On 15th May Paul Mac Flynn, Co-director & Dr Lisa Wilson, Senior Economist gave evidence to the NI Finance Committee on budget 2024-25.
Good afternoon, can we begin by thanking the Chair and the committee for the opportunity to speak with you today.
The context in which budget 2024/25 was set was very challenging and this was evident before the budget statement was made. We welcome the fact that the Executive was able to agree a budget given the existing spending pressures and the constraints of the overall fiscal settlement.
The most significant criticism that can be made of the Budget statement was that it was not set alongside a Programme for Government. A Programme for Government sets out joint priorities and a direction of travel for Northern Ireland and is fundamental to ensuring the best use of resources and delivery of public services. Without this it is hard to understand if the allocation of funds to the various departments amounts to anything more than just the divvying up the monies.
Such a process can result in ad hoc decision-making, fragmented policy initiatives, and inefficient use of resources. Not setting strategic common goals means that there is no context to the choices that are made about departmental allocations. Choices are seen as discrete decisions rather than necessary compromises within an overall limited settlement.
A PfG also provides a transparent framework for tracking progress and holding government accountable for its performance. In its absence, it becomes challenging for stakeholders, including oversight bodies, to assess the effectiveness of budgetary decisions and the delivery of public services. This can erode trust in government institutions and undermine democratic accountability.
Furthermore, without a PfG, there is a risk of fragmentation and duplication of efforts. Departments may pursue divergent priorities or initiatives without adequate coordination, leading to inefficiencies, overlaps, and gaps in service provision.
One of the most significant elements of this budget was the allocation to the Department of Health, which was less than the £1bn sought by its Minister. In the budgetary announcement it was stated that it was not sustainable for health to eat up more and more of the budget year on year. This is absolutely true. It is clear that the current spending dynamic within the Department of Health cannot continue indefinitely.
Had additional money been supplied to health it would have been at the expense of other government departments that have already faced significant cuts. However, simply withholding funding will not solve the problem either. There needs to be a plan to regain control of Health spending, but that plan will not be successful if it is limited to the confines of the Department of Health. The factors that contribute to the increase in Health spending span the entire range of government departments. This is why a programme for government is so central to budget setting. An Executive led, cross-departmental plan is needed to tackle not only the immediate spending pressures of Health, but to also to put in place pro-active measures to contain future demand is crucial to achieving fiscal sustainability.
This draws attention to the overall fiscal settlement in which this year’s budget was set. The UK government has committed to setting a fiscal floor based on public spending needs in Northern Ireland. The UK government references work already undertaken by the NI Fiscal Council in this regard. Firstly the definition of need employed in this discussion is an arbitrary formulation based on public spending decisions for local government in England. It should not in anyway be viewed as an objective assessment of public spending needs. Within the UK government formulation there are further issues regarding the calculation of that floor. Beyond that the most immediate concern is that the mechanisms outlined by the UK government to achieve that fiscal floor are utterly inappropriate.
The negotiations regarding the fiscal floor are set to continue between the Department of Finance and UK Treasury. We believe that the Executive will be most successful in this negotiation if it can set out how it plans to achieve longer term fiscal sustainability. However there needs to be a more honest and practical discussion of these issues than has been the case to date.
Before the return of the Executive, much had been made of Northern Ireland’s limited revenue raising powers and the ability of the Executive to address the shortfall in funds needed. To be clear, seeking to address the shortfall in Northern Ireland through revenue raising within the region can blur the purpose of devolution. The UK Government bears significant responsibility for the constrained fiscal position that Northern Ireland finds itself it. Devolution is about empowering regions to enact policies tailored to local needs, rather than simply being the handmaiden of national budgetary decisions.
Most of the revenue raised by the Northern Ireland Executive comes via the regional rates. It was clear that this budget was not an appropriate time to implement sharp increases in rates off the back of a cost-of-living crisis, when many people in Northern Ireland are already struggling and where wages have yet to cover increased prices.
That being said, over the longer term we need to move towards increasing the regional rates, and perhaps a missed opportunity in the recent budget was to signal that this would be the intention. This would have given households time to prepare for this, but also give an indication of the direction of travel to the UK Government and Treasury ahead of negotiations about the fiscal framework settlement.
In any move to raise the regional rate, the objective should not be to align with the revenue raised via the English council tax system. It's crucial to recognise that England's council tax system is highly regressive. It is also worth noting that the UK raises a disproportionate amount of revenue from property based taxes and other countries strike a greater balance with regard to income tax. We do not support the introduction of water charges. We take this position for a number of reasons, primarily because of the highly regressive nature of this taxation.
As with existing revenue raising capabilities, it would be extremely difficult to implement further fiscal devolution with the aim of meeting the current challenges in public funding. The Independent Fiscal Commission recommended that income tax as the most appropriate major tax for devolution to Northern Ireland. As can be seen from the Scottish experience, there are significant short term risks that can arise from devolving revenues, particularly if there are divergences between regional/national economic performance. Fiscal devolution should be seen as a long term project to boost regional sustainability not a short term quick fix.
Overall, the context of this years budget was extremely challenging and it is welcome that a budget has been set. However the absence of a programme for government means that setting budget in future years will be even more challenging. There is scope to achieve a more appropriate fiscal settlement from the UK government, but success in that endeavour requires a plan, and a programme for government should have been the start of that process.