It is widely speculated that Chancellor Rachel Reeves will announce increases in tax, and/or reductions in spending in her Budget on Wednesday to meet her fiscal rules.
Achieving a meaningful reduction in the deficit will be difficult without adjustments to the four big UK taxes – income tax, national insurance contributions (NICs), value added tax (VAT) and corporation tax.
PwC has been looking at which will potentially have the greatest impact on Northern Ireland, and where in principle an increase in tax take could hit us hardest. All figures are calculated using figures from the Office for National Statistics.
VAT – Northern Ireland contributes 2.7% of the UK total VAT take, and that is where we are, in theory, most exposed. Because household savings rates here are relatively low, a greater proportion of income is spent on consumption and, therefore, we are more exposed to broad consumption taxes.
A change to income tax rates appears to be off the cards in the November 26 Budget (Alamy Stock Photo)
NICs – Northern Ireland accounts for 2% of total UK national insurance contributions. This is a tax on earnings from work or self-employment and, as a large proportion of incomes here are from earnings, we are particularly exposed to NICs increases.
Income tax – Northern Ireland contributes 1.4% of the UK’s income tax revenue. The impact in the north of any change will depend on how it is implemented. For example, freezing the personal allowance or increasing the basic rate would disproportionately affect lower and middle earners. Increases in higher rates, or to the thresholds at which they kick in, would have a smaller relative impact here, given our lower income distribution. At the time of writing, a change to income tax rates appears to be off the cards, meaning changes to allowances and thresholds could be more likely.
Corporation tax – Northern Ireland contributes 1.4% of corporation tax receipts. This figure is based on the share of UK profits attributed to Northern Ireland for corporation taxpayers. However, increases in corporation tax could affect investment decisions, and the locations affected may not correspond to the distribution of profits. So, although the direct revenue exposure is small, a higher UK-wide corporation tax burden can still influence investment and supply-chain decisions by firms operating in or sourcing from Northern Ireland.
Then there is spending. Northern Ireland receives 3.3% of total UK public spending, compared with having 2.8% of the population. So, spending here is much higher per person.
In principle, therefore, we are more exposed to cuts in spending than we are to increases in the four main taxes.
But, the long-standing Barnett Formula offers some protection, as Stormont’s share of cuts is linked to population rather than to our higher share of total.
Greg Boyd, Northern Ireland economist at PwC UK
All eyes will be on which combination of measures the Chancellor looks to on Wednesday – not only the high-level decisions of which tax/spending lever to pull, but also the detail that will determine what the changes mean in practice for individual taxpayers and for the wider Northern Ireland economy.
- Greg Boyd is Northern Ireland economist at PwC UK