Emergency budget set to dispense 'tough medicine' to Northern Ireland

BELFAST BRIEFING:STORM CLOUDS are gathering in Northern Ireland as the prospect of a new era of cuts and tax hikes looms ever closer, writes FRANCESS McDONNELL

Today’s UK emergency budget promises to deliver a sharp shock for the North which has, for decades, enjoyed significant transfers from the treasury.

Minister for Finance Sammy Wilson has warned that the “good years of increased year-on-year public spending” in the North are over.

This means Northern Ireland, which has historically received about £9 billion (€11 billion) each year from the treasury, could be about to face its first real test of fiscal austerity.

The budget is likely to change the economic landscape across the UK and Northern Ireland is going to have to embrace its fair share of pain in that process.

The UK deficit is running at about 10.4 per cent of GDP and British chancellor of the exchequer George Osborne has warned he will take tough measures to deal with this.

The budget is likely to contain massive public spending cuts, changes to the welfare system and a new range of taxes and bank levies designed to raise revenue.

This could be hugely significant for a region like the North which has a public-expenditure driven economy and where nearly one in every three of the working population is employed directly by the government.

Esmond Birnie, chief economist with PricewaterhouseCoopers (PwC) in Northern Ireland, says the North should brace itself for the “toughest budget in a generation”. PwC believes there are a couple of obvious targets when it comes to finding ways of raising money.

The first is to increase VAT from its current level of 17.5 per cent to a possible 20 per cent, leaving a dent in most pockets in the North and also making cross- Border shopping less attractive for euro consumers already chastened by their weakening currency.

Another revenue-raising possibility, according to PwC, is to overhaul capital gains tax to bring it into line with income tax. The other hot target is the introduction of more “lifestyle taxes” on the likes of gambling, alcohol, tobacco and air transport.

Motorists are also unlikely to escape further rises in fuel prices.

PwC believes it would be hard for the chancellor to resist “increasing taxes on unhealthy lifestyle choices” in a bid to offset the cost of ring-fencing health budgets.

However a raft of new taxes may not be the biggest problem the North has to contend with. The real concern lies with just how the chancellor’s determination to cut public spending will affect the local economy.

Northern Ireland’s public expenditure is equivalent to more than 70 per cent of GDP. Reducing budgets, changing the current welfare structure or axing jobs would have an immediate impact.

Public-sector pay freezes and changes to welfare payments, which could include a shake-up of the current child tax credit and benefits system, would directly affect thousands of people and take millions out of the local economy which is already under pressure. Latest Government statistics show the number of people out of work in Northern Ireland hit 58,000 in the three months to April.

The unemployment rate rose to 6.9 per cent.

Richard Ramsey, chief economist with Ulster Bank, says it is not just people who are out of work who could potentially be worse off after the budget. Ramsey believes the budget is going to dispense “tough medicine” for everyone from business-owners to students. He predicts public- sector workers could be the biggest losers.

“Public-sector workers are expected to receive a pay and pensions double whammy. At best, the chancellor is expected to announce multi-year below- inflation pay settlements which will represent multi-year pay cuts in real terms.”

So will there be any good news for Northern Ireland?

There may be some room for the government to manoeuvre when it comes to income tax, personal allowances and there have also been strong hints that there may be some tax sweeteners for businesses which could directly help firms in the North.

This could include some relief on national insurance contributions for new staff and a cut in corporation tax from its current level of 28 per cent.

However whether the chancellor sets out to make any new friends in Northern Ireland remains to be seen.