It will be very challenging for Northern Ireland to balance the government’s books over the next two years.
In the absence of an Executive to take decisions, the administration seriously overspent last year. As a consequence, it will have to really tighten its belt this year to pay back that exceptional borrowing. While the rest of the UK is suffering from high inflation and a severe squeeze on public funds, things will be even more difficult for Northern Ireland in making up for last year’s spending over-run.
It may be the British government also sees these financial pressures as a way of persuading the DUP to return to the Executive. If that is the case, it is a bit like keeping all of the class in detention because of one obstreperous pupil.
As we know from past experience in the Republic, when big cuts have to be made, it is very difficult to reduce numbers of permanent public servants. As a consequence, the cuts fall even more heavily on everything else. For example, public funding for Northern Ireland’s voluntary bodies and community groups is being severely cut, or even stopped entirely.
Ironically, such groups that get some funding from the Republic will better weather the storm.
And although Northern Ireland badly needs to upgrade its physical infrastructure, an easy option for the Northern administration is to cut capital spending and refrain from starting any new projects, with serious long-term costs.
Education and health dominate the Northern Ireland budget. Both need big structural change. While reform should eventually improve the quality of service, as well as giving better value for money, the necessary changes would take time to implement. Along the way, there would also be transformation costs. Nonetheless, the process of reform should begin today, even though the benefits would only mature later in the decade.
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If there were an Executive in place, one option it would have would be to raise additional taxation to pay for improvements in public services. The Northern Ireland Fiscal Commission has estimated that differences in taxation and charges between Northern Ireland and the rest of the UK cost the North about 4 per cent of its annual budget.
Although raising taxes and charges would constitute unpleasant medicine, the alternative – cutting services – will be even more damaging
For example, if local property tax rates were aligned with the rest of the UK and if water charges were introduced as elsewhere, that would avoid the severe budgetary squeeze now under way. The fact that these local taxes and charges are significantly lower than elsewhere in the UK also contributes to a lack of political sympathy for Northern Ireland in London.
Although raising taxes and charges would constitute unpleasant medicine, the alternative – cutting services – will be even more damaging. But only an Executive can decide to raise revenue and not cut spending.
A further option for an Executive would be to trim those areas of public expenditure where Northern Ireland is out of line with other regions in the UK. Relative to the UK, Northern Ireland spends twice as much per head on public housing even though its population is not growing very rapidly. This contributes to keeping the cost of housing low in Northern Ireland relative to the rest of the UK and the Republic but it is a significant draw on public funds. It would be a better long-term use of resources to switch some of that funding to pay for reforms in education.
During the Troubles and its aftermath, Northern Ireland needed to spend more on security than in the rest of the UK, but 25 years on from the Belfast Agreement, security challenges are, thankfully, much more limited. Here too some savings could be realised.
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Last week, Newton Emerson highlighted a number of ways in which the Irish Government is providing financial support to Northern Ireland. These include finance to train more Irish nurses and investment in higher education in the northwest. There is also a commitment to fund some of the cost of upgrading the Dublin-Derry road. In each case, there is a clear benefit for those living in the South, especially in Border counties, from the expenditure.
But there is a danger that, with spare cash in the coffers down South, more of it would be directed to fill the gaps left by the London government. Such an approach would be very unwise. It would relax the pressure on politicians in Northern Ireland to put their own house in order, and there would be a serious danger that Northern Ireland would become reliant on Southern transfers, letting London off the hook.
