Belfast Telegraph

Friday 29 August 2014

Grasping the nettle

The Chancellor must now demonstrate that he can balance the public finances without snuffing out growth. He has his work cut out, argues Philip McDonagh

George Osborne yesterday described his first Budget as Chancellor as "tough but fair". Another adjective he used was "unavoidable", given the mess that Labour had allegedly made of the public finances.

With net borrowing expected to hit almost £150m this year - in excess of 10% of GDP and close to Greek levels of borrowing - and net public sector debt running at 62% of GDP and rising fast, the nettle had to be grasped. Prudence has given way to serious pruning.

Was it tough? Yes, it had to be and Mr Osborne actually promised to get the public finances back in balance by 2014/2015, one year earlier than previously planned.

This will probably impress the international financial markets, which have been waiting for some time to see the UK Government getting a grip of its wobbly public finances. After all, the Irish government undertook the same exercise last year and is already living with the pain.

Was it too tough? Will it push the economy back into recession and condemn us to years of slow economic growth? The answer to these questions remains to be seen.

While he reduced corporation tax from 28% to 24% and to 20% for small business and tried to make life easier for entrepreneurs, his big gamble is the increase in VAT from 17.5% to 20% in order to generate £13bn-per-year towards reducing the deficit.

This brings our VAT rate into line with the European average, but could choke off the steady rise in consumer spending that we need for the economy to recover.

Was it fair? The answer to this one is less clear and depends where you are sitting. VAT rises are an easy way for government to raise money quickly, but they are also regressive and tend to hit those at the bottom of the pile disproportionately harder.

Public sector workers are also not likely to regard the announcement of a pay freeze as fair - even if this is restricted to those earning more than £21,000-per-annum.

Others will say that the private sector has borne the brunt of the recession so far and it is entirely fair that the public sector should share the burden.

The fact is that the only serious way to reduce public spending is to cut either jobs or pay because staffing makes up the majority of the public sector budget.

In Northern Ireland there are around 225,000 public sector workers, more than one-third of all jobs, so the pay freeze will affect a lot of households.

However, with average pay in the public sector at 40% above private sector pay, it is difficult to argue that some rebalancing is not overdue.

But we also need to think about what it will do to our economy if all those public sector workers cut back on their spending while the private sector is still too small and weak to pick up the slack.

The fairness of the Budget will also be questioned by many households who depend on welfare benefits.

In all 75% of all households in Northern Ireland receive some form of state support, including state pensions, and 10% of total household income comes directly from social security benefits. This compares with 7% in the UK as a whole.

Benefits are particularly important to single-parent households and, apart from pensions, the main benefits are child benefit, child tax credit and disability living allowance, all of which are claimed by a greater proportion of households in Northern Ireland than in the rest of the UK.

Indeed, it is these benefits which have particularly been targeted by Treasury and from which the Chancellor wants to raise £11bn in savings by 2014/2015.

This Budget, therefore, raises big challenges for Northern Ireland. And there are more to come.

The Chancellor told us that departmental spending outside Health and International Development, which are protected, will have to be slashed by 25%.

The cuts in Northern Ireland will depend on what happens when the Barnett formula is applied proportionately for the comparable spending in England and Wales, but the bottom line is that we will be facing a serious reduction in the block grant over the next four years.

The years of easy public money in Northern Ireland are finally at an end.

The public spending debate in Northern Ireland needs to be an open and transparent one and should copy the initiative of Westminster in establishing an Office of Budget Responsibility that makes all the data and assumptions publicly available.

Mr Cameron had already flagged the size of the public sector in Northern Ireland during his election campaign, but he then rowed back by talking about growing the private sector.

The Chancellor echoed this in his speech announcing a White Paper on regional spending followed by a consultation paper on 're-balancing the economy in Northern Ireland'.

No doubt this paper will explore proposals for lower corporation tax and an enterprise zone for Northern Ireland.

So the big debate in Northern Ireland will start this summer as to how we manage public spending cuts while, at the same time, really seriously putting the economy at the top of the agenda.

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