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Things you always wanted to know about Northern Ireland public finances (Part 2)

Posted on November 28, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

In a previous Blog ‘Things you always wanted to know about public finances in Northern Ireland but were afraid to ask’ (Part 1) I outlined the main components of public spending and receipts. The arrangements for funding and how the UK Government allocates funds are complex.  Three factors have recently pushed the issue of public funding in Northern Ireland to the fore:

  1. Continuing pressure on public spending at UK level with further austerity signalled by all main political parties in the next Parliament (following May 2015).
  2. Controversy over UK Welfare Reform (see previous blog here)
  3. On-going debate about devolution including powers to vary taxes in Scotland, Northern Ireland and even large urban areas in the UK (earlier last week the Smith Commission reported on proposals for further Scottish independence).

Add to this speculation about an imminent statement on NI Corporate Tax in the Chancellor’s Autumn Statement this coming Wednesday (3rd December 2014).

In this week’s Blog I look at trends in public spending in Northern Ireland over time as well as comparisons across different regions of the UK. The bottom line is that Northern Ireland, in common with other regions of the UK, needs to up its game in terms of dynamic domestic enterprise and sustainable economic and social development. The current funding approach and dispensation is not sustainable.

Public spending had been rising in real terms in the years immediately prior to the crisis of 2008. Chart 1 shows trends in real public spending identifiable as spent in Northern Ireland.

Chart 1  Total Identifiable Public Expenditure in Northern Ireland

 

Note: Real expenditure is expressed in constant 2013 prices. Source: PESA ONS.

The data indicate growth over time in total nominal spending from £16.8 billion in 2007/08 to £19.7 billion in 2012/13 the last year for which final data are available currently. When this upward trend is set against inflation, as measured by the UK GDP price deflator, public spending was up by 5.1% in real terms. Notwithstanding fiscal austerity measures already implemented in Northern Ireland, this upward trend in real public spending reflects the impact of recession in Northern Ireland as a surge in unemployment and a rise in income-related tax credits and other social spending pushed up overall spending. Northern Ireland was particularly badly impacted by the collapse in construction mirroring Celtic Tiger overspills into Northern Ireland.

Chart 2  Trends in real spending (AME and DEL)

 

Chart 2 illustrates a continuous downward trend in real DEL spending. This is what some refer to as the Westminster ‘Block Grant’ – the money that goes to pay for day-to-day Department spending the allocation of which is under the control of Stormont.  Demand-driven spending (AME) recovered after 2012/13.

It is significant that the UK Government adopted a relatively moderate approach to fiscal austerity until 2010. Combined with an expansionary monetary policy entailing bond purchases by the Bank of England and low interest rates. This helped to mark out the UK and the US as relatively more successful in weathering the storms of recession and effecting a recovery albeit a fragile and unequal one in the case of the UK. To date, UK Governments have ‘implemented’ or signalled £90 billion in fiscal austerity measures (cuts in spending or increases in revenue). Some of these measures were cancelled out by counter measures. The extent of fiscal effort to lower borrowing was equivalent to very approximately 5% of GDP at the start of the current recession. By contrast, Governments in the Republic of Ireland exacted  approximately 20% of Irish GDP.

Northern Ireland has benefited from these global and macro-level impacts. However, it has also taken its share of cuts especially in those areas of the UK public service that were most severely cut non-ringfenced Departmental current spending. However, Northern Ireland took a disproportionate hit of 5% in real terms between 2009/10 and 2013/14 while the UK as a whole took a hit of 2% over that same period (combining current and capital, DEL and AME into Total Managed Expenditure in real terms – see Table 1.13 in latest PESA report).

There has been a particular squeeze on capital spending where, in Northern Ireland the total public capital spend dropped from £1.8 billion in 2009/10 to £1.4 billion in 2013/14

As explained in my previous Monday Blog on Northern Ireland public finances, there is a significant transfer between UK regions with the celtic fringes and Northern England receiving transfers from the South and South East of England. This is normal in most European countries. However, given the fraught nature of constitutional matters within the UK attention is paid to the level of spending per capita. Clearly, Northern Ireland shows the highest spend per capita (Chart 3) when it comes to identifiable spending. The ‘Block Grant’ of £10.5 billion in 2013/14 underpins much of the gap along with demand-driven characteristics. In the grand sum of things a transfer of £10.5 billion, while large, represents only 0.6% of total UK GDP or national income. Might there ever be a border poll sometime later in this present century about the question of a united Ireland, the 2014 levels of Westminster fiscal transfer would become a crucial question. A sum of £10.5 billion (or €13 billion) – if it were the responsibility of the Government in Dublin would come to 8% of GDP at current values and level of public revenue/spending (bringing the total Government deficit in the Republic to 8% of GDP for Ireland as a whole). This would pose an interesting challenge to taxpayers in the Republic of Ireland. Of course such a hypothetical situation is considered, here, on the basis of static numbers on economic activity and fiscal share of GDP.

Chart 3 Levels of Public Spending per capita in countries of the UK (2012/13)

 

Projections of public spending to the year 2016-17 (in the UK public finances are reckoned from April to March) signal significant cuts in real public spending in the UK and in Northern Ireland. This may be taken in conjunction with rising population - up from 1.7 million in 2001 to an estimated 1.85 million in 2014 and set to rise to 1.9 million. This projection envisages an annual growth rate of around 0.5% up to the end of this decade. Along with price inflation this must be factored into any comparison of public spending over time. The impact of age-related demographic pressure is particular evident in health where, according to the UK Institute of Fiscal Studies (IFS) a real freeze in NHS spending between 2010–11 and 2018–19 would be equivalent to a 9% cut in real age-adjusted NHS spending per person.

Current DEL spending - the current part of the Block Grant - expects a cut of 3% in real terms between 2013/14 and 2015/16 in Northern Ireland.

Devolution of corporate tax powers to Northern Ireland is under debate with an announcement imminent this Wednesday. HM Revenue and Customs estimate a total corporate tax yield of around £650 million in Northern Ireland in 2011/12.  To the extent that this sum could be lowered through a special lower regional rate of tax on corporate taxes the Northern Ireland executive would be under pressure to cut further public spending in other areas. There is the claim that a tax reduction move would help attract additional foreign direct investment and thus yield higher economic activity in Northern Ireland with positive impacts on public finance. However, these claims are not necessarily backed by empirical evidence. Past success in attracting foreign direct investment is unlikely to be replicated in Northern Ireland partly because other European countries as well as the UK and the Republic of Ireland have lowered corporate tax rates.

It should be recalled that, unlike the Republic of Ireland, Northern Ireland is closer to Scandinavian levels of taxation. HMRC estimate that total revenue collected in Northern Ireland comes to over £13 billion (the Department of Finance and Personnel put the figure at £14 billion). These estimates suggest that government revenue including income tax, VAT, national insurance contributions etc make up roughly one half of total regional income or gross value added in Northern Ireland. The comparable take in government revenue south of the border is 35%. The south remains a low tax economy and there is a cross-party cross-political consensus to keep it that way. This explains the delight in promising and implementing tax cuts even before a decent economic recovery is allowed to mature.

We can be sure that as the 21st century progresses fiscal sharing will become an increasingly contested area within the UK as its constituent components argue out the best way of organising its flows and as fiscal powers are devolved. This happens in the wider geo-political context of the European Union with its evolving toolbox of fiscal rules.

Let us be thankful that the jewel in the crown of UK public services – the National Health Service – was inaugurated in a post-war Britain where public debt exceeded 250% of national income!

 

 

Posted in: Government SpendingNorthern Ireland Taxation

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