The announcement of the UK Spending Review last week should have been one of the most significant fiscal events of this Labour government. It was to set out how government spending will evolve over the next 5 years, but more importantly for Northern Ireland, it was also expected to announce a new estimate of how our share of public funding would be decided.
In reality, the Spending Review on the day was somewhat underwhelming. There were no surprises and certainly no game-changers. While on the surface there appeared to be lots of announcements about new money for very big projects, the reality isn’t really all that positive.
Yes, there has been a marked increase in capital spending, and that is welcome. However, much of this is simply making up for decades of underinvestment. It will provide a boost to overall growth, but this impact will be measured in years, if not decades.
In terms of day to day spending, there is going to be very little breathing room over the next number of years. In many cases, budgets will barely keep pace with inflation and in many cases, they may fall behind. It isn’t quite austerity, but it isn’t the sea-change in public services that many people were hoping for.
The above analysis may seem harsh and it has to be accepted that the UK government faces many constraints in shaping its fiscal policy. This UK government inherited a fiscal mess. The Truss government, in a very short amount of time, managed to eliminate almost all of the UK’s room for fiscal manoeuvre. Bond markets now charge a high price for surprises.
That being said, this UK government added a further constraint to that which it inherited from its predecessor. It committed itself to the existing set of fiscal rules and also to maintaining rates of tax for the four main pillars of revenue. Both of these choices were voluntary.
While bond markets want fiscal credibility, they are open to a discussion about how that is implemented. Markets want a plan, but they could have been persuaded that a reappraisal of the current set of fiscal rules might have provided for more growth in the medium term and ultimately increased fiscal sustainability.
On taxes, this government constrained itself at the mercy of focus groups rather than bond markets. They reasoned that nobody likes tax increases and therefore, ruling them out would be quite popular. However, public opinion, like bond market sentiment, is more nuanced. In both cases, people’s minds can be changed, but you first need to make the case.
All of this is to say that while we tend to focus in Northern Ireland on decisions that relate specifically to us, we shouldn’t do this at the expense of the bigger picture. The big macro decisions made by the UK government eventually filter down to us.
Turning to home then, what does this spending review mean for Northern Ireland? In the short term, apart from a funding announcement for the redevelopment of Casement Park, not much has really changed. We knew what the broad spending totals would be from the Autumn Budget last year. The longer term is a different matter.
We were told that we would be getting an update on the calculation of public expenditure need in Northern Ireland. This is rather more exciting than it sounds. It is an adjustment that is made to the level of public spending made available to Northern Ireland in order to provide public services here on the same basis as they are provided in the rest of the UK.
This funding adjustment was a key part of the deal that brought back devolved government at the start of last year. Back then, the UK government committed to a figure for public expenditure need, but also committed to examining that figure to make sure it was the right one. That re-examination has now taken place.
The long and the short of it is that the public expenditure need here is a good bit higher than previously thought. This means that not only were we underfunded in the years leading up to 2024, we are now likely to be underfunded in the future.
While this estimate of public expenditure need was published on the same day as the Spending Review, it made absolutely no difference to the spending decisions that were made. The settlement for Northern Ireland was calculated based on the 2024 agreement with a commitment to enter another round of negotiations for yet another fiscal framework.
While this may sound like an unfortunate set of administrative errors, it does have significant implications for our budget. It means that, in essence, that the UK government will be underfunding Northern Ireland in years to come, and doing so knowingly. All we have is a vague commitment to rectify this underfunding at some point in the future.
We should also bear this in mind because during the many, many months that led up to the deal to restore devolution in January 2024, we were constantly told that all Northern Ireland’s budget problems were of our own making. At no point did the UK government ever admit that the problem was instead related to their underfunding.
The Spending Review should have offered an opportunity for the Northern Ireland Executive to make longer term plans about its priorities based on funding certainty. By ducking a decision on our needs adjustment, the UK government have removed that certainty. It is most certainly a case of opportunity lost.
Published in the Belfast Telegraph on 17 June 2025.