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Things you always wanted to know about public finances in Northern Ireland but were afraid to ask (Part 1)

Posted on November 15, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Fiscal austerity has dominated public discourse across Europe for more than half a decade. The UK and Northern Ireland has been no exception. Recent weeks have seen growing controversy and political tension as public spending cuts imposed by the UK government continue to impact on the local provision of public services and incomes.

In the Republic of Ireland following six years of severe fiscal adjustments impacting on taxes and spending to the value of approximately 20% of annual GDP (€30 billion – see my Monday Blog of 10 November) the prospects of a pause in further austerity has been signalled by the Government, there. Future economic prospects and decisions will tell whether additional fiscal measures are adopted. The situation seems to be different in the UK and, therefore, Northern Ireland where some commentators and estimates have suggested that the UK is only one third of the way through a decade of fiscal adjustment – this inspite of the relatively positive recovery in UK GDP.

Before considering the extent of possible or proposed austerity measures in the Northern Ireland context it would be useful to survey the extent and composition of public spending in Northern Ireland.  While useful and detailed statistical analysis is available from the UK Office of National Statistics (ONS) as well as the Northern Ireland Department of Finance and Personnel (DFP) a more simple-to-use and easy-to-understand central place to look up (and understand) statistics on Northern Ireland public spending (and revenue) would be helpful not only in assisting researchers but, also, informing public debate and commentary in Northern Ireland.

Total public spending is around two-thirds of local ‘GDP’ in Northern Ireland

Let’s start with the ladybird introduction to public finances in Northern Ireland.  In a full year total income or output, in Northern Ireland, is roughly £30 billion (latest estimate was for 2012 when it was £29.4bn)). Total public spending by Government in respect of Northern Ireland is estimated by the Department of Finance and Personnel (DFP) to be approximately £24 billion of which £23 billion is for total expenditure on services which, in turn, include just over £3 billion in estimated UK-wide ‘non-identifiable’ spending. Identifiable Northern Ireland expenditure on services comes to just over £19 billion (see Appendix 7.2 in the NERI Winter 2014 Quarterly Economic Observer). The position is summarised by DFP in Northern Ireland Net Fiscal Balance Report for 2011-2012) released in April of this year as follows:

In 2011-12, NI Total Managed expenditure was estimated at £23.8 billion; of this £19.4 billion was identifiable, £3.3 billion was non-identifiable, and £1.1 billion represented accounting adjustments.

For most purposes, identifiable public expenditure is the more used aggregate. This aggregate came to £19.8 billion in 2012-13 and corresponds to three revenue streams:

Departmental Expenditure Limits (DEL) = £10.4 billion

Annual Managed Expenditure (AME) = £8.1 billion

(DEL+AME=£18.5 billion=Total Managed Expenditure)

Locally generated funds (mainly Regional and Local Rates) = £1.3 billion

£10.4+£8.1+£1.3=£19.8=total NI Identifiable public expenditure.

As a rough approximation DEL is equivalent to the Westminster ‘Block Grant’. AME is largely outside Northern Ireland control while the allocation of DEL is under local control (but the overall ceiling is set by Westminster.

Not including North Sea oil, total revenue collected in Northern Ireland is estimated to be around £14 billion leaving a gap of just under £10 billion in any year. This is equivalent to about one third of local economy GVA (it is not possible to estimate GDP precisely for Northern Ireland).

Gross Domestic Product=Gross Value Added + taxes on products - subsidies on products.

When Ministers and commentators discuss cuts to public spending in Northern Ireland they are, typically, referring to DEL (the total of which comes to £10 billion) and not AME. AME may very well be reduced through a combination of UK-driven policy changes as well as changes to levels of labour market participation and lower unemployment (for example). Comparisons of published data on DEL and AME over time need to be treated with caution as some components within DEL and AME have been re-classified and shifted from one to the other thus rendering through-time comparisons problematic. A potentially confusing aspect of the debate about public finances in Northern Ireland is the focus on DEL spending only (understandably because this is the bit the Executive has some discretion over in so far as its allocation is concerned). For some Departments and functions of Government the bulk of public spending is under AME and not DEL (social protection being a primary example).

The Government deficit in Northern Ireland is a significant % of local ‘GDP’.

DFP estimate that the government deficit rose from 22% in 2007-08 to 36% in 2009-10 before easing back to 33% in 2011-12 as income contracted and unemployment rose. DFP cautions that net fiscal and total revenue and expenditure data are estimates subject to some margin of error or uncertainty. As an alternative, using HM Revenue and Customs estimates of revenue the gap between spending and revenue would be around £10.6 billion in 2011-12 instead of £9.6 billion per DFP estimates). If Northern Ireland’s notional revenue share of around £300 million North Sea Oil is included the deficit drops a little to 32% of total local income (it makes little difference).

