Tough choices in Budget

Michael McKernan analyses the potential impact of the draft Budget on public services and the options available to ministers.

Although Northern Ireland’s devolved government has usually taken a multi-annual approach to Budgeting, the one-year extension of the current Assembly mandate has necessitated the production of a single-year Budget for 2015-2016.

Following considerable difficulty in ministerial and party negotiations, the draft Budget was approved by the Executive on 30 October, presented to the Assembly on 3 November, and issued immediately for public consultation. However, only the DUP and Sinn Féin actually voted for the draft Budget and Sinn Féin emphasised that nothing should be presumed about a final Budget.

The fundamental Budget envelope in Northern Ireland is determined by the Government in London. The total amount available from the Treasury in 2015-2016 is approximately £20.2 billion. This figure comprises a departmental expenditure limit Budget of £11.2 billion, of which £10 billion is for current spending and £1.2 billion for capital spend. The Northern Ireland Executive is free to allocate this funding across departments as it sees fit. However, the other £9 billion of Budget funding, known as annual managed expenditure, is treated differently. As this is intended to cover largely non-discretionary expenditure such as social security and pension payments and student loans, the Executive has little discretion over it.

What has made the 2015-2016 Budget so difficult for ministers is the fact that the largest part of the departmental expenditure limit Budget (current expenditure) has been cut by 2.1 per cent overall in cash terms and close to 3.5 per cent in real terms. The position on the capital side is more manageable, although it is highly undesirable to set capital budgets for single years.

Given that the Executive has committed to protecting front-line health services and the unavoidable pressures an ageing population imposes on health provision generally, a Budget cut was not considered a realistic option. Yet as health spending accounts for almost half of the Executive’s Budget, failure to contain health spending means ever deeper cuts elsewhere. The decision in the draft Budget was to give the Department of Health, Social Services and Public Safety (DHSSPS) a 3.3 per cent increase – still regarded as short of what the department needed.

As well as health, there are other significant pressures facing the Executive’s 2015-2016 Budget: primarily the unresolved issue of welfare reform where the Executive faces growing penalty payments unless it agrees to introduce measures which are reducing welfare costs elsewhere in the UK. In the current year, the Executive has had to absorb a non-implementation penalty of £87 million. This penalty rises significantly in 2015-2016 and subsequent years, if agreement cannot be found.

In addition, the Executive will enter 2015-2016 with substantial parts of budgets already contractually committed. This applies to the Department of Enterprise, Trade and Investment (DETI) which – because of undertakings already entered into to support job creating investments – required an increased Budget. As a result, the draft Budget affords DETI a 5.3 per cent increase in resources.

Health and DETI aside, all other departments have received cuts to their current Budget. Despite the fact that the two proposed Budget increases went to departments with DUP ministers and the two biggest cuts to departments run by SDLP and Alliance ministers, Finance Minister Simon Hamilton has strenuously denied that there was anything “party political” about the proposed allocations.

Since publication of the draft Budget, departments and ministers have been reporting to their Assembly committees and consulting other stakeholders on the possible implications of the 2015-2016 Budget as it stands. It certainly appears at this stage that some draconian measures are unavoidable. Minister for the Environment Mark H Durkan has indicated that in order to live with his 11.1 per cent cut, he may have to shed up to 500 staff (one-third of his department) and cut back drastically on other departmental programmes, including road safety. The Department of Education, which accounts for almost a fifth of the Executive’s current Budget, is forecasting that its cut of 4.9 per cent will lead to the loss of 1,000 teaching posts and 1,500 non-teaching staff. The Department of Agriculture and Rural Development with a proposed 5.2 per cent is saying that 300 jobs are at risk.

In addition to job losses, departments are predicting serious pressure on normal services in 2015-2016. The Department of Justice has indicated that policing will suffer and there will be minimal resources available for (politically sensitive) historical inquiries. The Department of Culture, Arts and Leisure has acknowledged that many previously supported arts and culture groups may close down because of a lack of funds.

The Minister for Regional Development has also started to cut back on maintenance work including clearance of road drains (which prevents flooding) and upkeep of street lighting. The Department for Employment and Learning, facing a 10.8 per cent cut, has warned of the inevitability of higher student fees at Northern Ireland’s two universities and cutbacks on skills programmes.

So whatever way the draft Budget evolves following consultation, in the absence of additional money departments and public services are going to be under serious financial pressure in 2015-2016. Finance Minister Simon Hamilton acknowledges that this is very much a Budget of tough choices but has also pointed to the scope for achieving a more efficient use of resources through public sector reform. In that vein, his party colleagues have tabled proposals which foresee reductions in departmental administrative costs via new voluntary severance arrangements, although this has already met with opposition from trade unions.

Overall, while the pressures on the Executive’s Budget in 2015-2016 are undoubtedly severe, they are not completely irresistible. The Executive still has some options. The draft Budget includes, for example, a £70 million provision for the mitigation of the effects of welfare reform and the Chancellor’s Autumn Statement has given Stormont £76 million of additional resources. In addition, the Executive has some borrowing capacity under the Reinivestment and Reform Initiative (RRI) and the ability to bring in its own additional revenue streams via rates or other service charges.

The Budget is now at the centre of inter-party political negotiations covering a much wider agenda than finance and featuring the increased involvement of the UK and Irish governments.

It is widely believed, notwithstanding the Chancellor’s recent ‘carrot and stick’ offering on devolving corporation tax powers, that the final Budget logjam can really only be resolved if and when the Northern Ireland parties can cut a deal on welfare reform.

Allocations (£ million)

Figures rounded to nearest million. Non-ministerial departments: Assembly, Audit Office, Food Standards Agency, Ombudsman, Public Prosecution Service & Utility Regulator.