Northern Ireland Affairs Committee
Oral evidence: The funding and delivery of public services in Northern Ireland, HC 46
Wednesday 8 November 2023
Ordered by the House of Commons to be published on 8 November 2023.
Members present: Simon Hoare (Chair); Stephen Farry; Mary Kelly Foy; Sir Robert Goodwill; Claire Hanna; Carla Lockhart; Jim Shannon.
Questions 229 - 265
Witnesses
I: Paul Johnson CBE, Former Chair, Independent Fiscal Commission for Northern Ireland; Professor Gerald Holtham, Former Chair, Independent Commission on Funding and Finance for Wales.
Examination of witnesses
Witnesses: Paul Johnson and Professor Gerald Holtham.
Q229 Chair: Good morning, colleagues. Welcome to this, our first meeting of the last Session of this Parliament. I should start by saying that it was nice to see one of our own, Sir Robert Goodwill, proposing the Humble Address yesterday in the Chamber, which he did with much skill. Congratulations, Robert. It was lovely to hear.
This is our final session in our inquiry on the funding and delivery of public services in Northern Ireland, an issue that seems to become ever more pressing and critical as each week goes by. We have two panels this morning; I propose that we spend about an hour or an hour and a quarter on each session. We are joined first this morning by Professor Gerald Holtham and Paul Johnson. Gentlemen, you are welcome and we are grateful to you both for finding the time to come and see us this morning to help us with our work on this inquiry.
You will be aware that the Independent Fiscal Commission for Northern Ireland has suggested that income tax, the apprenticeship levy and corporation tax would be the most appropriate taxes to devolve if the circumstances were right. Do you agree that that is the closed list, or are there others that you think might be on it?
Paul Johnson: I was the author of the commission and we did not quite say that, particularly with regard to corporation tax. On our list of recommended taxes, of the big taxes, income tax seems very clearly to be the most appropriate. We have very clear experience of that in Scotland. It is partly devolved to Wales, although Wales has not made use of that. There are quite a lot of additional complexities associated with VAT and national insurance. If you are going to have tax devolution, it seems worthwhile to have a tax that can raise you quite substantial amounts of money.
There are other, smaller taxes that we thought were particularly susceptible to devolution. Stamp duty land tax is an obvious one that has been devolved really quite successfully to Scotland, as well as some of the smaller environmental levies, potentially. In terms of the apprenticeship levy, given that it is very closely associated with income tax, if you devolve income tax there is a good case for putting that on top, particularly since it is part of education policy, which is devolved to Northern Ireland, so it does it differently anyway.
Q230 Chair: Touching on that, we have heard as part of a previous inquiry that the problem with the apprenticeship levy as far as Northern Ireland is concerned is that it is not ringfenced. Effectively, it just goes into the general pot, which is creating quite a lot of antipathy towards it—I do not think that that is too strong a term to use—from those who are paying the levy. They are not seeing the direct benefit of it that counterparts in other parts of the UK are seeing. Is that an assessment that you share?
Paul Johnson: As you say, in the rest of the UK the apprenticeship levy is effectively hypothecated to apprenticeships. Whether you are an apprenticeship levy-paying employer or not, you are treated pretty similarly. You get a slightly higher level of subsidy—in fact, slightly more than 100%—if you are a levy payer and slightly less than 100% if you are not. I actually do not know exactly how that works in Northern Ireland. It is slightly odd that the situation there is different in that way.
When it comes to corporation tax, we said that, effectively, there is no value in the Northern Ireland Assembly putting this on a list of taxes that it wants devolved without first being very clear what it wants to do with it. Certainly historically, that has been about cutting it. If it wants to do that, it needs to be very clear with UK Treasury about how it is going to fund the long period of up-front reduction in its tax revenues. That is clearly what stopped it happening in the first place.
My sense is that there was no real plan in Northern Ireland. There was no appetite in the Treasury to subsidise that change. If that is to be taken forward, it needs to be taken forward with a very clear agreement about how that is going to happen. That is a different sort of thing from the other taxes that we looked at.
Q231 Chair: What is your assessment of the risk of damage to the overall tax take as it relates to the funding of public services if the dynamic in corporation tax were not a balanced, nuanced approach, for want of better phrases, in which we ask, “What do we need to raise from corporation tax while still being competitive?” If the other hand were to win the argument and we were to enter a corporation tax race, or competition, with the Republic, create a very large black hole in corporation tax take and either disproportionately raise other taxes or reduce funding, what would be your assessment of that scenario?
Paul Johnson: It is pretty clear that, in the short to medium term, if you, for example, cut the corporation tax rate in Northern Ireland from 25% to 15% to match the Republic’s rate, that would be a big loss of revenue. Hence you need to be clear about how you would fill that hole—whether that would be with Treasury subsidy, which I suspect would be hard to achieve, or other taxes elsewhere. The big unknown here is, in the longer term, how big an impact that would have on inward investment and growth in the Northern Irish economy.
There are other reasons for thinking positively about the Northern Irish economy at the moment, given its access to both the UK and EU markets. This might be—but it is not something that one can test empirically—an additional push in that direction, which would be very effective. If you were to devolve corporation tax and cut it to 15%, that would be a big punt. It might be a punt that is worth making. From the Northern Irish point of view, it would not be a punt worth making unless there were at least some underpinning guarantee or insurance from the UK Treasury. From the UK Treasury’s point of view, I think that it would want some upside.
Q232 Chair: You have talked about income tax, the apprenticeship levy and corporation tax as being the most appropriate. In terms of the timing, were they to be devolved, what is your assessment of whether they should be devolved en bloc or triaged to see how it plays out? If it is the latter, which one would you do first?
Paul Johnson: One thing that was very striking to me as we went through the whole process of thinking about tax devolution was that over a period of time you could think about a much broader set of taxes. It was pretty clear that there were quite a lot of taxes that, in principle, over a long period of time, could be devolved—more than we have experience of in the UK, but many other countries have experience of many other taxes that are devolved than those that we described.
In a sense, there is no obvious reason why you should not do those ones that we have just been talking about—stamp duty; income tax, or at least elements of income tax; one or two of the smaller environmental levies, and so on—together. Now, they are very different in terms of their administration. In our view, as with Scotland, you would have HMRC continuing to do the administration for income tax, whereas if you were to move stamp duty land tax, you would move that administration to Northern Ireland. Those are different sorts of things. They could be done together; they could be done separately. I do not have a strong view as to whether you would do them together or separately.