However, there is an important qualification on this estimate. If non-identifiable spending (e.g. UK defence and debt service costs) are excluded the net fiscal deficit or transfer for Northern Ireland was only £5.2 billion in 2011-2011. In other words, the ‘government deficit’ for Northern Ireland would be around 18% of local total income instead of 33%. (Table D1 of the DFP report).

Large inter-regional transfers are not unusual in other countries

Such a level of regional within-State transfer is not unusual in international terms. See Checherita, Nickel and Rother (2009). They show that European ‘households in the richest regions pay up to one third of their income as net transfers while households in the poorest regions receive transfers of up to 10% of their primary income.’  A comparison might be made with that of County Donegal or Lancashire. An estimate of Gross Value Added (if such were readily available for a recent year) is likely to be considerably less in Donegal than is the case in County Dublin. Total estimated public spending per person in County Donegal is likely to be higher than is the case in Dublin due a range of factors including population density, structure of population etc.  A similar point would arise in relation to inter-regional UK comparisons. There are some parallels in the case of Northern Ireland as it stands in relation to the national UK government although it has somewhat greater fiscal powers than say County Donegal in terms of raising local taxes and deciding on distribution of public spending (although the differences should not be exaggerated!).

NI Executive has very limited discretion to raise additional revenue

The revenue profile of Northern Ireland government finances shows just over £1 billion in local/Regional authority taxes (rates and other revenues). See Tables 3.1 and 3.5 in DFP report.  An interesting comparison of UK-wide and Northern Ireland revenue receipts from 2007-2012 shows shortfalls in the growth of local authority rates, capital inheritance and capital gains receipts (Table 3.6 in the DFP Report). Local government receipts plus the Regional Rate set by the NI Executive are made of two components: domestic rates equal to roughly half a billion in a full year and business rates equal to roughly the same amount again.  District council rates pay for parks, bin collections and other local services while the regional rate is not tied to specific areas of public spending.  All told, Northern Ireland has discretion over about £1 billion in annual revenue equivalent to only 3% of total regional income (or ‘GDP’). Beyond that it has limited discretion in regards to the allocation of Westminster funds (almost entirely under the heading of ‘Department Expenditure Limits’ – DEL – which comes to a little over half of total identifiable public service expenditure in Northern Ireland.

In addition to local rates, the other area of potential additional local discretionary funding lies in borrowing under the Reinvestment and Reform Initiative (RRI) first put in place in 2003. This is borrowing, for capital purposes, under the UK National Loans Fund. In recent years the amount borrowed has varied around the £200 million mark. There is, also, very limited scope for EU investment funding matched by local funding under DEL.

Social protection spending is higher in Northern Ireland compared to the rest of the UK for a number of reasons

Within total identifiable public spending of £19.8 billion in 2012-13 (Table 10.4 in PESA), ‘social protection’ accounted for £8.2 billion (this breaks out into £2.8 billion for state pensions, £2.1 billion for ‘incapacity, disability and injury benefits, £1 billion for family benefits, income support and tax credits), £0.7 billion for housing benefits and £0.2 billion for unemployment benefits. Various ‘personal social services’ are included in the overall total for ‘social protection’.  The extent of social protection expenditure has been much commented on (usually negatively. It should be borne in mind that a combination of specific local, demographic and conflict-related causative factors lie behind some of these numbers. Northern Ireland records lower levels of employment and income than any other region of the UK. At the same time it records higher levels of low pay, poverty and deprivation.  Were it not for public spending and protection the situation would be socially unsustainable.

Health spending, in 2012-13, came to £3.8 billion while education received £2.8 billion. The remaining £5 billion went to a range of Departments and functions including justice, agriculture, housing, regional development, etc.   Non-identifiable UK public spending ascribed to Northern Ireland relates mainly to defence and debt interest which, together, make up 75% of NI non-identifiable spending. It is estimated, for example, that £611 is spent, on average per annum, by every individual on UK defence. In a household of 4 persons the average would be £2,450 per annum.

DFP point out (page 34):

NI also has a lower population density than the UK which may partly explain the relative cost of providing a given level of public services, particularly in services such as health and education.

An estimated 27% of the population aged between 16-64 is not in employment. Of those not in employment 29% are classified as sick or with a disability (Labour Force Survey).  This is 5 percentage points higher than the UK-wide estimate.

