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No straitjacket, but Wilson will still be forced to tighten his belt

Minister of Finance and Personnel, Sammy Wilson, has the responsibility to balance the books for the devolved Northern Ireland Government. His job is difficult and will become even more difficult.

Assessments for the next four years make uncomfortable reading, not only for the minister, but also for everyone concerned with maintaining public services with reduced budgets. Northern Ireland faces reduced funding as the Barnett formula delivers a squeeze.

As minister, Sammy Wilson has been ready to admonish critics who differ in their interpretation of his budget wisdom. Two strands of debate stand out.

First, the minister believes delivering support for the economy is an Executive priority, demonstrated, inter alia, by continuing to avoid water charges and freezing the level of the regional rate. Second he argues, in a conclusion that sets challenges to his ministerial colleagues, that they can deliver public services at lower costs.

The minister has departed significantly from parity of taxation and services with Great Britain. The ability to vary some charges in Northern Ireland is a welcome feature of devolution. As the differences with England have widened, the way in which this flexibility is used merits challenge and debate.

Flexibility has been used with two effects. First, since devolution was re-established, the divergence in parity of taxation has widened by over £200 pa per household and it was already at least £300 to £400 per household when the period of direct rule ended. Even if allowance is made for lower average earnings, this difference is large and growing.

Second, and a sequential effect, some aspects of public services must now be financed on a level below parity elsewhere in the UK and the principle of passing to departments the ‘Barnett consequentials’ of budgeting no longer applies. In 2010-11, health and education budgets will be hit by a tighter budget than in England.

Sammy Wilson cannot be criticised because he persuaded the Executive to introduce local flexibility. A rigid parity system would be a straight-jacket. He may be criticised on the reasoning for his financial decisions. Two questions illustrate the tensions.

First, is the comparative reduction in water and council charges a good way to help the economy? Or another way to pose this question, by not taking (say) £100m from households is this a better way to boost the economy than by spending £100m on extra skills training which would secure and create jobs? Of course, leaving households with slightly higher disposable income will mean some increase in spending and will be an injection to the economy. However, that means less is available for high priority economic services.

Ministers have made a social judgment that also happens to be more popular than asking for higher household charges. This is understandable, but can be criticised as taking away from a stronger sustainable economic policy framework. Second, if expenditure allocations must fall behind the GB equivalent, how should the expenditure allocations be targeted and phased to minimise adverse consequences? The budget shortfall in 2010-11 will be even larger in later years. Ministers must consider how the public sector can operate with, over the next three years, a real reduction of the budget of a further 2%-3%.

Which services can release large sums through efficiency increases? Which services can acceptably be down sized? Which public sector costs can be cut directly: public sector pension contributions and/or public sector pay scales (relative to England)?

Even if water charges have a net impact of £200 per household and regional rates £250 per household, this could raise revenue by about £310m pa. The pending challenge is even larger. What alternative revenue can be found whether in charges, borrowing, or PPP contracts. As minister, Sammy Wilson faces serious difficulties even before he re-orientates policy to lift the economy. This challenge could be passed to the special Executive sub-committee on the economy!