If your objective is to give Northern Ireland some significant impact over its economic policy, the amount of revenue it is raising and its capacity to do redistribution, you would go for income tax. If you wanted something much more limited that was a small part of its role in managing its own local economy, stamp duty land tax or maybe apprenticeship levy would be the place to go.
Q233 Chair: The caveat has always been added, “If the circumstances were right”. What would the right circumstances be?
Paul Johnson: There are obviously political circumstances, which are more difficult now than when we were asked to do this.
Q234 Chair: Does that apply equally to Westminster and to Belfast?
Paul Johnson: I was particularly referring to Belfast in that statement, given the lack of operating Government. We said in terms in this document—and it is something that we were told by pretty much everybody we spoke to, even at the time that we were carrying this out, while things were still more normal—that there was a concern across the piece, among Unionists and nationalists, about the political capacity of the Northern Ireland Government to deal with this. It was pretty evenly balanced between those who felt, “They cannot do it; please do not give them any more” and those who felt, “They are not doing very well, but if you give them more responsibility that might push them to do things better.”
I am not in a position to judge which of those is more effective. Clearly, you are going to want a period of some stability before you move to this. From an economic point of view, it may be that this turns out to be a better moment. Had you done this back in 2008 or 2010, depending on exactly how you did the block grant adjustments, on most bases for doing the block grant adjustments it would have been pretty bad news for Northern Ireland because the economy there has grown really poorly since 2010. You might think that there are reasons for believing that the economy will do better over the next decade or two relative to the rest of the UK. You might not, but you might think that some of the risks associated are somewhat mitigated today relative to 15 years ago.
Q235 Chair: Professor, do you have any thoughts on that?
Professor Holtham: We have experience in Wales of income tax devolution. As Paul says, it has not been used, but it now constitutes a significant part of revenue. That brings some risk. If the economy grows more slowly, you would have been better off keeping the block grant. There is a general feeling that, in terms of making the Government responsible, it is a good thing to have.
When it comes to other taxes, the point I would make is that people tend to think of this as binary: “Is this a good tax to devolve? Yes, it is,” or, “No, it isn’t.” Actually, you can devolve any tax if you apply conditions to when you can have it or what you can do with it. In the case of corporation tax, for example, simply saying, “Yes, do what you like with it,” apart from the revenue issue, would threaten a race to the bottom. If you simply said, “You can have it only if your GDP per head is much lower than average and you can cut it only by X,” that would be possibly quite manageable and probably more persuasive if it were more generally applied.
In Wales, for example, income per head is 70% of the UK average. If you are looking to level up, a modest capacity to cut corporation tax, as in Northern Ireland, would be quite a good way to do it. I have not heard any other very compelling mechanisms for so-called levelling up, so this would be one to consider. It would have to be very conditional. You could not just give it away.
Q236 Chair: Does either of you have a concern about the—let me try to phrase this correctly—capacity and resilience to devolve these taxes in Northern Ireland?
Paul Johnson: There are different sorts of capacity and resilience. At the moment, the administrative framework does not exist, as you would expect. It is clearly possible to create that, as has happened in Scotland and, to a smaller extent, Wales. Indeed, we spoke to the organisations responsible in those countries for their versions of stamp duty land tax, and they were very positive about the capacity that was created for them to manage that locally. That said, we also refer to the report of the Northern Ireland Audit Office, which was, at the time—three or four years ago now—pretty scathing. It is not for us to judge whether it was right or wrong, but it was pretty scathing about the administrative capacity in Northern Ireland.
I referred in my previous answer to concerns about the political capacity and stability there to manage this. In the couple of years since, it has been pretty clear to me that you would want a period of stability where the Executive had been operational before you took this a great deal further. Given those conditions, you are always taking a chance with devolution of this kind. Scotland took a chance and, at one level, it has not come off terribly well in terms of the revenues that it has raised, but it has worked from an administrative and political point of view. There are obviously more risks associated in Northern Ireland on, particularly, the political point of view.
The other thing to say is that the spending side of things carries on, in some sense at least, but not brilliantly, in the absence of an Executive. You could do that with taxes, given wherever you got at the point at which the Executive stopped, but clearly this is a bigger political risk than it would be in the other two devolved nations.
Q237 Jim Shannon: Mr Johnson and Professor, thank you very much for what you are doing. You will probably have watched the Secretary of State’s attendance at the Committee just before the recess. Some of the questions that I asked were along the lines of what had been done to ensure a better payment per head for Wales, which I think worked out at about £115 against £100 in England.
The point I am making is that there was an agreement that that was the right system to use. Mr Johnson, you referred to the economy in Northern Ireland perhaps not performing as well as it has in other parts of the United Kingdom. I was just talking to my colleague about some of the things that were proposed to create moneys. One of them was water charges. One of them was reviewing the prescription charges, ever mindful that some of the people who are on prescriptions are those with very low incomes and therefore it is very important that they are retained, but there may be some who are in receipt of prescriptions who are financially better off. The other one was bus passes. That has been a tremendous success for pensioners in Northern Ireland.
I make these points because they illustrate that there are things that are necessary to give a better quality of life in terms of health and travel. Many, of course, including me, would say that we are already paying water charges in our rates that we pay for our houses and businesses, so that would be an extra tax above and beyond.
The point I want to come to is this. If I take the system that you referred to and the figures that you worked out, Professor, Wales would get £115 per head. Using the same system that you suggested—I am not quite sure whether the Secretary of State is in agreement—Northern Ireland should be at £121 to £124 per head. I would like to get your thoughts on that. It seems that, if you are going to have equality and you are going to treat all parts of the United Kingdom similarly, and if the system that you, Professor Holtham, suggested for Wales is going to be delivered for Northern Ireland, we in Northern Ireland, in order to get equal status, would have to get £121 to £124 per head.
Professor Holtham and Paul, what are your thoughts on how we get the economy back and give it a shot in the arm with equality for everyone?
Professor Holtham: We were asked to look at the Barnett formula as a whole. Anybody who has looked at it has concluded that it is totally arbitrary and that there is nothing fair about it. It just gives you a number. We asked the question, “What would it take to make it a needs-based formula?” Of course, we had to avoid philosophy. I mean, what is “need”? That is a black hole. So we asked the question, “How do they decide in England?” There is a health budget agreed. How much do you spend in Cornwall as opposed to Sunderland? The answer is that they have a needs‑based formula.
The first thing we did was to take these formulae for health and local government support grant. They had one for education in those days, which they do not now, which is a problem. We applied the formulae in Wales. We said, “If Wales were just an English region, it would get several percentage points more than it is currently getting.” This is limited, because we are not making new judgments about need and we are not doing any fresh work about need. We are just saying, “Be consistent. These are your needs formulae. If you applied them here, we would get a bit more.”