Unlike the rest of the UK, water and sewage costs are in the public sector domain in Northern Ireland but are not in the case of England (the total spend came to £270 million in 2012-13).  The DFP Report cited above draws heavily on the ONS PESA or Public Expenditure Statistical Analysis 2014 (the latest version of which was released in July of this year and is available online here). To begin to get an overall picture of public finances in Northern Ireland it is necessary to move back and forth between the DFP and PESA report (the latter contains 94 statistical tables distributed over 207 pages). Add to this the recent NI Budget plan available here to understand the likely significance of proposed reductions in public spending.

Planned public spending cuts in Northern Ireland concern mainly the ‘Block Grant’ component

Looking to the future, the Northern Ireland (NI) Executive is planning for further cuts to spending in 2015-16 as well as later years.  The Draft Budget 2015-2016 has signalled cuts in particular departmental allocations. It is important to note that these cuts – the details and allocation of which are at the discretion of the NI Executive impact on the DEL component of public spending. The total proposed cut in ‘non ring-fenced resource DEL’ (or simply the bulk of the Block grant for current spending) is just over £200 million or 2.1% in nominal terms (the real cut would be over 3%).  When AME is factored along with DEL the overall discretionary or planned real cut in Northern Ireland public spending at current levels of service is somewhat less than 3% depending on the final decisions to be made in relation to AME.  However, based on PESA data real public spending measured in real terms is projected to rise slightly between 2013-14 and 2015-2016 (see for example Table 1.13 of PESA). In part this reflects demographic and other pressures not least in the area of health where, universally, cost pressures are inexorable.

For those not familiar with the terminology and statistical classification of UK public finance data the following sets out the formal relationships between public spending aggregates in a Northern Ireland context.

Department Expenditure Limits (DEL) = Capital (conventional plus Financial Transactions Capital or FTC) + Resource (current) spending (pay and non-pay recurrent costs).

Plus

Annual Managed Expenditure (AME)=demand-led spending

Equals Total Expenditure Services

Plus

An  ‘accounting adjustment

Equals

Total Managed Expenditure (TME)

Plus

Regional and District Council rates + Other local revenue sources

Equals

Total Identifiable Expenditure (Northern Ireland)

Westminster ‘Block Grant’ = ‘Resource DEL’ (current spending) + ‘capital DEL’

Minus an estimate for depreciation

Note that the term ‘resource DEL’ spending means current DEL spending. To this must be added capital spending to get total DEL spending. (‘DEL’ in this context is not to be confused with the Department for Employment and Learning).  For programmes within the remit of DEL (for each of the Devolved Administrations) the block grant allocated by the UK Government in Westminster is currently determined by application of the ‘Barnett Formula’. Under this formula, budget allocations are determined by a population-based share of funding increases on comparative government spending programmes in Whitehall departments. In the case of Northern Ireland the Westminster ‘Block Grant’ is equivalent to the total amount of spending under DEL (current and capital and minus an estimate for depreciation). In 2013-14 this amount came to £10.5 billion (=£10.166 billion per Table 1.3 of PESA plus £931 per Table 1.8 of PESA minus an estimate of £500 million for depreciation).

Financial Transactions Capital (FTC) was introduced in 2012-13 and ‘can only be used to provide loans to, or equity investment in, the private sector and therefore can stimulate private sector investment in infrastructure projects that benefit the region, over and above the level of investment made by the Executive from its conventional Capital DEL budget.’

Easier-to-access and understand public statistics could help inform public debate

In this Blog I have highlighted some of the challenges in using statistics on Northern Ireland public finances. When it comes to discussing budgetary choices within the limit set by the UK Block Grant to Northern Ireland three sectors stand out (with 2015-16 figures in parentheses):

-        Health, social services & public order  (£4.5 billion)

-        Education (£1.9 billion)

-        Justice (£1.1 billion)

When it comes to considering all identifiable public spending in Northern Ireland three sectors stand out (with 2012-13 figures in parentheses):

-        Social protection (£8.2 billion)

-        Health (£3.8 billion)

-        Education (£2.8 billion)

But, in so far as the public interpretation of official statistics (or unofficial estimates) goes, as in all areas of statistics, it can be said:

Figures cannot lie but liars can figure!

At the risk of precipitating statistical indigestion and having outlined some of the main headings and components of public finance statistics in Northern Ireland I will, in Part 2, describe some recent trends and future projections as part of a further Monday Blog in December.

 

Posted in: Government SpendingInvestmentNorthern Ireland Taxation

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