Budget analysis: half baked and two speed

20 Nov 2014 Ryan Miller    Last updated: 18 Dec 2014

Northern Ireland budget cuts

A look at the consequences for the third sector, and beyond, stemming from Stormont's Draft Budget for 2015/16

Next year’s draft budget is still only half-baked – but the early signs are that it will move at two speeds for the third sector.

Cuts to the block grant have been passed on in various proportions across the Stormont Executive, meaning a 1.6% drop in day-to-day spending.

DHSSPS and DETI have been spared the axe but demand for health and social care services is set to far out-strip a small increase in support, while enterprise has the unenviable task of growing the local economy in the face of massive public sector cuts - with devolution of corporation tax an apparent priority.

For the other ten departments things are even trickier.

Community and voluntary organisations are set to find the short-term very difficult. Funding from all directions - including governmental, EU, charitable and philanthropic – will shrivel.

However, further down the line the loss of central public services due to cuts will open up opportunities for the third sector to step into the breach.

If, as seems very likely, an austerity agenda continues over several years it will provide large gaps in the market that suit the social enterprise approach.

In the meantime we have to wait for what each department makes of its new allocation, and a first view of a fully-cooked budget that may leave a few empty stomachs.

Some context

Before looking at some consequences of the budget in greater detail, it is worth exploring the context.

PwC, in its response to the 2011-15 budget, noted that “Northern Ireland has failed to achieve sustained economic convergence relative to the UK average” and that local GDP per capita continues to “languish” at 80% of the UK average.

It further stated that there have only ever been two periods where NI made any hardy movement towards UK average GDP per capita – going from around 58% to 67% in early WWII, and moving from the latter to today’s level in the mid 70s.

Both catch-up periods coincided with heavy public spending locally.

Richard Ramsey, Chief NI Economist with Ulster Bank, says this is a red flag for the local economy, but that it also provides an opportunity for reform of a local system that, in isolation, does not work.

“There’s no good way of dealing with all this, it cannot be avoided, what Stormont must do is the least amount of damage possible.

“In many ways I think, if there is a positive with austerity, it’s this is a once-in-a-generation opportunity to actually start restructuring government.”

Ramsey’s view is that Finance Minister Simon Hamilton is realistic in his general approach to local spending. He also says that the mushrooming growth of London and the South East in recent decades means comparisons between Northern Ireland and the whole of the UK have become less useful.

“Remove those [London and the South East] and compare NI with the remainder and it’s probably about 90% GDP per capita, and we probably improved a bit from 1997 to 2007, or at least 2001 to 2007, but again that was because of an increase in expenditure just flowing.

“However, unless we do something radically different our economy isn’t going to be radically different. A lot of what we are doing at the edges, such as with InvestNI, is doing a good job but it’s not going to be transformational.”

Although agreeing that the cuts are clearly bad for the local economy in the immediate future, Richard’s view is that a “get the money in” attitude has prevailed recently in Northern Ireland, where increasing funding – from whatever channel – has always been seen as a fundamental success, without considering how it will be spent.

Now we live in far more straitened times and, whatever you think about that observation, value for money is ever more important.

Ramsey said: “We have had the narrative of austerity, but not the reality of it. Even if Labour wins the next election there will be more cuts, and they are going to get deeper in the next five years.”

However, for several reasons the overarching picture of this budget has been rushed through, falling way short of Executive unanimity. Does this hamstring our ability to spend limited funds well?

The nature of the cuts: silos, multiple wounds and no time for conversation

Over the coming weeks the details of the 2015-16 budget will be decided.

The Finance Minister has handed each department its allocation, so ministers and officials now quickly have to come up with a plan that agrees with the bottom line.

Spending plans usually evolve from one year to the next but, given the extent of ongoing cuts, in an ideal world Stormont would begin with one big, blank sheet of paper and construct the best possible provision from what is available.

Instead, departments are likely to shave off whatever they can and must to reach their decreed saving. The available timeframe suggests there won’t be too much cross-departmental chatting about the big picture.

To illustrate the point with a theoretical example, provision for mental health and learning disability comes, in various guises, under the remit of OFMdFM, DARD, DE, DEL, DHSSPS and DSD.

If departments cannot communicate properly in a rush to balance the books, what happens if each of these decides to take a relatively large chunk out of its provision in this area?

The answer is that the overall service could be smashed.

If there isn’t time to have these conversations, or have proper oversight, what guarantees can be given some areas of service won’t take a pounding? This should be a real concern for everyone.

For the third sector there is a further, similar problem. With short-term cuts necessary, will community and voluntary enterprises find that the Executive turns the taps off when it comes to funding for such services?

Social enterprises could be an easy target for budget reductions. It’s nothing personal, but with departmental cuts of up to 11% ministers may feel they have no alternative.

Richard Ramsey’s view of what will happen probably sounds very disheartening to some.

He foresees some organisations will not be viable, others merging with other groups within the same area and, ultimately, the survivors finding room to grow.

“I think, within their own niches, there will be mergers and acquisitions within the sector, and job losses with that.

“They are going to have to come together, there will be less money but it’s probably in the medium term there’s more likelihood of being asked to deliver more services.”

Another concern emerging from all this pressure is the effect on services. Groups who are counting pennies in order to survive will, out of sheer necessity, spend a higher proportion of their time on budget issues. This means less time devoted to providing core services.

What now?

For both the third sector and the local economy generally, the pressure from Westminster cutting the block grant comes at a time when relief from elsewhere is not apparent.

Northern Ireland draws down a lot of money from the EU but its attempts at recovery are spluttering, with Prime Minister David Cameron citing a faltering Eurozone as one of several “red warning lights” flashing on the dashboard of the global economy.

Some may also be dismayed that the PM says the picture shows his plans are working, reinforcing what is already known – that cuts to come from London are likely to be much deeper and more keenly felt than anything so far.

Generous programmes such as Atlantic Philanthropies have also been good to NI, but it is set to conclude in the coming years.

A pessimistic view of the future will see doom. A more dispassionate stance will say that there is certainly great flux on the horizon.

The third sector is broadly in the same position as individual people and much of private industry. Adaptability and, on occasion, the willingness to make choices that are not easy but are clear-sighted will give enterprises the best chance to thrive into the future, and deliver increasingly valuable services to local society.

But it’s going to be tough.

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