Victor Hewitt: the rentier region
Victor Hewitt examines how the block grant separates work from reward: maintaining the welfare state takes priority over growing the economy.
In the period between 2004-2005 and 2008-2009 (the last year for which outturn data is available) public expenditure in Northern Ireland totalled some £95 billion of which roughly £60 billion was covered by the revenue from taxes and charges paid by people and companies in the region, while the remaining £35 billion was covered by other UK tax payers.
For a region with a population of only 1.7 million these are staggering figures. On an annual basis alone, the deficit in the local budget is now more than one third of the value of everything produced in the region. Gross expenditure exceeding £20 billion per year directly employs around a third of the total workforce with the same again dependent for their livelihoods on the spending of the public sector and its employees.
Looked at in a different way, this annual transfer of spending power enables the people of Northern Ireland to import goods to a value well beyond what would be possible if they had to rely on the proceeds of their exports to the rest of the world.
Given that large amounts of expenditure have been sustained in Northern Ireland over decades without the need to impose crippling levels of taxation or a crushing burden of debt on its citizens, it is a puzzle why such an advantage has not produced the fastest growing region in the UK instead of one of its worst performers. Surprisingly, part of the answer may come from studies of small and oil rich states in the Arabian Gulf. These states and their economies have characteristics which scholars describe as rentier states.
The rentier state is highly dependent on externally generated resources which accrue to the government and relieve it of the need to extract revenue from the domestic economy in order to sustain expenditure. In the case of the Gulf states this external resource is money from oil exports since the price of oil is almost entirely ‘rent’, that is, value above the cost of producing it. In the case of Northern Ireland (and many other regions, though we are an extreme case) the annual subvention to pay for public services is the external resource and essentially all of this is rent since no costs are incurred to obtain it.
In the rentier state, the focus of government is primarily on the allocation of resources rather than increasing indigenous output. Great effort is put into protecting the source of the rent that makes this distribution possible. It is not difficult to see these traits in the relationship between the local administration in Northern Ireland and the public expenditure ‘block’. Whatever the stated priority of promoting economic development, the reality is that only a small fraction of spending by the Executive actually goes directly for this end.
By far the greatest proportion of spending goes for consumption on healthcare, education or other aspects of the welfare state rather than productive investment to boost the economy. And at the margins when new resources become available, the tendency has been to siphon these off into new entitlements (free prescriptions, for example) or reliefs (deferment of water charges). These are all traits of the rentier state mentality and reflect the discontinuity between work and reward that dependency on substantial injections of external resources promotes.
The rentier habits of Northern Ireland are threatened by two policy developments. The first is the squeeze on public expenditure in the UK as part of the debt reduction programme. This hits the local administration through the Barnett formula. Such a shock will concentrate minds but it may also reinforce the desire to ‘protect the block’.
The second development is the proposal to transfer corporation tax-setting powers to the Executive which, because of the Azores judgement, have to be paid for if a lower rate is put in place compared to Great Britain. This is a direct challenge to the rentier mentality since the benefit of lower corporation tax flows directly to private business at the expense of other programmes. For Northern Ireland this would be revolutionary and perhaps the beginning of a serious effort to rebalance the economy.
