Belfast Telegraph

The economic cost of lack of devolution isn't clear

Economy Watch

By Paul MacFlynn, Economist at the Nevin Economic Research Institute

As the deadline of June 29 passed without the establishment of a new Stormont Executive, it looks as though Northern Ireland may be in for a long period with no devolved government. Quite how long this interregnum will last is in the realm of political speculation, but it does have important implications for our economy.

Much has been made of the fact that, as a consequence of the failure to form an Executive back in March, the civil service has been 'running the country'.

That the walls have not come tumbling down around us, has led many to question the real benefits of devolution and whether we would really miss the Executive if it never came back.

However, much of this commentary is premature, as the economic implications of this interlude are yet to be felt.

Much of the damage may be in train, but we are unlikely to experience its effects for the time being. The economic implications are wide and varied but can be broken down into two phases, medium and long-term impacts.

The medium-term impacts stem from the decisions around public spending in Northern Ireland. Under existing legislation, civil servants can only release funding of up to 95% of last year's budget allocations.

If the situation continues to the end of the financial year, it could result in a large shortfall of some £500m in public spending.

In reality, this scenario is extremely unlikely to play out as the Government would step in long before that point and either introduce a budget or appoint direct rule ministers. Running out of money is not the issue here.

At present civil servants have the power to continue public spending as it currently stands, but they have limited or no capacity to make policy changes.

This has been a key concern for the community and voluntary sector in terms of its funding, but the same scenario also applies in capital spending.

Large infrastructure projects are planned years in advance of construction and require ministerial direction. The absence of that direction, even for a few months can push these projects into delays that can last even longer.

The knock-on effects for local construction firms and suppliers can be even more disruptive.

Many firms will make investment decisions based on the promised infrastructure projects and therefore any delay in public investment can be multiplied in the private sector.

The level of disruption caused is directly linked to the length of this current impasse.

The absence of an Executive in the first part of this year also meant the absence of a June monitoring round, and the Secretary of State is now making arrangements with the Treasury in order to disburse up to £120m of unspent funds.

How he will choose to allocate that money is completely a matter for himself. There will be no democratic accountability for it nor will there be any debates in the Assembly about the wisdom of any such allocations.

When the amount in question is only £120m, it may not seem a big deal, but as we look at the trajectory of the block grant over the next four years, these decisions become much more substantial.

The block grant is set to remain static at just over £11bn up to 2021. However, as inflation is currently running at just under 3%, Northern Ireland's block grant will actually be cut and it could be up to 7% lower in real terms by 2019 - on top of the already increasing pressures on the health and education sectors.

How this spending profile is to be managed will require some significant and enduring decisions. What areas of spending are prioritised? Can we really afford a cut in corporation tax?

While the introduction of direct rule ministers could bring some certainty to the decision-making process, we are likely to be short changed in the end.

Direct rule ministers owe a greater allegiance to the Treasury than they do to voters in Northern Ireland. Whatever the shortcomings of the political class, devolution allows for a debate about what kind of economy and society Northern Ireland wants to be.

This brings us to the long-term impact of the current impasse.

Devolution is meant to have an economic benefit beyond the peace-building role that it is so often identified with. Bringing decisions closer to the people that they affect and instilling greater ownership of those decisions is a way of building up social capital.

A devolved government can create important networks with social partners and businesses allowing for its intervention in the economy to be effective, efficient and innovative. For all its faults to date, the Executive showed the capacity to do this job well and every day that it remains in limbo, it is undoing that progress.

Belfast Telegraph