Belfast Telegraph

Why our peek behind the budgetary veil was far from pleasant viewing

 

By Esmond Birnie of the Northern Ireland Economic Policy Centre

Some people have been talking about building a bridge from Northern Ireland to Scotland, but is there anything we can learn from the recent Scottish Draft Budget 2018-19 in comparison to the Department of Finance's Briefing Paper on Northern Ireland Budgetary Outlook 2018-20?

The context for both documents is very similar. The block grant of funding from the Exchequer is declining in real terms and this is happening at a time when forecast economic growth is low.

Indeed, the independent Scottish Fiscal Commission anticipates growth of only 0.7% in both 2017 and 2018 in Scotland, with the Scottish economic growth rate not rising above 1% until 2022 - and then only marginally.

The prospects for Northern Ireland, as indicated by the Ulster University Economic Policy Centre model, are slightly better, though we will still lag behind the UK average.

The Northern Ireland Department of Finance paper was unusual in that an analysis of this sort would normally be presented behind closed doors to a minister.

In the absence of either functioning devolution or full-blooded direct rule, we are getting a little peek behind the veil. Unfortunately, it is not a pleasant picture.

In terms of the monies available to fund current spending (the Resource DEL), by 2019-20 the allocation will have declined by 2.3% in cash terms relative to 2017-18. Obviously, once inflation is allowed for, the situation will be worse.

Admittedly, greater buoyancy in funding for capital spending is anticipated.

The Northern Ireland paper invites comment on the options. Unfortunately, these are small in number and none are without pain.

One option would be to continue with the approach usually used in the past. Health and education would receive a degree of protection, but all other departments would suffer a funding cut of around 4% in the first year, accumulating to about 8% over the two years in total.

Alternatively, there could be more direction from the centre, especially in terms of identifying spending programmes which should stop completely.

More effort could also be made to raise revenues and charges. The document provides a long list including higher rates and increased car parking charges in the health service, alongside a restoration of prescription charges.

The realism contained in this document is both welcome and appropriate. I cannot understand why one obvious charge is not mentioned - domestic water charges. Those would have the potential to raise at least £200m annually.

It might be argued that all the political parties have ruled out additional water charges, even though there was almost agreement to introduce such charges during 2007-10.

Arguably, worsening circumstances demands a re-think. The document should have at least considered the question, can we continue to afford the old policy of always protecting health and education, given the massive pressures being imposed on the rest of the public sector?

Talking radical, the major talking point from the Scottish Draft Budget is the change to income tax, such that for the first time since devolution began in 1999, there will be some divergence between tax rates in Scotland and the rest of the UK. On income between £11,850 and £13,856, Scots will pay only 19% - 1 percentage point below the UK basic rate. For incomes up to £24,000, the 20% rate will continue to apply.

Thereafter, and until the Scottish higher rate threshold at £44,273, a new rate of 21% will apply.

The higher rate also rises, from 40% to 41%, and the additional rate from 45% to 46%.

What the Scottish Finance Minister David MacKay is doing is tilting the Scottish system slightly relative to the rest of the UK.

Low-income Scots will pay less than their counterparts in England, Wales and Northern Ireland. The better-off minority pay more.

According to accountancy body ICAS, 1.4 million taxpayers will be better off compared to their counterparts in the rest of the UK, but almost 1.2 million will be worse off.

These changes have been much heralded by the SNP Government as "fair and progressive", but also much criticised by the Conservatives and business representatives as eroding Scotland's economic competitiveness.

The truth is probably that an alteration of a percentage point is very small and not likely to have much of an impact.

Do not expect any obvious changes in either income distribution or the economic growth rate.

The Scottish Government chose not to take the risk of pushing up the higher rate by an amount that would produce disincentives, out-migration or tax avoidance.

However, what is significant is the principle of what has been done.

Hadrian's Wall has become a fiscal frontier. The minority Government in Edinburgh continues to move in the direction of greater fiscal self-responsibility.

If you want to spend more, you have to find a way to fund that spending.

Here in Belfast, we still struggle with the concept of self-responsibility and we still have no government.

In next week's Economy Watch, we hear from Danske Bank economist Conor Lambe

Belfast Telegraph

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