Category Archives: Analysis

Asher’s Case is highly complex

We do not profess to be legal experts, but we have drafted Equality Schemes for both public sector and voluntary bodies in Northern Ireland and the Republic over the past fifteen years.

So, what about the Asher’s case? It is complex. We see no evidence of bias in the media, but we do see challenges around dealing with the detail of the case.

Space does not permit us to do this either, but a few points are worth noting.

Firstly, equality law in Northern Ireland is a hotchpotch of regulations and orders, primarily following on from provisions made in Equality Law elsewhere in the UK, and in the Northern Ireland Act which gave force to the 1998 Agreement. Consideration is being given to a Single Equality Bill (the UK Parliament passed such an Act in 2010 applying to England & Wales and Scotland, but equality law is devolved in Northern Ireland).

Secondly, equality law in Northern Ireland does allow religious organisations specifically to discriminate on religious grounds, including on employment and service. This does not, however, apply to religious people or to people operating indirectly on behalf of religious organisations.

Thirdly, consumer law in Northern Ireland does allow a service provider to refuse service; essentially there are two exceptions to this – it may not abuse this to promote reduced prices; and it may not do so in a way which discriminates against someone on the grounds of various things, including (relevantly here) political opinion and sexual orientation.

There are several ways in which the bakery could defend itself. It could say that it has a policy of avoiding political slogans at all on cakes it bakes – which, if not demonstrated to be false (say, by past cakes), would almost certainly clear it. It could argue that it did not wish to bake that particular cake simply because it did not want to, but that it was unaware of the sexual orientation of the customer – which would be trickier, but theoretically possible (and seems the most likely line). It could argue that it believes the provisions applying to religious organisations should apply to it – which would surely be rejected.

It is a surprise to us that the Equality Commission took this particular case given it is not clear cut and there is a real risk of defeat. However, to be fair to it, either way the outcome will be of significant legal interest.

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Stormont hits the iceberg – what now?

As Northern Ireland’s devolved institutions shudder, where now for welfare reform, corporation tax and political stability?

First Minister Peter Robinson and Enterprise Minister Arlene Foster had been planning to head to the United States this weekend to celebrate St Patrick’s, complete with a story of political stability and a pending reduction in corporation tax to 12.5%. The intention was to start on the West Coast, with industrialists there, and then cross over to Washington DC. They would perhaps have said a few words about improved working relationships, seeing off doubters, and even the power of compromise. Oh dear.

What has happened is probably a lot simpler than many are trying to make it – from its point of view, Sinn Fein negotiated very badly ahead of the Stormont House Agreement. In return for Welfare Reform (which it had presented as “Tory cuts”), there would be “£2 billion extra spending power” (none of which consisted of truly new money under the Executive’s sole competence) and “an all-Ireland corporation tax”. This was always going to be a hard sell ahead of key elections, and at the weekend’s Ard Fheis it proved impossible to sustain.

Welfare Reform

The Welfare Reform Bill was due to pass Final Stage this week, and would probably have received Royal Assent mid-month. The reason for the speed was to get it implemented as soon as possible, thus avoiding the repayments (commonly but erroneously referred to as “fines” or “penalties”) due for running a different system from the rest of the UK under “parity“.

The Bill is almost identical to that passed by the UK Parliament for Great Britain in 2012.

However, Sinn Fein’s stated intent to use a Petition of Concern, backed by the SDLP and Greens, would have seen it defeated – thus, the Bill would have fallen. DUP Minister Mervyn Storey thus opted not to move it (i.e. remove it from the schedule), leaving the Bill stalled (but not fallen) pending negotiations.

Quite what this means is anyone’s guess.

It is well to be prepared for just about anything, but currently we would not expect to see the Bill back before the Assembly this side of the UK General Election on 7 May.

Corporation Tax

The passing of the Welfare Reform Bill through the NI Assembly was directly and deliberately linked in the Stormont House Agreement to the passing of a Corporation Tax Bill through the UK Parliament for operation potentially as early as the 2017/18 financial year.

The delay on the former means the latter – implementation of a reduced rate of Corporation Tax in Northern Ireland as per the draft – will surely not now proceed in time for 2017/18. We have remained of the view all along that it is unlikely ever to proceed, as public opinion was already shifting against (in a way to which Sinn Fein and other parties would be likely to respond).

Institutions

The Ulster Unionists have suggested the Welfare Reform Bill was necessary to the Stormont House Agreement, and the Stormont House Agreement was necessary to Stormont itself remaining in operation. This is the same logic as past statements from the DUP leadership.

