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Why Stormont crisis needs some unpalatable decisions

By John Simpson

Published 08/09/2015

Finance Minister Arlene Foster
Finance Minister Arlene Foster

Stormont's budget is currently unsustainable. The present political arrangements are unworkable now and will be in 2016-17. The budget imbalance has emerged from three sources. First, there is an emerging and growing crisis in managing welfare spending. Second, there is a need to plan for the impact of devolution on the power to set the rate of corporation tax. Finally, a growing economy needs additional spending, current and capital, which has not been available in the recent past.

The size of the budget changes needed is difficult but not impossible. It probably represents less than 5% of current annual spending. Presented as less than 5% seems manageable: converted to "less than £1bn" it looks more frightening.

For the optimists, one cautionary point should be acknowledged. Starting with the constraint that the UK Treasury has no significant bailout fund ready to deliver, an optimistic assumption might be that, leaving the current deficit as it is a more buoyant economy would generate extra funds.

Even an optimistic forecast that the economy will grow steadily would still leave an unacceptable emerging deficit.

If the devolved institutions of regional Government continue to function, the three sources of financial problems must be tackled. That leads into heroic assumptions which must be translated into action.

Welfare reform adjustment first; the welfare reform arithmetic must be managed. There are several options but the least disruptive starts from an agreement to take the most generous financial arrangement available from the Treasury followed by the off-setting of specific difficulties remaining in the local budget.

In other words, Northern Ireland should implement the rules on welfare payments as are now in place for Great Britain and accept those financial transfers on the former parity framework.

The residual cost of welfare reform, with local discretion to tackle systemic effects on some disadvantaged groups, might need about £50m to £70m from the local budget.

In the face of a Treasury imposed Barnett allocation, without this type of compromise on welfare reform, a Stormont managed budget seems impossible. This hurdle simply must be overcome. If implemented, then the remaining Stormont House funding must be released.

The second steps emerge from the fundamental crisis in the continuing budget arithmetic. Stormont has drifted into a continuing serious budget deficit, largely because local budgets have been too easy on local tax payers or too generous on spending issues.

Second, the Stormont budget must plan for lower corporation tax receipts, although this change will be phased in over about three years.

The Stormont House Agreement should be used to escape the penalties of non-implementation of welfare reform but, just as significant, it would release capital borrowing to finance the reshaping of the civil service and also allow some increase in capital spending.

The Treasury might be persuaded to allow the local budget to phase in a series of budget corrections over a period of three to five years. However, some of the budget demands are immediate so that a gentle phased approach may be difficult.

Corrective measures of tax increases or reduced expenditure would need to start with discrete steps, possibly looking for an adjustment of £100m in 2016-17 then followed by incremental increases.

Finance Minister Arlene Foster must ask the Executive to agree some unpalatable decisions.

These could include:

1. An annual phased "inflation plus 3%" increase in the regional domestic rate to begin to narrow the existing underfunding from households for rates.

2. A commitment to withdraw the remaining industrial de-rating arrangements partially to offset the cost of corporation tax relief to businesses.

3. Prescription charges at a fixed rate.

4. As a preliminary to an agreed water charging system, a fixed charge per household (levied as part of the domestic rates bill) of £100 each year.

These proposals would be a sensible start. Even these unpopular changes would leave households in Northern Ireland with lower household charges than already apply in other regions.

Belfast Telegraph

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