Posted on Monday 22 November 2010 byUlster Business
It was presented as a hammer blow to Northern Ireland, but could the Spending Review actually make our political parties work together to bring in measures that will stabilise the economy, asks Symon Ross
It has been well flagged that the days of inflated levels of public sector subvention from Westminster are over.
In the run up to Chancellor George Osborne's spending review the fears centred on cuts of £2bn to Northern Ireland's Budget over a four year period.
A few jaws dropped then, when, following Mr Osborne's announcement, the Department for Finance and Personnel announced that number as £4bn.
Of course the £4bn was a cumulative figure over four years, rather than the difference in real terms between 2010-11 and 2014-15 which had been used before – chosen to focus the minds of the electorate on the difficulties that lie ahead.
The figure most economists were quoting as the difference between what Northern Ireland has to run its economy now and what it will have in 2014-15 was between £1.4bn and £1.6bn, depending on the rate of inflation adjusted for.
While that's not as bad as many commentators had feared it still represents a huge adjustment. Current expenditure for wages and day-to-day services will be unchanged at £9.9bn, an 8% cut in real terms, while capital spending drops from £1.2bn to £800m, a massive 40% reduction in real terms. That latter figure is perhaps the most significant given the impact it will have on construction activity.
Finance Minister Sammy Wilson said on the day: "We are going to have to take some very difficult decisions in terms of what projects to fund going forward – the reality is that we have much less money available than was envisaged under the Investment Strategy that was published as part of the previous budget."
The Northern Ireland numbers came as part of £81bn in overall cuts unveiled by the Chancellor which included plans to axe 500,000 jobs from the public payroll across the UK, take £7bn from welfare spending and increase the state pension age to 66 by 2020.
Public sector union NIPSA predicted that the effect of those measures in Northern Ireland could be 30,000 lost jobs, while PricewaterhouseCoopers warned a further 16,000 private sector jobs were at risk from the knock-on effects on the economy.
With an Assembly election in just six months time there are fears in business circles that our politicians will be tempted towards short-termism when they sit down to thrash out a new Budget and Programme for Government.
CBI chairman Terence Brannigan told the Assembly's Finance and Personnel committee: "It is vital the Executive reaches agreement before the end of the year on the Programme for Government and Budget. The business community is looking for decisive political leadership which can help build confidence. We need to remove the uncertainty surrounding the budget – this is unhelpful to businesses, undermines consumer confidence and I am sure it is undermining morale within the public sector."
While they are going to be painful, there is a reason such cuts are being enforced. Public expenditure in Northern Ireland has almost doubled since 2000 and figures show the good times continued through the recession. For example, the number of public sector employees rose by 4,000 in the two years to March 2010 as private sector employment fell by 32,000 and average public sector earnings are now almost 30% higher than in the private sector.
While unions have been at pains to point out the social impact that simply cutting jobs and salaries would have on the local economy, the CBI's recent research suggested government could make annual savings of £1.1bn by 2014/15: £340m by controlling costs such as labour; £170m by exposing public services to competition; and £570m from more effective use of technology.
It is encouraging that the political parties appear to be thinking along similar lines, with recent proposals from the DUP and Sinn Fein both putting forward proposals designed to take some of the pain while protecting frontline services.
The DUP's Rising to the Challenge policy document even acknowledged: "In a multi-party coalition no party will be able to deliver its entire agenda… No party will have a monopoly on ideas but all must be prepared to consider new and innovative ideas. It is through this process that we can deliver a Budget which meets the needs of all the people of Northern Ireland."
Neil Gibson, director of Oxford Economics, believes the debate must move from one about public sector cuts to one about public sector reform.
"The cuts are challenging but they are not an excuse for Northern Ireland to plunge into despair, or to deliver bad services, or to suggest any of the economic problems we are now facing are somebody else's fault. We have to deal with what is a challenging but not devastating set of cuts and use them to transform the running of the economy so that is no longer so significantly dependent on the British taxpayer," he said.
"Actually what they are asking for is for the economy to be run on the same amount of money today for the next four years. If you went round the private sector and said I can guarantee you flat cash for the next four years, most of them would break your arm for it," he added.
Gibson cites Philip Green's analysis of the UK civil service as evidence that Stormont could keep wages and procurement costs under control by using their mass buying power and being more strategic with purchases.
"The headline numbers about job losses are not a given – that's a choice. If they can keep procurement costs flat and pay flat, you wouldn't have to sack anybody.
"The argument is that they can't keep pay flat because lots of them are in deals. But if you sat down with members of the civil service and said we can sack 20% of you or you can all take a 3% pay cut, you don't know what way it would go. People should have that choice," he said.
However, Ulster Bank economist Richard Ramsey believes that even if our politicians take brave decisions and get them right, there are likely to be substantial job losses.
"By 2014/15 I think you are going see public sector job losses in the region of 20,000. Pay reductions will probably limit that in the short term but I still think you are going to see in the order of 20,000 over four or five years, and then also many more on the private sector side," he told Ulster Business.
"Getting back the jobs lost through this recession is really only going to take hold in the next spending review. It is probably going to be about 2012 before unemployment stops rising, so by 2014 it is at least going to be higher than it is at the minute.
Recovery in those sectors like construction and retail up to 2014 is going to be pretty challenging. Even if by 2014/15 you are in recovery mode, it is going to be a weak recovery."
He added: "It's difficult in the private sector to see where the jobs are going to be. On the one hand there are companies like Citi bringing 500 jobs, which are all well and good and hopefully that continues. But when you look at the capital investment, that was a good social policy as well because it because it was mopping up those with no skills or qualifications. There is no other policy out there to do that. You cannot overstate the importance of what needs to be done on the capital investment side because the construction sector is in intensive care."
Gibson says that the onus is on the Executive to be straight with the electorate.
"I wonder are we giving the voters enough credit, they understand there are challenges. I am unsure the immediate reaction to the cuts was helpful for consumer confidence and for the workforce in the civil service who now all think their jobs are under threat when the numbers are not nearly as startling as they are being portrayed," he says.
The CBI's director in Northern Ireland Nigel Smyth agrees.
"It's so important that the guys on the hill, despite their differences, come to an agreement on this – a four year programme for government and four year budget. We cannot afford to have another six months of squabbling and talk about cuts," he said.
"At our national conference the Prime Minister said cuts are over, we know where we are, let's focus on growth, where are we going to grow the economy, this is where we are investing. That's where we need to start moving the debate in Northern Ireland."
Between business organisations such as the CBI and Northern Ireland Chamber of Commerce, and political parties including the DUP and Sinn Fein a number of ideas to save and generate money have been proposed. They include:
Rates relief for new companies
Fast-tracking the planning process
Relief on national insurance payments for all employees in new business
Reduced corporation tax to 12.5%
Review potential sales of public sector assets
Freeze on public sector pay over £21,000
End to pay escalation entitlement in the public sector
Making civil servants pay for parking
Freeze on civil service recruitment
Reduction in quangos
Reduce number of government departments
Privatisation of functions such as government statistics and records
Clamp down on absenteeism, duplication and red tape