Certainly, the first part of this is true – the Stormont House Agreement did hinge on a resolution to Welfare Reform, and that resolution has now unravelled. Thus, in effect, the Agreement no longer applies unless it can be put back together by a further deal (in practice between the DUP and Sinn Fein) on Welfare Reform. Whether the devolved institutions depend on the Agreement is more debatable.

The more immediate problems are financial. Without a deal on Welfare Reform, the Assembly Budget, which was the immediate reason for crisis last autumn, is no longer correctly assessed. The 2015/16 Budget assumed implementation of Welfare Reform halfway through the financial year and removal of repayments for breaking “parity” from then (an effective saving versus the previous year of between £40m and £57m); this is no longer the case. However, it also assumed a significant fund for “mitigation”, which presumably will not now apply either (this would go about halfway to addressing the balance).

In the longer term, the unravelling of the Stormont House Agreement may mean the removal of all the UK Government’s commitments – on spending on Shared Education and the Past, on higher borrowing limits, and even perhaps on switching money from current resource to capital to pay past debts. The most obvious victim of this would be the Voluntary Exit Scheme through which 10% of Northern Ireland’s public sector workers are being encouraged to leave service in return for a pay-out; this would no longer be viable without the borrowing and permission to use capital spending.

Politically, there is the suggestion that the institutions will now collapse, causing an Assembly Election to coincide with the UK General Election on 7 May. This is unlikely as, strictly, the timescale does not allow it even in the event of immediate resignation. 

Financially, it is a marginal problem for 2015/16 which can probably be address in Monitoring Rounds. In the longer term, it is a more serious problem, although even then limited by the fact that much of the vaunted “£2 billion extra spending power” was not really extra money. There is a real risk, however, that the “Voluntary Exit Scheme” will be abandoned, replaced by “natural wastage” and surely, in some specific instances, compulsory redundancies.

Current position

The Assembly’s plenary sessions have been suspended, but the Assembly itself has not. The party leaders met within hours of Sinn Fein’s announcement, as they are collectively responsible for implementation of the internal side of the Stormont House Agreement.

In theory, life goes on as normal, just without a Welfare Reform Bill (or, in practice, the financial deal agreed at Stormont House). In practice, it is likely that the British Labour Party’s call for the UK and Irish Government to reconvene talks will be heeded, with Secretary of State Theresa Villiers now coming to Stormont, although quite how much time the UK side would wish to put into it within two months of a General Election is dubious.

Stormont is rarely dull – even if sometimes we may wish it were!

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Analysis update – NI budget

The Finance Minister is currently presenting a revised NI Executive Budget to the NI Assembly, after consulting on the Draft Budget and the availability of some additional funds through Barnett Consequentials and non-use during the current financial year. This follows on from and is complementary to our analysis of the Draft Budget.

Figures apply only to Current Resource spending except where specified.

Extra Allocation

The Executive is promoting an “extra allocation” of £150 million for Resource spending – around 1.5% extra.

The “extra” money comes from:

  • an allocation by the UK Treasury through Barnett consequentials (most obviously from the £1.7b increase in NHS spending for 2015/16) – £79m;
  • money not used to mitigate welfare reform – £43.1m; and
  • reduced requirements identified in monitoring rounds – £30.5m (although other pressures see this effectively reduced to £28.1m).

This is below £150m, and the latter strictly applies to 2014/15 not 2015/16, but there are also some helpful sundries including £10.7m from the revaluation of public sector pension schemes, £5.9m reduction in interest repayments, and £1.3 in increased rates revenue (although there are is also an overcommitment of £4.4m to address in the current financial year, and some other minor negatives).

This, plus the ability to use Capital funds to pay back loans and welfare deductions to the UK Treasury, is sufficient to mean that total Current Resource Spending will be only £60m lower in 2015/16 than 2014/15 (assuming that the NI Executive is allowed to keep an unallocated £13.9m to run over).

There is also an allocation of £18.7m which had not previously been agreed for European projects, and some re-adjustment on the capital side which does not affect current resource spending directly.

The term “extra” is used in the sense that no Department will lose out versus its position in the Draft Budget. The extra money will be allocation additionally to that.

Executive Change Fund

The Minister’s Statement also includes the allocation of £30 million held in the “Executive Change Fund”, held aside as money to be bid for for “innovative reform” by Departments.

Health

Health receives no “extra” money. It receives £4 million (c. 13%) of the “Executive Change Fund” allocation – much lower than its share of the overall Draft Current Resource Budget of 47%.

Some concern is hinted at concerning the “performance” of the Department of Health, Social Services and Public Safety in managing its budget.

Education

Education does well, receiving almost half the “extra” allocation (£63m), an increase of 3.4%. It also receives £1.4m from the “Executive Change Fund”, much less significant.

Justice

Policing receives an extra £20m, which means the overall spend on Justice rises 2%.