We also realised that they were not going to do it. They were not going to change the Barnett formula to a needs basis, for various political reasons that we can discuss. We said, “There is a second best here. If we can show that we are not getting more than we would as an English region, you should put a floor underneath that.”
As you are probably all aware, if you are getting more than the average expenditure per head in England, the Barnett formula will very slowly squeeze you down to that average level, which does not apply within England. If the north-east gets more money than the east of England because it is poorer, it continues to get more money. There is no mechanism that squeezes them down to an average level. We said, “If you are not going to reform Barnett overall, at least stick a floor in at the level where we are not getting any more than we would if we were part of England.”
That was the bit that was agreed. All we did was to estimate for Wales what it would get if it were an English region and then say, “Let us put the floor in at that level,” which is £115, not £117, actually. That, finally, was agreed, two Governments and seven years later. That is what happened.
The difficulty that you will face is that this just comes from a comparison with England. If you have factors unique to Northern Ireland, they will not get taken into account. In Wales, for example, we said, “If we compare with England, we get £115,” but there are certain things that are unique to Wales. For example, it is a bilingual country. A fifth of the population speaks Welsh, so you have to provide a bilingual primary education system. You do not have to do that in England. If you took that into account, it would not be £115; it would be £116 or £117, but that is not taken into account. They agreed to put the floor in at the same level that we would get if we were in England.
In Northern Ireland, you no doubt will have a number of unique elements. One of them, of course, is your need for security and policing, which you are going to be spending on at a higher level than in England. Just comparing you with what people get in England will not make provision for that special need. The difficulty that you face is to somehow combine the procedure that we followed, which was to identify what your share would be if you were an English region, and then to persuade the Treasury that, on top of that, you need special provision for these special needs. We did not succeed in dong that. We just have the floor of what we would get if we were an English region and no allowance for special factors.
Q238 Jim Shannon: In the interest of equality and consistency, to use your words, Professor Holtham, surely the argument and the principle of what is right in the funding formula for Northern Ireland would indicate that there has to be that change. It took seven years for Wales to get to where it is. What are your thoughts on how we progress that?
Professor Holtham: The principle of the floor to resist the Barnett squeeze taking you to unreasonably low levels has been conceded. Northern Ireland is on strong ground. If the Barnett squeeze threatens to take you below that relatively equal level—that is a peculiar way to put it, but the level that you would get if you were just an English region—the argument for getting that is established because they have done it for Wales.
When we looked at Northern Ireland—these are very old numbers now; they are not particularly current, but I know that some work has been done more recently—we said that £121 was about what Northern Ireland would get if it were an English region. I do not think that that number has changed a great deal, from what I have gathered from the Northern Ireland Fiscal Commission. You have this issue that, on top of that, you would like to have a specific allowance for police and security because there is no comparison in England with what your requirements are. That might take you to £124 or whatever it is.
All I would say is that you have a very strong case, but you do not have a precedent. You have a precedent for £121. I do not see how they could resist the £121 because they have conceded it for Wales, but the special needs are something you have to negotiate yourselves, as it were.
Q239 Jim Shannon: Mr Johnson, where are we now? Professor Holtham has said that the figures may be a bit older and perhaps you might have better figures for where we are today. Is that possible? Do you have them?
Paul Johnson: I do not have that figure. One issue relative to the time that Gerry’s commission did its work is that the system in England has pretty much broken down. There are formulae, but they are now based on absurdly out-of-date data. The relationship among the English regions between what the formula says, what the actual situation is and what the needs are has changed. You have a mess within England.
My recollection is that, broadly speaking, we concluded that the current budget of Northern Ireland is in the same ballpark as what it would be if it were an English region. You are probably quite close to whatever the appropriate floor would be. I certainly agree that, given that the principle has been conceded in Wales, there is no reason why it should not be conceded in Northern Ireland. This is, in a sense, a much more difficult moment to do it because the situation in England is so confused at the moment.
Professor Holtham: One thing that helps there is that what we did was in two stages. The first stage was to, as I said, laboriously take all these formulae in England and apply them to Wales. There was quite a lot of work involved because there are lots of variables in these various formulae and the Welsh data is not quite organised in the same way, so you had to rearrange the data and feed it into these formulae. It was a long job.
We then asked the question, “Can we short-circuit this somehow? People will not want to do this every year to update a floor anyway. Can we model what we have done and find something simpler?” We were reasonably successful. We said, “Let us take five variables.” These were dependency ratios, old-timers and children, proportion of long-term sick in the population, proportion of people in poverty, and sparsity—how spread out your population is, because if they are all rural it is much more expensive to service them. There were those five variables.
We found that, running this regression, we could explain 95% of the variation in expenditures across English regions. We said, “Okay, that is close enough. This is not that precise.” There are public data available for all of those five variables. They cannot be gamed. They are public and published for the whole UK. If you are prepared to apply the regression equation rather than do anything more complicated, you can come up with a number. That was the number. We did not do that complicated job for Northern Ireland. We just plugged the regression equation in and that gave us the £121. If you are prepared to be quick and dirty, as it were, you can always produce this number and it will be quite easy to do so.
As Paul says, unfortunately the basis for the complicated calculation that does it all in detail has been undermined. It would be more difficult now than it was previously to do the detailed thing. You are really thrown back on the quick comparison using these five variables. You will notice that the five variables do not include incidents of terrorism or security issues, so that is why you have to think of that separately.
Q240 Chair: In 1978 the then Chief Secretary to the Treasury, Joel Barnett, of formula fame, created it—I would not quite say on the back of a fag packet, but it was almost on the back of a fag packet—as what is now recognised as a short-term fix to ease intra-Cabinet discussions of the Callaghan Government with regards to the financial implications of devolution as they were ramping up to the Welsh and Scottish devolution referenda in the late 1970s. We sit now in 2023 talking about the Barnett formula, which has almost become as sacred as the tablets of stone or Moses coming down from the mountain, etc.
Is there any other civilised, advanced industrial democracy in the world that is still working out which parts of the country get X based on a short‑term fix formula created on the back of the mythical fag packet in 1978? If there is, tell us which. If there is not, could you tell us whether you think that it is advisable, or indeed desirable, that we are still doing so?
Professor Holtham: I suppose that the country that is most assiduous in doing this is Australia, where it has standing commissions that work out needs of different provinces and make recommendations to the Government for how they should organise a federal system. I am sure that there are lessons to be learned from its experience. In this country, I am afraid that the situation has not got any better. Let me tell you a story about this floor, for example.
