Establishing a fiscal council

The Northern Ireland Executive is set to establish a fiscal council to scrutinise public finances and a fiscal commission that will produce a cost-benefit analysis for the devolution of additional fiscal powers. agendaNi contextualises this ambition.

Independent fiscal institutions (IFIs) are a collective of fiscal commissions, offices of budget responsibility and parliamentary budget offices. Independent of the executive branch of government, IFIs are mandated to undertake the assessment of government fiscal policy and performance.

While some IFIs, such as the UK Office of Budget Responsibility (OBR) prepare their own macroeconomic and fiscal forecasts, others, such as the French High Council of Public Finance analyse the forecasts prepared by government departments. Unlike audit institutions, which conduct ex-post analysis, IFIs usually undertake ex-ante analysis.

After 2008, there was a significant increase in IFIs established in OECD countries. This was a reaction to the Great Recession and the subsequent increase in national deficits. When appropriately designed, IFIs can promote greater fiscal discipline and contribute to the rebuilding of public trust in government budgeting processes.

In 2014, the OECD published 22 principles of IFI design under nine broad categories: local ownership; independence and non-partisanship; mandate; resources; relationship with the legislature; access to information; transparency; communication; and external evaluation.

Republic of Ireland

Existing independent fiscal institutions vary across jurisdictions in terms of role and remit. While some IFIs, including the Oireachtas Parliamentary Budget Office (PBO), are primarily focused on the needs of the legislature, others, such as the Irish Fiscal Advisory Council (IFAC), are established by the executive branch.

The IFAC was established as a statutory body by the Fiscal Responsibility Act in December 2011. As well as providing independent economic analysis, it assesses official forecasts, fiscal stance and compliance with fiscal rules, while also endorsing macroeconomic forecasts.

In contrast to the IFAC, the PBO provides independent and impartial analysis and advice to the Houses of the Oireachtas. The PBO was established in 2017 following an OECD recommendation that the Oireachtas should “establish an Irish Parliamentary Budget Office to support parliamentary engagement and budget scrutiny” and a subsequent Oireachtas Sub-Committee on Dáil Reform report in 2016.

Scotland

Meanwhile, the Scottish Fiscal Commission (SFC) was the first sub-national IFI established in the UK. According to OECD listings, only two additional sub-national IFIs currently exist: the Financial Accountability Office of Ontario in Canada; and the Victorian Parliamentary Budget Office, Australia. Unlike the Victorian Parliamentary Budget Office, which is a legislative budget office, the SFC is more similar to a fiscal council.

The SFC is independent from the Scottish Government and its functions were established in the Scottish Fiscal Commission Act 2016. These include:

• forecasting Scottish Government revenue from fully or partially devolved taxes and devolved social security spending; and
• forecasting onshore Scottish GDP.

Wales

In December 2016, a fiscal framework providing for the devolution of stamp duty, land tax, landfill tax and the creation of local rates of income tax was agreed between the Welsh and UK Governments. As of 1 April 2019, the sub-national IFI role in Wales is fulfilled by the UK’s Office for Budget Responsibility (OBR) via contractual agreement from 1 April 2019. OBR provides Welsh tax revenue forecasts to Senedd Cymru.

Northern Ireland

Both the November 2015 Fresh Start Agreement and the January 2020 New Decade, New Approach propose the establishment of an Independent Fiscal Council for Northern Ireland (IFCNI).

Acknowledging the UK Government’s approval of the Executive’s plan to create an IFCNI, the Fresh Start Agreement outlined its proposed remit, stating: “The Council will: prepare an annual assessment of the Executive’s revenue streams and spending proposals and how these will allow the Executive to balance their budget; and prepare a further annual report on the sustainability of the Executive’s public finances.”

Committing to the establishment of IFCNI by July 2020, New Decade, New Approach agreement elaborated on the remit outlined in the Fresh Start agreement, indicating: “[The Council will] have its membership and terms of reference agreed with the UK Government” and adding: “[The Council] will provide independent monitoring and reporting on the Executive’s performance in delivering the Programme for Government.”

