CAIN: Democratic Dialogue: Hard Choices: Policy autonomy and priority-setting in public expenditure (Report No. 10)

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Hard Choices

Policy autonomy and priority-setting in public expenditure

Public expenditure on the eve of devolution

Richard Barnett
Graeme Hutchinson

In terms of constitutional issues, the Labour government at Westminster promises to be one of the great reforming administrations of the century. Democratically elected regional governments are being introduced in Northern Ireland, Scotland and Wales and regional levels of governance are to be considered in England where demand is sufficient.

The government is not operating according to a blueprint: an à la carte approach is being taken, the precise structure of the regional bodies varying to meet perceived circumstances. The form of government to operate in Northern Ireland is set out in the Good Friday agreement.[2]

A key issue for the overall governance of the United Kingdom is the achievement of UK -wide priorities in the context of substantive regional decision-making.

With the increasing importance of trans-border economic relations and growing demand for regional government, it is recognised worldwide that many national governments are 'too big for the small things' and 'too small for the big things'. Yet, as it develops a system of regional governance, it is not clear that the Labour government has recognised this new reality and what it means for priority-setting.

One indication that central government is not yet sufficiently attuned to the impending political realities of devolution is provided by the government's terms of reference for the comprehensive spending review in Scotland, which affirm: "One of the main objectives of the review … will be to hand over to the Parliament an overall public expenditure programme that is already effective and properly focused on Scotland's needs." Is it not for Scotland's Parliament to determine what Scotland needs? And ditto for Northern Ireland's Assembly?

Within the annual Public Expenditure Survey (PES) - to date, the focus of all expenditure decision-making in the UK- Northern Ireland public expenditure is allocated by a block-formula system. While the origin of this formula can be traced to the late 70s, the history of apportioning public expenditure within the UK on a formula basis is more extensive.

For instance, the Goschen formula (named after George Goschen, chancellor of the exchequer in Lord Salisbury's 1886-92 administration) was the mechanism whereby Scotland received 11/80ths of British spending on comparable programmes. The proportion was based on the assignment of probate duties relative to exchequer contributions.[3] It fell into abeyance after the second world war.

Similarly, in Northern Ireland during devolution, there were various arrangements - particularly with regard to social services - for allocating funds using broad population formulae.4 During the 60s and 70s, public-expenditure plans for UK regions were however settled collectively by negotiation within the wider PES, rather than by formulae.

It was not until the late 70s, when devolution to Scotland and Wales seemed imminent, that a population-based formula returned to the political agenda. Its author was Joel Barnett, chief secretary to the Treasury in the 1974-79 Labour government, and the 'Barnett formula' - established in 1978 before the abortive Scottish and Welsh referenda-remains in operation today. Twenty years on, its future should be discussed, especially in the context of renewed devolutionary developments.

For purposes of planning and consistency, Northern Ireland - as with Scotland and Wales - is treated as a single block within the annual PES. Although the respective secretaries of state have discretion to switch funds within their block, it must be consistent with overall government policy.

In theory, the Northern Ireland secretary has had the greatest discretion, since the block allocates almost all programme expenditure in the region-98 per cent in 1995-96-with only expenditure by the regional agricultural department on 'national' agricultural and fisheries support excluded.

As Thain and Wright observe, this vastly overestimates the true extent of discretion once the 'parity principle' is accepted, since social security is only nominally within the block:[5] the managed block thus comprised 63 per cent of programme expenditure in Northern Ireland in 1995-96. Yet in Scotland and Wales, items not encompassed in their respective blocks - over and above social security - include all expenditure on agriculture, fisheries and food and on industry, energy and employment.

The Barnett formula, based on the population balance between England, Scotland and Wales (85:10:5), allocated any changes in planned public expenditure between them-it was never envisaged that the formula would allocate levels of expenditure. Similar arrangements were agreed for Northern Ireland, although its formula is based on the region's share of the UK population, rather than that of Great Britain.

The formula only applies to expenditure within the blocks; non-block expenditure is determined through conventional bidding. Thus, as David Heald argues,[6] there are two components to block expenditure:

  • the inherited expenditure base, which dates back to the period when the formula was first implemented, and
  • the incremental expenditure, determined by the operation of the formula.

In 1992 the formulae were subjected to their first and only revision, using new population estimates. In Northern Ireland, block expenditure is adjusted by applying a percentage of 2.87 (2.75 pre-1992) to the totality of changes in comparable programmes in Britain. While the formula adjustment reflected the 1991 census returns, Thain and Wright

suggest that "of equal importance in the decision to revise it was the Chief Secretary's attempt to keep total spending in line with published targets".[7]

Over the long term, operation of the Barnett formula should bring about a convergence in public expenditure per head across UK regions/nations, as the population-based increments gradually predominated over the disparate inherited levels. Obviously, the rate of convergence would depend on public expenditure growth (the faster spending increased in England, the faster convergence would occur), as well as on the stability of population shares (relative population decline in a well-endowed region would reduce convergence).

The Barnett formula was first applied to Northern Ireland when public expenditure reductions appeared probable, not least because of the relatively high baseline of expenditure in the region. The attractiveness of the formula was obvious: any cuts would thereby be no worse than proportionate.[8]

Since then, however there has been some convergence down towards the UK average (Table 1). Not only has UK expenditure not fallen since the early 80s; apart from the 1992 adjustment, the fixity of the formula has worked to Northern Ireland's disbenefit as its population share has risen.[9]

But identifiable public expenditure includes the social-security programme, outside the scope of the Barnett formula. When social security is excluded, the degree of convergence is somewhat reduced. At the same time, identifiable public expenditure covers only around 75 per cent of total spending; more attention should thus be paid to assessing comparable public expenditure across the four components of the UK. Heald suggests such an exercise would reveal greater convergence[10] than the identifiable series implies.[11]

The fact that the formula has survived for so long - including its reaffirmation by the current Labour administration - would suggest it must have some beneficial (two-way) qualities. For the Treasury, the formula is simple and the need for annual negotiations between the centre and the regions/nations is avoided. The fact that it has produced "a fair and politically acceptable distribution of funds over a long period"[12] would endorse Heald's view that it is an effective mechanism of territorial management in a highly centralised state.[13] For the regions/nations, there is less scrutiny of block programmes than other spending departments endure, as well as the discretion to address self-defined priorities.