Chair: That had the ring of Max Bygraves about it.
Professor Holtham: When we plugged in this simple regression, it came up with £115. Our complicated work had said that it was somewhere between £114 and £118 depending on things such as education, but the regression equation said £115. When the British Government decided that they were going to implement this thing after all, I assumed that they would do new work to check that equation out and see whether things had changed. There was no interest whatever. The number was £115: “That is the number the Welsh said, so we will have it.” I said, “Are you not going to check it? Are you not going to update it? It is now seven years old.” “No, £115.”
Paul Johnson: They were worried that it would come up with a bigger number.
Professor Holtham: There seems to be almost a devotion to the ad hoc.
Chair: I suppose that we should take comfort from the fact that income tax was only introduced as a temporary measure to pay for the Napoleonic wars.
Q241 Sir Robert Goodwill: Mr Johnson, you have touched on the practicalities of collecting tax in a devolved way. You mentioned that HMRC could probably deal with a devolved income tax without a lot of additional cost, but some of the other changes might involve costs. I can remember that, when I was at the Department for Transport, we lost 300 jobs at Coleraine because we moved DVLA vehicle licensing to Swansea with no additional jobs there because of the computerisation. I am wondering to what extent, if we devolve taxes, there will be more cost in raising those taxes and the administration. Is that something that we need to bear in mind if we are going to devolve more?
Paul Johnson: There is no getting around the fact that there would be more administration involved. Stamp duty is the obvious one to look at. I cannot remember the numbers, but there are a small number of dozens of people, I think, in the Scottish and Welsh organisations who do that. We did not look directly, but there will be a smaller number than that who have been lost from the UK as a result, because you have to have another chief executive, another set of back office and all that sort of thing. There is definitely a cost.
Relative to the, from memory, £40 million or so that stamp duty raises in Northern Ireland, you would probably be looking at 0.5% or maybe 1% of that as an additional cost associated with raising that. It is certainly something to take into account and to weigh in the balance when you are thinking about the benefits of devolution relative to the cost. Scotland has Revenue Scotland and some other elements there. Yes, any devolution, as with the devolved Government there, adds some administration and they weigh in the balance.
Q242 Sir Robert Goodwill: On a different area, if Northern Ireland were to, say, reduce corporation tax to levels closer to the Republic, is there a danger that there could be companies relocating their headquarters? We are all familiar with companies such as Shell moving to the UK. Other companies are based in Luxembourg because of low taxes. Could it be that we might get more tax raised in Northern Ireland, but not necessarily get the investment and the jobs, because it would just be headquarters in operation? Indeed, if the headquarters moved from GB to NI, we could end up losing tax overall in terms of what is going into the public purse.
Paul Johnson: You absolutely have to be careful to avoid that and have rules in place so you do not just have that brass-plating. There would undoubtedly be an additional level of complexity involved to avoid that. We know that countries such as Germany, the US and so on have devolved corporation tax systems and manage to do that to some extent. As I said, in corporation tax you have lots of trade-offs to make. One would be an additional and more complex, potentially, within-UK set of rules to avoid exactly the behaviour that you are describing.
Sir Robert Goodwill: This is the third point that I would like to ask about. Not having an Executive at Stormont is almost the default situation. It is not something that we are happy about, of course. If we had a situation where tax had been devolved and income tax had been set at different levels, then we went into a period without an Administration, the experience we have had in the past is that civil servants go on to automatic pilot and do not change anything unless they can find a political decision that was made in the past to do that. Could we have a situation where, for example, personal allowances or thresholds were changed in the Budget here in Westminster, but they were unable to make commensurate changes in Northern Ireland? We could end up with a system that, if we had no devolved Administration for a while, was slightly pernicious for the people living there.
Professor Holtham: That depends on the way that income tax is devolved. In Scotland, it has been entirely devolved. In Wales, for example, it is shared. Any changes made to UK income tax would carry through if there were no offsetting moves on the Welsh bit.
The way it works is that Wales gets 10 points of each tax schedule. The basic rate is 20p; Wales gets 10p. The higher rate is 40p; Wales still gets 10p. If the UK reduced the basic rate, the basic rate in Wales would come down unless Wales increased its 10p to offset that. If you are sharing income tax points in that way, you would not get the problem that you have described, but of course you would have less control as well than if you had total devolution. You get less risk and less control.
Q243 Sir Robert Goodwill: It is slightly obvious with corporation tax that reducing the levels would tend to attract investment. With income tax, there is a bit of a cleft stick situation, because they may want to raise more tax to pay for better public services in Northern Ireland but, at the same time, would not want to necessarily burden people in Northern Ireland with high levels of taxes that currently are picked up by the whole of the UK because of the way that the system works. I am trying to see the advantages of devolving income tax to Northern Ireland, because it seems to be in a lose-lose situation rather than a win-win one.
Paul Johnson: It is a risk issue. You would have to devolve it in such a way that, if you increased the rate of income tax in Northern Ireland, Northern Ireland would have more money to spend, all else equal. There is a lose from the point of view that you have higher income tax, but a win from the point of view that you have more money to spend on public services.
There are three things to add to that. First, to refer back to what your colleague was saying earlier, there is already a lot of capacity in Northern Ireland to raise more revenue if it wants, whether it be through water rates or some of the equivalent to more than £20 billion of money that is not raised in Northern Ireland but is raised in the UK, by doing things the same way. If more money is wanted, it is there, but through those particular, as we refer to them, super-parity comparisons.
On income tax, we were very careful to say throughout this that our view is that this is not just about raising revenue. You could decide to cut taxes, whether it be income tax, corporation tax or what have you, to make things more competitive, though we would not expect that to be what happened, to be frank, with income tax.
The third thing to say about income tax in Northern Ireland is that Northern Ireland incomes and earnings are much lower than in the rest of the UK. For example, if you wanted a system that was in some sense equivalent, you might think that it would be appropriate to have a lower personal tax threshold and a lower higher-rate threshold so you have a similar fraction of people in those rates. That would raise more revenue in Northern Ireland than happens at the moment.
There are quite a lot of things that you could change, but absolutely with the clear trade-off that you might lose out from that. We have seen that over a period of time very clearly in Scotland. Significantly higher rates of income tax have not given it as much money as it might have expected because, at least up until now, its economy has not performed as well, in terms of producing tax revenue, as that in the rest of the UK. If you were to devolve to Northern Ireland and things did not go well, it might lose out. As I said at the beginning, we may be entering a period when the Northern Ireland economy does better, in which case you would get a double bonus.
