This week saw the Treasury’s Open Book Review of the Northern Ireland Executive Budget being leaked and discussed widely, if unofficially. What does it say and why was it so roundly rejected by Executive Ministers?
Summary
The report contains useful analysis and suggestions about managing Northern Ireland’s public finances. All of these issues have been raised before, and in that sense there is little new: higher spending per head on public services; larger size of the public sector here; less local revenue raising than in GB; super parity policies. What is different is that the Treasury has put specific numbers against each element, and totalled them up to an enormous £3.3 billion potential savings annually, a figure that was swiftly rejected by Executive Ministers as both inaccurate and unrealistic. So what started as a joint exercise concluded as a Treasury-only report. Nevertheless the issues raised in the report are important and deserve more consideration. Dismissing the report out of hand is a disappointing outcome that overlooks what is potentially helpful. The scale of change suggested in the report is wildly ambitious, but the areas highlighted all need proper attention. The Executive would be more likely to get a good hearing from the UK Government in their requests for more funding if they demonstrated taking actions themselves to make their finances more sustainable. Overall this feels like a missed opportunity to make some meaningful process on NI’s budgetary challenges.
Analysis
The review is 44 pages, plus a data annex that Pivotal hasn’t seen. The open book exercise was agreed in mid-February at the time of the £400m reserve claim. It was meant to be a joint exercise, but during the process it evolved into a Treasury report that the Department of Finance did not endorse (and a reminder that it was leaked rather than published). Perhaps this was inevitable given that the aspirations of the NI Executive and the UK Govt at the start of this exercise were poles apart.
The original aim of the review was to inform the Executive’s decision-making and provide an evidence base for the multi-year budget process. With the report being rejected by the Executive, it’s now unclear whether or how it will be used.
In the light of recent and projected overspends, the report is forthright in setting out areas where the Executive could make savings in its budget. Headlines are:
Reducing spending per head in Northern Ireland on health and education to 124% of England’s spending per head could save £1.7 billion per year
Reducing the public sector pay bill to be a similar share of total spending as in England could save £2.5 billion per year
Reducing the size of the NI Civil Service to be 124% of England’s could save £393 million per year
Increasing rates (and removing rates reliefs) to levels comparable to England could raise £639m per year
Removing super parity policies (like zero water charges, lower tuition fees, welfare mitigations and concessionary fares) could save £684m per year.
The document sums this all up to an eye-watering £3.3bn that the Treasury conclude could be saved annually from doing a subset of these measures, adding that even doing one-eighth of these actions would cover the most recent annual overspend (around £400m).
None of this is new of course, although the costing figures are disputed. All of these issues have been discussed for years and set out in various Fiscal Council, Fiscal Commission and other reports.
Some of the content of the review can be challenged in terms of the methodology and implications. For example, some of the figures for current spending per head in NI are much higher than in other recent studies. The figure for health spending per head being 152% above England is much higher than earlier estimates. Education spending per head at 140% also seems higher than other studies.
But without seeing the Treasury’s calculations (and having a very good understanding of public expenditure data), it is difficult to make a judgement. This is a highly complex area so we would be wary about drawing quick conclusions.
The practical implications of some of the suggestions also need challenge. Making these changes would take time, be difficult in practice, not to mention politically unpalatable. Shrinking the public sector workforce would have implications for service delivery and workloads, plus significant upfront funding would be needed for redundancy schemes. Breaking public sector pay parity could mean industrial action and/or recruitment and retention problems. Raising more revenue at the level envisaged is politically unimaginable when many households’ budgets are stretched already. Perhaps most importantly, achieving any of these savings would require significant change and time. There are certainly no quick fixes here, and in that sense pointing to an annual potential headline saving of £3.3bn is hugely unrealistic.
To be fair, the report makes clear that it is setting out options and potential savings, not recommending particular policy choices. Its intention was to illustrate options for where steps could be taken to make savings, rather than suggesting it should all be done quickly or easily. However, by headlining disputed and/or unrealistic figures, the report has failed in its aim of establishing a shared evidence base, before it even got off the ground. The timescales for this review also have to be questioned: around six weeks from start to finish always looked like a stretch for such a complex and contested issue, and is surely part of the reason why there was no agreement on the numbers or the report. More consideration and challenge would have been helpful, particularly involving Northern Ireland ministers and officials.
So there are definite shortcomings in the report. But to dismiss it out of hand because of that would be a mistake. The NI Executive does need to take greater responsibility for improving its own financial sustainability, and there are important points in the report that need consideration. We need a constant focus on ensuring public services here are delivering the best they can with the funding available. Other reports have shown clear areas where efficiencies could be made. Longer term transformation in how, when and where services are delivered is essential and must take centre-stage in all departments’ plans. Maintaining pay parity with our relatively larger public sector is going to become increasingly unaffordable; the case for rationalisation of the workforce should be properly considered. Greater revenue raising is always dismissed as a possibility, but there are many households here who could afford to contribute more. All of this is worthy of consideration as the Executive thinks about the challenge of achieving greater sustainability in the public finances.
In terms of next steps, Northern Ireland’s Ministers are once again going back to the UK Government to ask for more funding. In particular, they are pointing to Scotland and Wales being funded above their level of need (which they say is by 20 percentage points and 5pp respectively) which gives greater flexibility to invest in reform at the same time as delivering services. A cursory glance at the content and tone of the Treasury’s Open Book Review will give you an idea of what the UK Govt’s response might be to this request.
In Pivotal’s view, an approach that demonstrated more clearly that the Executive is willing to take steps to improve its own financial position would be more likely to get a good hearing, recognising where changes need to be made and setting out realistic plans to deliver them. Failure to makes these decisions so far is partly enabling the Treasury to criticise the Executive’s choices in the ways set out in this report.
So this feels like a missed opportunity. What was billed as a joint exercise to inform NI’s multi year budget has ended up underlining the differences in views about public finances here. We’re now back in the familiar stand-off between the Executive and the UK Government: more money is requested, UK Government says no, and eventually more funding will probably be released but with conditions attached about transformation and revenue raising. There were hopes that the open book exercise might enable some more joint thinking. Perhaps behind the scenes there is still the chance of a more constructive conversation.