Table 1: Treasury analysis of identifiable' public expenditure per head (£m)

Change (exc social security)
United Kingdom
Northern Ireland
Source: HM Treasury, Statistical Supplement (various issues)

The drawbacks are administrative and/or political. The former include 'formula bypass'. The regions/nations tend to benefit when additional expenditure occurring during a financial year - pay awards, for example - is allocated on the basis of cost rather than the formula. Since Scotland and Northern Ireland spend more per capita on health than England, they are likely to gain a larger share of any such additional resources than would be suggested by a strict application of the Barnett formula. And the fact that England is the base country means that clear comparators are sometimes difficult to obtain.

But the fact that the formula kept the same population relatives from its inception until the early 90s clearly benefited Scotland (where population fell) rather than Wales or Northern Ireland (where it rose), and the only viable explanation appears to be political. Had the formula been revised, Scotland would have fared less well, and this would have done little to improve the electoral prospects of the Conservatives there, under pressure as they were from Labour and the Nationalists throughout the 80s - a problem they did not, of course, face in Northern Ireland.

Yet, though Northern Ireland was adversely affected by the formula remaining unchanged for as long as it did, the fact that the region still enjoys higher spending per head (albeit falling in relative terms) would suggest there have been real benefits from additional allocations above comparability.[14]

As to the future, the government has undertaken to update the population figures from 1999-2000 and annually thereafter.[15] The fact that it has deemed 'fair'[16] the settlements arising out of the block-formula arrangements suggests it sees little point in adjusting something that already works. There have, however, been calls for modifications.

Most notably, Lord Barnett himself, in evidence to the Treasury Select Committee, has advocated a formula that takes account of rising income per head in the regions/nations of the UK, as well as needs and expenditure-Barnett mark II. The current formula takes no account of spending needs, beyond population.

In the interests of fiscal rectitude, there may be arguments in favour of conducting a needs-assessment exercise similar to that carried out by the Treasury in the late 70s.[17] Such an exercise would seek to determine the appropriateness of the Barnett formula-how it relates to need and how total expenditure (not just marginal changes) has been allocated according to need. As we argue below, however, one problem with this type of analysis is that assessment of need is highly subjective.[18]

While Lord Barnett has advocated revisions to the formula, he continues to support its underlying principles. He told the Treasury Select Committee: "I am flattered that the Barnett formula has lasted twenty years. I hope it will last much longer. At the time, I must confess, I did not think it would last a year or even twenty minutes."[19]

But despite the formula's longevity, it has never been tested in the environment for which it was designed - devolved government. While regional decision-makers (the secretaries of state and their ministerial teams) have had discretion to vary policy, they have always had overarching policy objectives in line with those of the UK-wide government of which they have been members. With devolved government, this congruence of overarching goals may cease. Indeed, one of the prime objectives of devolution is reflection of regional preference in policy decisions.

A key aspect of the economics of multilevel government, or 'fiscal federalism', is the assignment problem. This refers to the allocation of functions between different levels of government - the who-should-do-what? question. It is conventional to divide the economic functions of government into macro-economic stabilisation, income (and wealth) redistribution and the efficient allocation of resources (correction of micro-economic market failures). The widely held consensus is that the macro-economic and redistributive functions should be allocated to the higher level of government.

In splitting the micro-economic function between the various levels, the key factor is the geographic area over which the benefits of the policy extend. In the case of public goods, for example, some are 'national' in scope while others are more regional. The 'decentralisation theorem' shows that welfare increases if provision reflects the preferences of those who benefit from the good or service. Since 'national' governments tend to provide services uniformly, it follows that regional determination of provision is likely to be welfare-enhancing.

But if resources are allocated, via the Barnett formula, in an environment in which some public spending reflects regional policy priorities, accountability will be blurred. Regional government will always be able to blame central government when it fails to provide services to a high standard. Bloomfield and Carter warn that it may "spend its time complaining about the parsimony of the Treasury".[20] Such a lack of clear lines of accountability and the resultant squabbling over who is to blame is already evident in local government in England, where extensive rate-capping has left local politicians allocating public-service funds from an essentially fixed budget.

Bloomfield and Carter's solution is for regional government to have tax-raising powers, and in terms of accountable government this makes perfect sense: accountability implies that the government that spends money should be accountable to its electorate by having to raise taxes to pay for public programmes. But it is important to distinguish between marginal and full accountability.[21]

Full accountability would require that the regional assembly raised all its funds from regional sources of taxation, and this is not feasible. Fiscal imbalance is a characteristic of almost all multi-level governments. Typically, the higher level of government is assigned tax-raising powers in excess of its expenditure needs, while the reverse is the case for lower levels.

There is, however, a strong case for building marginal accountability into the public-finance structure for a regional assembly. Without such marginal accountability, there is no clear designation of responsibility for public-spending decisions.

