NI’s fiscal powers – the coming storm

 

Last week, the Northern Ireland Fiscal Council published its first report into local public finances.

After the release of Sustainability Report 2022, Council Chair Sir Robert Chote said: “We find that a squeeze on the Block Grant is placing increasing pressure on the NI Executive’s ability to deliver public services comparable to that in England.

“This will require determined efforts by the Executive to use its funding as efficiently as possible, or consider a range of other options such as additional revenue-raising.”

These comments are no great surprise, but he’s not wrong.

Northern Ireland’s public purse faces some tough decisions. They all seem to involve balance, finding the least-worst choice among many less-than-ideal options. The context is this:

Northern Ireland has a spending advantage over other parts of the UK, in absolute terms, based on local need.

This need isn’t just about post-conflict society and moving past the Troubles (although that is an element). It accounts for our spluttering economy, local demographics and more.

However, this spending advantage is shrinking over time. This shrinkage is baked in to the current model for public finances. Per head of population, Northern Ireland had 38% more spending power than England in 2017-18.

This year, that premium is more like 28%. By 2024-25 it will be 25%. Current projections show it dipping below 20% by the end of the decade, and below 10% by the middle of the century.

Are the needs of Northern Ireland really moving that much closer to those of England? That’s a tricky question.

Sustainability

The Fiscal Council’s definition of sustainability – meaning that Stormont “can deliver the same quantity and quality of public services as in the rest of the UK” – requires funding per head of population to be equal to elsewhere in the UK, adjusted for relative need.

The report explains: “This ‘need’ would reflect the proportion of people requiring each service (due to the age structure and other characteristics of the population), as well as the variations in the cost of providing it.

“For example, a younger population would likely have a greater relative need for schools, which might be compounded by it costing more to provide schooling in a deprived or rural area. In order to provide the same quantity and quality of service in education, the Executive would therefore need additional resources that could come from the Block Grant, or revenue raising, or a combination of both.”

The Block Grant, of course, makes up by far the bulk of NI’s finances (currently around 83% of total budgets). The Block Grant changes over time, following the Barnett Formula. This formula ensures that, when Westminster increases spending in the rest of the UK on services for which Stormont has local responsibility, the Block Grant rises by broadly the same amount per head of population.

The squeeze

This means that, as spending increase, the value of the Block Grant on a per capita basis moves closer to Westminster’s spending output – while the removal of other special, time-limited payments is also shrinking NI’s public finances, relative to the rest of the UK.

“As well as the impact of the Barnett formula, the slower growth in the NI Block Grant is in part due to the withdrawal of previous time limited allocations, including from political agreements. This slower growth would see the Block Grant fall from 38 per cent above UK equivalent spending per head of population in 2017- 18 to 25 per cent above in 2024-25. (Excluding non-Barnett additions to the Block Grant, the premium would be 22 per cent.)”

The report also outlines current projections for this “Barnett squeeze” over time. These long-term analyses need to be taken with a pinch of salt, because who knows what the world will actually look like in 20 years (ask yourself if, back in 2002, you foresaw the present day as it is, right now).

“We project that the NI Block Grant premium over equivalent spending per head would fall below 20 per cent in 2030-31, 10 per cent in the late 2040s and would end the 50-year projection slightly above 5 per cent in the early 2070s.

“If the 2021 Spending Review plans left NI’s overall funding advantage at 38 per cent, rather than prospectively reducing it to 25 per cent, the Block Grant would be £1.5 billion higher in 2024-25 (in 2020-21 prices).

“This reduction in relative spending advantage is equivalent to approximately £2,000 per household and confronts the Executive with a significant near-term sustainability challenge in terms of delivering equivalent quality and quantity of services to those in England.”

Choices

The Fiscal Council projects that Stormont will be left with a roster of choices that looks like this:

• simply to accept a lower quality and quality of services than England
• to try to increase the efficiency with which NI services are provided
• to cease or reduce the provision of lowest priority services
• to make additional ‘fiscal effort’ (raising Regional Rates and/or fees and charges, with domestic water charges most frequently suggested)
• to seek greater tax raising or borrowing powers from the Treasury
• to seek additional funding from the UK Government

None of these are easy.

Lower quality services? No-one wants that. Cessation of services? That is a targeted version of “lower quality”.