Sir Robert Goodwill: That is very interesting. Thank you very much.
Q244 Claire Hanna: We have covered aspects of the Barnett formula. Following on from that and on the Fiscal Commission report just briefly, can you quantify in any way the impact of Northern Ireland governance decisions—poor decisions and, I suppose, the governance gaps, such as those we are experiencing now—on the funding of public services? I think everybody has highlighted some of the deficiencies in the funding settlement. How much of the funding gap is down to that and how much of it is down to the fact that we have periods without any active Ministers? I am just trying to pick up on some of the other questions. What I intended to ask has been covered. What is your assessment of the impact on the public finances of having these lengthy periods without any democratic oversight of public funding decisions?
Professor Holtham: One of the very few advantages or good features of the Barnett formula is its automaticity. It is automatic. The UK Government spend money in England and the increment—the increase in expenditure per head—is automatically given to the devolved authorities. You do not need a Government to negotiate that. It is automatic.
Q245 Claire Hanna: I suppose it is not automatic, in that it is hypothecated but it does not directly flow into those Departments.
Professor Holtham: No, that is right. That is true. Another advantage of the Barnett formula is that it is not hypothecated. It is generated by particular expenditures but the recipient Government are not obliged to follow the same pattern of expenditures. It is a block grant; they can do what they like with it. It is perfectly true that, if you do not have a Government, you will be on autopilot on the expenditure side. There will be nobody making decisions such as, “We will spend more on education and less on health” or vice versa, but that will not affect how much money you actually get.
There is a caveat, which is that, in the real world, the Barnett formula is not the whole story. People negotiate off-Barnett settlements. There was a famous one in Northern Ireland under the Theresa May negotiation, which produced £1 billion. There are things such as that.
Chair: It was a very complex negotiation, Professor. That was two fag packets.
Professor Holtham: Indeed. The Scots are particularly skilled at obtaining money down the back of the sofa. If things arise, if political events give an opportunity to negotiate a side payment and you do not have a Government, you will miss that opportunity. There is that informal aspect, but the year-by-year operation of the Barnett formula is not going to be affected by your not having a Government.
Q246 Claire Hanna: No, sorry, I phrased the question poorly. I suppose it is the gap in our ability to deliver those public services. There is fresh discussion in Northern Ireland about the Barnett formula. That is not new. We opened it all up in the early periods of devolution as well, and parties took different positions about its suitability then. Do you think that there has been adequate scrutiny and analysis of it in Westminster, or do you think that the formulae were just decided and not recalibrated? Is it just a given in Treasury or do you think that there is an intention to change them on this side of things?
Professor Holtham: I do not detect any intention to change. One political bedevilment here is that any examination of relative need, taking the British Government’s own preferences as given, will show that Scotland gets a lot more than it would if it were an English region. Therefore, if you introduce needs-based elements into the Barnett formula, there is a logical implication that Scotland is going to get less money. Nobody wants to take that on. They certainly did not want to take it on before the Scottish referendum, which is why it took Wales seven years to get the floor, because nobody wanted to go there. Nobody wanted to infect Barnett with any notion of need whatsoever.
To some extent, that is still the case. It makes no political sense to take money off Scotland and give it to Wales because Scotland has an oilfield and a successful national party and Wales does not have either, so nobody is going to take money off Scotland and give it to Wales. That is the political reality. The Treasury is not wanting to give people any money at all if it can avoid it. You put these two together and there is no great pressure to change the Barnett formula. That is why we are getting these ad hoc fixes such as, “Let’s put a floor in when it gets too painful for the poor dabs. We will give them a floor.” It is going to continue to be ad hoc, as far as I can see, because of that political situation.
Q247 Claire Hanna: Mr Johnson, do you want to add anything to that and generally about the suitability of the formula for Northern Ireland?
Paul Johnson: I want to add to that that the real issue that Northern Ireland is facing at the moment is actually not different in kind from that which is being faced across the rest of the UK and in England. What is being experienced is a long period in which spending on local government, education and so on across England has not gone up very much. That is clearly having a direct effect on the funding of the devolved Administrations. It is not clear to me that it is the fact that Barnett has got worse. It is more that the squeeze on funding more generally has been significant.
Looking a few years ahead, if you take the numbers in the Budget Red Book seriously, that is going to get a lot harder over the next four or five years. There is a big “if” there—if you take those seriously—but within that the Chancellor has pencilled in 1%-a-year increases in public service spending. Actually, this Parliament has seen quite big increases in public service spending. At one level, this might well be the high water point in terms of money that is available. Looking at the expected increase—as I say, I do not think it is the most likely increase—the numbers in the public finances are for much tighter settlements over the next four years.
Q248 Claire Hanna: Could you expand slightly on that? You said it is not just about Barnett but the impending squeeze on finances more generally. Could you broaden that out slightly?
Paul Johnson: If you look at the period since 2010, there has clearly been a general squeeze on finances. English local government is something like 20% down in income per person across the piece, with a bigger cut in the central grant. Education spending is not up. We have had cuts in justice spending. A lot of the Barnett-able funding has gone down over the past period since 2010, although, as I said, the period since 2019 has actually seen quite big increases in that. That is why I say that, over that period, this should feel, in some sense, less difficult than 2019. There are obviously lots of other pressures, particularly those we are seeing in the health service, which suggest that maybe equilibrium increases would have been even higher.
The real worry for all public services across all of the UK is that, if you take seriously what the Chancellor has pencilled in for spending going forward, on our calculations, if you give a sensible amount to health, once you take account of defence, the new childcare and so on, you have cuts in other public services. Those cuts would flow through Barnett into Scotland, Wales and Northern Ireland. My bet is that the numbers in the Budget Red Book will not be what comes to pass, because that would be very difficult, but that is a bet that would require, on the other side, a Government willing to put up taxes even further. This has been the biggest tax-raising Parliament in history already, so that is also a really difficult situation.
I am trying to, in a sense, put the Northern Ireland situation into a UK context. It is important to see that. There are obviously lots of special features of Northern Ireland, but I do not think that it is actually being more squeezed than we are seeing right across the piece.
Professor Holtham: There is a very important point here, which is that the thing that is going to be most influential or most evident in your public finances is the growth in public expenditure in the UK as a whole. That is going to be much more important than whether you are getting £110 or £111, or whatever it is.
There is an oddity in this that the Barnett squeeze works when public expenditure is growing. When public expenditure is shrinking, it goes into reverse. You will be getting slightly higher levels relative to England, but a higher share of a smaller cake. It is the size of the cake, not the share, that is dominant.