Under the proposed Northern Ireland arrangements, the only tax under the control of the Assembly will be the regional rate. This is used to help fund those services, such as primary and secondary education, which are local government responsibilities in Britain but are currently the responsibility of central departments in Northern Ireland. With the regional rate as the only 'safety valve' providing flexibility for the Assembly budget, there is a danger it will be used inappropriately Also, it is not a tax which is readily associated in the minds of the electorate with services not provided by local government. A regional income tax would seem a more appropriate tax for the Assembly.[22]

The arguments against allocating some tax-raising power to a regional assembly are neither strong nor convincing. First, it is argued that central government has a responsibility for achieving macro-economic stability and that the public sector borrowing requirement is a key policy instrument in this regard. (This was one of the arguments used for restricting the expenditure and tax-raising ability of local authorities in Britain.) But additions to expenditure financed out of regional taxes have no impact on the PSBR.

More broadly, it is argued that central government has a policy objective to control public spending. While such an objective might be defended - on the assertion that public expenditure 'crowds out' private investment - central government must recognise that in the new policy environment of devolved governance some aspects of control will be lost. There is a cost-benefit calculation here: the benefits of effective and accountable devolved government easily outweigh the costs of some loss of overall control of public expenditure.

The blurring of accountability which will result from application of the Barnett formula in the new context is a consequence of a system of funding for regional government which relies to all intents and purposes wholly on block-grant transfer from central government. Other weaknesses of the precise form of the block grant generated by the formula might also emerge.

Most systems of intergovernmental transfers would take cognisance of access to regional taxes (differential resources) and expenditure needs. That differential tax-base resources have not been an issue in discussion of the Barnett formula is purely because it gives no role for regional taxation. Nevertheless, any system of intergovernmental transfers should be transparent and simple to understand. Given the relatively small role that regional taxation is likely to play in the overall regional budget, even with tax-raising powers, we do not believe any differentials in regional tax bases should be a concern.

Furthermore, attempts to correct for differential tax-base resources generally require matching grants from central government. Such funding does have PSBR implications: the greater is regional spending, the greater will be the centre's obligation to pay grant. As a consequence, it is likely to be resisted by central government.

In the existing Barnett formula, population is taken to be an (or, more precisely, the) indicator of expenditure need. Lord Barnett believes that the indicator should be revised, albeit modestly. We would caution against any movement towards a comprehensive needs assessment, for two inter-related reasons.

First, as Midwinter highlighted in his evidence to the Treasury Select Committee, there is no objective measure of expenditure need.[23] Ultimately, needs assessment is a political exercise.

Secondly, comprehensive needs assessments tend to result in complicated formulae which lack transparency. It is always easy, then, for central government to adjust the various weights used in the needs-assessment model to achieve its own political objectives - the model used for allocating funds to British local authorities provides ample evidence for this. Also, to aid accountability, it is desirable that the total quantities of the intergovernmental transfer should not vary significantly, year-on-year. A simple formula, with limited scope for central manipulation, is most likely to produce such stability.

Discussions of the public sector in Northern Ireland almost always include some mention of the so-called subvention - the difference between public spending in the region and taxes raised. Any such discussion needs to be more broadly based than often in the past, for two main reasons.

First, such calculations are always incomplete. For example, the package of economic measures for Northern Ireland[24] announced by the chancellor, Gordon Brown, in May included some £100 million of tax expenditures. Tax expenditures represent an important part of the overall fiscal system, yet rarely is any attempt made to include them in calculations of subventions to the various regions/nations of the UK. Their inclusion would be likely to alter radically the pattern of regional subventions, but arriving at an agreed measure is impossible, since there is no obvious counterfactual to use as a baseline in the calculations.[25]

Secondly, subventions to various regions of a state are a typical feature of devolved systems of government. By international standards the size of the subventions to the various components of the UK, including Northern Ireland, is perhaps not atypical.[26]

The concept of society within which devolution is to take place is also relevant. One model, favoured by some economists, is competitive regionalism or 'Balkanisation'[27] - in which the country is little more than a collection of regions and, unless families and other factors are perfectly mobile, living standards and public services may vary considerably between regions, depending on their ability to compete. In such a framework the subvention - as indeed most, if not all, fiscal transfers - is viewed negatively.

We do not believe this is the context within which devolution is being introduced in the UK. Society is something more than a collection of regions, families are not perfectly mobile and should not be forced to move, and living standards are a UK-wide concern. In this framework, social goals may dominate purely economic ones. Thus, while in narrow economic terms a large subvention (appropriately measured to allow for tax expenditures) may cause a deadweight loss,[28] this must be set against the broader social benefits any subvention helps achieve.

Yet there are clearly aspects of Northern Ireland's large public sector which hinder regional economic performance - for example, the high public-private wage differential.[29] Any such detrimental factors should, however, be addressed directly, with any impact on the subvention following as a consequence.

Having explored the mechanism determining the public expenditure available to the Northern Ireland secretary - the block-formula system - the next question is the means by which this is apportioned between government departments and how these departments express their requirements.

In Northern Ireland the public expenditure 'programme total' includes central government expenditure, grants to district councils and the external financing of public corporations. Items not included relate to those UK departments that provide services in Northern Ireland (expenditure on the army and the court service).

There is no universally acceptable method of measuring the growth of public expenditure. Convention usually dictates a twofold approach: relating public expenditure to gross domestic product,[30] and expressing the cash figures in real terms. As to the latter, the 'deflator' used to correct for inflation should take account of the public-sector environment. Thus, instead of using the common GDP price deflator, we adopt an index of the prices of those goods and services purchased by the public sector in the UK.[31]

The figures presented in Table 2 illustrate the growth in public expenditure between 1979-80 and 1995-96, both when converted to constant prices (1990) and as a proportion of GDP. The dramatic growth in public expenditure in Northern Ireland has frequently been remarked upon, but this was very much a phenomenon of the 70s.

