In recent years, the Irish Government has failed to control expenditure, continually exceeding planned outlays, but because of the corporation tax bonanza there has been no crisis.
Though this is a bad way to manage the public finances, so far the Government has got away with it.
North of the Border, the Northern Ireland Executive has also been spending substantially more than the resources allocated to it. However, to date, it has avoided the most serious consequences, as London has picked up the tab for the overruns.
This now looks about to change, meaning that lack of budgetary discipline will have real negative consequences for Northern Ireland’s public services.
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Aside from bursting its budget, Stormont is already heavily reliant on the rest of the UK to keep it afloat.
Revenue raised in the North, such as VAT and income tax, doesn’t cover its public spending – the shortfall is around 25 per cent of Northern Ireland’s GDP.
It is normal in states such as the Republic and the UK that their richer regions transfer resources to poorer ones – with net transfers from Dublin to Connacht, for example. However, the level of transfers from London to Northern Ireland is exceptionally large, and greater than to other UK regions.
Despite this generosity, the Stormont government has allowed expenditure to exceed the grants from London. Under Treasury rules, failure to keep spending in line with the resources is considered “serious mismanagement”.
In 2023 and 2024 the North overspent by more than £500 million. Under Treasury rules, this overrun was due to be deducted from resources in subsequent years. However, the Treasury forgave that debt – but such forbearance is unlikely to continue. With the Northern Ireland Fiscal Council (NIFC) forecasting a £450 million overspend for 2025/26, transfers to Stormont in future years are likely to be reduced to repay this debt.
The UK itself faces major fiscal headwinds, and the painful action needed to prevent a financial crisis is posing big problems for Keir Starmer’s government. As a result, the resources available to fund public services across the UK are highly constrained.
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Belt tightening is the norm for regions within Britain, and UK Treasury sympathy for Northern Ireland’s fiscal overruns is likely to be at an all-time low. If this is the case, the North will face a period of major austerity. To pay for past profligacy, it may face tougher cuts in public services than elsewhere in the UK.
The NIFC’s report also highlights that the transfers from London to regions to cover public pay rates assume a similar profile of public-service employment across all regions. However, this is not the case for Northern Ireland.
In England, those working in public administration, including the civil service and the police, come to 4.4 per cent of total employment. In the Republic, it is 5.5 per cent. In Northern Ireland, it is 7.7 per cent.
Taking the broader public sector, the gap between Northern Ireland and England is even wider, given that there is a higher share working in education and health in the North.
This broad public sector accounts for only a quarter of English employment, but a third of jobs in the North. So the transfer from London to cover public pay rises will fall short of what they cost.
The North faces a major fiscal challenge over the coming year. To bridge the gap, it may need to cut public-sector jobs, forgo increases in public-sector pay or raise more revenue from local taxes on householders and businesses.
Unlike the rest of the UK, consumers in Northern Ireland don’t pay for water. More than 15 years ago, the Treasury made it clear that British residents who pay for water would not subsidise consumers in the North who get it free. Instead, the North would have to cut spending on other vital services if it chose not to charge for water.
While Northern Ireland is undoubtedly one of the poorest regions in the UK, London’s sympathy has been affected by the perceived mismanagement of public funds. Aside from the “cash for ash” scandal, there are also poor results from other programmes.
While the North spends more per head on health and education, outcomes are much worse than in Britain.
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As in the past, despite its own fiscal challenges, the Treasury might ultimately relent and come up with more money. If, as seems more likely, it doesn’t, the dysfunctional Northern Ireland Executive will have to implement a serious austerity programme over the coming years.