Enterprise

Enterprise had already done well from the Draft Budget, and an extra £3m goes directly to Invest NI.

Employment and Learning, which is likely to merge with Enterprise at the end of the financial year, receives the biggest share uplift at 5% (£33.2m), although this is against a very unfavourable initial allocation.

Other Departments

Other Departments receive extra allocations of up to £5 million. Another £5 million is set aside for a “Social Investment Fund”.

New Northern Ireland Current Resource Departmental Expenditure allocations in revised Budget for 2015/16

New Northern Ireland Current Resource Departmental Expenditure allocations in revised Budget for 2015/16

Rates

No revenue raising applies. The average household in Northern Ireland will pay £812 in “household taxes” and zero extra for water (versus £1322 in Scotland, £1433 in England and £1613 in Wales where water delivery is charged extra).

Notification of amendment to Recommendations for Written (Ulster) Scots

Since 2012, Ultonia Language Services has maintained a grammatical and orthographical standard for writing (Ulster) Scots based absolutely on the conventions used in Ulster Scots – A Short Reference Grammar (published by Ultonia Publishing).

This is a notification of some minor amendments to formation of past forms.

1. For regular verbs ending in a vowel cluster but not -e, the recommended suffix is now -ed (replacing -d, which is now rejected) – therefore poued not poud.

2. The strong verb frys ‘freeze’ is now considered to be Class I (not Class IV fruis, which is now rejected), past form fris.

3. The strong verb leak ‘leak’ is now considered to be Class IV (not Class II lek, which is now rejected), recommended past form lak.

4. The strong verbs break and speak now take the recommended past forms brak and spak (replacing braek and spaek, which are now rejected).

5. The strong verb present form shuit ‘shoot’ is now recommended to be so written (replacing shoot, which remains optional); this effectively places it in Class II, but it remains listed separately.

The presence of a velar consonant after the root vowel is now taken to explain the anomalies in Class II (e.g. fecht-focht versus get-gat) and Class IVb (e.g. break-brak versus beat-baet).

Corporation Tax (NI) Bill – Overview

The draft Corporation Tax (Northern Ireland) Bill was published last week, with the Secretary of State pledging her best endeavours to have it on the statute book by May’s election (in other words, by the end of March). This is an extremely challenging timescale, but any new government would be bound by the spirit of the Stormont House Agreement to proceed with it anyway. So, what is it?

Background

The Republic of Ireland’s economy grew rapidly from the early 1990s to the early 2000s, moving from GDP/capita 20% below the EU average to 40% above in just over a decade. Campaigners, particularly businesses, argued that one of the key components of that success was its rate of Corporation Tax (i.e. the tax incorporated businesses pay on their profits), which were placed at much lower than the EU mainstream and were thus seen as an easy way of promoting inward investment from North America. It was suggested by them, in Northern Ireland and elsewhere, that a similar policy should be tried. This analysis is, however, contested – for example, the Republic of Ireland also made use of tax loopholes so that some large investors were able to avoid paying any Corporation Tax at all. There are also questions over the long-term sustainability of the policy and whether “GDP/capita” is a sensible measurement of economic progress in any case.

The proposal is generally referred to in Northern Ireland discussion simply as “Corporation Tax”, understood to mean the reduction of Corporation Tax in Northern Ireland to match the rate across the border.

In fact, the proposal is specifically to transfer the power to set the rate of Corporation Tax to the Northern Ireland Assembly, and then only for companies with a presence in Northern Ireland on profits attributable to trade in Northern Ireland outside the broad finance and oil industries. It is noted also that the power to move the rate downwards would require the Northern Ireland Executive itself to find, from Departmental Budgets, money to pay back to the Treasury to make up the difference. (It is commonly stated that this comes about because of “EU rules”, and indeed it does; but in fact it also comes about under the existing UK financial policy known as “Parity”, which is currently topical due to Welfare Reform).

The assumption is that the Assembly would immediately use this power to reduce the rate to the current rate across the border, i.e. from 20% (the UK rate from April 2015) to 12.5% (the Irish rate). However, that is not contained in the Bill. The Assembly could in theory (as has been mooted already by the Enterprise Minister) reduce it further, perhaps to 10% or even nil; on the other hand, there is an increasing body of opinion which supports transfer of the powers but does not support using them immediately, given the Executive’s ongoing Budget difficulties.

1. Rate Application

After passage of the Bill, there would be a “Northern Ireland Rate” (of Corporation Tax) and a “Main [i.e. UK] Rate”.

The “Northern Ireland Rate” would apply to trading profits of SMEs whose costs and employee time are largely (75%) in Northern Ireland and to the profits of a large company attributable to a presence in Northern Ireland, and also excludes certain industries.

