Executive faces budget shortfall of up to £700m
The Northern Ireland Executive could face a budget shortfall of between £500m and £700m over the next three years, a new analysis warns today.
Business advisors PricewaterhouseCoopers said Northern Ireland would likely have to face its share of the £20bn in additional tax rises or spending cuts that will be needed over and above current plans to close the UK fiscal gap by 2013/14.
PwC’s chief economist Esmond Birnie said: “The Executive has already identified around £370m of savings that it intends to make in 2010/11.
“But if a new government decides to bridge the £20bn gap by equal measures of spending cuts and tax increases, the Executive faces the challenge of identifying substantial new sources of income or imposing even stiffer cuts.
“Depending on how much central government is prepared to shelter spending on health and education, the Executive could face a further shortfall of between £500 and £700m over the next three years.
“With the private sector lacking the critical mass to make up the shortfall, the prognosis is of a particularly difficult period ahead.”
Mr Birnie said that the Northern Ireland economy shrank by around 4.5% in 2009, which was the lowest level of contraction of all 12 UK regions due to continued public expenditure.
He predicts the local economy will now grow by around 0.9% in 2010 — marginally ahead of Scotland and Wales — but that the lack of a large and internationally-competitive private sector, combined with a sharp fall in regional public spending, may mean problems from 2011 onwards.
PwC also forecasts that unemployment will continue to rise during 2010 from the January level of 56,100 to around 63,000 before the end of the year.
However, Mr Birnie says the requirement for employers to report only redundancies of 20 or more persons, plus a rise of 12,000 in the number of economically inactive people, may already have hidden the real level of unemployment in the province.
“With 71,555 VAT registered businesses, of which 88.5% employ fewer than 10 people, there is considerable anecdotal evidence that the total number of redundancies reported in the official statistics is significantly understated,” said Mr Birnie.
“Around a third of private sector employers have told PwC that they expect to operate during 2010 in survival mode,” he added.
PwC tips the UK economy to grow by 1% in 2010 and 2.5% in 2011, but notes concerns over consumers spending remain due to high debt levels and fears of tax hikes and job cuts after the general election. Northern Ireland growth is expected to be restricted to 2% in 2011.
Mr Birnie said that medium-term UK public spending growth is likely to be nil, which will translate into nil growth for Northern Ireland’s budget under the Barnett formula.
He added that the UK faces potential new taxation of perhaps £10bn which will also impact on the region.
“If the Executive cannot identify new sources of finance and the private sector cannot substantially grow its size, productivity and international competitiveness, Northern Ireland is facing serious medium-term difficulties,” he said.