Table 2: public expenditure in Northern Ireland, 1979-80 to 1995-96

Change at constant prices (%)
Change as proportion
of GDP (%)
1979-80 to 1982-83
1982-83 to 1986-87
1986-87 to 1990-91
1990-91 to 1995-96
1979-80 to 1995-96
Source: Northern Ireland Expenditure Plans and Priorities (various issues)

Public expenditure has continued to grow subsequently - l0 per cent in real terms in the period under review, or an annual growth of 0.6 per cent. But growth has been particularly associated with recession, as in 1990-91 to 1992-93, when real growth was almost 8 per cent. And there has been a clear decline in the ratio to GDP - from 68.9 to 59.1 per cent.[32] This finding is consistent with international experience[33] which, as Oxley and Martin argue,[34] reflects concerns about the impact of continuing public-sector expansion on private-sector performance and greater appreciation of the social costs of higher taxation.

Table 3 decomposes public expenditure by economic category for selected years between 1984-85 and 1995-96. This provides some indication of how the public sector interacts with the rest of the economy The first two components of the table - departmental running costs and other public-service pay - can broadly be taken to indicate the contribution public-sector employment has had to public spending.

Table 3: public expenditure change per annum in real terms,
by economic category 1%)

Departmental running costs
(net of receipts)
Other public service pay and other expenditure on goods and services
Current grants
Net capital expenditure on assets
Capital grants
Lending and other financial transactions
Source: Northern Ireland Expenditure Plans and Priorities (various issues)

The sum of these categories increased in real terms over the period by 22 per cent, or 1.9 per cent annually - again much less than in the 70s.[35] Public-sector employment grew by 40 per cent between 1970 and 1974, and by a further 25 per cent between 1974 and 1979,[36] but thereafter steadily declined.

The subsidy and capital-grant components of Table 3 also fell substantially over the period (by 33 and 55 per cent respectively), highlighting the growing reticence of government to provide wholesale fiscal support to the private sector. Policy documents such as Pathfinder and Competing in the 1990s[37] reflected the concern of government that heavy reliance on public funds by many companies was insulating them from competition and thus hindering innovation and growth.

By contrast, there has been significant growth in current grants, overwhelmingly social-security benefits (82 per cent in 1995-96), increasing by 39 per cent over the period. This is again consistent with international experience, in that income redistribution appears to have been the core activity of most governments in recent decades.[38] The erratic behaviour of the component covering lending and other financial transactions may be explained by the fact that in 1988-89 (and 1989-90) it was enlarged to cover the payments made by the Industrial Development Board on behalf of the government for the privatisation of Short Brothers and Harland and Wolff.

The fact that definitions of public expenditure in Northern Ireland have been periodically revised (as in the rest of the UK) indicates the problems associated with its control - in the sense of establishing budgetary procedures to ensure chosen objectives are secured. The introduction of the planning total meant that grants to district councils, but not local-government expenditure financed from the rates, were included-the justification being that public expenditure should relate only to those areas where central government has control.[39] In 1992 the 'new control total' was introduced, removing the cyclical element of social-security expenditure which had been extremely difficult to predict.

One way of determining how effectively public expenditure is controlled is to compare projected to actual out-turns (Table 4). Actual public expenditure in Northern Ireland exceeded its estimated total six times between 1983-84 and 1995-96. (For purposes of continuity, the cyclical social-security component is included throughout, although the figures in brackets in the last three rows represent the difference between the actual and estimated control total.)

But there were seven occasions between 1983-84 and 1993-94 when the outturn for UK public expenditure as a whole exceeded the plan[40] - indeed, the scale of the overspend was higher than for Northern Ireland specifically, except in 1988-89 when the overspend in the region was due to the privatisation issues. So the procedures for allocating public spending in the region do appear to represent an effective mechanism for territorial management. The separate treatment of cyclical social-security benefits from 1993-94 would suggest that the new control total represents a marginal improvement in the control process.

The process of priority-setting in Northern Ireland is much the same as in the rest of the UK: the central tenet has been, to date, the annual PES. Decisions are made in the autumn on cash plans for the year ahead, with more flexible plans for the following two years. As these figures comprise the base for subsequent surveys, it is not surprising that the most important factor in the size and composition of the budget is the previous year's version.

Recent announcements may, however, change this. In the Treasury's Economic and Fiscal Strategy Report,[41] which set the framework for the results of the Comprehensive Spending Review (see below), cash plans are to be made for three years in advance, precisely with the aim to move away from the short-term, incremental procedures characteristic of the annual spending round.

Table 4: Northern Ireland public expenditure, estimated and actual out-turns

Estimated out-turn (£bn)
Out-turn (£bn)
Difference (£bn)
Difference (%)
7.595 (7.109)
7.624 (7.104)
0.029 (-0.005)
0.4 (-0.1)
8.054 (7.492)
7.961 (7.416)
-0.093 (-0.076)
-1.2 (-1.0)
8.387 (7.823)
8.259 (7.714)
-0.128 (-0.109)
-1.5 (-1.4)
Source: Northern Ireland Expenditure Plans and Priorities (various issues)

As things stand, the Department of Finance and Personnel, which acts as the manager of the block programme, initially forwards guidelines to the Northern Ireland departments and the Northern Ireland Office, seeking information on public spending in the region relative to the rest of the UK - as Thain and Wright put it, "comparability provides the bedrock of territorial expenditure".[42] When the DFP receives PES returns from the departments and the NIO, these are scrutinised and revised during the summer.

A co-ordinating committee comprising departmental and NIO permanent secretaries advises the secretary of state on negotiations with the Treasury, although the DFP view normally take precedence. Throughout the survey, the strategic priorities of public expenditure provide the baseline against which departmental proposals are considered.

