Seeing ourselves as others see us? Looking at NI’s budget dilemmas from the perspective of Scotland’s draft budget

On the eve of Burns’ Night, is there anything Northern Ireland can learn from Scotland’s draft Budget for 2018-19?

   24 January 2018

On the eve of Burns’ Night, is there anything Northern Ireland can learn from Scotland’s draft Budget for 2018-19? This may be as close as we can get to Burns’ seeing ourselves as others see us.

A couple of weeks before Christmas the Scottish Draft Budget 2018-19 was published. At more or less the same time, the Department of Finance published a Briefing on Northern Ireland Budgetary Outlook 2018-20.

In both Northern Ireland and Scotland the block grant of funding from the UK Exchequer is going to decline in real terms. This is happening at a time when forecast economic growth is low. Indeed, the independent Scottish Fiscal Commission anticipates growth of only 0.7% in both 2017 and 2018 in Scotland with the Scottish economic growth rate not rising above 1% until 2022 and then only marginally. The prospects for Northern Ireland, as indicated by the UUEPC economic model, are slightly better though we still lag behind the UK average.

The Department of Finance paper was the sort of analysis which would normally be presented behind closed doors to a Minister. In the absence of either functioning devolution or full-blooded direct rule we are getting a little peek behind the veil. Unfortunately, it is not a pleasant picture. In terms of the monies available to fund current spending (the Resource DEL)- by 2019-20 the  allocation will have declined by 2.3% in cash terms relative to 2017-18. Obviously, once inflation is allowed for the situation will be worse. Admittedly, the position with respect to funding capital spending appears more optimistic.

The Northern Ireland paper outlines options but these are small in number and none are without pain. One option would be to continue with the approach usually used in the past- health and education would receive a degree of protection but all other Departments would suffer a funding cut which would be around 4% in the first year and accumulating to about 8% over the two years in total. Alternatively, there could be more direction from the centre especially in terms of identifying spending programmes which should stop completely. Thirdly, more efforts could be made to raise revenues and charges. The document provides a long list including raising Rates to the higher levels found in GB (other possibilities include restored prescription charges, fewer concessionary fares and more car parking charges- in the case of the latter possibly including those for the NI Civil Service).,

The realism contained in this document is timely and necessary. I do not understand why one obvious “charge” is not mentioned- domestic water charges. Such charges would have the potential to raise at least £200m annually. Similarly, a more radical approach would have been to at least ask the question; can we continue to afford the old policy of always protecting health and education?

In terms of possible radicalism, one of the notable features of the Scottish Budget was the change to Income Tax such that for the first time since devolution began in 1999 there is some divergence between tax rates in Scotland and the rest of the UK. On income between £11,850 and £13,856 Scots will pay only 19%, 1% point below the UK Basic Rate, and for incomes through to £24,000 the 20% rate continues to apply.  Thereafter and until the Scottish Higher Rate threshold at £44,273 a new rate of 21% will apply.  The Higher Rate also rises, from 40% to 41%, and the Additional Rate from 45% to 46%.

What the Scottish Finance Minister David MacKay is doing is tilting the Scottish system slightly relative to the rest of the UK to make it more “progressive”. Low income Scots pay less, and also pay less than their counterparts in England, Wales and Northern Ireland. The better off minority pay more. According to the Accountancy body ICAS 1.4m taxpayers will be better off compared to their “rest of UK” counterparts but almost 1.2m will be worse off.

These changes have been much heralded by the SNP government as “fair and progressive” and also much criticised by the Conservatives and business representatives as eroding Scotland’s economic competitiveness.

The truth is probably that an alteration of 1% point is very small and not likely to have much impact either for good or bad. Do not expect any obvious changes in terms of either income equality or the economic growth rate. The Scottish government very deliberately decided not to take the risk of pushing up the Higher Rate by an amount which might produce either disincentives, out-migration or avoidance. However, what is significant is the principle of what has been done. Berwick-upon-Tweed has become a fiscal frontier. The minority government in Edinburgh continues to move in the direction of greater fiscal self-responsibility. That is, if you want to spend more you have to find a way to fund that spending. Here in Belfast we still struggle with that concept and we still have “no government.”

Dr Esmond Birnie

Senior Economist (Economic Research)

Department of Acc, Finance & Economics

Areas of expertise Economic policy, competitiveness, economic growth and productivity.