RRI was funding capital as opposed to resource spending. I suspect that it has been something of a mix. Therefore, has it fulfilled the name on the tin: reinvestment and reform? It has to an extent but maybe not as much as was hoped for in 2002-03 when the then Chancellor, Gordon Brown, introduced it, or gave that power to the Executive.

Importantly, the Executive need to get some sense of the totality of debt that the public sector in Northern Ireland has, and by that I mean not just Departments but various public agencies and local government. The Executive have not done that hitherto, and, if they have, it has not been in the public domain. How big is that debt? How big is the annual interest charge, the unitary charges or whatever? They might also want to look at payments relating to past public-private partnerships (PPPs) and PFIs in order to get some sense of how much debt has been carried. They might then want to move on to consider whether the debt is still at a sustainable level and whether should we borrow more. It is hard to answer those questions because we lack that data. We know that Scotland and Wales have borrowing powers as well. Stormont's borrowing powers are not out of line with those of Wales on a per head of population basis; they may actually be greater. Scotland, according to some definitions, probably has a higher borrowing headroom or capacity, although not all of it has been used hitherto.

Mr O'Toole: Thank you.

Mr Catney: Thanks very much, Dr Birnie. I had a little bar on Donegall Quay back in the early 70s, and I saw the vast revenue that was going into the Harbour Commissioners. That has not been mentioned in your thoughts or as part of your brief. Should the Executive be looking at that because they seem to have very good trading terms in order to be able to amass that amount of wealth?

My second question goes back to Mr Allister's about the amount of money that is involved. Scotland and Wales earn something between 20% and 30%. We in Northern Ireland are at 9%. Mr Allister asked about the intervention and how much it involved. In the small businesses that I have sold in my lifetime, I had corporation tax to pay as well as the profits that were made on them. Has a study been done in Northern Ireland of the total tax lift from the Six Counties that goes across the water and of what is subtracted from that in order to find out what it takes to run the place? Your figure was £2 billion or £3 billion. Does that take into account all the revenue that is lifted collectively in Northern Ireland and amassed into that pot, which then leaves and goes across the water, regardless of what comes back to us through Barnett?

Dr Birnie: I will deal with the bit at the end. The Office for National Statistics (ONS), the UK statistics agency, which is independent of government, uses apportioning techniques. It tries to capture or represent all the tax that is collected in Northern Ireland. Some of it is an estimate that is based on the share of the population and shares of other types of economic activity. When I say that the levels of income tax is £2·9 billion and VAT is £3 billion-plus, I mean that there is some uncertainty, plus or minus, about those admittedly big figures, but I think that they are probably broadly correct. Hence, in turn, the figure for the fiscal transfer, which is the £9·4 billion in 2018-19, is also broadly correct, albeit that it includes the non-identifiable spending on UK national debt, overseas aid, overseas representation and a Northern Ireland share, as it were, of UK general defence spending.

In your question, you mentioned the Harbour Commissioners. Were you talking about Belfast harbour, or which port were you talking about?

Mr Catney: I was talking about the Belfast Harbour Commissioners and the amount of money and wealth that was accumulated.

Dr Birnie: Right. There is a question about the so-called reserves of various public bodies and agencies across Northern Ireland, not just those of the various ports and the Harbour Commissioners, and it would maybe be unfair to single them out.

The NICVA report was really about tax variation. However, there is a legitimate question about whether Stormont — I mean the Executive and Northern Ireland's central Government — could say to various public agencies across Northern Ireland, such as further education colleges, universities — I am an employee of a university — and the Harbour Commissioners etc, "To the extent that you have reserves, instead of us providing you with a grant from Stormont, you should make do with running down your reserves". That is a hugely debatable and controversial area. Of course, there will be varying estimates and views of how big those various public bodies' reserves are and, indeed, in some cases, whether they really have net reserves at all because of the level of debt and so forth. Therefore, to what extent is it meaningful to talk about their reserves?

About 10 years ago, there was a proposal to fund a certain level of public expenditure that was based on extracting a certain amount of reserves from the Belfast Harbour Commissioners. Rightly or wrongly, that did not happen. We are obviously in a different economic position now. I am sure that they will speak for themselves, but those in Belfast Harbour and their counterparts in the other Northern Ireland ports and harbours will probably argue that this is a very difficult time for them given the COVID-related recession and the impact on Great Britain to Northern Ireland trade. They would probably argue that this is not a good time to ask them to surrender their reserves.

It is an interesting question. I do not have the data to say to what extent there is scope for Stormont to reduce the call on its block grant by requiring those various public bodies to, as it were, operate off reserve rather than from cash that comes as a grant from the Northern Ireland regional government.

Mr Catney: And the last—.

The Chairperson (Dr Aiken): Just a short question. We are running over time a wee bit.

Mr Catney: I understand, Chair. I will try to be as quick as I can, but I waited quite a long time to get in. Thank you. [Laughter.]

The corporation —.

The Chairperson (Dr Aiken): That is me told off. [Laughter.]

Mr Wells: Resign. Resign [Laughter.]

Mr Catney: No, there have been enough resignations. [Laughter.]

The 12·5 % to 13% rate of corporation tax in the South of Ireland makes it nearly impossible for Northern Ireland on this island. It is competing with both jurisdictions in order to try to have stable business that can compete with our Southern counterparts. Why would we even look at trying to increase that rate? The talk should be about trying to lower it rather than to increase it. Do you agree? What is the point in the British Government trying to raise that rate to 25%?

That would put us in a position where we would find it nearly impossible to attract inward investment or to compete.

