Posted on Friday 21 December 2018 by Ulster Business

Bud 1

Economist John Simpson examines the latest Budget and looks at what challenges remain for the public sector as the UK emerges from years of austerity

The ambition for the public sector in 2019 is that it should give an impetus which will boost the economy after the period of modest short-term support during the months when there has been an absence of devolved Government and active local political engagement. This commentary must be set against the background of that period of ad hoc management with an absence of the implementation of serious new policy initiatives. One way or another, in 2019, the decision making void needs to be filled.

The public sector will be operating, even after the ending of the (so-called) years of austerity, with a still tightly constrained budget with limited, but significant, management discretion in the delivery of policy priorities.

The public sector budget for 2019-20 will be shaped by the details released by the Chancellor’s Budget which, on first sight, points towards an end to austerity. The real impact in 2019 will be minor increases for current spending along with provision for a significant increase in capital spending of over £300m in both 2019 and 2020 when the capital budget increases to £1.5m a year.

While the overall public sector spending limits will give room for some discretionary decisions, the immediate scope for initiatives is still limited by the very modest widening of the powers exercised by the senior civil servants allowed by the short-term legislation on local devolution. For example, will it be possible to legislate for reduced rates for businesses in line with the English changes?  

During 2019 there will be many initiatives which are stopped because there is no inherited policy from earlier decisions by ministers.

Nevertheless, partly in hope rather than immediate expectation, the ambition for future progress means that public services should be assessed by reasonable expectations of a functioning Government. There are functionally two strands to this review.

First, the scope and priorities for Northern Ireland flexibility in dealing with current revenue and spending is considerable and, as inherited, may need and merit reconsideration.  Second, the emerging inadequacies and capacity constraints in the provision of infrastructure to support public services is evidence which points to the rational for a reconsideration of the scale and sources of capital expenditure and, as a linked feature, the search for priorities in selection and timing.

Despite Northern Ireland’s relatively favoured levels of public spending and taxation, compared to other UK regions, there is evidence that major deficiencies now exist.

There have been many references to desirable larger and continuing capital programmes for utilities including electricity, water and sewerage, and broadband. These sit alongside understandable ambitions in further and higher education (including the universities), >
health facilities and an inadequate corporate objective of major increases and improvements to housing investment.

The public sector capital budget, separately designated, has recently been less than generous. Now there is greater scope enhanced by projects such as the Belfast Region City Deal.

In a reconsidered public sector capital programme, there are serious questions about the allocation of discretionary current spending. Compared to the higher charges in GB, is the scale of Northern Ireland additional offsets to the rents charged for social housing justified? Is the scale of offset to domestic rates justified? Critically, is the differential in financing water and sewerage services – to the point of avoiding domestic water charges- a continuing top priority?

In addition to these questions on the merits of discretionary spending, whether capital or current, as Northern Ireland faces into 2019 there is the pending ‘cost’ of the possible introduction of a Northern Ireland rate of corporation tax at 12.5%.  

If this remains a committed policy decision (as can be argued) it can only be introduced if the revenue lost to Northern Ireland is found from within the current available public sector funds: possibly over £200m each year.  

If there is a Brexit deal, the UK Government has indicated that the State aid rules inherited from the EU would continue to apply. Even if there is no Brexit deal, that question would still need to be considered.

These financial questions fall into two possible groups. There are services seeking better funding, usually capital, which must be assessed on whether they might contribute more to self-funding.  For the utilities that should be amendable to discussion.

Electricity services are already organised to be self-funding. Broadband services will expect to be partly self-funding. Water and sewerage services now face capital spending needs, even to allow modest urban development to take place, and not in all locations, that must have implications both for the organisation of these services and their capital funding. Moves to greater self-funding seem inescapable even if, in a phased timing, the funding structure might be in parallel with amended charging systems for domestic rates.

In the spectrum of urgent needs for supplemented capital spending, there is a strong case for the whole range of public services. Because of the possible wider domino effects, water and sewerage services merit an initial priority boost. The prospect of development planning applications being refused because of an inability to provide water and sewerage connections in several urban centres and the pending capacity restrictions in parts of the Belfast region could be avoided if a larger, carefully planned, programme for the most pressing areas is prepared.

There are high expectations of the impact of the Belfast Region City Deal. However, that is mainly directed at incentives for private sector development and it is phased over more than 10 years.  

The tensions of maintaining and enhancing the public sector capital infrastructure pose a very considerable challenge to public sector managers, whether ministers, Secretary of State, or senior civil servants. This combination needs to find a method of arranging security and certainty in delivery. Miracles would be welcome.

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