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NI and the UK Spring Statement: Reasonable short term prospects but longer term much less clear

Recent weather may not feel spring-like but Tuesday (13th) saw the first UK budgetary Spring Statement [Note 1] from the Chancellor of the Exchequer. All this less than a week after the NI Departments’ Budget for 2018-19 was announced at Westminster.

In both cases, the NI Budget and the Chancellor’s Statement, there was some cheer as to the short term but some deeper questions about longer term prospects remain unanswered.

In terms of the UK Spring Statement, the good news was that the Chancellor was in a position to report slightly more favourable forecasts from the Office for Budget Responsibility (OBR) relating to UK productivity growth and hence GDP growth (the OBR forecast for 2018 goes up from 1.4% to 1.5%). That  means that the forecasts for tax receipts are now more favourable.

The Chancellor will therefore be in the fortunate position to be marginally more generous about spending whilst still maintaining his target to reduce public debt as a percentage of GDP. He hinted that an increase of several £bn on spending on NHS England is in prospect for the Autumn 2018 Budget. Much of this would be to enable an increase in pay after about eight years of pay restraint. If that increase comes through the funding block for Northern Ireland benefits through a Barnett share of that increase, but that is for the Autumn and not today.

Chancellors often want to establish themselves as reformers. In Philip Hammond’s case he has responded to public and media concern about plastic pollution. In this Statement he announced £20m of investment funds and a call for evidence to consider a levy on single use plastic items such as disposable coffee cups. The experience of the plastic bag levies suggests such “nudges” sometimes change behaviour.

As expected, the Chancellor chose not to reveal his thinking about some of the big, long term issues such as whether to merge the Income Tax and National Insurance systems, the tax treatment of the self-employed, and how to fund health and social care for the elderly given an ageing population. However, the consideration of how to reform taxation of the online sector (e.g. in terms of VAT) progresses.

In terms last week’s NI Budget, what had looked like a grim outlook for 2018-19 and 2019-20, as summarized in the Department of Finance budget briefing just before Christmas, was changed for 2018-19 into a more or less “flat real terms” outcome (the percentage increase in nominal funding for the NI Departments overall at about 3%,  matched likely inflation). Some individual Departments face a much less favourable cash allocation. The better than  expected outcome in the 2018-19 Budget was achieved partly through shifting £100m from capital to current spending, a £25m annual increase in the domestic Regional Rate and use of some of the Confidence and Supply money. Questions therefore remain as to what any future devolved Executive might do in the longer term, especially when the Confidence and Supply money is gone. Will there be further increases in regional taxes and charges (not just more Rates increases but, possibly, reduction in Rates’ reliefs, application of domestic water charges, re-introduction of prescription charges, removal of free transport for 60-64s, higher Tuition Fees etc.)? Is the policy of somewhat protecting two Departments- schools and hospitals- really sustainable in the long run? [Note 2]

Notes

  1. Last Autumn Chancellor Hammond indicated that instead of two major “fiscal events” each year, he would consolidate this into a main Budget each Autumn: November-December. This will become the main event for changes in tax and spending. However, a so-called Spring Statement will still happen each March. In this the latest Office for Budget Responsibility forecasts are published and the Chancellor retains some scope to make policy changes in the light of these although he has implied he wants to reserve any major changes to the Autumn Budget.
  2. NIO Ministers may feel duty-bound to such a policy given that it characterised previous Executive Budgets. One criticism of such a policy is that it inevitably leads to an even greater strain on all the other Departments. Also, it is not really the case that all education and health spending is protected. Spending on social care (nursing and residential homes) has not been. Spending on higher education and further education, part of the responsibility of the Economy Department, is not. It might be wise to ask the question why demand for health care is growing at about 6% annually because a rate of growth of funding at that level cannot be sustained.