The UK Government deficit is not sustainable. The balance between raising taxes and cutting spending is debatable, but the proposed tax increases are already high and rising.
The Northern Ireland budget is causing a disproportionate part of the deficit: £7.5bn in a total of £145bn.
Sammy Wilson, as Minister of Finance and Personnel, has ably made his case to the Treasury. Now he knows, roughly, the size of his Budget problems which will be confirmed on October 20.
Expect a total reduction, in 2010 prices, of £2bn in nearly equal steps each year to 2014-15. This understates the full impact, since the social security budget, which will also be reduced, does not directly enter the Executive budget.
This reduction will feel larger because current spending on water services and the capital budget for water must be financed, although these services bring no funds through the Barnett formula.
Treating the cuts as a phased change does not ease the long-term impact, but may make implementation easier.
There are different ways to live with this 14% real reduction or, annually, about 3.5%. The Executive can discuss variations in how it can be done, but the ‘bottom line’ is fixed.
The impact can be softened by improving the revenue for the Executive from rates and other charges. Capital funding can be enhanced by local decision making. The CBI has joined the groups suggesting higher rates, water charges, and reduced subventions for some services.
There can also be a trade-off between job losses and lower salary bills (and lower public sector pension costs).
If the full budget reduction of about £2bn was spread prorate across the public sector, it might affect 14% of all public sector jobs. That could mean 32,000 fewer employees. Other estimates put the possible employment reduction up to 40,000. If some services were competitively out-sourced, that would shift jobs into the private sector.
Alternatively, if public sector pay rates are frozen, then the impact on employment would be lower (as has been modelled for the Scottish Government). Probably up to half of the threatened job losses might well be avoided if there was a complete freeze on public sector salaries.
A salary freeze may emerge as an aspect of decisions in London. In that case, Northern Ireland would have an easier decision to follow suit. If the London decision is less rigorous, the possibility is that Northern Ireland might be more demanding than London.
An easier way for the Executive to live with the cuts would be to decide that, Barnett style, Northern Ireland would make the same proportionate reductions as the Treasury is imposing on English departments: a form of parity of treatment.
Indeed, the Sammy Wilson approach to the Executive might be that he will apply this parity unless the Executive agrees otherwise!
A parity-type solution probably poses difficult decisions for those who |are the biggest spenders: health and social security.
Spending reductions will, to some degree, mean reduced services. Some agencies will be told to manage with a big budget reduction. There are some non-departmental public bodies where external observers could suggest big reductions. Of course, turkeys will not vote for Christmas, but self-opinionated judgments must be over-ridden.
The public sector now faces a need for a penetrating independent external review in the style of the review completed in Dublin a year ago.
The Executive could turn the budget problem into an opportunity for major re-shaping of services: out of the pain might emerge some long-term gain.
The Executive would be well advised to take account of the critical suggestions of the commercially-based organisations.
After considering the various local options, the Executive might be able to postpone or re-profile the sharpest reductions in public spending in the first year.
Not to consider these options would suggest that the Executive still lacked clear economic priorities.