Inattention to the deficit syndrome – how Northern Ireland spends more than it earns

Today’s public sector strike reflects widespread antipathy towards what was agreed in the Stormont House Agreement. Traditionally trade unions have been supportive of agreements made between local parties, and as Eamonn McCann points out, this is the first time that trade unions have opposed a deal. There is certainly a lot of anger on issues such as redundancies and cuts to services, but it is important to bear in mind the reason why the fiscal measures outlined in the Stormont House Agreement were introduced in the first place; the gap between what the Government spends and what it earns remains at historic highs.

The graph below shows how the subvention, the gap between tax revenues and government spending in Northern Ireland, has varied since 1967. Figures from 1967 to 1996 were sourced from CAIN, and figures from 2002 onwards were gathered from the Department of Finance Net Fiscal Balance reports (I couldn’t find data from 1996 to 2002). These figures are all expressed in 2012 pounds, and were adjusted using the Consumer Price Index (CPI).

There were three large increases over this period; at the outbreak of the troubles in the early 70s (increased security costs were a large driver), during the peace process in the late 90s, and finally in 2008, when tax revenues collapsed but spending kept increasing. A modest rebound in tax revenues since then has brought the deficit down slightly, but it is still at a historic high. At just under £10bn, the deficit is more than three times larger in real terms than it was in 1990.

NI Subvention

If Northern Ireland was an independent country, then its deficit as a percentage of the size of its economy would be vastly higher than any other developed economy. The graph below shows how the ratio of fiscal deficit to GDP has varied since 2008 (I don’t have data for Northern Ireland for 2014), with data from the OECD.

The comparison with the situation across the border in the Republic of Ireland is striking. The aftermath of the financial crisis saw the deficit jump to over 30% of GDP in 2010, close to the levels in Northern Ireland now, but swingeing cuts in the public sector, and a rebound in the economy has saw this fall back drastically (as of 2015, the ratio is 3.1%, less than the United States (4.6%) and the UK (4.1%). In 2012, the deficit in Northern Ireland was nearly three times higher than the fiscal deficit of Greece.

Deficit Comparison

Northern Ireland needs a serious economic growth spurt to increase the tax base and reduce the subvention from its current historic highs. It is unlikely that the patience of the British Government will last forever, and the days of a 90s-style explosion in public spending are well and truly behind us. If Northern Ireland doesn’t find a means of paying its own way in the world, then the cuts imposed by the Stormont House Agreement may turn out to be the tip of a very austere iceberg.