Dr Birnie: I would not put it as strongly as saying that it would make it impossible, because there is a range of factors that make an area attractive to inward investors. Those include your availability of skilled labour, the wage rates and other labour costs that have to be paid, your transport infrastructure and whether you have ready access to research and development facilities. To some extent, certainly in the past and, no doubt, in the future, Northern Ireland, obviously, has had to play to its own particular strengths and to say to inward investors, "You could go to Dublin, Dundalk or Cork and get very low corporation tax, but, equally, if you come to Belfast, you will find that we have certain strengths as well". In some areas of the economy, that has worked quite well. In the last 15 or so years, the greater Belfast area in particular has had an extremely high rate of inward investment from US-based service sector companies.

However, there would be a widening gap in corporation tax if we went up to 25% and the Southern Irish rate remained at 12·5%. Remember that that is the nominal quoted rate, but the practical rate that some very big companies in particular in the Republic are actually paying is much, much lower. We have seen that from the experience of, for example, Apple and the controversy about its tax payment, or lack of tax payment. The rate that is paid is sometimes far below the nominal quoted 12·5%. That makes life harder for Invest Northern Ireland and for businesses that are operating here and competing. I certainly cannot argue with that. I do not know whether it makes life impossible, but it makes it harder.

Mr McHugh: Tá fáilte romhaibh, a Esmond agus a Sheamuis. You are both very welcome. Our main focus today was on assessing the transfer of powers to Northern Ireland, looking at our ability to raise funds and taking responsibility for the distribution of the same funds. When you look at the Northern Irish economy at the time of partition, you see that it was a net contributor to the British economy. It is now the opposite. You talked about the intervention that we depend on each and every year. Whilst one does not have those figures exactly one way or the other and there is still a lot of dispute about the exact amount of moneys that are raised in this economy, there is no doubt about one thing, which is that we are totally dependent.

We are not functioning that well as an economy. Irrespective of whether we have the ability to raise some of our own taxes, which I think is welcome in itself, it still will not address the central issue, and that is the creation of wealth in the Northern Irish economy. It is the very reason why house prices and everything else are much lower than in other places. Basically, the wealth is not here to create that kind of demand for houses or whatever it might be to be at a higher price.

Esmond, you alluded to other advantages that we might have in the Northern Irish economy, including our labour force being well enough educated, but that is exactly what we are competing on with the Republic at present. It has exactly the same qualities, but, over and above everything else, it is still part of the single market. It is now to our advantage that we will be part of that single market as well. I will come back to my point that, when it comes to different instruments for raising taxation, are those not totally and absolutely dependent, first and foremost, on the creation of wealth?

Dr Birnie: Thank you very much, Mr McHugh. You make an excellent point about the emphasis on creating wealth. I certainly endorse that. That creates very real dilemmas — they are what we call "trade-offs" — where there are two things that you want to achieve, but, if you go for one, you get less of the other, and, if you go for the other, you get less of the first thing. It is all very well devolving income tax to Stormont. You might say, "Let us go down the Scottish route of pushing up the 40% rate to 41% or 42% and the 45% rate to 46%, 47%, 48% or whatever". However, we have a limited number of entrepreneurs, and, if you do that, arguably, you will discourage any growth in entrepreneurship. I cannot say to you, "You are the politicians, you stood for election, you have been elected, you have mandates, and those mandates, to varying degrees, will reflect either a wish for greater equality or a wish for greater growth and efficiency". Somehow or other, you have to balance that, and it will be difficult in the case of income tax, for example.

Mr McHugh: If I may come back on that point, what, in your opinion, hampers the growth and development of the economy for the North of Ireland in particular in comparison with the Republic?

Dr Birnie: Again, that is a very interesting question. It would take many sessions to get to the heart of that. I have long felt that, for decades, the key strategic weakness of the Northern Ireland economy is that we have a relatively low level of productivity; that is, output per worker. That means that, in turn, we cannot pay wages that are as high as those in other parts of the UK, Britain and Ireland or Europe. It also means that our businesses tend to be less competitive and expand less rapidly. Why do we have a low level of productivity? There are many explanations for that. Some of it is to do with our industrial training system. We probably do not have enough apprentices who are trained in technical and vocational skills. There are also questions about the capacity and capability of our management. About a decade ago, a very interesting survey was conducted using a method that was developed by McKinsey and Company consultants. It showed that management capacity in Northern Ireland was lagging behind that of a wide range of other global economies. Fundamentally, those are the issues.

At the start, I said that fiscal devolution will not be a miracle cure. It might help a little bit. For example, incentivising air travel through cutting APD might encourage new ideas and inward investment to be brought in. Cutting corporation tax might have some effect when it comes to bringing in new companies, but fundamentally, we need to address the training system and the capacity, experience and skills set of senior managers.

Mr McHugh: It might be unfair of me to ask you to give an answer to this one, but, having looked at the likes of the North of Ireland, I believe that addressing those issues in isolation will not allow us to really get to the core of the matter. In order to realise our full potential, even with regard to how we could contribute to the economy of the whole island, it demands a much wider debate on everyone's part. It is central to what is happening in the north-west now, in particular, and it should be widened for the whole island.

Dr Birnie: By all means, Northern Ireland firms should, where appropriate, collaborate with their counterparts south of the border. However, on other occasions, they will be competing. Similarly, we need to develop to their full potential the links that, undoubtedly, exist between businesses here and in Great Britain. Some of this is politically blind, as it were. We need to strengthen our capacity to compete and collaborate, North/South and east-west.

Mr McHugh: I agree. Go raibh maith agat.

The Chairperson (Dr Aiken): Seamus and Esmond, thank you very much indeed for a comprehensive evidence session. Seamus, sorry we did not get much time to talk to you. Esmond, I understand that we will talk to you again fairly soon. We are looking forward to that.

Mr McAleavey: Thank you, Chair. It is much better to talk to the expert. [Laughter.]