The public finances of Northern Ireland

The starting point for any assessment of the feasibility of the economics of Irish unity has to be Northern Ireland’s public finances. The large subvention from the UK Treasury required annually to sustain living standards in Northern Ireland has long been the ace-in-the-hole argument of unionism against a united Ireland. Time and again, the argument made by unionists is that a united Ireland is not economically viable as an annual subvention of approximately £9bn would be an intolerable fiscal burden on the Dublin exchequer. Almost immediately, the privilege of being a nation once again would lead to significant increases in taxes alongside hefty public expenditure cutbacks in both parts of the island. Thus, for unionists, harsh economic realities makes the demand for Irish reunification a political unicorn. For many years, the economic unfeasibility of Irish unity has been the accepted view, shared by many even beyond unionism. But it has to be said that at times a very bad odour comes off the arguments made by unionist leaning commentators on this matter. Some suggest that nationalists and republicans need "an economic lesson’ about the viability of Irish unification (Roche and Birnie 1995). The not too subtle message is that nationalists and republicans are economic dunderheads who would be unable to manage their own affairs.

To discuss sensibly whether the subvention represents a serious fiscal blockage to a united Ireland, it is first necessary to extend the comments made in Chapter 2 about the nature of public finances in Northern Ireland. But a word of caution is first necessary about data collection. Invariably, to arrive at a set of coherent figures about regional public finances in the UK, a good many simplifying assumptions are required about how to compile the relevant data. Additionally, it is necessary to bear in mind that the scope of the public sector varies between the countries of the UK. For example, water supply is in the public sector in Scotland and Northern Ireland, but in the private sector in England and Wales. Thus, the figures presented are intended to give a broad overview and cannot be regarded as definitive or precise.

Traditionally, the UK has operated as a fairly centralized yet redistributive fiscal union. In practice, this has nearly always involved resources being reallocated from London, the South East and the East of England - the only three regions to consistently raise more in taxes than they receive in public spending - to the rest of the UK. Over the years, almost all taxes were set in Westminster, with public expenditure in the regions allocated through an annual block grant determined by the Treasury in London. The introduction of devolution in 1999 has moderated the centralized character of this fiscal union. Devolved governments were created in Scotland, Wales, and Northern Ireland and given the responsibility to manage large budgets. Gradually, the tax raising powers of these devolved administrations have increased over the past 20 years - more so for Scotland than for Northern Ireland and Wales. It is important not to overemphasize the amount of fiscal decentralization that has taken place. Most tax revenue continues to be pooled centrally, with funding allocations for each nation (or regions in the case of England) not generally based on where revenue was raised (Smith Commission 2015). Certainly in relation to Northern Ireland, the vast bulk of taxes and public expenditure levels continues to be set in London.

Public expenditure in Northern Ireland - commonly referred as the block grant - is determined by the Treasury through what is known as the Barnett formula, named after the Labour peer Lord Joel Barnett, the Chief Secretary to the Treasury in the late 1970s, who oversaw its introduction. For the most part, the Barnett formula aims to give Northern Ireland the same ‘pounds- per-person’ change in funding as the change in funding for comparable government services in England. For instance, if the funding for education in England increases by the equivalent of £100 per pupil, the block grant to Northern Ireland will also increase by £100 per pupil. Importantly, the Northern Ireland Executive has some discretion to spend the Barnett-formula determined block grant as it wishes. So if the Northern Ireland Executive at Stormont received an extra £100 as a result of the education budget in England increasing by £100 per pupil, it would not be obliged to spend it all on education. At the same time, there are parts of the block grant on which there is minimal discretion: pensions and social security payments, for example, tend to regarded as fixed elements of the block grant (Christie and Swales 2010).