More efficiency? That’s great, when it is realisable, but believing more efficiency is always possible is tmagical thinking. And, while there are areas where greater efficiency is not just possible but essential (like the health service, and in education), achieving those efficiencies requires huge up-front spending that will be hard to find (and, in the case of health, this efficiency is not being drawn up to lower spending – but to ensure that this huge spending can do its intended job). Efficiency isn’t always cheap, at least to begin with.

Some revenue raising could be a good idea, if correctly designed – but the NI public is historically opposed to anything like this. Widening tax powers to, presumably, increase income tax or corporation tax or similar seems politically very unlikely.

Seeking additional funding from the UK Government is, of course, a given. Whether it solves all our problems is another matter. It never has yet.

Complications

This sounds alarming, but the context is muddy. First of all, the Fiscal Council’s report is not quite saying that these are the choices facing an Executive, whether theoretical or real, right now.

At different times in the past 50 years, estimates have been made about what spending premium NI requires, when compared with England.

In 1979, the Treasury calculated the required premium as 31%. In 1994, they said it was 22%. In 2002, the NI Executive came up with a figure of 25%. And, in 2010, the Independent Commission on Funding and Finance for Wales (the Holtham Commission) suggested it was 21% - but cautioned that their figure was only “broadly indicative”.

The Fiscal Council’s report notes that none of these estimates are recent “but our review suggests that the relative ‘need’ for spending may be about 20 per cent higher in NI than England” and that it will be about ten years before local spending power drops below this relative threshold.

Note that these measures involve a degree of subtlety. The NI Executive’s 2002 estimate factored in needs ranging from a 242% premium for agriculture to 12% for employment.

That doesn’t mean they tell the whole story.

Problems

As discussed above, the biggest achievable efficiency in Northern Ireland lies in Health and Social Care.

The current model for health eats up almost 50% of the local budget. Demand is rising by 6% a year (and that’s ignoring the pandemic), and has been for over a decade. The need for reform of services was recognised, officially and comprehensively, in 2011’s Transforming Your Care review.

Reform is underway but it is not happening quickly. It is also underfunded. Immediate health needs eat up huge amounts in cash and resources. The cost of any transformation is additional to that. The cost of not pursuing transformation is a rapid escalation in spending on services, a collapse of the service system or – as seems to be happening now – both.

Political squabbling and inaction are a significant cause in these delays in health reform. This has hurt the sustainability of NI’s public finances hugely, both now and in the future. These costs continue to rise.

What other harm is being done to the public purse right now? There can hardly be any bigger example of political inaction than refusing to form a government at all.

And that is only one area of concern for public spending, albeit the biggest one.

The Fiscal Council seems to have taken that into account, because it is producing a supplementary report on sustainability in the health system in a few weeks.

For now, we have a report that lays bare the coming challenges for local public finances.

Response

One suggested mitigation, if not a fix entirely, is to copy the Welsh Government. The Senedd has received guarantees on its own Block Grant, meaning the size of its spending dispensation will never fall below a certain premium when compared with equivalent spending in Wales (15%) as well as an additional uplift to the Barnett formula to slow the rate at which the premium approaches this 15% floor.

Could Stormont do the same? Would it even be enough?

Per the Fiscal Council: “The biggest threat to the sustainability of the Executive’s finances, in terms of its ability of deliver services comparable to those in the rest of the UK, is the Barnett squeeze – the fact that an x per cent increase in UK Government spending in the rest of the UK on services that the Executive provides in NI will result in a less-than-x per cent increase in the core Block Grant with which to finance them.

“The Barnett squeeze implies a Barnett paradox – the greater the increase in the Block Grant in absolute terms, the greater the squeeze in relative terms. It is an interesting question to what extent people in NI care more about spending or service quality in absolute terms or relative to England…

“The Executive’s ability to top up the Block Grant through its own policy action is limited but not negligible. Restrictions on the size and purpose of its borrowing rule out meaningful deficit finance, but the Executive could increase Regional Rates and/or fees and charges. Household rates bills in NI are significantly smaller than council tax bills and water charges elsewhere in the UK, but eliminating the gap might not be popular. Part of a longer-term solution may involve seeking changes to the fiscal framework to incorporate an assessment of need in the operation of the Barnett formula, as the Treasury has agreed to do with the Welsh Government…

“Against this backdrop, the Executive will have to make every effort to maximise the efficiency and value for money of every pound spent in NI’s public services.”