This is designed to stop large companies simply shifting their nominal HQs to Northern Ireland from elsewhere in the UK.

2. Rate Setting

The “Northern Ireland Rate” would simply be set by resolution of the Assembly at any time before the start of the financial year. If one is not set, the existing rate continues to apply.

In practice, this would appear to make the setting of a lower rate for 2017/18 unlikely but conceivable.

3. Application

The Bill distinguishes between “Northern Ireland profits” (i.e. profits due to activity based in Northern Ireland) and “mainstream profits”. The former is taxed at the “Northern Ireland Rate”, and the latter at the “Main Rate”.

Losses are relieved as far as possible against the relevant rate.

The objective here is that the “Northern Ireland Rate” would be paid on profits due to trade attributable to activity in Northern Ireland. This is designed to encourage local employment and, again, to stop companies simply shifting nominal HQ from elsewhere in the UK (or anywhere else, for that matter).

4. Definition

To qualify to pay the “Northern Ireland Rate”, a company must be a “Northern Ireland Company”. To do this, it must meet the aforementioned conditions concerning trading and presence in Northern Ireland and must be in a “qualifying trade” (although a “Northern Ireland Company” may pay the “Northern Ireland Rate” on profits from “back-office functions” even of a non-qualifying trade).

A “Northern Ireland Company” may be a “Northern Ireland SME” or a “Northern Ireland Large Company” (or a large company with a “Regional Establishment”, see 5 below).

This is primarily designed to encourage local entrepreneurship across the board, but to stop any threats to London or Edinburgh as the UK’s prime financial centres (finance is a non-qualifying trade).

5. Regional Establishment

Large companies may qualify to pay the “Northern Ireland Rate” (if the above conditions are met) on profits from a Northern Ireland trading arm. To do this, they will formally have to set up a “Northern Ireland Regional Establishment” – essentially a devolved part of the company meeting the trading and presence requirements.

This is designed to enable investors to pay the “Northern Ireland Rate”, but only on Northern Ireland activity.

6. Profits and Losses

Where a company is in a non-qualifying trade (notably finance) but has some back-office functions, it may declare its profits (and losses) separately – paying the “Main Rate” on front-line (non-qualifying) activity, and the “Northern Ireland Rate” on back-office activity.

This is complex, but seems designed to boost Northern Ireland’s growing back-office finance industry.

7. Other Provisions

Other provisions include the allowance of relief against establishing a “Northern Ireland Regional Establishment”; the payment of royalties at the “Main Rate”; makes the “Northern Ireland Regional Establishment” effectively a separate but not independent enterprise; and distinguishes “back-office activities”.

8. Assets

Essentially, assets used for the purpose of making a profit payable at the “Northern Ireland Rate” are set against the Northern Ireland Rate.

This is extraordinarily complex, depending on the type of company, its trade, the location of its activities, the date of establishment of the asset, the purpose of the asset, and so on. Accountants and lawyers will have a field day!

9. Credits

R&D credits are assessed against the “Main Rate” (generally and where possible). The adjustments required to achieve this are, again, extraordinarily complex.

The idea is to ensure no one loses out (or is dissuaded) from R&D activity.

10. Land

Profits and losses on land are treated similarly to assets and credits above.

11. Film

Film tax credits remain in place and the system is designed to ensure they are unaffected by film companies paying the “Northern Ireland Rate” or “Main Rate” as appropriate.

As this is a key industry for Northern Ireland currently, the objective is clear.

12. Television Production

Television Production is treated as film above.

13. Video Games

Video Games are treated as Film and Television Production above.

14. Theatrical Production

Theatrical Production is treated as Film, Television Production and Video Games above.

15. Intellectual Property

Intellectual Property deductions from Corporation Tax payments are separated into “Mainstream Deductions” and “Northern Ireland Deductions”.

16. Partnerships

Partnerships will be dealt with similarly to companies (although a new term, “Northern Ireland Firm”, is used for them).

17. Non-qualifying trades

Non-qualifying or “excluded” trades include lending, investment, investment management, re-insurance, long-term insurance, and oil and gas exploration. The Treasury has the right to amend this list, and to define “back-office activities”.

This is designed to protect key sectors elsewhere in the UK. The specific omission of oil and gas exploration (and any activities around the UK’s Continental Shelf) may also be preparation for the day a similar Bill is demanded for Scotland.

18. Note

The Stormont House Agreement sets the year from transfer of powers at 2017, but does not say exactly when that year (this is relevant, because the Northern Ireland Assembly has to pass a resolution to change the rate before the beginning of the financial year).

The Bill does not clarify this, and indeed does not even reference 2017. It merely gives the power to the Treasury to declare when the transfer of powers applies.

