Spending cuts put squeeze on Stormont budget

28 May 2010

JM Thorn

The plans of the new British government to make spending cuts of £6bn within the current financial year have immediate consequences for the Stormont executive.  It will have to find extra savings of £128m this year, and comes on top of the £393m of  “efficiency” savings that government departments have been told they have to make.  Taken together these cuts represent 1.3 per cent of the total state budget for the north.  The Executive has been offered the option of deferring the £128m of cuts to next year or cutting now, or a combination of cuts and deferral, but either way the cuts have to be made.  Any cuts that are deferred will be added into the second year of a four-year programme of public spending cuts.  The north could therefore be taking a double hit in 2011. 

Whether these cuts come now or later is really a minor point for they are just the opening shots in a major assault on the public sector.  We already know that the cost cutting programme will last for at least four years.  While it has not yet been quantified, we will soon start to get a sense of this.  The next indicator will come in June when the British government delivers its emergency budget.  A Comprehensive Spending Review that will set out the public expenditure plans for the next three years from next April will follow in the autumn.  It has been estimated that over a four period public spending will be reduced by £60bn; and reduced further beyond 2014.  If the Executive’s share of these cuts were in proportion to its share of the initial £6bn, then it would suffer a budget reduction of £1bn - that’s 10 per cent of its current annual subvention from the British Treasury.  Such a reduction would mark a sharp reversal for the north, which over the previous decade has seen above inflation rises in public spending and the annual subvention rising to over  £10bn. 

The political response from the local parties to proposed spending cuts has been the familiar pleading, blame shifting and tokenism.  All accept the need for cuts, but none of them want to take responsibility, blaming the British government while pleading to be treated as a special case, or blaming each other and pleading for the budgets of the particular government departments they control to be protected.   They are not even prepared to use the few economic levers they do have, such as rates and water charges, to offset the cuts. The finance minister admits that water charges are inevitable, but says they won’t be introduced before April 2012.  Deputy First Minister Martin McGuinness, meanwhile, proposes that Ministers and senior civil servants take a 5 per cent pay cut. 

The response to the threat of public spending cuts really exposes the dysfunctional nature of the Executive, in particular its failure to make decisions and take collective responsibility.   This was highlighted recently with the revelation that £12 had been spent on the failure to agree on the development of the former Maze/Long Kesh site and the announcement that the re-organisation of local government, which has so far cost £9m, would be further delayed.  However, these expensive failures are inherent within a political system that is primarily concerned with distributing sectarian patronage rather than making and implementing decisions.  A good example of this is the creation of the Education and Skills Authority (ESA) - the new governing body for the education sector.  When first proposed ESA was promoted as a means of rationalising the way education was organised, cutting across the existing divisions in the sector.  But as the process of creating ESA moved forward every interest group, from the Catholic Church to Irish language advocates, was incorporated into it to the degree that it was more bureaucratic and costly than the structures it was supposed to replace.  Even now it hasn’t got up and running as the DUP are holding up funding over the supposed under representation of Protestant churches in the body.  Such things epitomise the costly absurdities thrown up by the system.  Yet the costs of maintaining sectarianism are the least likely to face cuts, for sectarianism is the foundation of the settlement.  Indeed, the scope of sectarian patronage is likely to expand, as sectarianism becomes an outlet for the frustration generated by the cuts in public services. 

The one thing the parties in the Executive do formally agree on is the need for a reduction in corporation tax.  However, they are also mindful that such a reduction would be accompanied by a corresponding fall in annual revenue of £200m.  The fact that they are not pushing that strongly for the transfer of tax varying powers suggests that local politicians don’t really believe that a cut in corporation would be the magic formula for an expansion of the economy that would make up for the shortfall.  There are also doubts that the new British government, despite making some positive noises, would be prepared to set a precedent by transferring this power.  A review by the previous government came out against such a move.   That it should cling to a policy that doesn’t command confidence, and which is unlikely to be introduced in any case, really exposes the Executive’s threadbare strategy for economic development. 

Significantly the demands of the local capitalist class have focused not so much on a cut in corporation tax (though they in favour), but on the “transformation” of the public sector.  The argument that they make is that the public sector is too big and needs to be reduced to encourage private investment and to “rebalance” the economy.  Essentially this is a call for wage reduction, both in terms of wages and conditions of employment, and in the quality and cost of the public services used by workers. They envisage not so much a cut in state spending, but more public funds being channelled into private hands through privatisation and private-public partnerships.   A local representative for the Institute of Directors suggested the scandal hit NI Water as a model for other public services. 

The trade union movement has come out against cuts but its arguments have been based on the very narrow ground of taxation – pointing out that the budget deficit could be easily filled by cracking down on tax version and avoidance, and ensuring that taxes are actually collected. While this is a good rhetorical point it is unlikely to make much impact on Government, and certainly is no substitute for developing a strategy to defend workers and their public services. 

The prospect of spending cuts reveals the extent to which the north’s economy is dependent on the state and the financial subvention from Britain.    While the overall size of the northern economy is £25bn, the state budget accounts for £16bn.  Of that £16bn, over ten billion comes from the British Treasury.  The public sector share of GDP is 71 per cent, with state expenditure at 135% of the UK average per head.   The state sector directly employs 29 percent of the workforce, with many more employed indirectly (for example, the community t sector employs 30,000, almost the same as the Civil Service).  Much of the activity and employment in the private sector is also linked to the state with many companies being dependent upon public sector contracts.  Another significant aspect of state spending in the north is the high number of people in receipt of benefits. For example, the north has the highest level of economic inactivity (26 per cent) of any region of the UK.  The level of state dependency has deepened since 1999 with the establishment of local political institutions and the bureaucracy that has grown up around them. 

Given its dependence on the state severe cuts in public spending will have a disproportionate impact on the north, with the prospect of rising unemployment, benefits cuts and deteriorating public services. To defend themselves workers must give up any illusions in a political settlement that can only fuel sectarianism.  Instead workers must develop an independent strategy that promotes unity, challenging both the cuts and the political institutions through which they will be introduced.