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Stephen Farry MP: Fiscal floor must be increased to reflect need

Alliance MP Stephen Farry argues that the 124 per cent fiscal floor included in Chris Heaton-Harris MP’s financial package for Northern Ireland should be increased to 127 per cent.

It is clear this region has been structurally under-funded by almost £400 million per annum. However, this is compounded by significant inefficiencies in how money is spent in Northern Ireland, including the slow rate of reform in many areas and the distortions that come from trying to manage a divided society.

This places disproportionate pressure on local government departments to balance the books, and leads to underfunding of crucial public services, addressing climate change, and supporting our economy. Long overdue public sector pay rises have yet to be made and workers have been forced to engage in strike action.

I have been lobbying the NIO, Treasury, and Prime Minister for significant time for a financial package for Northern Ireland to give this region the opportunity to recover, restructure, and rebuild. This should entail stabilising the current financial crisis and then driving transformation on an invest-to-save basis. Northern Ireland cannot become more efficient and effective in terms of achieving better outcomes from a burning platform of cuts and further cuts.

Alliance has been clear; lessons must be learned from the poor implementation of previous financial packages and some degree of conditionality would be a reality. Beneath this lies the structural challenge of how Northern Ireland is funded. In December 2023, the UK Government conceded on this point in its acknowledgment of the requirement for a fiscal floor.

Essentially, a fiscal floor for Northern Ireland would ensure we are fairly funded in relation to our specific level of relative social and economic need, and funding could not fall below that level.

The Fiscal Council suggests we have been structurally underfunded by between £300 million and £400 million per year since 2022, versus the level we would receive if an appropriate fiscal floor were in place. This is based on a relative need of 124 per cent in Northern Ireland, i.e. for every £100 spent in England, £124 must be spent here to ensure equivalent funding. However, Alliance is also concerned that the 124 per cent measure may not be sufficient to adequately reflect our true underlying relative need.

In order to account for the devolution of policing and justice powers, the Fiscal Council used funding allocated to these services over the 2017-2022 period. In our view, the preceding ringfenced funding period from 2010-2015 is arguably a more accurate reflection of policing and justice need, as indicated by the UK Government when the powers were first devolved.

Gerry Holtham, Hodge Professor of Regional Economy, Cardiff Metropolitan University, recently endorsed Alliance’s argument on this at the Northern Ireland Affairs Committee. We estimate the level of relative need, based on this different period, would be closer to 127 per cent for Northern Ireland. It would be higher again if other issues such as relative taxable capacity and extent of benefit reliance were factored in on top of this.

These key methodological differences imply huge amounts of extra funding entitlement for Northern Ireland, and we will continue to make representations to the UK Government on this. The financial package offered in December 2023 by the UK Government to any restored Executive is, on the surface, significant at £3.3 billion. However, it is only really a glass half-full. What is on offer would only provide stability for about two years before we face another cliff edge.

Essentially, the UK Government is reluctant to make long-term financial commitments to Northern Ireland in light of one of the Prime Minister’s tests of reducing debt as a share of GDP over the next five years. In practice, addressing Northern Ireland’s needs would barely impact on this at all.

Alliance’s view is that a revised financial settlement for Northern Ireland should be driven by an independent review to provide a revised evidence base to the incoming government. For now, the major question is whether or not we will soon see a restored Executive that can draw down the £3.3 billion package.

If this does not happen, then yet another budget would be set by the Secretary of State. A major consideration must be how much of the offered financial package can be deployed in the absence of an Executive. Northern Ireland has to be governed, and public services must be funded.

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