19. Politics

The Bill is highly complex, filled with highly technical language and even complicated mathematical formulas! This does demonstrate that a lot of work has gone into it and it is a serious attempt at offering Northern Ireland a central tool to “re-balancing its economy” away from dependence on the public sector (i.e., crudely, subvention from Great Britain).

The Bill does its best to ward off any threats from the rest of the UK, removing from the equation in particular key Scottish industries (finance and oil). Nevertheless, it is inconceivable that the Scottish Government would not demand the same powers if Northern Ireland were ever to use them and be seen to benefit; and it is equally inconceivable in the current climate that they would not get them (indeed, as noted at 17 above, the Bill seems already written for that inevitability).

An increasingly widespread view is that the powers should be transferred but not necessarily used (and certainly not immediately). This carries a degree of risk, as the UK Government sees the Bill as a generous devolution uniquely to Northern Ireland of a highly useful economic tool. There is a risk, therefore, that the UK Government’s response to any future “begging bowl” would be simply to recommend to the use of that economic tool. This risk may not be significant, as the UK Government effectively rejected the “begging bowl” at Stormont House last month in any case.

There is also an increasingly apparent tendency for Nationalist parties in Northern Ireland to be swayed by broadly “left-wing” views, which oppose this tax reduction at the expense of a loss to funds for public services.

20. Economics

The actual economics of using the powers in the Bill to reduce the “Northern Ireland Rate” to 12.5% are highly contested.

The case for is that it would make Northern Ireland a uniquely appealing location to invest – within the UK but with lower corporation tax and property costs; within the Irish Corporation Tax zone but with lower housing costs, lower VAT and more favourable income tax bands (reducing employee costs). As a headline alone, reduced Corporation Tax would be a significant advantage to those promoting Northern Ireland.

The case against is that those benefits may be outweighed by the loss to the funding of public services and the uncertainty around what the actual cost to Northern Ireland Departments would be. Already, the sense is that Northern Ireland’s government structures are simply not up to the challenge of managing spending reductions; to add further strain by using the powers transferred would have unpredictable (and surely disadvantageous) results.

It is a finely balanced case, also prone to external shocks (such as the potential eventual devolution of Corporation Tax to Scotland, and what it would mean if the Scottish Government used it either to go to 17%, as the SNP has advocated, or even to 12.5% to match Ireland). The outcome of the debate, as with the outcome of actually using the powers transferred, is unpredictable!

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“Stormont House” deal – financial/political implications

As in Scotland, five parties have been locked in negotiations for weeks in Northern Ireland and have now reached a deal which impacts on finances and the political institutions. This is a brief, immediate, overview of what has been agreed.

Welfare Reform

The Welfare Reform Bill will pass the Northern Ireland Assembly by the end of February 2015, to be implemented by the end of March 2016.

The faster implementation proceeds, the lower the “deduction” from Northern Ireland’s devolved budget will be – if it takes the whole of the 2015/16 financial year, it will be £114 million.

The NI Executive agrees to pay the administration and costs for anything it does differently – it has already been agreed this would cost around £17 million to avoid the so-called “Bedroom Tax”.

Finance

The Financial Deal effectively means that money may be relatively freely passed between Capital and Resource (current) budgets.

The £650 million of “new and additional funding” in fact covers only those things which are partly the responsibility of the UK Government (e.g. Commissions on the Past, Identity, Historical Inquiries and Implementation) or which have to be agreed with the UK Government (essentially for Shared Education campuses).

The £350 million of increased borrowing for Capital projects is over four years, and is effectively to cover for the re-allocation of other money from Capital budgets.

The £900 million of resource re-allocation over four years essentially allows money from Capital budgets to be used for:

  • paying for a “Voluntary Exit scheme” to reduce the size of the Civil Service and public sector at large (£700m);
  • payment of this year’s UK Treasury loan (£100m); and
  • payment of any deductions for breaching parity on welfare (up to £114m).

Additional Tax Powers

The deal allows for the devolution of landfill taxes, aggregate levy, stamp duty and most notably Corporation Tax (specifically on trading profit) by mid-2017. The last of these is additional to those powers proposed for Scotland; on the other hand, income tax powers are not proposed for Northern Ireland.

Institutional Reform

The most surprisingly advanced section of the deal is perhaps that on institutions, which essentially allows for the creation of an Official Opposition from the next Assembly Election (2016).

The proposal is that instead of forming the Executive automatically “by d’Hondt” (the mathematical formula which determines the number of Ministers for each party and order of choice of Ministry), parties which would be entitled to a place in the Executive would meet to agree a Programme for Government and any party not in agreement would be entitled to opt to go into Opposition instead, with appropriate allocations of speaking rights and research funding.

