Belfast Telegraph

Tuesday 25 November 2014

Stakes high as Osborne places UK’s biggest bet

The Chancellor is gambling that slashing the public sector will not end in meltdown. Angela McGowan asks if the local private sector can cope

The Comprehensive Spending Review is the Government’s first attempt at improving the nation’s fiscal position by reducing its expenditure.

Although Chancellor George Osborne was keen to blame the previous administration for the country’s deficit, the reality is that a global financial crisis and widespread recession have forced the UK to dramatically increase national debt levels over the past two years.

The difference between what the country currently raises in taxes and what it spends has stretched to more than 11% of GDP.

This week’s announcements are only the start of a process aimed at adjusting the overall budget lines of departments from April 2011 onwards.

The cuts are easily the deepest and most sustained cuts to public expenditure since the Second World War.

The Chancellor chose to highlight the Government’s multi-faceted approach to improving the nation’s balance-sheet through three main principals — “reform, fairness and growth”.

While it can be more specific about reform to public services in terms of departmental cuts, the Government will undoubtedly be challenged on its approach to “fairness” and, of course, the “growth” element is by no means guaranteed.

In the first instance, the Chancellor has proposed “reform”. Reform of the public sector was widely anticipated and, of course, when money is scarce it is also a necessity.

In spite of ring-fencing UK health expenditure and protecting education, all departments in the UK will be facing a cut in administration — although the cut to the Treasury of up to 33% is by far the largest administrative cut.

In an effort to protect frontline services, the coalition Government can insist where administration savings are to be made in UK departments — but there is no guarantee that Northern Ireland’s departments will choose to cut administrators over frontline services.

The UK is primarily protecting health and education and, for this reason, cuts to some other departments have been huge. Local government will endure a decline of 27% over the spending period; Transport, 21%; the Department of Business Innovation and Skills 25%; and the Department of Culture, Media and Sport, 24%.

Northern Ireland’s resource block grant, which is currently in the region of £9.3bn, will be £9.4bn in 2011-2012 and only £9.5bn at the end of the four-year period. This represents an accumulative fall of 6.9% in real growth, a smaller decline compared to Wales (7.5%) and larger than Scotland’s 6.8%.

The local capital budget, however, looks set to take a significant knock with proposals to take the local capital-spending budget from £1.2bn this year down to £0.8bn by 2014-2015 — a decline in real terms of 37%.

With a reduced block grant, the Executive will now be preparing a draft Budget for the local economy which we expect to see in late November or early December

The Executive is highly sensitive to the fact that private-sector growth in the local economy is by no means strong enough to take up the baton when public spending declines. In this respect, ministers are not expected to announce large scale public sector redundancies and are more likely to be exploring a combination of initiatives, including cost-cutting, natural wastage in terms of public sector employment and revenue-raising.

Indeed, on the latter, George Osborne was keen to note the need for selling public assets in order to raise much-needed revenue. Disposing of public sector assets at the local level could make a large difference to Northern Ireland’s ability to cope with reduced funding in the years ahead.

However, ensuring that the Executive is allowed to retain revenues from any such sales will be important as the Chancellor might be keen to use such revenues to fund other initiatives, such as the Green Investment Bank.

Some good news for the local economy with the news of a £25m access fund to resolve the issues arising from the collapse of the Presbyterian Mutual Society.

There is also talk of a £175m loan for the Executive, though without details and conditions, we can make no judgment on its desirability yet.

The reform of the national welfare system is a major issue for Northern Ireland as the Executive has no control over national changes to benefits or tax credits. As the local population is more dependent upon welfare benefits than other UK regions, the Government’s desire to cut the welfare bill by a further £7bn — on top of the £11bn cuts already announced — will undoubtedly have a disproportionate impact upon the local economy.

The Government has proposed that its reforms will ensure no household on benefits will be better off than the average working family. While this measure will go some way to reducing the poverty trap that clearly exists in Northern Ireland, it also assumes that there will be sufficient job vacancies for current benefit recipients to fill — and therein lies our biggest challenge.

The Government has this week taken a gamble that public spending cuts will not knock an already weak economy back into recession. Only time will tell.

Angela McGowan is the chief economist at Northern Bank

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