North may feel pinch as Darling's budget likely to tighten screw on public finances

BELFAST BRIEFING:THERE IS growing anxiety that UK chancellor Alastair Darling is not going to shower Northern Ireland with goodies tomorrow when he unveils his second budget.

Huge spending cuts are likely, given the massive decline in the UK’s public finances. Personal tax increases appear unavoidable and “sin taxes”, such as excise on alcohol and tobacco, are also likely to rise.

There have been hints that budget 2009 will be a green affair with incentives to promote a low carbon economy and boost the UK car industry. But the big question about tomorrow centres on suggestions that Darling intends to make £15 billion (€17 billion) of savings – a move that could prove disastrous for the North.

The Northern Ireland Executive has little fiscal responsibility; it has no revenue raising powers. Therefore, it is at the mercy of the UK government which hands the North a pot of money. In theory, NI’s leaders decide how and where it should be spent.

The money the North receives is decided under a system known as the Barnett formula, designed 30 years ago to ensure equal spending per head of the UK population. But according to the Institute for Public Policy Research in the UK, NI gets far more than its counterparts in any other part of the UK.

The institute estimated that, based on 2007/08 figures, NI “received £5,684 per head: 21 per cent above the UK average spend per head and £1,161 more per head than that spent in England”.

The chances are if Alastair Darling implements major spending cuts, NI could come out worse in the long run than anywhere else in the UK.

Alan Bridle, Bank of Ireland’s NI economist believes “pain tomorrow” is likely to be the recurring theme of Darling’s budget. Bridle says the North is likely to suffer “a long squeeze on public finances” as the UK government’s borrowing approaches £150 billion this year.

He believes those on lower incomes and some business sectors may find a little more “recession relief” in the budget, but NI is going to face challenges when it comes to public finances.

He feels the key question facing the Executive after this week will be whether “the cost of sticking to current plans is greater than the cost of recasting the Northern Ireland budget”.

Either way the result is likely to be that the North’s leaders are likely to find themselves in a very tight spot and under serious pressure just in time for the European elections in June.

They will face difficult decisions which are unlikely to endear them to taxpayers in general.

If, as PricewaterhouseCoopers advocates, Darling gives taxpayers a break by looking at key issues for the North such as inheritance tax and redundancy pay it might soften the blow. But at least one of the North’s leading economists believes there is a strong case for showing a little sympathy to local politicians who are going to face the problem of trying to juggle budgets over the coming weeks.

Richard Ramsey, Ulster Bank’s Northern Ireland economist, says regardless of other underlying factors luck has not been on their side. “Since the Northern Ireland Executive made the economy its number one priority, it has been dealt the worst hand it could have ever imagined, what with the housing downturn, credit crunch and wider global recession. Following Wednesday’s budget, this hand is set to weaken further with public expenditure under even greater pressure than before,” Ramsey says.

Key business leaders say the UK chancellor should focus on stimulating investment and maintaining jobs in North.

It may not be the beginning of a cosy love affair but it could just prevent major heartache in the short term.