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Goodbye to Austerity? The Conservative-DUP government deal

Most of commentary on this deal, which will be summarized in Wednesday’s Queen’s Speech, has focused on the politics of the arrangement but what of the business implications of what looks like a two year “Confidence and Supply” arrangement? [See Note 1]

One irony, given some of the criticism of the deal, is that the DUP may be about to reinforce a tendency amongst the Conservatives to return to the centre ground by partially abandoning so-called austerity. In considering whether this is a good or bad thing from both a UK and Northern Ireland let me approach this at two levels.

First, could the deal mean the end of austerity? PM May and Chancellor Hammond were already signalling a reduced emphasis on deficit reduction through spending cuts and tax rises. So, this deal may simply confirm what was happening anyway. Given the painful reductions in funding already sustained by some English government departments during 2010-17, a 30% real terms cut at Justice, a 40% cut in Work and Pensions and a 50% cut in Transport, any easing of austerity may prove popular.

The deeper economic question is whether we can ignore the very high level of UK national or government debt which is equivalent to just under 90% of national income or GDP, a considerably higher level of debt than that in the Republic of Ireland. At the moment, maintaining and servicing that debt is not a problem but that could change very suddenly if the international money markets lost confidence in UK government policy. For sure, UK taxpayers will ultimately have to pay the interest on that debt and at the moment interest rates can only go in one direction- up!

Second, are the good people of Northern Ireland about to be showered by the economic equivalent of manna from heaven in the shape of a host of funding arrangements and other concessions made by the London government and HM Treasury? Assessment of the longer term impact is not straightforward.

For one thing, Northern Ireland government never implemented austerity on a scale comparable to GB. A case could be made that Stormont missed an opportunity after 2010 to really reform and modernize government. Executives and MLAs delayed applying cuts on the same scale as GB and were perhaps using the economic policy of Mr. Mcawber “waiting for something to turn up”. Well, now something has turned up but, what will happen next?

History suggests that periods when public expenditure boomed in Northern Ireland such as the Second World War, the introduction of Direct Rule in the 1970s and the Blair Governments 1997-2007, were accompanied by an upsurge in economic growth. That’s the good news but the warning from history is that these growth surges were not permanent. Growth in the Northern Ireland public sector was not accompanied by a commensurate growth in the scale or competitiveness of the private sector.

To the extent that the DUP have extracted funds to invest in productive infrastructure, such as transport, international connectivity, research to support business needs or energy, or may even have gained some tax reductions which will make business here more cost competitive (Air Passenger Duty, Corporation Tax), then we have solid gains both for the present and future generations.

To the extent that unreformed public services or voluntary groups move into nice new buildings the long term benefits are unclear. Indeed, there is question of the long term sustainability of such spending since additional funds will need to be found to cover running costs. If a large part of a potential extra £1bn of funding for Northern Ireland are spent on meeting health and educational needs that’s good but bear in mind the argument that Northern Ireland already has a lot of money tied up in the wrong sort of educational and health infrastructure- empty classrooms and acute hospitals.

Something we should have learned from the RHI fiasco is that good intentions are not enough given the danger of depending too much on so-called “free money” coming from GB.

Notes:

  1. This falls short of the full coalition which occurred during 2010-15 when the Conservatives and Liberal Democrats agreed a common Programme for Government. Under this arrangement the DUP undertakes to vote with the Conservatives on the critical Budget votes and in any votes of No Confidence. The two Parties retain freedom of action on other issues.