How will the Executive pay for £1.2 Billion of cuts?

Today’s report for NICVA by the Economic Research Institute, Northern Ireland and Oxford Economics (or rather their local operation, which was formerly known as Regional Forecasts) not only makes for grim reading, it also begs the question, is the Northern Irish public ready for cuts in its  governmental services of the scale likely to be sent down the line when George Osborne’s first Comprehensive Spending Review hits in October this year?

I would quibble with the authors’ apparent certainty that the Coalition’s deflationary fiscal policy is necessary, or at least on the scale being talked about. Second quarter growth in the UK was a phenomenal 1.1%, suggesting that Mr Osborne’s claims that ‘things are worse than we thought’ (or as Chris put it, kitchen sinking the bad news) appears to justify former chancellor Alisdair Darling suggestion that “the coalition’s economic policy is not inevitable – it’s a choice they’ve made”.

But for the good folks on the hill of Stormont that’s purely academic. Northern Ireland’s political vulnerability to the changed climate at Westminster/Whitehall is the excess of public spending over taxes raised in Northern Ireland of between £7-9 Billion a year.

Chicken feed in terms of the UK economy maybe, but given the Coalition is looking for cuts of 25% in non ring-fenced Whitehall departments special pleading will not help Northern Ireland avoid a painful shedding of its considerable fiscal load.

How painful? Well the report estimates £1.2 Billion between now and 2015/6. NI budgets have doubled since 2000, and spending over the last five years has risen by £1 Billion. Our spending boom is over. Cold reality even if not sinking in yet, will certainly begin sometime after the Chancellor delivers his first CSR in late October.

Add to this, something like £300, 000 of the annual spend which is currently unfunded. £200k is the subsidy paid to NI Water in lieu of fresh water and sewerage charges. The Minister is committed to finding a solution to that body’s governance problems, but it is not clear that he will agree to shipping it off the public balance sheet.

So what about the cuts? The report outlines a tension between current account spending (mostly about keeping people happy today) and capital investment (mostly about expanding the horizons of tomorrow):

It would be a choice for the Executive to protect the capital programme by accepting larger cuts in current expenditure (but not vice versa) though the practical politics of this would be exceptionally difficult since it would further exacerbate job losses in the public sector.

It is our view that totally protecting large spending programmes in the face of deep cuts to the overall block is simply not feasible. Both health and education will need to bear some of the burden of cuts if the Executive is to maintain a meaningful presence in other spending areas. The present Investment Strategy (PDF) planned by the Executive is unsustainable if the reductions in capital spending in Great Britain projected in the Budget are carried over through the Barnett formula to NI. [emphasis added]

They go on to advise that unless some kind of careful planning (with level heads) at the political level (ie, the Executive) takes place, which makes use of the complex reporting mechanisms delivered them by the Civil Service, there will be trouble in the medium to long term:

The scale and severity of the cuts could easily lead to panic and ‘bad choices’ during the process, or lead to delays in taking action which will only increase the likelihood of panic later in the process. The need for clear heads and evidenced consideration of the choices ahead is imperative to minimise the potential damage to the NI economy and its people.

Yet the authors anticipate that the temptation to go the easy route will prove too much. In particular, the Unions have already declared against job and wages cuts. Yet, as it notes, “…the idea that recruitment freezes are a ‘victimless’ way of reducing headcounts and thus costs is also incorrect as this creates a large pool of youth unemployed who might other wise have joined the public service.”
In particular, and I suspect this was one of NICVA’s core concerns in commissioning this report, that in the face of such blunt, and unconsidered ultimatums, Permanent Secretaries will be tempted to preserve their core departemental funding and recommend instead the slashing of external costs: including that large slice of cash that buys in value-for-money services from the voluntary sector…
All Ministers face tough decisions, regardless of their political stripe. The report six principles as a guide, of which the shift from outputs to inputs may be the most helpful. It suggests that Ministers ask the following:
  • What is this services / activity doing?
  • Do we need / want this outcome?
  • Is it doing it as efficiently as it could be?
  • What alternatives for delivering the outcomes are there, assuming we do want the outcome?
  • Have all other similar spending areas been considered in a similar way?

But there are two major problems. Despite the simplicity of the plan to cut, even experienced Thatcherite Ministers have found it tough to cut growth sustainably within the public machine. Our guys have the added problem of being in cabinet with people from other parties they suspect (sometimes correctly) of using budgetary rounds to gain a political  advantage over them.

And then, as we are beginning to sense in the NI Water story, Ministers (and MLAs) at times appear to have little to no awareness of what actually goes on inside their own departments. And they can be overly reliant upon advice from senior civil servants some of whom are less interested in effecting efficiency savings than keeping their personnel in line.

And remember, £1.2 Billion is just the start. Darling is right. The coalition at Westminister is not cutting spending just because there’s a recession on stupid. It’s doing it because it believes it is the right thing to do. Northern Ireland of the Peace Process era was feather bedded to get the peace to hold. This is just the first of many deflationary shocks to the spending regime.

From here on in, we are going to be increasingly in deciding what we spend or don’t spend. So we have to trust that our politicians will rise to the challenge. As the report suggests in its short summary, perhaps:

…new delivery models may emerge, new entities may be created to deliver or support public services, pilot schemes that have proved their cost effectiveness may be rolled out wider, functions with a clear economic benefit or a proven track record in supporting the most vulnerable are likely to find an increased or expanded role may result. Even the process of looking within departments and functions at spending, processes and outcomes will undoubtedly bring benefits and savings.

Yes, perhaps. But in order to do that, our politicians will have apply themselves to a level of detail that little in their public careers have prepared them for. As the famous quote Yes, Minister goes, “a career in politics is no preparation for government”. And they must also find a new way of speaking that allows them to tell the public the bad news, and well as just handing out the goodie bags…

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