Table 5 highlights the main components of public expenditure in Northern Ireland and how these have altered between 1979-80 and 1995-96, giving some indication of changing priorities. Those experiencing growth include 'law and order' (1.8 per cent per annum), health (2.0 per cent per annum) and education (1.0 per cent per annum). Their combined real growth has been 1.6 per cent per annum over the period and together they accounted for 47 per cent of public spending at its conclusion.

Table 5: real public expenditure growth per annum, 1979-SO to 1995-96,
by function (%)

Industry, energy, trade and employment
Transport and roads
Law and order**
Education, science, arts and libraries
Health and social services
Social security
* includes expenditure in Northern Ireland by the UK Ministry of Agriculture, Fisheries and Food
** includes expenditure by the NIO
Source: Northern Ireland Expenditure Plans and Priorities (various issues)

Those services that have experienced a real reduction over the period include industry/employment (-57.8 per cent, or -3.4 per cent per annum), housing, transport/roads and agriculture. One area of concern is that the social-security programme, which offers little in public-service provision, experienced the largest growth (3.9 per cent per annum)-in the last year of analysis (1995-96) comprising almost 36 per cent of the public expenditure budget. There can be little doubt that large and persistent unemployment and economic inactivity in the region is the main reason for this.

The trends observed in Table 5 would broadly support official claims that the priorities for public spending are mostly located within the social arena. For example, the increases in the 'law and order', education and health components are consistent with the aims of providing a stable and secure society, achieving sustained economic growth through improved educational standards, and enhancing the quality of life through general health improvement. Below these priorities, there have been several additions such as 'targeting social need' and 'policy appraisal and fair treatment'.

TSN, introduced in 1991, seeks to address disadvantage and employment inequality. Since that entails redressing the balance between the Catholic and Protestant communities, it represents an attempt to ease intercommunal conflict and, eventually, reduce the 'law and order' programme. One problem has been the difficulty in determining those areas to which it is applicable: the Standing Advisory Commission on Human Rights highlighted (and rejected) an official view that most government expenditure, by its nature, targets social need.[43] Any process of public-expenditure priority-setting thus needs to be specific and well defined.

PAFT, introduced in 1994, seeks to ensure that all sections of the community enjoy equal opportunities and fair treatment. Aside from experiencing similar problems to TSN, the enforcement of PAFT has been particularly difficult. SACHR argued that this stemmed from insufficient status being given to the PAST guidelines, which have enjoyed little weight in the decision-making process. A successful programme of priority-setting must then also be enforceable, preferably through statutory means. The white paper Partnership for Equality[44] broadly supported SACHR's findings and envisaged a more rigorous system of 'equality-proofing' in public policy and in decisions taken by public-sector organisations.

Given the scale of public expenditure in Northern Ireland and the complex array of priorities, and given that the secretary of state has "discretion to allocate resources within the Northern Ireland Block",[45] his or her responsibility in making an allocation between departments is, at least in theory, a large one. In 1995-96, for instance, the discretionary budget amounted to over £5.3 billion-total programme expenditure minus social security. But, as already intimated, a number of factors restrict the operation of these powers.

First, while each territory enjoys some detachment from the Treasury - particularly Northern Ireland, as it remains the only region to have experienced devolution before, and has retained many institutional features since - they still together comprise the union and thus are broadly subject to UK-wide policies. Moreover, while the secretary of state has discretion to allocate expenditure between programmes (though not between departments and the NIO unless the Treasury allows), any increase in one programme will normally be at the expense of others. Any deviation from the UK-wide agenda will thus first be agreed with the Treasury, which will ensure the deviation is neither unusual nor likely to have repercussions elsewhere.[46]

Secondly, as Table 3 highlighted, the major component of public spending in Northern Ireland is pay, and within this there is little scope for the secretary of state to pursue an independent path: the main procedure for public-sector wage bargaining is again UK-wide. Even during devolution, where regional procedures were used for public services under the control of the regional government, various agreements were reached that ensured parity or equivalent pay and conditions with comparable groups in the public sector in Britain.[47] These close ties between the public sector in Northern Ireland and in the rest of the UK, while clearly beneficial to the employee, also restrict discretion in resource allocation.

Finally, the autonomy of the territorial departments does not reduce the need for monitoring and auditing of expenditure programmes. For instance, the ceiling which the block-formula system imposes on the territories means that a wasteful use of resources in one arena means less availability of funds elsewhere-including to finance regional initiatives. While the authority for scrutinising public expenditure ultimately rests with the Treasury, thereby reducing the discretionary power of the secretary of state, in Northern Ireland this is less so since the DFP examines all departmental expenditure except that of the NIO.

Once the budget decisions have been made for Northern Ireland, the onus for sharing out the funds to each of the competing departments rests with the DSP. With NIO expenditure[48] and total departmental running costs agreed first, the departments then bid for resources- programme and running costs-and the same co-ordinating committee that advised the secretary of state on negotiations with the Treasury advises the DFP on internal allocation.

While committing itself to the tight expenditure plans of the Conservatives for its first two years, the Labour government promised to reallocate resources towards its priorities-such as front-line services in education and health-via the Comprehensive Spending Review, introduced in June 1997 by the then chief secretary to the Treasury, Alistair Darling. Although the review sought to examine the whole of government spending, it had two sub-components: individual departmental reviews and cross-departmental reviews. Thain argues that the latter represented "an earnest attempt by a new administration to find the holy grail of interdepartmental co-ordination and policy cohesion".[49]

In Northern Ireland the review covered all programmes within the block, seeking from a zero base to determine whether each makes an effective contribution to the government's priorities. De facto, it represented the PES for 1997-98 since the latter was cancelled.

