Belfast Telegraph

Treasury and Scots hold key to our economy

By John Simpson

This week the Chancellor of the Exchequer will announce his plans to try to balance the conflicting goals of reducing the amount of UK Government borrowing and trying to stimulate the growth of the economy.

His decisions will affect the financing of the Stormont administration.

The funds that flow from Westminster, as an outworking of the Barnett formula, are then linked to funds from local sources (eg rates and permitted borrowing) to determine the total funds available for the Northern Ireland budget. The revenue available must then be set alongside the decisions on spending.

Getting a clear understanding of the inter-relationships of Stormont finances is not easy.

Minister of Finance Sammy Wilson, in the recent Monitoring Round, pointed to the merits of some planned improvements now contained in a Review of Financial Processes which is awaiting agreement in the Executive.

Mr Wilson added: "It is regrettable that this important piece of work has not been able to be progressed within the Executive over the last few months. I find this deeply concerning ... "

The presentation of more consistent financial information is necessary as an appreciation of key features of spending programmes in different departments and also to the debate on local tax concessions in a comprehensive context.

Northern Ireland is far from being a self-financing region. The scale of the dependence on supplementary funding (the 'subvention') is large. The reasons for the imbalance stem largely from the lower levels of output per person (more technically, lower GVA per person) where Northern Ireland generates comparators just over 80% of the UK averages.

The scale of the subvention has risen sharply in the last 30 years. In the years before 1970 the evidence was that Government revenue raised in Northern Ireland matched over 80% of Government spending. That contrasts with the most recent evidence, on a more scientific basis, where Northern Ireland arrangements permitted total spending of £23.3bn alongside total revenue of £12.7bn. Revenue was just under 55% of all spending.

This big change inevitably generates debate about whether there are aspects of the budgetary processes where we are too generously treated or where the Barnett formula is being mis-used.

The key Northern Ireland macro-comparators in 2009-10 were:

  • 2.8% of the United Kingdom population;
  • 2.4% of United Kingdom public sector revenue;
  • 3.4% of UK public sector expenditure;
  • Fiscal deficit 38% of GVA: UK fiscal deficit 12%;

Northern Ireland is the source of a smaller share of public sector revenue, largely because of lower levels of personal income. The larger difference is that public sector spending is proportionately higher than the UK averages.

Higher spending per person is most noticeable in public order and safety, social protection (or social security), housing and community amenities, agriculture and health.

Because of the impending referendum on the merits of Scottish independence and also for comparison with Northern Ireland, there is considerable interest in the comparisons and contrasts between the fiscal positions of both. In such a comparison there is the extra and more controversial dimension of the attribution of net revenue from North Sea oil.

In 2009-10, excluding any allowance for North Sea oil, Scotland has just over 9% of the UK population, raised 8.3% of total UK revenue, and accounted for 9.3% of spending.

The net fiscal deficit for Scotland was nearly 16% of GDP, well under half of the Northern Ireland comparator.

In a debate about the stand-alone independence of Scotland, if the revenues from North Sea oil are allocated according to the location of the oil industry units, then the Scottish net fiscal deficit falls to just over 7% of GDP. In that comparison, Scotland would have a nearly sustainable net deficit, lower than the overall UK average.

Because of the sale of the net benefits, fiscal devolution as it affects Northern Ireland is much more vulnerable to critical review by the Treasury than is likely for Scotland.