The Barnett formula has come in a fair degree of criticism. Using relative population size to more or less determine public expenditure levels in Northern Ireland and the other devolved administrations of the UK is seen as relatively crude as it pays insufficient attention to factors such as the characteristics of the population, deprivation, population density, and so on. In other words, the formula is not a particularly sophisticated needs-based funding calculation (Phillips 2014). But we do not need to stray too far into these arguments. More important for our purposes is to realize that the Barnett formula has led to public spending per person being consistently higher in Northern Ireland (as well as Scotland and Wales) than in England. Thus in 2018/19, public spending per person in England was £9,296 (3 per cent below the UК average), compared with £ 11,247 for Scotland (17 per cent above the UK average), £10,656 for Wales (11 per cent above the UK average), and £11,590 for Northern Ireland (21 per cent above the UK average). A contrasting picture emerges when we turn to the revenue side of the equation: revenues per person were highest in London (£18,180 per person), the South East (£14,340), and the East of England (£12,430) in 2018/19. Revenues per person were actually lowest in Wales (£9,390), followed by the North East of England (£9,500), and then Northern Ireland (£9,830). But the overall picture is clear: public expenditure per person is greater in Northern Ireland than anywhere else in the UK, whereas the amount of tax collected per person in Northern Ireland is the third lowest in the UK. At the same time, a point made earlier needs re-emphasizing: public expenditure in Northern Ireland fell in real terms every year in the decade 2009-2019. Thus, although public expenditure is pivotal to economic and social life in the region, it is receiving less of it in recent years. As a result, even though public expenditure hugely stabilizes the Northern Ireland economy, a widespread sense of hardship pervades the region as every Government department, apart from Health, has had to come to terms with reduced budgets.

Chapter 2 highlights the large and persistent gap between public revenue and public expenditure in Northern Ireland, even if it has been reducing over recent years. This gap reached a high point in 2010 when it peaked at £12.7bn, but since then it has declined roughly by a quarter to about £9.5bn in real terms in 2019. The Great Recession causing a collapse in the collection of multiple taxes, most notably income tax, is probably the key factor explaining why the public finance deficit reached a high in 2010. In contrast, the reduction in the deficit since then can be attributed mostly to the real term cuts in public expenditure introduced by the Coalition Government headed by David Cameron and then the Conservative Government of Teresa May. Through squeezing public spending, austerity has lowered the gap between public revenue and public expenditure. But standing at £9.5bn, which works out roughly at £5,000 per person in Northern Ireland, it is nevertheless still sizeable and explains why Northern Ireland is in need of a fiscal transfer each year from the UK Treasury. Without the annual subvention to close the gap between revenue (income) and expenditure, the Northern Ireland economy would very quickly hit the buffers.

If the subvention did end, public expenditure would have to be slashed, causing a dramatic reduction in budgets for health, education, and social security. For sure, Northern Ireland has faced a severe public expenditure squeeze over the past debate, triggering a huge deterioration in health, education. and other public services. But without the subvention. Northern Ireland would face austerity on steroids: a conservative estimate is that on average public sector budgets would require cutting by roughly 25 per cent. Additionally, new taxes such as water charges would have to be introduced in a desperate attempt to secure more public revenue. At this point it needs highlighting that although Northern Ireland requires a subvention from Westminster year-in, year-out, this is not a huge drain on the UK exchequer: in 2019 total public expenditure in Northern Ireland only represented 1.29 per cent of overall UK GDR Thus, the UK government has the fiscal wherewithal to finance the large public sector in Northern Ireland for the foreseeable future. The big question for the politicians is the extent to which they consider it desirable for the Northern Ireland economy to be dependent on fiscal handouts from London.

To provide greater understanding of the structure of public expenditure in Northern Ireland, Figure 6.1 breaks down public expenditure into broad functional areas. It shows that the broad area of social protection, which covers things such as pensions, various forms of welfare, and income support benefits, constitutes a whopping 44 per cent of total public expenditure in the region. In 2019, approximately £9.4bn was spent on social protection. About

Public expenditure in Northern Ireland by sub-function, 2019 (%)

Figure 6.1 Public expenditure in Northern Ireland by sub-function, 2019 (%)

Source: Northern Ireland Statistics and Research Agency.

