How did we get here?
The Agreement reached by Northern Ireland's political parties at Stormont House last year covered many topics from parades and the past to political reform and shared education. The agreement has now seemingly come unstuck over the issue of welfare reform. Welfare reform was arguably the most intractable of issues supposedly dealt with by the Stormont House Agreement and the quasi-collapse of the deal still threatens to derail Northern Ireland's budget for 2015/16. That budget, if implemented would be the last instalment of austerity from the current UK government.
As we approach another general election, it is worth examining exactly what the experience of austerity has been over the last five years. How has it impacted the UK as a whole? How has it impacted Northern Ireland? What choices lie ahead after this election? How could that effect Northern Ireland?
For the purposes of clarity this blog will examine Austerity as two distinct five year parliamentary terms, 2010-15 and 2015-20. Austerity measures were introduced as early as late 2008, however many of the immediate measures had only marginal impact with more significant policy changes taking effect in 2010. There have been many tax changes but cuts to public expenditure have formed the vast majority of austerity measures and so they will be the focus of this analysis.
Austerity in the United Kingdom
On the 22nd of June 2010, George Osborne introduced an emergency Budget which sought to amend the outgoing Labour governments March Budget. In his Budget speech the Chancellor outlined the two goals which would guide the government's fiscal policy throughout the term. The first was that the structural current budget deficit would be eliminated and the second was that National Debt as a percentage of GDP would be falling. Over the five years there were increases in indirect taxation coupled with decreases in direct taxation, but it was clear in 2010 that the government intended to achieve both of its goals through substantial reductions in public expenditure.
As of 2015, the government has not achieved its fiscal goals. The deficit has not been eliminated. It is, as a percentage of GDP, half what it was in 2010. The performance of government debt reduction is more complex. It was announced in George Osborne's March 2015 Budget that due to the sale of government assets (mostly bank shares) government debt as a proportion of GDP was now falling. While the assets sales ensured that the second target has been met, it does not constitute a long term debt solution and government debt may yet rise again.
It is worthwhile examining just how these policies played out for both Northern Ireland and the UK as a whole. There is a view expressed within public discourse that reductions in public expenditure in Northern Ireland have not been as harsh as they have been for the UK as a whole, but as discussion below shows, the reality is more complex.
Austerity in Northern Ireland
There are two excellent blog posts from Tom Healy on public expenditure in Northern Ireland here and here. For the purposes of this discussion it is only necessary to focus on the broad streams of government expenditure. The block grant as it is known in Northern Ireland covers all day to day spending on public services, known as 'Resource DEL' and long term expenditure known and 'Capital DEL'. DEL stands for Departmental Expenditure Limits and Resource DEL pays salaries of teachers and doctors, while Capital DEL pays for schools and hospitals to be built and maintained. Beyond the block grant there is Annually Managed Expenditure which covers most social transfers such as welfare payments and pensions.
The amount of money Northern Ireland receives through these schemes is ultimately but indirectly determined by the UK government.
1. The block grant is calculated for Northern Ireland (as in Scotland and Wales) based on a percentage of the level of public spending in England, this is known as the Barnett formula. This means that the UK government controls how much is spent on public services for the England and thereby how much will ultimately be spent in Northern Ireland.
2. For Annually Managed Expenditure the route is more complex. The welfare and pensions element of AME is paid to recipients in Northern Ireland on the basis that they qualify for payment of a particular benefit. If the UK government wished to reduce AME it may go about tightening restrictions for those who are entitled to receive such payments.
Changes to entitlements allow the UK government to exert control over AME in Scotland and Wales, but not Northern Ireland as Welfare policy is a devolved matter for the Stroman Assembly. If the Stormont Assembly does not follow the UK government and implement changes to welfare entitlements, Annually Managed Expenditure in Northern Ireland will not fall. This is precisely the scenario we find ourselves in with the current dispute over welfare reform. In this instance the UK government has sought to recoup the expected saving in AME through the other channel available to them, a fine on Northern Ireland's block grant.
The figures in table 1.1 show how reductions in public expenditure through these streams affected Northern Ireland and the UK as a whole. Capital Spending, both in Northern Ireland and the UK has seen that largest percentage fall over five years. However while in total the block grant in Northern Ireland has fallen by 8% in real terms since 2010, at UK level the equivalent reduction was almost 11%. This is due in part to the fact that areas such as health and education have been somewhat protected from expenditure cuts at UK level and these areas form the vast majority of departmental spending within Northern Ireland. Other areas such as defence have seen very large cuts but spending in these areas is at UK level and as such they do not factor in Northern Ireland public spending.
While cuts to expenditure on public services in Northern Ireland have not been as severe as the rest of the UK, spending on pensions and welfare has had quite a different experience.
Annually Managed Expenditure has been subject to revisions and reclassifications making comparisons between the UK and Northern Ireland quite difficult. For this reason table 1.1 presents Departmental AME for the UK as a whole which strips out 'other AME'. Other Annually Managed Expenditure includes payments to the EU, national debt and one off spending. The Chancellors Departments have also seen massive fluctuations in expenditure in recent years due to the financial assistance provided to the UK's banking industry by the UK government. Neither of these spending areas could be reasonably compared to anything in Northern Ireland and so they are omitted from the calculation.