The Deal also agrees:

  • reduction in the number of Executive Departments from 10 to 7 (plus OFMDFM and Justice) from 2016;
  • reduction in the number of MLAs from 108 to (likely) 90 from 2021;
  • some changes to the operation of Executive meetings;
  • changes to protocols around the use of the “Petition of Concern” (although these are not expanded upon); and
  • re-establishment (in effect) of the Civic Forum.

The Departments are not expanded upon, but it is likely that in effect Culture, Regional Development and Employment/Learning will be merged into others (most obviously Education, Environment and Enterprise respectively).

New Public Bodies

There will be new Commissions and various other bodies on Identity, Oral Archives, Historical Investigations, Information Retrieval and Reconciliation.

It is proposed that Parades be devolved, effectively to OFMDFM.

Conclusion

Much of what was supposed to be agreed during last year’s “Haass Talks” remains unresolved, mainly handed over to new bodies.

There is clear agreement to proceed with Welfare Reform and institutional reform (to allow formation of an Opposition).

There is some flexibility over finance, but really very little clearly new. Most notably, current budgetary pressures are not significantly helped.

The Chancellor giveth… and the Chancellor taketh away?

There seems to be some confusion over what the Chancellor’s announcement of £2 billion extra for the Health Service across the UK would mean for Northern Ireland. All are agreed that it would mean an uplift in Northern Ireland’s budget, but how much and where?

The system is in fact fairly simple. “Territorially identifiable expenditure” is established for each financial year in the Budget, the Comprehensive Spending Review and in other announcements. Population estimates are used for each country of the UK to establish how much money in “territorially identifiable expenditure” must be spent in each country for every £100 spent in England – currently this is £3.45 for Northern Ireland (and £10.03 for Scotland, as that’s currently in the news). This means for every £100 added to spending on Health, or roads, or education in England, £3.45 must be added for Northern Ireland.

From this, we reported initially a figure of (just under) £70 million for Northern Ireland, on an original understanding that the £2 billion figure was going to be announced for England. If the £2 billion figure applies to the whole UK, however, that reduces the Northern Ireland figure, by our calculations, to just under £60 million. BBC NI is reporting £41 million – we don’t know where this figure comes from, but perhaps it is based on a lower overall figure – we will see when the Autumn Statement takes place.

However, money allocated to devolved authorities is in fact allocated to that country’s Secretary of State, who passes it to the relevant Department of Finance in the devolved Executive (or Government). That Department may choose to allocate the extra money wherever it wishes. There is no obligation, therefore, for Northern Ireland to spend all the extra on Health. In fact, it could spend all of it on something else if it wished. It was ever so, and indeed it has frequently happened – of “territorially identifiable expenditure” Health already accounts for 22% in England but less than 19% in Scotland and Northern Ireland, precisely because Scotland and Northern Ireland have generally chosen to spent part of the money allocated from rising Health spending in England on things other than Health in Scotland and Northern Ireland.

There is a big catch. When, for example, Scotland chose to move away from Tuition Fees altogether and Northern Ireland chose to retain them at previous levels as England tripled its, the reverse happened – money was removed from university education in England, and thus taken from Scotland and Northern Ireland. The assumption is always that Scotland and Northern Ireland (we are leaving Wales out of it because it is a little different) will do the same as England – if they don’t in the case of a reduction in spending in England, they have to find the money to cover that reduction elsewhere.

Here is the warning for Northern Ireland. An pre-election give-away uplift in Health spending (and perhaps also in other areas) will see anything from £41 million (by our calculations, from £59 million) added to the Northern Ireland Departmental budget now. However, all sides are agreed that post-election, the reverse will happen – further spending reductions will be implemented and that means in effect that Scotland and Northern Ireland will have to implement them too (although they could choose to close the gap by raising taxation/rates/charges if they wished). Those of us operating in Scotland and Northern Ireland need to be keenly aware that what the pre-election Chancellor giveth, the post-election Chancellor probably taketh away…

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Notes on Smith Commission on Scottish Devolution

The Smith Commission’s report on Scottish devolution will prove a momentous change in the UK’s constitutional history. Unfortunately it defies the relatively simple headlines put forward by the media in this age of sound bytes; it deserves more scrutiny not just about what is in it, but about what it may mean including beyond Scotland.

Parliamentary Sovereignty

The momentous change is essentially the proposal that the Scottish Government and Parliament be made permanent in legislation – in other words that absolute Parliamentary sovereignty be ended and that, in the case of Scotland, national sovereignty effectively be pooled between Westminster and Holyrood. This constitutes a clear shift towards federalism, which may soon be matched in Wales (it is effectively already the case in Northern Ireland but in a different manner, as its devolved institutions are formed under an international agreement).

