The Need for a Strategic Approach to Taxation

In the first of three articles on taxes and their role in public policy, we consider the need for the Northern Ireland Executive to review the local system of taxation.

Northern Ireland Departments have received their final allocations for 2015/16, but given their tight budget envelopes it is to be expected that calls will be made for additional resources to fund valuable projects and services, and to respond to unforeseen needs. As neither the Conservative or Labour parties are expected to increase public spending in the next parliament this is a situation that will remain for a number of years. Meanwhile, the Scottish Parliament is assuming a range of additional tax powers, and the Northern Ireland Assembly stands to take control of corporation tax.

In this difficult and changing fiscal context, the Northern Ireland Executive needs to look strategically at the local system of public finance. This could include a review of rates (Northern Ireland Assembly's main taxation lever); taking control of other taxes such as income tax; and changing or introducing service charges.

The alternative to a planned approach is to raise funds in an ad-hoc fashion, as needs arise. The proposal by DHSSPS to reintroduce prescription charges, abolished in 2010, is indicative of this approach. The proposal is contained in the department’s consultation paper on a process called Individual Funding Requests (IFR), by which clinicians can apply for patients to receive specialised treatments not normally available from the health service (for example because it is not considered cost-effective enough for routine use). DHSSPS estimates that additional finance of between £4.8m and £9.5m is needed to fund the scheme (between 1% and 2% of the department’s non-ring-fenced resource budget) and has suggested prescription charges to bridge the gap.

Linking prescription charges to a specific purpose in this way gives citizens a clear link between their taxes and the services funded, making it easier to generate political support for the levy. For example cancer treatments are commonly funded through the IFR and many people would be willing to pay a little extra to ensure that these treatments are available.

However it is questionable whether this is the best way to raise additional funding. There is a high level of bureaucracy involved in administering prescription charges; they may have an adverse impact on health (if they deter even a small number of people from using medicines they need); and the money they would raise is relatively small. By way of comparison, a recent Audit Office report found that if GPs proscribed lower cost medicines, savings of up to £54m could be realised without affecting patient care. DHSSPS has queried whether this level of savings is achievable, but it should surely be possible to realise the £9.5m required (17.6% of £54m).

The Northern Ireland Executive needs to set out a clear and coherent position on taxation policy, as part of a wider review of the public finance system. In the absence of a strategic approach agreed at Executive level, public bodies will resort to a silo mentality and opportunistic means of raising additional finance, with each department doing its own thing. This is unlikely to contribute to efficient government or good public policy.

The next article will discuss the key principles upon which a taxation system should be based and the third article will look at the pros and cons of ring-fencing revenues for specific purposes.



The opinions, views or comments in this article do not necessarily reflect any views or policies of NICVA.

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