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Esmond Birnie

Scrutinising Northern Ireland's sizeable fiscal deficit is interesting

Esmond Birnie

Economy Watch


Stormont got extra funding in the New Decade, New Approach agreement

Stormont got extra funding in the New Decade, New Approach agreement

Stormont got extra funding in the New Decade, New Approach agreement

Tucked away, five days before Christmas, the Office for National Statistics (ONS) published the 2018-19 data on the fiscal transfers. That is, for each of the 12 major UK regions how did the sum of money raised through taxes in that region compare to the level of public spending which benefits that region? In other words, which regions get more out of the UK exchequer than they put in?

Northern Ireland (NI) still has a large fiscal transfer or fiscal deficit relative to the UK exchequer.

Whilst not all commentators would accept this, NI does benefit from certain categories of "UK central public expenditure" notably the interest on public debt, defence spending and international diplomatic representation, even though that spending does not actually take place inside NI.

ONS allocates to NI a share of such "non-identifiable spending", usually NI's percentage share of total UK population or about 2.8%.

In recent years such non-identifiable spending relating to NI has been about £2.5bn-£3bn, compared to a sum of public spending which happens inside NI of about £25bn (in 2018-19). Even if the non-identifiable spending was stripped out of the reckoning the sum of spending in NI substantially exceeds regional tax revenues.

NI is far from unique in having a fiscal deficit. All of the 12 UK regions bar London, South East and East of England have one. In other words, the greater South East of England as the generally most prosperous part of the UK economy made a net contribution into the UK exchequer which then provides the means to pay out to the poorer regions in the English Midlands and North and Scotland, Wales and NI.

It is probably the proportional scale of the NI fiscal deficit which is surprising. It is by far the largest in the UK, nearly £5,000 per person compared to £4,300 in Wales and £4,100 in the North East of England - second and third highest.

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The latest ONS data show that the size of fiscal deficit in NI has been slight decline over the last three years: £9.7bn in 2016-17, £9.7bn in 2017-18 and £9.4bn in 2018-19.

In 2019 by the Dublin-based economics Professors Seamus McGuinness and Adele Bergin and John FitzGerald and Edgar Morgenroth used historical data going back to the 1970s to show that whilst the deficit had been in a slight trend decline during the 2010s, when measured as a percentage of total NI regional economic output in proportional terms the deficit in 2018-19 was still larger than those experienced in the 1990s, 1980s or 1970s.

This very large fiscal deficit is part of rather sober economic context for our recently restored devolved Executive. In the New Decade, New Approach Agreement, Stormont did receive some extra funding from London.

There have been continuing demands for an even more generous funding package. Any such packages will almost certainly make the fiscal deficit larger - at least in the short to medium-term.

This might then prompt the deeper question: "Is a large fiscal deficit a good or bad thing for the NI economy?"

Three types of responses can be considered:

The first response is one of "denial"- that the deficit doesn't really exist at all. Whilst there is some room to debate definitions of public spending and hence the transfer might be recorded as a bit smaller than in the ONS figures there seems no doubt that NI is a deficit economy.

Regional job and consumptions levels are being kept at a higher level than they would otherwise have been in the absence of the fiscal deficit and the fiscal transfer from the exchequer.

The second response is one of "relaxation" - that this sort of fiscal transfer is the normal thing which happens from richer to poorer regions.

This argument is true to an extent (after all, nine of the 12 UK regions have fiscal deficits) but only to an extent.

What may be really of concern is the scale of NI's deficit and the fact that proportionally it is much bigger in 2020 than it was 50 years ago.

The third response is one of "worry" - a concern that the long-term effects may be harmful.

Chronic and very large fiscal deficits may act to, as economists put, soften budget constraints in NI creating moral hazard.

Because the regional economy no suffers all the ill consequences of having low levels of productivity and competitiveness (given the compensating impact of the fiscal transfer) behaviours and policies designed to raise that productivity and competitiveness are less likely to be adopted. Less than fully responsible decision-making and a large fiscal deficit may be locked together in a vicious circle.

In next week's Economy Watch we hear from Paul MacFlynn of Neri

Dr Esmond Birnie is senior economist, Ulster University Business School