Tax/welfare structures

Structures under a Memorandum of Understanding are required to manage differential tax and welfare systems. Their establishment sets a precedent which could then be repeated in Northern Ireland and Wales.

Tax devolution

Income tax (on earned income, not dividends or savings), aggregates levy and air duty are fully devolved in the report. The latter of these was already the case in Northern Ireland, but Scotland may now compete. Income tax is not as dramatic as it first seems – it accounts for only about a quarter of all UK tax receipts and the likelihood is Scotland will not differentiate significantly (it hadn’t used its 3% option either way).

VAT and Corporation Tax, which had drawn attention in Northern Ireland, are not devolved. An announcement on the latter will follow next week, but it remains hard to see Corporation Tax being reduced in Northern Ireland without Scotland demanding and getting the same right soon after (as has happened with air duty).

However, the first ten points of VAT are assigned to the Scottish budget, which has the effect of raising the Scottish budget in the case of raised VAT receipts in Scotland comparative to the rest of the UK, and vice-versa – a similar system operates in Germany.

The National Minimum Wage remains reserved, so common UK-wide. This limits potential for “Living Wage” campaigns in any particular part of the UK.

Notably, Scotland takes full responsibility for any differential in administrative costs from applying different tax rates. That is a precedent which will be noted in Northern Ireland and Wales.

Welfare devolution

Scotland gets almost every individual aspect of working-age welfare devolved except the biggest, namely Universal Credit. It is entitled, even with Universal Credit, to use its housing powers and to vary the timing of payments. This is effectively the same as Northern Ireland, except Universal Credit is devolved there too in theory, right through to the requirement that Scotland meet any additional costs (administrative or otherwise) of doing things differently, although the concept of “parity” (making Scotland pay for its entire system if it does things differently) would not in effect apply.

Pensions and benefits to do with children/parenting are not devolved in the report. They are devolved to Northern Ireland but it is a convention (albeit one challenged by some Unions) that those powers are not applied and that pan-UK arrangements are maintained.

Scotland has discretion to introduce extra welfare payments in devolved areas with no prior consent necessary. A similar idea has been proposed using Northern Ireland’s powers to break the current welfare deadlock.

European Union

Other than pooled sovereignty, perhaps the most significant move in the report is the consultation with devolved Ministers on European issues and potentially even the representation of UK interests by devolved Ministers (thus access to the Council of Ministers). This applies to Northern Ireland (and, where appropriate, to Wales) just as to Scotland.

Super-majority

Most of the administration of the Scottish Parliament itself and of elections to it (and Scottish Councils) is fully devolved, but notably changes to some electoral arrangements (e.g. the number of MSPs) require a two-thirds super-majority to pass. That same super-majority has been proposed by some to replace “cross-community” (designation) votes in Northern Ireland.

Cross-border working

The role of the Joint Ministerial Committee is enhanced and a joint Parliamentary body is proposed. Are there lessons to be learned from the North-South Ministerial Council on the island of Ireland, which does something similar?

Election dates

The holding of Scottish Parliamentary elections in the same day as UK General elections (or any other elections) is prohibited. This is not the case in Wales or Northern Ireland, and indeed Northern Ireland Assembly Elections and Council Elections were held on the same day in 2011.

Consultative Roles

Scottish Ministers gain a consultative role in areas of broadcasting and regulation. These are markedly different across the UK. Regulation is devolved in Northern Ireland in some cases (Ofcom operates there but Ofgem does not; in the case of electricity, regulation is carried out on an all-Ireland basis in effect); S4C is a unique arrangement in broadcasting in Wales.

Comsumer advice and protection and certain aspects of supplier obligations with regard to energy efficiency are devolved to Scotland in the report. These are already devolved to Northern Ireland (often in the case of energy with a cross-border aspect).

Equality

Most aspects of employment are effectively devolved to Scotland in the report, but Equality is not. There is a view that abortion should be devolved to Scotland. Equality and abortion are both devolved to Northern Ireland.

Transport

Speed limits are proposed for devolution to Scotland in the report. They were already devolved to Northern Ireland.

Conclusion

The report is fairly comprehensive and sets some very interesting precedents. It is also notable for some omissions. It does set the scene for a Federal UK, yet significant powers remain reserved. Although the focus is on income tax, that may prove one of the least interesting aspects of how the new powers are devolved and used in practice.

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Analysis of NI Executive Draft Budget under consideration

Earlier this month, the Northern Ireland Executive ran out of money. Over-spending left it with a shortfall of £100 million (around 1% of the overall budget). To cover this, the UK Treasury allocated it a loan, on condition that the Executive agree its 2015/16 budget by the end of the month.

