Why our budget crisis gives Greece a run for its money
Stormont faces major financial problems which can be compared to those in the Greek crisis. The scale and seriousness of the deficit in the Stormont budget is not fully appreciated. Stormont departments are today living well beyond their reasonable expectations.
First, the real level of spending, as allocated by Westminster, has fallen in each of the last three years. In parallel with UK deficit correcting policies, Stormont was told to reduce departmental spending by about £250m, some 2% each year, in efficiency savings or other adjustments: a cumulative fall of over £1bn. That reduction should have been anticipated, but was not acted upon. The real terms reduction was part of the budget which, initially, had no connection with the later arrival of welfare reform.
Second, the Stormont Executive in recent years has been generous in the allocation of the flexibility of the devolved budget. Domestic rates are well below comparable English levels, water charges are deferred, lower university fees agreed, prescription charges avoided and rates for manufacturers are heavily subsidised. All these combine to take more than £1bn from the Stormont budget.
Third, in 2014-15 and 2015-16, the imbalance from budgetary over-commitments was partly (and temporarily) offset by a one-off loan of £100m from the Treasury, now due to be repaid.
Fourth, as welfare benefit reforms were introduced in GB, Northern Ireland did not make the changes which would have kept the welfare bill in line with GB parity. The Treasury has now imposed a deduction from the Stormont budget to cover the extra costs incurred. Last year £91m was deducted from the Block Grant and this year it has risen to £114m. Next year the deduction rises to £196m followed by £283m in 2017-18.
Fifth, the July 8 budget has made a big hit in approved welfare spending. Northern Ireland will make changes in tax credits, as part of UK taxation. However, in the absence of changes in the benefit cap, down to £20,000 maximum, and without removal of housing benefit for people aged 18-25, a big further budget penalty looms.
Sixth, Northern Ireland is facing a situation where the administration of social security will be out-dated by a changed administration system in GB. A separate, locally adapted administration will be needed and costly.
Faced with this scale of budget shortfalls, the Stormont Executive, in co-operation with the UK and Irish governments, developed the budget rescue package which might have brought an extra £2bn to the budget over the next five years in the Stormont House Agreement, signed at Christmas 2014.
The Stormont House Agreement (SHA) has been stalled. There is disagreement on the implementation of welfare reform. Sinn Fein argues that nobody should be worse off because of welfare reform, whether they are current claimants or future claimants. The Unionist parties agree with the Secretary of State that the SHA did not intend, and indeed could not afford, to protect (on the previous rules) all future claimants against loss. The implementation of the SHA is necessary to begin to rebalance the devolved budget.
The Assembly has voted to approve an amended budget, purporting to include all the benefits of the SHA. However, this means that the management of Government funds is in breach of the financial controls expected by the London Treasury. Already, the reallocation procedure due in the June monitoring round has defaulted and cannot be implemented by the Executive.
The fuse to a budget crisis is burning. How long will the Treasury continue to transfer funds to Stormont? When the Treasury acts, what will it do? When the Treasury moves to manage the flow of funds, with reduced spending limits, could the Executive continue to serve any useful purpose by remaining in office?
Devolution means living with devolved responsibilities: it cannot mean deciding to derogate on those responsibilities.