In Wales, for example, in the first 10 years of devolution, public expenditure was growing very quickly. The Welsh share was getting squeezed down, but nobody even noticed the squeeze down. The money was rolling because public expenditure was going up in England. When public expenditure started falling, Wales was doing relatively better but nobody noticed that. All that they could see was the squeeze.
Paul is entirely right. The experience that you are having now is the direct result of the general austerity on public spending in the UK as a whole. That will generally dominate your perception compared with whether the Barnett squeeze is giving you a bit more or a bit less relatively. You are talking about a per cent here or there and that will be dominated by the general trend of public spending.
Q249 Stephen Farry: Good morning to our witnesses. This conversation around a fiscal floor, Professor Holtham in particular, is crucial for Northern Ireland. The work points to a conclusion that Northern Ireland has been structurally underfunded for many years. That puts into context some of the pressures we are seeing on our public services. I am mindful that, in this past financial year, there was an overspend, which is not a good place to be, but it puts it in context none the less. This year, in particular with no Executive, there is a very large overspend that is building up, which may not necessarily be the case.
I wanted to touch upon your work comparing Wales to Northern Ireland. If I am following things correctly, a direct read-across from your methodology from Wales to Northern Ireland gives you a figure of £121.
Professor Holtham: Well, it did.
Stephen Farry: It may well change, okay. The Fiscal Council’s work, when it factors in policing and justice, takes us to £124. I am grateful that you met with some of my party colleagues last week to talk through the issue around policing and justice. You will recall from that conversation that our concern is that the use of the 2017 to 2022 period by the Fiscal Council perhaps does not fully capture the actual relative need in Northern Ireland around policing and justice. We felt that the period between 2010 and 2015, when there was a ringfenced budget, was a more accurate measurement of relative need compared with the UK as a whole. Could you expand on that point around how policing and justice should be best calculated in application to Northern Ireland?
Professor Holtham: The premise here is that a comparison of distribution decisions within England, let us say, is not relevant because English regions do not have markedly different security positions. Just saying, “What would you get if you were part of England?” works for most things, but it does not work where you have something that is radically different from anything that is happening in England.
That creates a prima facie case for saying, “Let us consider this area separately. We will take the comparison with England for everything else, but because this is a unique situation we have to consider that on its own.” In the spirit of saying, “We are not going to argue with you about what need is; we are going to take your judgment,” their judgment of the need was presumably shown by the ringfenced block grant they gave specifically for this particular activity, for security and police. You could appeal to that and say, “The last time you gave a dedicated block grant for this particular function, it was X. If we update that for inflation we get this,” and that is the relevant number.
In that sense, you could say that that approach was consistent with the general approach of saying, “We are not trying to invent new measures or our own measures of need. We are trying to appeal to consistency in using your methods for deciding what is necessary and applying them to Northern Ireland.” This is not a comparison with the rest of the country. It is simply you pointing to their decisions when they were in control of that allocation.
Q250 Stephen Farry: Using a different time reference, albeit factoring in inflation, could take the £124 figure from the Fiscal Council to a higher level—potentially £129 or so, we reckon.
Professor Holtham: I do not know. I cannot say that. I have not looked at the numbers, I am afraid. It would be a justifiable line of argument to say that, once you ceased to hypothecate that number, you no longer had any indication of what the British Government thought the appropriate allocation was for police and security. The last time you had that indication was when they were ringfencing. You could use that argument to look at that period rather than the more recent period. I can understand the motivation for that, but I cannot tell you what that would imply in terms of numbers.
Q251 Stephen Farry: That is great. Thank you for that. In the context of that structural underfunding over a period of time, and in the light of Northern Ireland’s current very precarious financial situation, how difficult or otherwise is it going to be for us to make an argument for some degree of retrospective application of a fiscal floor? That was not considered in Wales. Can an argument be made in that way?
Professor Holtham: I am not sure what you mean by structural underfunding. As Paul says, we have all been suffering from structural underfunding as a result of 10 years of cutting back on public spending because of the problems within the economy. You would have to point to very specific reasons why Northern Ireland has suffered more than other places. I am not really aware of that, to be honest.
Q252 Stephen Farry: We reckon that, if a fiscal floor was in place at present, we would be about £300 million to £400 million better off. If you accumulate that over this Parliament, you are talking in excess of £1 billion that we have potentially lost out on.
Paul Johnson: Obviously it depends where you put the fiscal floor. I agree with Gerry that it is not obvious that Northern Ireland is underfunded relative certainly to Wales, which gets a worse deal out of Barnett than Northern Ireland, and indeed relative to a similar poor area of England such as the north-east. What is being experienced in Northern Ireland is much more a reflection of the overall UK public finances. There are obviously specific issues in Northern Ireland that you could make a case for, but I would push back reasonably strongly against the idea that, relative to the way Wales and the north-east of England are funded, in some general sense Northern Ireland is structurally underfunded. I do not think that the evidence supports that.
Professor Holtham: As I say, I am entirely sympathetic to the argument that you have special needs in the security and police area. You can argue that on top. That is a sound argument and a good position, but there is no precedent to help you. In Wales, we did not get anything for bilingual education, for example. That was too bad; we just got the comparison. The wind is in your face if you are trying to argue, “Not only do I want to get a floor, but I want to be recompensed for any past periods where I was below the floor.” You get what you negotiate, basically, in this world, I am afraid. I would not say that you could not do it, but there is no precedent for doing it. We did not get that.
Stephen Farry: We never say never in Northern Ireland.
Chair: Some people do, and usually quite loudly.
Q253 Carla Lockhart: Can I thank the panel for their openness? It has been very enlightening and helps us all understand what is a very complex area. You have said a couple of things that I want to pick up on. What do you believe the consequences for public services in Northern Ireland will be if the Barnett formula remains the way it is in terms of block grant, as opposed to the fiscal floor or needs basis that we have been discussing?
Professor Holtham: As Paul has said, it depends on what is happening to public expenditure in the UK as a whole. If public expenditure grows strongly, you will get the benefit of that, but you also will suffer a Barnett squeeze. The size of your expenditure per head relative to expenditure per head in England will decline if public spending is growing quite strongly in nominal terms. If you are at £121 at the moment and £121 is the comparison, you could get pushed below £121 if you do not have a floor. The floor is insurance, really, against that happening.
Of course, if we are in continued austerity, it will feel terrible, but you will not get a Barnett squeeze. If public expenditure is not growing, then there is no Barnett squeeze. It is one of these paradoxical situations where you feel better when you are being squeezed than you do when you are not.