It is noteworthy, first of all, that the Executive does have some revenue-raising powers. It could:

  • raise the Regional Rate paid by households and/or businesses (a 19% rise, as implemented on one occasion under Direct Rule, would raise almost exactly the £100m shortfall) and/or remove the Regional Rate Cap (whereby rates are not assessed on property value above £400,000);
  • introduce separate Water Charges paid by households (depending on exemptions, this would eventually raise £150m-£250m annually, although it would likely be phased in so would raise less than half immediately); and/or
  • introduce other charges, such as for Prescriptions (raising £7m-£31m depending on the charge itself and exemptions) or motorway tolls (as in the Republic of Ireland, potentially raising £30m annually although there would be set-up costs).

The largest party, the DUP, is against all of these except Prescription Charges (the Finance Minister noted that, in any case, the full advantage to the public purse would not be felt immediately). The second largest party, Sinn Fein, is against Prescription Charges (and seemingly everything else except removing the Regional Rate cap). The outcome, therefore, is that revenue-raising options will be ignored.

That means that any shortfall in the 2015/16 budget – estimated at around £762 million plus repayment of the £100 million loan – has to be met purely through spending reductions. In practice, although Health and Education remain priorities, absolute protection of their budgets becomes impossible when looking at an effective 8-9% reduction across the board, not least as these are the biggest two Departments.

The Draft which will be put to the Executive is as follows:

Department

Draft Outcome (£ million)

Change

Share

Agriculture

187.3

-5.2%

1.9%

Culture

87.1

-12.8%

0.9%

Education

1849.3

-1.0%

18.5%

Employment

659.4

-12.8%

6.6%

Environment

101.7

-12.8%

1.0%

Enterprise

194.0

+5.3%

1.9%

Finance

139.0

-10.9%

1.4%

Health

4693.1

+3.3%

46.9%

Justice

1024.0

-6.0

10.2%

Regional Dev.

322.0

-4.0

3.2%

Social Dev.

589.1

-9.9

5.9%

OFMDFM

65.4

-0.6

0.7%

Assembly

42.5

Nil

0.4%

Sundries

38.5

-6.8%

0.4%

Some smaller parties have difficulties with this, particularly in the area of Education. There may be some minor changes there, but it is hard to see any significant difference emerging from the above, assuming any deal is done at all.

It is worth noting also that the above budgets refer only to expenditure falling under what is known as Departmental Expenditure Limits – in other words spending on public services. It does not include areas such as benefits and pensions, which fall under Annually Managed Expenditure (as strictly speaking they can be estimated but not precisely budgeted for).

Pensions/Welfare: what is “parity”?

The Public Sector Pensions Bill is currently making its way through Stormont.

This is essentially parallel legislation with the 2013 Act which has already gone through Westminster. As it falls under welfare, it is subject to a process known as “parity”. This has led to a lot of misunderstanding (some of it, frankly, intentional).

“Parity” was a deal brought in at the time of the beginning of the Welfare system between the UK Treasury and the Government of Northern Ireland. The basic principle is that everyone in the UK should be subject to the same welfare provisions (including pensions); the deal itself is that, although welfare (including pensions, out-of-work benefits and so on) is devolved to Northern Ireland, the UK Treasury will make up any shortfall in the funding of it provided Northern Ireland enacts the same policies.

This is entirely separate from the “Barnett Formula”, which dates from the Callaghan Government. That was a formula, meant to be used on a temporary basis, whereby funding (i.e. public spending allocated to what are now devolved institutions) for Scotland, Wales and Northern Ireland would go up or down proportionately depending on how it goes up and down in England in a way devised to ensure everyone in the UK enjoys the same standard of living (on average in each country). So, for example, if health spending rises in England, it rises by the equivalent amount in Northern Ireland – however, for example, Northern Ireland could choose not to allocate this to health, but to education or transport or whatever. Likewise, if spending decreases in England, it decreases by the equivalent amount proportionately in Northern Ireland.

Because pensions fall under welfare and thus under “parity” (not “Barnett”), the deal is simple: Northern Ireland enacts the same legislation as the UK Government has and the UK Government will make up the shortfall (roughly ₤250 million per year). However, if Northern Ireland does not enact the same legislation, the UK Government will not make up the shortfall – Northern Ireland would therefore have to find extra money to pay for the pensions under the current arrangements and additionally make up the shortfall itself from existing budgets in other departments, effectively taking ₤250 million each year from health, education, transport, justice, business support and so on.

Some parties are making great play of “standing up for public sector pensions” and that is their right; however, they also have to explain to the rest of Northern Ireland where they are going to take the money from firstly to pay for the existing system (which is unaffordable under current arrangements) and secondly to cut ₤250 million from other public services delivered by Stormont. Those are the facts of the matter.

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