The increase in AME in Northern Ireland was 6.5%, while the UK increase in Departmental AME was almost 15%. As AME now accounts for nearly half of all UK public spending this has a significant impact on the overall reduction in public spending. Comparing like with like Total Managed Expenditure (AME + DEL) has fallen by 1.9% in real terms in Northern Ireland compared to a fall of 1.8% at UK level. Taking into account other AME and government support for financial institutions, public expenditure at UK level fell by 1.4%.
Annually Managed Expenditure
That Annually Managed Expenditure has continued to grow over a period of austerity should be surprising, but that its growth at UK level is so much greater than in Northern Ireland is more so. At UK level over two thirds of the increase in AME can be attributed to the Department for Work and Pensions and the Department of Health. As mentioned previously the main differences between Departmental Expenditure Limits and AME is the degree of control which the government can exercise over spending in these areas. The government can control entitlements to benefit payments and pensions but it is quite possible for expenditure on AME to increase substantially without any change in government policy. To understand this more clearly it is worth examining the breakdown of spending by the UK Department of Work and Pensions, by far the single biggest AME department.
In the year 2012/13 the Department for Work and Pensions spent over £166bn on benefits. Media coverage of benefit spending in the UK often misrepresents the make-up of this expenditure that Chart 1.1 shows.
The state Pension now accounts for almost 40% of welfare spending and this is closely followed by tax credits which account for 14%. Tax credits are paid to low income earners and low income families with children. It is also important to remember that although tax credits are considered a welfare benefit, 70% of tax credit recipients are in work (NPI, 2013). The third largest component of expenditure is housing benefit. Together these three forms of support make up almost two thirds of all welfare spending. However the reasons behind increased spending in these areas is more nuanced than media reports suggest
1. Firstly, the level of spending on the state pension has increased significantly due to demographic pressures (there were 6m recipients in 1970 versus 13m today, DWP, 2014). Interestingly even though it is now the largest component of welfare expenditure, and has seen some of the largest increases in the last number of years, the current UK government have sought to exclude all pensioner related benefits from expenditure cuts.
2. Real wages have stagnated over the last number of years but even before the current crisis levels of low pay in the UK have been increasing. This has caused many more people to become entitled to tax credits in order to boost their income. Some have suggested that the system of tax credits while helping to improve the incomes of low paid employees has forced the burden of pay rises from employers to the government.
3. Lastly, it is important to note that the increase in Housing Benefits has not been due to an increase in claimants. In 1996/97 there were 4.7 million housing benefit claimants and in 2013/14 there were 5 million while at the same time expenditure on housing benefit has increased in real terms from £16bn to £25bn (DWP, 2014). Most of this can be explained by the significant reduction in council housing which has exposed the government to rapidly increasing rents within the private sector.
We cannot know at this point what fiscal path the next UK government will choose but we can examine what the commitments of the different political parties are and what this may mean for Northern Ireland. The Institute for Fiscal Studies has outlined how the spending plans of the three main parties stack up post 2015. The first thing to note is that while there is apparent consensus on deficit reduction, not all political parties are aiming for the same deficit goal. The Charter for Budget Responsibility, which was an Act of Parliament signed up to by all of the three main parties, commits them to eliminating the current structural deficit within three years of the next Parliament. The Conservative Party however have gone further and set a goal of having an OVERALL budget surplus of £7bn by 2019/20 (the target was a £23bn surplus in December 2014 but this was revised down in the March 2015 budget). In contrast the Labour Party and the Liberal Democrats only aim to achieve the original target, a balance on the current budget by 2017/18. The 'current' budget excludes borrowing for investment and so the Labour and Liberal Democrat spending plans would entail significantly less expenditure cuts or tax increases.
Of course any calculations are predicated on political parties sticking to the spending plans they have outlined before the election, but according to the IFS the level of cuts required under Conservative proposals are five times what would be required by the Labour Party or the Liberal Democrats. (This is even after the Conservative toned down their surplus plans in the March 2015 Budget).
Looking as Table 1.1 it would be easy to conclude that the only austerity has only affected day to day spending on public services. However the overall welfare spend disguises deep cuts. In fact the current government has introduced policies that have cut £16.7bn out of the welfare budget since 2010, but due to the on-going pressures outlined in previous paragraphs the welfare bill continues to rise. Nevertheless the Conservatives Party have already signalled their intention to remove a further £12bn for working-age benefits after the next election.
What we can say from the above analysis is that Northern Ireland has been hit by significant austerity cuts over the last five years equal to those imposed on the rest of the United Kingdom. This is mostly due to continuing greater increases in Annually Managed Expenditure at UK level. It is then quite perverse that the issue holding back budgetary progress in here is disagreement on how to reduce Annually Managed Expenditure in Northern Ireland!
This quite neatly draws attention to the central flaw in the austerity policies of the current UK government. Instead of focussing on the long-term structural causes of increases in public expenditure, the current government have adopted glib and uninformed targets for reductions in overall expenditure. Rather than tackling a housing crisis or low pay they have introduced measures like the benefit cap and the bedroom tax. The Labour Party's plan quite sensibly allow for more government borrowing to fund investment and they do not aim to cut public expenditure by more than is necessary , but more is needed. The next UK government needs to abandon such a childish fixation with short-term measures and plot a responsible and compassionate for public spending for the long-term.