Breaking parity

Victor Hewitt explains the finances of welfare and the consequences for public expenditure if Northern Ireland moves away from parity with Britain.

At the start of 2014 Simon Hamilton, the Minister of Finance, warned that a failure by the Northern Ireland Executive to bring in reforms of the welfare system in line with those already implemented in Great Britain would result in financial penalties for the public expenditure regime in Northern Ireland as the Treasury sought to make good the savings they were being denied.

By the summer, the first round of the inevitable cuts was being made to local programmes to pay these fines with the prospect of much deeper cuts in future years. This short article examines how we have come to this point and looks at the deeper tensions that threaten to undermine the stability of the public expenditure block.

Back in the late 1990s, in the run-up to devolution, officials in both London and Belfast were quietly exercised by the prospect of the proposed Northern Ireland Assembly and its Executive becoming aware that the social welfare budgets, including pensions and social security, were actually devolved matters under the control of local ministers.

The fear was that this knowledge would, sooner or later, tempt local politicians to start tinkering with the carefully constructed arrangements that had been built up around these matters going back decades. Steps were taken to minimise the risks through various administrative ‘concordats’ and other measures.

In the event – and quite ironically – the crisis that now threatens this part of the Northern Ireland budget has been brought about not through local actions but as a consequence of the extensive welfare reforms launched by the Coalition Government in Great Britain. In short, while Westminster has been pushing ahead with quite radical reforms, the Northern Ireland Executive has been fighting a rearguard action to preserve the status quo and now faces mounting fines for failing to make the savings that reforms would bring.

Welfare budgets are huge but have generally not loomed large in the consciousness of the public or politicians. This is because this type of public expenditure is different from spending on things such as the Health Service or roads which is directly controlled by the Executive.

The budgets for the latter programmes are called departmental spending limits (DEL) and fall within the scope of the famous ‘Barnett formula’ which provides additions or reductions to the Executive budget when spending on comparable programmes in England rise or fall. Technically there is resource DEL, which is current spending on goods and services, and capital DEL, which is the purchase of capital assets, as well as a special DEL for funding financial instruments.

Welfare spending, however, is classified as annually managed expenditure (AME) and is directly funded by the Treasury as needed. The table below gives some idea of the scale of these budgets in Northern Ireland and their growth in recent years. It is sobering to reflect that total revenue from taxation in Northern Ireland would be sufficient to finance only one of these budgets.

There are two very good reasons for being concerned about this dispute and even more troubling is the possibility that these reasons, each legitimate in themselves, may actually be in fundamental conflict.

Allowing Northern Ireland to go its own way in welfare reform without penalty would be a fundamental breach of the ‘parity principle’ which underpins virtually all AME expenditure.

Parity was defined in 1938 by the then Chancellor of the Exchequer, Sir John Simon, stating that in the event of “a deficit on the Northern Ireland budget that was not the result of a standard of social expenditure higher than that of Great Britain nor the result of a standard of taxation lower than that of Great Britain”, the UK Government would “make good this deficit in such a way as to ensure that Northern Ireland should be in a financial position to enjoy the same social services and to have the same standards as Britain”.

This guarantee has been of enormous value to Northern Ireland and without it welfare benefits would be drastically lower than elsewhere in the UK.

Of course, every blessing has its cost and the cost of parity is the loss of the second important principle which is autonomy of local expenditure or in simple terms devolution. The Executive has wide autonomy over DEL spending and has used it to break parity in matters such as water charges, free prescriptions and student fees.

The current stand-off over welfare is in fact transferring responsibility from the parity area of AME to the non-parity area of the DEL but without transferring any resources to fund the breaches in parity.

This cannot be sustained in the long run but it also sends a signal to the Treasury that perhaps Northern Ireland has rather more DEL available than it needs to provide services at a similar level to those in England. These are dangerous waters in which to sail.

Public finance in Northern Ireland (£ billion)

Source: Public Expenditure Statistical Analysis 2014, HM Treasury