The Government is now finalising the complex decisions which form part of the comprehensive spending review (CSR) for the next four years.
A big reduction in overall spending is expected. But should some local services be spared the full weight of the cuts?
Locally, two defensive suggestions are made. First, Northern Ireland did not cause the UK deficit. Second, Northern Ireland has lower income levels, and is more reliant on public sector services, and therefore should be treated with less severity. Both suggestions are questionable.
Northern Ireland now adds about £7bn to the UK deficit of £170bn — about 4% of the total, from 2.8% of the population. Much of the local deficit stems from social needs, but even on a generous interpretation, some of the overall deficit comes from Northern Ireland.
Second, in a surprising contrast, Northern Ireland’s household spending is 4% higher than the UK average, and is higher than many other regions.
Since average household incomes are 6% lower, how does this reconcile? Part of the answer is that higher spending leaves less saving. Another partial explanation is that the average number of people per household is 13% higher so that, per person, spending is actually lower than in some regions.
More importantly, a critical feature of household finances is that public policy adds much lower bills than in other regions. There are much smaller household bills for rates (council tax), rents, and (the absence of) water charges. Lower public sector charges help households to sustain other spending, averaging several hundred pounds per household each year.
With this evidence, asking ministers to go to London to seek special treatment on public spending is risky. This is not to deny the evidence on social and economic needs but points to critical |weaknesses in a bald argument.
If the case for special pleading fails, what is the likely impact on the CSR? Local ministers are currently awaiting the outcome before making detailed assessments.
In contrast, and in preparation for a difficult CSR, Scottish ministers appointed a group of experts to analyse their prospects, analysing the projections for the UK as revealed in the June Budget, making assumptions based on the Barnett formula.
The Scottish independent budget review (IBR) is a compelling read whether in Scotland or, by extension, Northern Ireland.
Applying the arithmetic of the Scottish model to the Northern Ireland baseline figures for 2010-11 shows the implications if the Treasury affirms its announced tough tax and spending policies.
Devolved public sector spending in Northern Ireland (adjusted to remove inflation and excluding policing) would fall in annual steps from £10.5bn in 2010-11 to £9.1bn in 2014-15.
In real terms, this would be a reduction in current spending of just over 10% and a reduction in capital spending of 28%. Current spending would fall, in real terms, by 3% each year.
The Scottish study made the conservative assumption that the main budget adjustment might be through the public sector pay bill, which would be cut, while remaining at nearly 60% of current spending.
First, they examined the expected cuts in line with reduced spending. Second, they assumed that public sector pay would be frozen at 2010 levels for two years, and then restrained heavily for another two years. The second option illustrates the extent to which a freeze on pay would offset the need for job losses.
Applying this arithmetic to Northern Ireland over four years, under the first option, the pay bill would need to fall by £560m, or 10.5%. If this was alongside earnings that nearly matched inflation, the number employed might fall by over 20,000. Under the second option, where pay rates were frozen, the reduction in jobs could be less than 4,000.
Executive ministers have an unenviable task. How will they use their devolved responsibilities for pay and employment? Should preparations for these changes not be made now, to cope better with the Treasury squeeze?