3.5bn was spent on pensions, which represents about 37 per cent of the total social protection budget. Expenditure on sickness and disability support amounted to approximately £2.7bn, making up 29 per cent of the total in this budget category. Thus, a few big ticket items accounted for most social protection expenditure. The figure also shows that about a fifth of the overall budget is spent on health, in monetary terms nearly £5.7bn was spent on health in 2019. Even though the health budget has been increasing in real terms over the past decade, a consensus exists that the health service in Northern Ireland is in deep crisis. Although part of this crisis is due to underfunding, a fairly widespread view exists that a massive change management programme is required for the sector. Spending on education made up 14 per cent of the overall budget in Northern Ireland in 2019 - some £2.8bn: unlike health, education services in recent years have experienced a real term expenditure reduction. A consensus also exists that the education sector too is ripe for radical restructuring (Borooah and Knox 2015).

In the context of discussions about the economics of Irish unity, an important distinction that needs to be made is between identifiable and non- identifiable public expenditure. In broad terms, identifiable expenditure relates to that part of public expenditure that has been incurred for the direct benefit of individuals, organizations and communities within Northern Ireland. Spending on education and health as well as public sector wages are examples of identifiable public expenditure. Non-identifiable public expenditure is that part of public expenditure that does not benefit Northern Ireland directly or exclusively, but nevertheless has been incurred for the benefit of the UK as a whole. Roughly, it can be viewed as Northern Ireland’s contribution to a series of national, UK-wide ‘overheads’. Spending on defence and security services as well as public debt interest payments are two examples usually given of non-identifiable public expenditure, although aspects of the work of the Foreign Office, the Home Office, and the Treasury are also

Identifiable and non-identifiable public expenditure in Northern Ireland Source

Figure 6.2 Identifiable and non-identifiable public expenditure in Northern Ireland Source: Northern Ireland Statistics and Research Agency.

included in this category of expenditure. For the most part, boundaries between identifiable and non-identifiable expenditure are easily enough to delineate, but at the margins the distinction between the two forms of expenditure becomes blurred and government statisticians get into quite a palaver determining whether certain items of expenditure should be classified as identifiable or non-identifiable.

Thankfully, we do not have to get exercised by these discussions as levels of identifiable and non-identifiable public expenditure for Northern Ireland are fairly evident. Figure 6.2 sets out the extent of identifiable and non- identifiable public expenditure for the past 20 years - more or less since the signing of the Belfast Agreement. A few points are worthy of note. Levels of identifiable expenditure hugely overshadow levels of non-identifiable public expenditure, most of the public expenditure budget is spent in Northern Ireland, which is no great surprise. We have already discussed the breakdown of identified public expenditure in Northern Ireland, but what about non- identifiable public expenditure? Table 6.1 sets out the nature and scale of non-identifiable public expenditure in Northern Ireland.

Table 6.1 reveals what and how much is spent outside Northern Ireland by the UK Government, but which is deemed to be either ‘on behalf of’ Northern Ireland or in the shared interest of all nations and regions of the UK. It does not itemize all items of non-identifiable expenditures, only those categories that involve expenditure in excess of £100m. Smaller ticket items such as public order and safety (average annual budget of £55m) and economic affairs (average annual budget of £15m) are excluded, but are included in the total for non-identifiable expenditure. Overall, it can be seen that about

Table 6.1 Non-identifiable public expenditure in Northern Ireland 201 N2019 (£bn)

2011

2012

2013

2014

2015

2016

2017

2018

2019

General public services

1,381

1,446

1,325

1,309

1.649

1,695

1,779

1,932

1,782

of which: public and common services

126

136

125

123

123

132

137

143

137

of which: international services

39

37

37

41

35

35

35

29

43

of which: public sector debt interest

1,216

1,273

1,162

1,144

1.491

1,529

1,606

1,760

1.602

Defence

1,127

1,106

974

998

1,024

1,029

1,035

1,072

1.119

Recreation, culture and religion

133

121

111

108

121

108

114

103

104

EU transfers

-427

-404

-411

-404

-297

-425

-392

-549

-1,021

Total non-identifiable expenditure

2,305

2,330

2,090

2,084

2,581

2,527

2,638

2,662

2,105

£2.5bn has been spent on average over the past decade on non-identifiable public expenditure (although in the past this was reduced each year by the region receiving about £lbn from EU funds), with defence and public sector debt interest the two largest areas of expenditure. Every year, Northern Ireland makes roughly a £lbn contribution to the overall defence of the UK and about £1.6bn to servicing interest payments on public sector debt that has been incurred to fund Government spending.

 
Source
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