So that public expenditure in Northern Ireland remained within the totals set for 1997-98 and 1998-99, the review endeavoured to identify priorities which might attract additional resources and, conversely, areas where spending could be cut or eliminated. But while the secretary of state could reshape priorities if necessary, the terms of reference for Northern Ireland suggested her discretion was limited. Before any decisions were made as to regional changes, adequate regard had to be given to any conclusions emanating from the review of programmes in Britain.

Moreover, adjustments UK-wide in the scale of public expenditure would be reflected in increments/decrements in the Northern Ireland block covered by the Barnett formula. Therefore, while there can be little doubt that the review represents further evidence of the Treasury taking a less active role in co-ordination-'tilting further the balance between central control and departmental discretion towards departments,[50] - there is no compelling evidence that the review enhanced the discretionary power of the Northern Ireland secretary.

Thus it was in line with an overall statement by the chancellor, Mr Brown, that the secretary of state, Mo Mowlam, announced in July the upshot of the review for Northern Ireland. This set out a three-year projected rise in a new 'departmental expenditure limit'-replacing the control total-from a 1998-99 baseline of £5,680 million to £6,307 million in 200 1-2. Alongside this, 'annually managed expenditure' (largely social-security benefits) was estimated to increase from £3,355 million to £3,796 million over the period.[51]

Ms Mowlam said she would discuss detailed allocations with the first and deputy first ministers, and the Assembly. Indeed, the Comprehensive Spending Review must be assessed in the context of devolution. While it will provide a useful input into decision-making and priority-setting by these regional/national levels of government, it will be for the new bodies themselves to set their priorities. With respect to the public services to be devolved, the current central government is in a sense an outgoing administration. While it might seek to do so, it cannot expect to 'tie the hands' of the incoming devolved governments.

It will be interesting to observe the attitude of the Northern Ireland Assembly to those public-expenditure planning changes envisaged in the recent Treasury report.[52] For instance, the framework of three-year planning, instead of the annual spending round, would imply that the Assembly would conduct a fundamental review of all spending decisions/priorities every three years rather than pursue the annual, incremental approach. The strict division of budgets between current and capital- with power to carry over surpluses year-to-year but not to make transfers between these categories-might also suggest that the Assembly would be unable to fund any portion of capital expenditure from surplus current revenues, as would have been possible previously.[53]

The incoming devolved governments will also inherit the new system of resource accounting, and asset registers are being compiled. With its focus on resources consumed in a year rather than on cash spent, such public accounting will lead to a more economically rational use of public-sector assets. The implications for the devolved territories are likely to be small-although, other things being equal, with their additional tier of government they are likely to have a larger asset base than other parts of the UK.

As Northern Ireland prepares to enter a regime of 'real politics' for the first time in almost three decades, the central administration-of what has been for a generation one of the most centralised systems of government - will meanwhile have to relinquish some areas of responsibility. This, experience suggests, will not be easy.

The central administration did not find it easy, for example, to change its culture to adjust to the Local Management of Schools initiative.[54] And in its 1988 'green budget', the Institute for Fiscal Studies pointed out that the government's commitment to improve front-line services in health and education was easier to secure for the former than the latter, since (in Britain) local authorities received a grant to deliver schooling from central government which they could allocate according to their own priorities.[55]

With devolution and funding via the Barnett formula, in future more services will be funded by such non-hypothecated grants and will be subject to regional priority-setting. It will be a great pity if, like a good parent, central government does not learn to 'let go'. But what does this mean for UK-wide manifesto commitments? Will central government adjust easily to a political environment in which it is less important? If not, we may see an attempt to sustain influence by the replacement of the block grant with hypothecated, or specific, funds.

The Northern Ireland Assembly, meanwhile, comprises elected representatives who have to all intents and purposes spent the last three decades in permanent opposition. They have not had to confront any of the hard decisions associated with priority-setting and resource allocation.

Yet there is already evidence that the electorate expects the Assembly to 'make a difference'. For example, there have been calls for the outcome of the review of acute-hospital provision to be put to one side, to allow the Assembly to make the final decision. Expectations are being raised that small hospitals might thereby be saved.

The main drivers for change in acute provision are not, however, political. They stem from the Royal Colleges, in terms of consultant led-provision and junior doctors' hours. The new political environment will not alter these extra-political drivers.[56] So how will the Assembly manage what in many areas are likely to be the unrealistic expectations of the electorate?

More generally, as indicated above, much of the public budget is spent on wages. Unless UK-wide bargaining is to be broken, the Assembly's room for manoeuvre will constrained by the pay bill.[57]

For very good reasons, some decisions in the assembly are to be taken on a cross-community basis, requiring:
either parallel consent, that is a majority of those members present and voting, including a majority of the unionist and nationalist designations present and voting;
or a weighted majority (60 per cent) of members present and voting, including at least 40 per cent of each of the nationalist and unionist designations present and voting.[58]

When set alongside the constituency interests of Assembly members and the loose systems of allegiance operating within the parties, the difficulties such a qualified-majority voting system may create for policy-making are evident.

Yet with sensitive powers (like human rights 'reserved' to Westminster, the Assembly will not be dealing with traditionally divisive affairs. And the experience in Europe and in local government gives some hope of real policy innovation.[59] Moreover, we should bear in mind the principle of subsidiarity, which argues that decision-making should be carried out at as close to the citizen as possible - a natural consequence of devolved government.

