Given recent polling showing that support for Irish unity is at all-time highs in Northern Ireland, there has again been a significant amount of scrutiny on the Northern Ireland fiscal deficit (also known as the subvention or block grant), the gap between taxation and government spending in Northern Ireland that it is assumed would have to be absorbed by the Irish government in the event of Irish unification.
The charts at the top of the post show Northern Ireland tax revenues, government spending, and the fiscal deficit, over the course of this century, adjusted for inflation. The deficit peaked in 2010 at £12.7bn, and over the course of this decade has fallen around 25% in real terms to £9.5bn.
So, what were the drivers behind the sharp rise of the deficit over the course of the 00s, and subsequent decline over the course of this decade?
A significant factor was the collapse in personal taxation revenues (such as income tax and National Insurance) in the wake of the 2008 recession, which was driven by a fall in income growth. From 2000 to 2006, average gross household disposable income growth in Northern Ireland was 4.9%, the highest in the UK (by comparison, it was 4.8% in London).
However, from 2007 to 2013 Northern Ireland went from having the highest income growth in the UK to having the lowest, at 1.9%. This caused a collapse in taxation revenues; in real terms, personal tax revenues have still to recover from their 2007 peak.
Another significant factor was the growth in public spending under the Labour government from 1997 to 2010. In real terms, spending on social protection such as benefits and pensions increased by 47% between 2000 and 2010. There were also real terms increases in areas such as health (63%) and capital expenditure (53%).
Over the course of the 2010s, the fall in the deficit has been driven by real terms spending decreases and not increased taxation revenues, which have been broadly flat.
Real terms expenditures on public order and safety have fallen by 26% since 2010. There have also been reduced expenditures on education (18%), and other identifiable expenditure such as transport, science and technology, enterprise and economic development (28%). Spending on health has remained flat.
The story of Northern Ireland’s fiscal deficit since 2000 can be told in three main parts. A significant increase in public spending under the Labour government until 2010, then a fall in income growth in the wake of the 2008 recession, followed by austerity under Conservative led governments since 2010 which has seen real terms spending cuts in areas such as education and economic development.
Northern Ireland’s fiscal deficit may have fallen since its 2010 peak, but this has come through government spending cuts rather than through sustainable income growth. To take an example, according to Eurostat 38.7% of Northern Ireland adults aged 30-34 have attained a tertiary education, by far the lowest region in the island of Ireland (Northern & Western 54.2%, Eastern & Midland 59.5%, Southern 51.5%), and amongst the lowest in the UK as well.
Northern Ireland needs substantial investment in its education system in order to grow incomes to the level where it could be economically self-sustaining. Instead, there have been significant real-terms cuts in education, which may have brought about a gradual decrease in the deficit, but not in a sustainable way.
The data used in this analysis can be found here.