Northern Ireland's Public Finances - Revenue Matters
Posted on March 05, 2018 by Paul Mac Flynn
When the £1 billion supply and confidence deal was signed between the Conservatives and the DUP last summer, many across the water began to take a more in depth look at the public finances in Northern Ireland. When they examined official statistics, many were horrified to learn that a region to which the UK government had just pledged a massive increase in funds was already one of the highest spending regions of the UK. How could anyone plausibly claim that Northern Ireland should be entitled to more public spending?
In analysing Northern Ireland’s situation, many commentators chose to focus almost exclusively on spending side of the public finances. Before going into greater detail, it is worth noting that the statistics which we use to examine regional public finances are themselves a matter of contention. In some cases, public spending totals include money spent outside of Northern Ireland ostensibly for the benefit of Northern Ireland. One example of this is that a portion of the cost of operating national museums in London is apportioned to Northern Ireland. Even so, when the more contentious items of spending are removed, Northern Ireland still comes out on top.
So, spending per head of population in Northern Ireland is the highest of all the UK regions. So what? When you construct a league table someone has to be at the top of it. Identifiable spending per head in Northern Ireland was £10,900. The second highest was Scotland which spends £10,500, but surprisingly, for many, London is the third highest spender coming in at £10,200.
You don’t hear many people writing articles decrying the overly generous subvention that the UK government makes to London. That is chiefly because while London spends more, it also brings in more, a lot more.
This brings us to the other component of public finances, revenue. The one thing most people know about the public finances in Northern Ireland is that taxes do not cover expenditure and therefore Northern Ireland runs a theoretical deficit. The size of that deficit can be disputed the central point cannot.
What most people do not realise is that apart from London and the South East of England, every other region of the UK runs a deficit. Its perfectly normal. Expecting taxes raised in Northern Ireland to cover the cost expenditure is as ridiculous as expecting county Donegal to be able to do the same in the Republic of Ireland.
If there was perfectly balanced regional development than all regions could sustain themselves within their own resources, but that’s not how regional development in the UK has panned out. The UK is an intensely centralised economic entity and the most valuable and productive industries are not shared out evenly.
There is nothing inevitable about this form of centralisation. Germany, one of the world’s best performing economies, operates with many regional centres of economic growth. Almost unique among capital cities, Berlin does not outperform the national average in output per head. London by comparison has nearly double the UK average.
This is important because the tax revenue that can conceivably be collected from Northern Ireland is inextricably linked to the size of the economy here. Northern Ireland paid 41.8% of total output (Gross Value Added) in taxes in 2016. This was the third highest of all UK regions. London by comparison paid only 34.5%, the second lowest.
In this instance London is paying more than enough to cover its own expenditure, but it is paying less than Northern Ireland when you adjust for the size of the local economy.
There are two policy implications stemming from this, one is the budget and the other concerns an industrial strategy for Northern Ireland.
Just before Christmas the Northern Ireland Civil Service produced a document outlining cuts and charges for public services that they felt were necessary to meet the challenge of the public finances. The most disturbing element of this document was the implicit acceptance that public spending in Northern Ireland was in decline and the only recourse for policymakers was to manage that decline.
The debate that we should be having is about how we grow revenue, not how we reduce spending. And when we talk about growing revenue, that does not mean raising tax rates, we’re paying our fair share of tax already. It means growing the value of our output and consequently boosting the total amount of tax we pay. This is where the industrial strategy comes in.
A new industrial strategy that challenges the failures of the past and sets a new course toward greater productivity is needed now more than ever.
The real tragedy would be if Northern Ireland slides back into direct rule, public spending is slowly and painfully contracted year after year and nothing else changes. It shows how much Northern Ireland needs its own government to challenge this kind of fatalistic groupthink and seek a mandate for ambition.
This article appeared in the Belfast Telegraph on Tuesday 27 February.