The Assembly should set itself ambitious policy targets, especially in economic development. As described above, expenditure on education and health has enjoyed prioritisation at the expense of industry/employment and housing. In a period of peace, the former programmes should be maintained, but resources from 'law and order' ought to be directed towards encouraging private-sector activity through economic and employment programmes. For three reasons, we would concur with Sir George Quigley's view that the Assembly should set "stretching economic targets", involving partnership with the private sector.[60]

First, much private-sector activity in Northern Ireland is low-skilled and low-productivity, which does require assistance from government if it is to move on to a higher growth path. Current policy is correct in eschewing generalised subsidy, as against facilitating private-sector expansion. But with additional resources, albeit for the short-run, this process could be hastened, particularly in the light of possible increases in foreign direct investment.

Secondly, private-sector wages in Northern Ireland have lagged behind those in the public sector, the latter thus tending to be viewed as an employer of first resort. Convergence in public and private wages-for similar skill levels- would be desirable. Such convergence might be brought about by decentralised public wage-setting.[61] Alternatively - and with a view to protecting the quality of public services - convergence might be sought via a high-wage economy, in which private wages matched public wages institutionally set.

The industrial policy required for these two scenarios would be quite different. A priority for the Assembly must be to determine whether industrial policy is to be based on a high - or low - wage economy.

Thirdly, as remarked above, a large (and growing) component of public expenditure in Northern Ireland is social security. The deployment of 'peace-induced' resources towards employment programmes can thus be seen as a proactive measure to reduce what is not only the largest component of public spending but also one which offers little in the way of tangible services.

Therefore, assuming that a climate of peace subsists, and the 'law and order' budget can return to its pre-'troubles' level, the acquired resources ought to be used to reshape the internal priorities of Northern Ireland public expenditure. A more equitable balance between social and economic services would provide the fiscal framework for general prosperity.

There are, however, two apparent constraints. First, the agreement floated the possibility of a Department of Equality.[62] However welcome, this would require the usual (substantial) resources. The new body would compete for public funds in the same way as existing departments, but there are obvious and unanswered concerns about the priority such a department would be given, relative to others. As to, secondly, north-south bodies, however, it may be that policies and expenditure will be more concentrated on overcoming differences between the two administrations-not least in employment and wage structures[63] - rather than service provision.

Along with the other 'Celtic fringe' regions/nations of the UK, Northern Ireland places a high value on public services- a fact which perhaps the English-dominated Conservative governments of the 80s and 90s never really appreciated. Services such as education are valued in their own right, not just in utilitarian (or economic) terms. It is therefore likely that the Assembly will wish to improve regional public services, while developing ambitious industrial policies. This further supports the argument for a regional tax.

For the first time in three decades, Northern Ireland is about to be in a position to determine its own priorities in key policy areas. The main political institutions are well mapped out, but for the Assembly to enjoy the success it deserves, the fiscal environment within which it will operate needs further consideration. In particular, the issue of accountability needs to be addressed.

And devolved government requires a change in the mindset of central government: it has got to learn to 'let go'.