Q254 Carla Lockhart: In terms of the way that we have been funded, what is your assessment of how far Northern Ireland is behind? I know Paul has maybe pushed back on this, but I would tend to agree with Mr Farry: we firmly believe that we are underfunded. That has had a major impact on the delivery of public services, and particularly the transformation of services, which is what is really needed in Northern Ireland. I am keen to understand what your assessment is of how we have been funded over the last number of years in comparison with Wales.
Professor Holtham: As Paul has said, if we take the formula that we used, Northern Ireland’s need are somewhat greater than Wales’s needs. On the whole, Northern Ireland has been receiving a block grant that is roughly corresponding to those needs, whereas before the Welsh floor was put in Wales was not getting its floor. The floor has helped Wales and it would prevent Northern Ireland’s situation from getting worse if it were put in. On the numbers that I have seen, the updating of our work by the Fiscal Commission did not push that number up a great deal. It was still around the £121 area, or £121 to £124. That is roughly what you are getting. It would not greatly increase the annual allocation; it would just stop it falling.
Q255 Carla Lockhart: That £121 is a figure that was noted in your report, which was prior to the devolution of policing and justice. Really, it would need to be £124, on the basis that it is now devolved.
Professor Holtham: That is a very solid argument. You have a good argument there that you have a particular need, which is not met by a simple comparison with what is happening in England. Therefore, that is a special element that you could add to the floor formula. That is not an unreasonable position at all. Aside from that, you have basically been suffering from what everyone else has been suffering from, rather than anything that is specific to Northern Ireland. Good luck to you if you can pull it off, but you do not have much chance of negotiating a retrospective correction, as it were. The reason the Treasury will resist it is that Wales will come in right behind you and say, “We have been underfunded for years. Give us a few billion.” It is not going to want to open that door.
Paul Johnson: Again, you look at the numbers and in a sense it already looks like Northern Ireland has a bit on top of what Wales has, given the relative needs. The elephant in the room here is Scotland, which just gets a lot more than anything it would get from any needs-based formula. For political reasons, that is not an elephant any of the politicians wants to tackle. Obviously, there are cases that you can make, but if you look at spending in Northern Ireland on some services it is so far above what happens in any part of England. That is the pushback that will come if you try to make that case.
As Gerry said, it is a negotiation, but it is quite hard to make the case, with the possible exception of some of these specific issues, that Northern Ireland is structurally underfunded relative to Wales and poorer parts of England. That is not to say that there is not a strong case for more funding, but it is that relative case that is much harder to make.
Professor Holtham: The other thing is that people tend to see one blade of the scissors. One of the arguments that we had in Wales was that, if you are looking at the bit of the block grant that comes from local government support, that is done by looking at need in the local area and comparing it with the tax resources of the local area, which in England means council tax, basically.
We looked at this and we said, “Gosh, if you look at Wales, council tax rates relative to the tax base—i.e. relative to the value of housing—are much higher than in England. We should get an allowance for the fact that we are making more of a tax effort. If you are saying you are topping up the local authority, you are topping us up off a tax effort that is already much higher than is going on in England. We need another per cent or two for that.” We did not get it, of course. We just got the £115 and “you can forget that”. That is good news for you, because with you they can play it the other way around. What is the term that you were using?
Paul Johnson: Super-parity.
Professor Holtham: The tax effort in Northern Ireland on local taxes is lower, simply because the local authority will provide water for nothing, whereas in England it is going to charge for it. Your tax effort is lower. They could use that as a reason to reduce the grant, but they are not supposed to do that. They did not use the fact that our tax effort is higher as a reason to increase our grant. You are right to point to Wales and say, “This is a precedent that says you do not take that into account.” They should not take super-parity into account, because they did not take it into account with us when we were the other way around.
It is difficult. You start pointing to a set of arguments and the Treasury is going to point to arguments on the other side.
Q256 Carla Lockhart: You said that you do not detect any desire to change. Certainly it would be our desire to get this on the agenda and try to push it with Treasury and the Government. Is there anything additional we should be doing to try to push that along? The Secretary of State at our last session talked about the fact that it took seven years. My understanding is that it did not take seven years to come up with the actual solution or the funding floor. It was a political debate that strung it out over seven years.
Professor Holtham: Yes, 100%. My estimate is that it would take roughly seven minutes. I remember when we first did our report I went to talk to the Chief Secretary to the Treasury. It was a Labour Government. I talked to Yvette Cooper and then Liam Byrne. “Gerry, we would love to help you, but it is very difficult.” Gordon Brown was the Prime Minister and he was not going to have anything that would reduce the Scottish grant. Although there was no direct implication, they were just very worried that, as soon as you start introducing needs elements into Barnett, even for a floor, it raises the question of who is getting what and why Scotland is getting so much. They did not want to touch it.
After the general election, it was a coalition Government. The Chief Secretary to the Treasury was Danny Alexander, who is a Scottish MP, and the Liberal Democrats had more seats in Scotland than in Wales. Again, there was no interest.
It was only after we had another election and a Conservative Government, and they won the Scottish referendum, so that the independence stuff was off the agenda at least for a while, that the Welsh Secretary of State went to Cameron and said, “Labour did not do it. If we do it, it will because very good for the Conservative party in Wales, and it is peanuts. Wales is 5% of national expenditure. We are talking about 3% of 5%. It is not even a rounding error. Let me have it.” They said, “Yes, go on then. Have it.” That is how we got it.
Chair: There are the merits of a Conservative Government for you.
Professor Holtham: It was pure politics. There was no reason in administration or anything else for the delay. It was 100% politics. That is the story. These various discussions you are having, at the end of the day, are going to be political discussions. It depends where the leverage is. I do not mean to sound cynical, but that is the experience.
Q257 Carla Lockhart: Very finally, you talked about working on new figures and looking at the figures as of today, as opposed to when the report was done. Can you give us a little bit more information? If you had a blank sheet as to how Northern Ireland should be funded, setting aside even the Welsh precedent—if you were to wipe the slate clean and go for the proper funding of Northern Ireland—what would your suggestion be?
Professor Holtham: The first difficulty you have there is relative needs. How much should we be spending on education? How much should we be spending on higher education? How much should we be spending on remedial education? How do you measure the need for social care against the need for other services? The trouble is that it is virtually an endless discussion and people will have different views. That is exactly the reason that we short-circuited it and said, “These are your formulae. We are not telling you what you are supposed to think. Let us just be consistent.”
Once you start saying, “We are not content to take the distribution formulae used in England, apply them more generally and insist on consistency,” you are getting into those quite deep political discussions. There are some conclusions that would give Northern Ireland a lot more money and some conclusions that might give it rather less. I do not want to say it is above my pay grade, but it is very difficult to see where you start.
