Devolution has dramatically altered the political and economic makeup of the United Kingdom over the last 20 years. In more recent times, greater fiscal powers for devolved regions have become a key policy goal to achieving more balanced regional development in the UK. However, in Northern Ireland (NI) such measures always weighed against the risk that the resources for public expenditure might be threatened. Financial governance issues have been a source of instability for the NI Executive and it is far from clear that adding significant fiscal powers would improve that situation.
This paper contends that the current devolution settlement in NI incentivises poor expenditure decisions and policymaking particularly as it relates to economic affairs. The extent of expenditure devolution in NI is misleading and has led to most of the policy mistakes to date. In particular, the devolution to NI of spending on social transfers without full policy autonomy has never been reconciled. While the process of fiscal devolution in Scotland would likely be the model adopted for NI, this would be a mistake for NI. The current devolution settlement was not designed for the purposes to which it is now being put. If fiscal devolution is to take place, policy would be better focused on reforming the entirety of the current revenue and expenditure system to design one more appropriate for the political situation that now exists. Introducing a needs-based system to replace the Barnett formula would ensure that spending power for public services actually is equalised on a per capita basis among the regions. NI should only seek broader fiscal powers under a full system of fiscal equalisation which recognises the unique cost and revenue challenges of the region.