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Stormont has one week to chop £850m from public spending

By Liam Clarke

Published 28/10/2014

The power-sharing administration at Stormont is in trouble
The power-sharing administration at Stormont is in trouble

The Executive must agree this week on the biggest public sector cuts in our history to survive.

The Belfast Telegraph can reveal the figure that the Finance Minister has told his Executive colleagues they need to save to strike a budget - a massive £850 million, almost one tenth of Northern Ireland's total funding allocation.

The huge figure was spelled out in a paper circulated to ministers yesterday by Simon Hamilton.

They must decide whether to go with it by Friday - the end of the month - or risk losing a £100m bailout from the Treasury, something that would threaten an immediate crisis as senior civil servants would be forced to step in to balance the books.

The unprecedented level of the cuts will affect everyone:

  • The rising cost of Health, which is protected from cuts, means that the pressure on other departmental budgets is increased.
  • Justice, Agriculture, Arts and Regional Development are likely to have their budgets slashed.
  • The minister proposes ending the exemption of Education from cuts - a decision that is likely to put him on a collision course with Sinn Fein.
  • The budget will include provision for a Civil Service redundancy scheme, which ministers believe could save £200m a year.

"This is a critical week," Mr Hamilton said. "It will not be an easy budget, it will not be covered in good news, but tough decisions have to be made. We cannot have an Executive if you do not have a budget agreed - it is as simple as that."

He added "We have three days to get it agreed. We in the DUP will be available for discussion morning, noon and night until this is sorted. We are willing to work into the wee small hours."

Mr Hamilton warned that departmental budgets will suffer "but we have to understand that we have pressures of hundreds of millions of pounds".

One problem is that our block grant, the allowance we get from Westminster, has fallen in real terms, and will come down by 1.6% next year. If it had kept pace with inflation we would have up to £200m extra in the kitty.

Another pressure comes from public sector pensions, particularly in health and education. Pension reforms in England have meant that we must now pay another £200m a year in employers' contributions unless we reduce public sector jobs drastically.

Another pressure comes from the health service, which currently costs £4.54bn a year. Health spending as a proportion of our block grant has risen from 35% in 2005 to just under half of our £10bn-a-year block grant from Westminster. Next year it needs another 6% to cover demands for its services.

Health, a DUP department, was ring-fenced from cuts this year and in response Sinn Fein secured ring-fencing for Education. This is the second-highest spending department and is presided over by the party's John O'Dowd.

"That situation can't continue into the next financial year," said Mr Hamilton. "While I value Education, it is currently capable of making a contribution to some of the reductions that other departments are facing."

He added: "Protecting both Health and Education means reducing other departments by around 20%. That is undeliverable."

However, Mr Hamilton proposes protecting the Department of Enterprise, Trade and Investment, which is DUP-controlled and responsible for job creation.

In the meantime, Northern Ireland also faces fines for failing to adopt welfare changes agreed in Britain. This amounts to £200m spread over this year and 2015, and will rise steadily after that.

Mr Hamilton said yesterday he was hopeful that if welfare reform could be agreed then the Treasury might excuse the first £100m in fines.

Alliance leader David Ford said: "We must start making difficult decisions now.

"While there have been claims that this crisis has been solely caused by Tory cuts, the truth is that this problem has been mainly self-inflicted by the long-term financial mismanagement and populism of recent years by the DUP and Sinn Fein.

"This has been further compounded by the short-term stupidity of the SDLP and Sinn Fein, who have opposed the implementation of welfare reform."

The five key issues

The block grant

Most of our spending is doled out to us in a block grant from Westminster. This amounts to £9.6-£10bn a year and has fallen in relation to inflation. Using the Barnett formula the amount is calculated based on spending levels in England and Wales. Although it has fallen, it has actually been higher than was predicted four years ago when the present budgetary round was set. Public spending here is 27% higher per head than in England and we raise 23% less in taxes. This means there is little sympathy for us amongst English MPs.

The public service

There are about 212,000 public servants here. These include workers like teachers, medics and police as well as civil servants. There have already been widespread public sector redundancies in England and the Treasury is looking to us to follow suit. Simon Hamilton wants to save up to £200m by making public sector workers voluntarily redundant, but this is a lower proportion than in England. He hopes to borrow the money from the initial payoffs from a Government fund, the Reform and Reinvestment Initiative, and to be “in profit” after 18 months.

Accumulation of pressures

Ministers have been told by Mr Hamilton that they must save up to £850m from the public purse next year in addition to implementing welfare reform. Public sector redundancies and pay restraint will cover some of the cost but there will need to be deep cuts in services to cover the rest.

The deadline

The Treasury has offered us a £100m bailout loan to tide us over. To avail of it we have to show him a plan for a viable, fully-funded budget by Friday. Otherwise the Government has warned that civil servants will have to move in to take the hard decisions. This would almost certainly lead to the collapse of the Executive.

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