If you take the British Government’s implicit judgments in the way that they distribute money around England, you can use that to start. Doing that, you get these numbers that we have talked about, the £121 to £124 area. To go beyond that, you would need a royal commission or something to make decisions about what is more important and what is not, and to set up a whole new system. I would not hold your breath.
Q258 Carla Lockhart: Let us just be consistent. Consistency is the key and it is Northern Ireland being consistent with the rest of the United Kingdom that would see it receive more money.
Professor Holtham: I do not know that it would.
Q259 Chair: Is your message not, in short, to be careful what you wish for?
Paul Johnson: There are lots of elements of consistency here. I have just been looking at the numbers. For example, the average household rates bill in England is about 80% higher than it is in Northern Ireland. You do have to be careful what you wish for in terms of consistency here.
Jim Shannon: The wages are grossly bigger here than they are in Northern Ireland.
Q260 Carla Lockhart: The wages are a lot better. It would be remiss of us not to say that Northern Ireland comes from a very different starting point. Many of our towns and villages were structurally blown to pieces during a very troubled period.
Paul Johnson: That is a complexity of coming to something that is consistent across the piece.
Q261 Carla Lockhart: The money we spent rebuilding those obviously has now had a detrimental impact on what we do today, because we are still dealing with that and its outworkings.
Professor Holtham: That is the unique feature in Northern Ireland and the reason that you can go beyond the straight comparison. The straight comparison itself does not suggest that you are underfunded. It may suggest that you are now approaching the right level; you are no longer overfunded and therefore a floor might be useful. The specific argument about security and its aftermath is a perfectly sound one, but it goes beyond that comparison. That just has to be negotiated itself. As we have said, the fact that you have a sum of money that the British Government used to allocate is a starting point for doing that.
Paul Johnson: In a sense, what we are saying is that we would advise you not to start from, “Let us look at a formula for Northern Ireland, the English regions and so on.” If you just do that, you will not get very far off from where you are. It may be a little bit more; it may be a little bit less. It is the other arguments about the special stuff that you cannot get into a formula, which have actually been the basis of lots of negotiations up until now. A formula-based system that works better than Barnett is not going to give you much more money and might not give you any more at all.
Q262 Chair: Our final question is from the other end of the telescope, or the other side of the equation. The Westminster Government are asking Northern Ireland Departments to consult on a range of revenue-raising options, which local politicians have ducked and dodged over a period of time; let us be absolutely frank. One can produce a perfectly viable argument that there is an over-reliance on the Treasury in Northern Ireland in comparison with other parts of the UK. What are the options that are likely to work best in terms of revenue raising?
Paul Johnson: Do you mean within the current situation, rather than giving additional tax-raising powers?
Chair: Are we looking at rates? Are we looking at water? What are we looking at?
Paul Johnson: The big one is water. That is by far the biggest. That is £350 million or so, which, topped up to UK levels, is in the order of £10 billion in terms of thinking about the UK-level budget. That is a big number. As part of the commission, we talked to people who have been through this process before. Obviously, there is not a great deal of keenness to make that change, but in terms of scale that is a big number and that would bring Northern Ireland into line with the situation in England and the rest of the UK.
Q263 Chair: Logistically, Mr Johnson, is it relatively easy to introduce? Forget about the politics for a moment. From a logistical point of view, is it relatively easy to introduce?
Paul Johnson: It depends how you do it. As a rates system, it is extremely straightforward. If you want to move to metering, which is where England is going, that will take a much longer period but again has been gradually rolled out within England, with some significant changes.
Looking down the list of the things that we looked at, everything else is relatively small. There are some aspects of industrial rating, which is significantly more generous in Northern Ireland than in England. There are some welfare mitigations, which make the welfare system in Northern Ireland somewhat more generous than in England. Prescription charges is quite small, at £20 million or so. There is a whole list of smaller things. University tuition fees are more generous in Northern Ireland than in England, though it is really quite difficult to estimate what those are worth.
If you take all of the things that we have here under Department of Finance control, mostly to do with various elements of rates, you have well over £100 million within that, which is down to specific additions such as vacant property relief and industrial derating, which might be related to the specific situation in Northern Ireland in some instances.
Q264 Chair: Again from a logistical point of view, you could quite easily get to about £450 million on water and peripheral changes to the rates system.
Paul Johnson: Yes, and other things, which, again, you have to multiply by something like 20 or 25 to think about in UK terms. These are significant sums in a Northern Ireland situation.
Professor Holtham: The question was asked earlier: what is the point of tax devolution? Here, you see it. If you had income tax, there would be two ways you could raise £350 million. You could either do all of these things, which you do not want to do, or you could put in an income tax. You would have that choice. You could decide which.
Chair: You could do a bit of both.
Professor Holtham: You could decide which way you wanted to raise the money. At the moment, you do not have that choice. That is really the only argument for tax devolution: it gives you more choices about how you raise money when you need to raise money.
Paul Johnson: It is obviously easy to sit here and say there is £350 million from water rates, but, given the way that would work, that would obviously be a big hit to a lot of household budgets, including a lot of relatively low-income people. People get used to the situation they are in, so you would almost certainly want to do that over a period of time.
Q265 Chair: Yes, it would not be agreed on Monday and introduced on Tuesday. Then there would be all sorts of exemptions. Briefly, Mr Johnson, because I am conscious of the time, the commission recommended an NI reserve as an alternative method of maintaining revenue. What steps would be needed to introduce that?
Paul Johnson: I am not sure it is so much an alternative. If you are going to have devolved taxes, then you have some risks, so you might want to be able to keep some back in order to pay further in the future. We also recommend a capacity to borrow in order to overcome some of those issues. It is worth saying that Northern Ireland actually has rights to borrow for capital spending, which it does not use. Obviously, if you borrow, then you have payments in the future. Given what has happened to interest rates, it probably does not look wise, because you could have borrowed at very low interest rates in the past.
It was one of the things that really struck me: there is money sitting here in the street and it is not being picked up. It is not free, because you have to pay it back, but actually Northern Ireland has more borrowing powers, in a sense, than the other devolved Administrations because of its capacity to borrow for infrastructure, which again is related to its specific situation.
Chair: Gentlemen, thank you. We are grateful for your thoughts and your insight in taking our questions. By the miracle of Paul Daniels magic-like skills, name badges will now change and we will move to panel 2. You are very welcome to stay for panel 2, but in the words of “Why Don’t You?”, if you have something more interesting to go and do, please feel free to go and do it.