1 Thanks are due to Colin Knox and Norman Gibson for comments on an earlier draft.
2 The Agreement: agreement reached in the multi-party negotiations, Cm 3883, 1998
3David Heald, 'Formula-based territorial public expenditure in the United Kingdom', Aberdeen papers in accountancy, finance and management W7, University of Aberdeen, 1992
4Norman Gibson, 'Northern Ireland and Westminster: fiscal decentralisation - a public economics perspective', in Northern Ireland Economic Council, Decentralised Government and Economic Performance in Northern Ireland, Belfast, 1996
5C Thain and M Wright, The Theasury and Whitehall: The Planning and Control of Public Expenditure, 1976-1993, Clarendon, Oxford, 1995
6Heald, 'Territorial public expenditure in the UK', Public Administration, no 72, 1994, pp 147-75
7Thain and Wright, op cit, p324
8If expenditure on services in Britain equivalent to those in the Northern Ireland block decreased by £100, then the Northern Ireland block would be reduced by £2.87.
9In 1976-96, percentage population change was: Northern Ireland +9.1, England +5.2, Wales +4.4 and Scotland -2.0 (Office of National Statistics, Population Trends, spring 1998).
10 Heald, Evidence to the Treasury Committee, Second Report: The Barnett Formula, House of Commons (Hc 341), London, 1997. The switch from volume to cash planning may also determine the process of convergence. For instance, instead of baselines being indexed to inflation-thereby reducing its impact-they are raised (from year two of the survey to the new year three) by 2 per cent.
11When the Treasury Committee requested comparative expenditures, the Treasury produced the following figures, stressing they represented broad orders of magnitude only: "In 1995/96, for Scottish block spending of around £13.7bn or £2670 per head, equivalent spending in England was around £98.7bn or £2020 per head; for Welsh block spending of some £6.5bn or £2230 per head, 'English equivalent' spending was some £87.2bn or £1780 per head; for Northern Ireland block spending of £7.7bn or £4680 per head, the 'English equivalent' was £173.3bn or £3540 per head." (Treasury Committee, March 1998, HC 619, p vii)
12 Treasury Committee, 1997, Q77
13 Heald, 1997, op cit
14 Thain and Wright, op cit, p325
15 Treasury Committee, 1998, op cit
16 Scotland's Parliament, Cm 3658, §7.4
17 Treasury, Needs Assessment Study: Report, HMSO, London, 1979
18 Treasury Committee, 1997, op cit
19 ibid, Q1
20 K Bloomfield and C Carter, 'Introduction' in People and Government: Questions for Northern Ireland, Chief Executives' Forum/Joseph Rowntree Foundation, 1998, p5
21 J M Mintz and TA Wilson, 'The allocation of tax authority: the Canadian federation', in R W Boadway, T J Courchene and D D Purvis eds, Economic Dimensions of Constitutional Change, John Deutsch Institute for the Study of Economic Policy, Queen's University, Ontario, 1991
22 Cases can also be made for some power to modify the rate of corporation tax, for example, to stimulate investment. But it is doubtful whether this can be done within EU policy constraints and problems arise in the regional attribution of profits if companies operate in more than one jurisdiction.
23 Treasury Committee, 1997, ibid
24 'Northern Ireland: towards a prosperous future', Northern Ireland Information Service release, May 12th 1998
25Similar problems arise in attempts to assess the impact of the public sector on personal distribution of income. The most significant tax expenditures include: occupational tax exemptions, mortgage-interest exemptions, corporation-tax capital allowances, capital-gains-tax exemptions and income-tax allowances. For the fiscal year 1997-98 tax expenditures are estimated to total some £95 billion.
26E Ahmad, 'Intergovernmental transfers: an international perspective', in Ahmad ed, Financing Decentralised Expenditures, Edward Elgar, Cheltenham, 1997
27J-L Migne, Federalism and Free Trade, Institute of Economic Affairs, London, 1993
28Deadweight effects in economics appear where an activity is subsidised which would have taken place even if the subsidy had not been granted.
29Barnett and Hutchinson, Public/private wage differentials in a regional economy: the case of Northern Ireland', Ulster Papers in Public Policy and Management, no 72, 1998
30There are a number of methodological problems associated with the public-expenditure/GDP ratio. One component, transfer payments, forms part of the numerator but not the denominator. A proportion of public expenditure will be consumed on imported goods and services which are not part of GDP. And public expenditure figures cover financial years, whereas GDP is calculated across calendar years.
31 See J V Simpson, 'The finances of the public sector in Northern Ireland: 1968-1978', Journal of the Statistical and Social Inquiry Society of Ireland, Vol XXIV, part II, 1980.
32Aside from the previous qualifications relating to the ratio, the decline in the PE/GDP ratio in Northern Ireland needs to be interpreted with caution. First, the base year (1979-80) represents a period when public expenditure was particularly high and, secondly, the ratio is still 18 percentage points higher than the UK average in 1995-96.
33Analysis of the public expenditure/GDP ratio across 20 OECD countries, over the period 1960-1990, found a decline in several cases, particularly between 1985 and 1990. See PA McNutt, The Economics of Public Choice, Edward Elgar, Cheltenham, 1996.
34H Oxley and J P Martin, Controlling government spending and deficits: trends in the 1980s and prospects for the 1990s, OECD Economic Studies 17, 1991
35Simpson, op cit
36M Smyth, 'The public sector and the economy', in P Teague ed, The Economy of Northern Ireland: Perspectives for Structural Change, Lawrence and Wishart, London, 1993
37Department of Economic Development, Belfast, 1987 and 1990 respectively
38G Esping-Andersen, The Three Worlds of Welfare Capitalism, Polity, Cambridge, 1990
39Department of Finance and Personnel, Northern Ireland Commentary on Public Expenditure Plans 1990-91 to 1992-93, Belfast, 1990, p3
40See Thain and Wright, op cit, p490 and P M Jackson, Planning, control and the contract state', in D Carry ed, Public Expenditure, Effective Management and Control, Institute for Public Policy ResearchlDryden Press, London, 1997, p229.
41 Cm 3978, 1998
42op cit, p318
43Standing Advisory Commission on Human Rights, Employment Equality: Building for the Future, Cm 3684, Stationery Office, Belfast, 1997
44Cm 3890, 1998
45Department of Finance and Personnel, Northern Ireland Expenditure Plans and Priorities: The Government's Expenditure Plans 1998-99 to 2000-01, Stationery Office: London, 1998
46Thain and Wright, op cit
47B Black, Collective bargaining structure in Northern Ireland: dimensions, determinants and development', Journal of the Statistical and Social Enquiry Society of Ireland, Vol XXV, part II, 1984-85
48NIO expenditure is negotiated and agreed separately with the Treasury - see Thain and Wright, op cit, p323
49Thain, Squaring the circle in public spending', Parliamentary Brief, vol 5, no 3, 1998, p24
51'Mo Mowlam welcomes £1.4 billion additional spending in Northern Ireland', Northern Ireland Information Service, July 14th 1998
52Treasury, Stability and In vestment for the Long Term: Economic and Fiscal Strategy Report, Cm 3978, Stationery Office, London, 1998
53V N Hewitt, 'The public sector', in Harris, Jefferson and Spencer eds, The Northern Ireland Economy: A Comparative Study in the Economic Development of a Peripheral Region, Longman, London, 1990
54P McKeown, R Barnett and G Byrne, An Initial Analysis of the Impact of Formula Funding and Local Management of Schools on the Management of Northern Ireland Schools: A School's Perspective, Research Report Series, Department of Education Northern Ireland, Belfast, 1997
55Institute for Fiscal Studies, The IFS Green Budget, London, 1998
56Although one aspect of current policy might be dropped-that access should not be a key determinant in the review-there will be a public-expenditure cost to this.
57As we note above, public wages set UK-wide may hinder the performance of the regional economy. From a social viewpoint, however, this might be viewed as an acceptable constraint on economic performance.
58 Cm 3883, p5.
59 C Knox, 'Local government', in Bloomfield and Carter eds, op cit
60G Quigley, 'Opening remarks', in NIEC, op cit
61P Teague and J McCarthy, 'Big differences that matter: labour market systems in Ireland, north and south', in J Bradley ed, The Two Economies of Ireland: Public Policy, Growth and Employment, Oak Tree Press, Dublin, 1995
62Cm 3883, p17.
63Teague and McCarthy, op cit

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