Work to establish a Fiscal Council and a Fiscal Commission began in early 2020 but was delayed by Covid-19.

Currently, the fiscal powers devolved to the Northern Ireland Executive are relatively limited in comparison to Scotland and Wales. These powers includes setting the regional rate and aspects of air passenger duty. In 2018, the rate of corporation tax was also devolved but has not yet been utilised. As such, the Fiscal Council is likely to have an equally limited remit.

Finance Minister Conor Murphy MLA outlined: “The establishment of both the Fiscal Council and the Fiscal Commission represents a real step forward. We have secured very distinguished Chairs and members for these important pieces of work.

“As we hopefully begin to emerge from the pandemic, rebuilding and restoring our economy and wider society is that task in front of us. If we are to deliver on our social and economic priorities, it is vital that we have all the levers we need at our disposal.

“The work of the Fiscal Commission will inform that important discussion. And with ever increasing demands on public spending, and in time, increased fiscal powers, the transparency and independent scrutiny of the Executive’s finances that the Council will bring is something that I warmly welcome.”

Fiscal Council

The Fiscal Council will be a permanent organisation tasked with providing greater transparency and scrutinising public finances in Northern Ireland. Initially, the Council will be established on a non-statutory basis but could potentially evolve as a non-ministerial department or as a statutory arm’s length body.

With its terms of reference developed in line with the OECD’s principles, the immediate focus of the Fiscal Council will be to prepare an annual assessment of the Executive’s revenue streams and spending proposals and to prepare an additional annual report on the sustainability of the public finances, implications of spending policy and effectiveness of long-term efficiency measures.

“The establishment of both the Fiscal Council and the Fiscal Commission represents a real step forward… If we are to deliver on our social and economic priorities, it is vital that we have all the levers we need at our disposal.”

— Finance Minister Conor Murphy MLA

After its establishment, it is anticipated that the role and terms of reference of the Fiscal Council will be expanded to include economic and financial modelling. It is also expected that the Council will be legislated for on a statutory basis so that its independence can be safeguarded. An external evaluation will be conducted after four or five years in relation to progress towards adhering towards the OECD principles and recommendations.

Chaired by Robert Chote for its initial six to nine months, the Council will be staffed by: Esmond Birnie, a senior economist at Ulster University; Alan Barrett, chief executive of the ESRI; and Maureen O’Reilly, an independent economist.

Fiscal Commission

The Fiscal Commission will be established with a lifespan of nine months and will be tasked with examining the case for and producing a report on increasing the Executive’s task varying powers. It will conduct research and provide independent advice on options for devolution of taxes and other revenue raising measures to the Finance Minister to inform future recommendations and proposals in the next Assembly mandate.

While “a considerable amount of work” had previously been undertaken with regard to the devolution of Corporation Tax and Air Passenger Duty, alongside Aggregates Levy, Stamp Duty Land Tax and Landfill Tax; no “comprehensive formal review” of the fiscal options available to the Executive has ever been completed.

The Fiscal Commission will be chaired by Paul Johnson, Director of the Institute for Fiscal Studies and supported by: Iain McLean, professor of politics at Oxford University; Cathy Gormley-Heenan, Deputy Vice Chancellor at Ulster University; and Lisa Wilson, senior economist at the Nevin Economic Research Institute.

Corporation tax

Unveiling Budget 2021, UK Chancellor Rishi Sunak MP signalled an increase in corporation tax to 25 per cent from April 2023. The establishment of the Fiscal Commission could ensure that businesses avoid paying this rate of tax. However, a lower rate of corporate tax and an associated reduction in revenue may simultaneously require a reduction in public expenditure.

While Executive parties had previously indicated a preference to mirror the Republic’s corporation tax rate of 12.5 per cent, the subsequent reduction in the UK rate to 19 per cent temporarily suspended that ambition.