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


Conclusion

Paul Gorecki[1]

The governance of the United Kingdom is entering uncharted waters, with the creation of devolved institutions in Wales, Scotland and Northern Ireland. No longer will public-expenditure levels and priorities be set in London by a single government consisting of one party responsible for the whole of the UK, with some adaptation to suit regional needs and circumstances.

Instead, regionally elected and accountable politicians will have a much greater voice in determining these levels and priorities in their respective jurisdictions. While there will be differences reflecting the particular powers and responsibilities devolved across Wales, Scotland and Northern Ireland, there will also be common concerns that transcend these differences.

Several important themes emerged from the round-table. Although its focus was firmly on Northern Ireland, there will be resonances in Wales and Scotland. Indeed, there should be ample opportunity for each jurisdiction to learn from the others as the devolution process gathers steam.

Four themes are worth developing:

  • Is the Barnett formula for determining public expenditure sustainable?
  • Should the new Assembly have taxation powers?
  • Are Northern Ireland's attitudes to public expenditure tenable?
  • Can and will public-expenditure priorities differ radically under the Assembly?

It was argued by several of the contributors to the seminar that the Barnett formula had worked to Northern Ireland's advantage since introduced in 1979. Public expenditure per capita had started off well above that in Great Britain when the formula was first applied. And while strict application should have led to gradual convergence with the rest of the UK, this had not happened to the extent anticipated. Decisions on public expenditure had been made outside the formula and these had benefited the disadvantaged territories, including Northern Ireland.

There can be no automatic assumption, however, that the Barnett formula will survive the devolutionary process as the basis for allocating public expenditure across the UK. Although it was designed at a time when devolution was being considered, it has never actually been tested in that environment. Instead of being a method for allocating public expenditure between different tiers of government, Barnett has been a convenient mechanism - often misrepresented and even more frequently misunderstood, according to David Heald - for transferring money internally within one government. There can be no guarantee it will survive in the new context.

Indeed Barnett is already the subject of much debate in England. The initial stages of the London mayoral election led to headlines such as London "subsidises rest of UK by up to £l4bn"'.[2] The North East Chamber of Commerce, Trade and Industry argues that much has changed since Barnett was introduced and these changes need to he reflected in a revised formula-otherwise, inequality of treatment will continue. If this rising chorus of disapproval continues - as seems likely as regional development agencies and chambers are created in England - the issue of territorial public-expenditure allocation is unlikely to go away.

Thus the perceived favourability of Northern Ireland's public-expenditure treatment is likely to be increasingly questioned. Sooner or later, a new method of allocating territorial expenditure across the UK will be devised, to ensure broad democratic support is sustained. In countries like Canada, which have a federal structure and explicit rules for allocating expenditure between levels of government, changes of circumstance - such as the OPEC oil-price hikes of the 70s or the federal government's large debt in the 80s-cause the rules to be re-examined. Recently, the European Commission has raised the whole issue of how EU contributions are distributed across the various member states. As circumstances change so policy needs to be reassessed.

It is frequently argued - and with good reason - that governments should be accountable to the electorate in raising taxes to pay for the public services provided by the state. There are costs associated with higher taxes: loss of efficiency, administrative expenditure and reductions in personal or corporate income. These need to be offset against the benefits of public expenditure, such as provision of health care, education, social security and reduced inequality.

If the costs and benefits are considered at the same time, the size of the state should expand to the point where the marginal or additional benefit provided by a public service is equated to the marginal or extra cost represented by a tax. Different political parties offer different packages to the electorate, as they seek to find the trade-off preferred by sufficient voters to win an election.

Since Northern Ireland is part of a centralised rather than decentralised or federal state, such a procedure does not occur. Levels of taxation and public expenditure are determined separately. Furthermore, given the substantial difference between tax revenues and public expenditure - a deficit of the order of several billion pounds - the level of taxation required to pay for regional public services in full would be prohibitive. Smith, for example, estimates that the standard rate of income tax would have to increase from 24 to 55 per cent, and the top rate from 40 to 91 per cent, if all Northern Ireland public expenditure were to be financed by regional taxation.[3]

It is not uncommon in multi-tier government systems, however, for a level in receipt of substantial net contributions from a higher tier to be given some tax-varying powers at the margin. In other words, instead of full accountability (all public expenditure at that level funded through taxation at that level), there is marginal accountability (tax voted at that level covering only a portion of expenditure at that level).

Scotland's Parliament, for example, will have the power to vary the standard rate of income tax by 3p in the pound. Such a power has the advantage that should the devolved legislature wish to spend more than is set by the higher level of government, the lower tier has the ability to do so. It can help avoid unproductive disagreements between different levels of government.

There are no proposals in the Belfast agreement for the Assembly to have tax-varying powers. While the existing power over the regional property rate will remain, Smith shows convincingly this is not a good base for regional taxation.[4] By far the best is a regional income tax. Thus Northern Ireland-for reasons of accountability and efficiency-should eventually adopt a regional taxation system, based on income rather than property.

Attitudes to the role of the public sector have changed dramatically in the world since World War II. As John Loughlin indicated, there has been a movement away from the 'expanding welfare' state of the late 40s and 50s, through the 'contracting neo-liberal' model of the 80s and 90s, to an 'enabling communitarian/social' variant in the late 90s - this last could be described as 'neo-liberalism with a human face'. Northern Ireland operates in this wider framework, which shows, as Vani Borooah notes, every sign of being less than receptive to substantial increases in public expenditure in relation to gross domestic product.

Public expenditure is large in relation to the regional economy: its ratio to GDP is around 60 per cent, compared with 40 per cent for the UK as a whole. Furthermore, there seems to be a pervasive view in Northern Ireland that public expenditure, or some other aspect of public policy, always holds the key to resolving a particular problem.

At its worst, this results in a 'dependency culture' that permeates all sectors of the economy and inefficient public-policy decisions (because regional policy failures are funded by central government); at its best it brings imaginative and innovative policy interventions. Yet no matter whether one favours a malign or benign perspective on this, what is striking is that the implicit model harks back to the expansive welfare state of the immediate aftermath of the second world war. Things have moved on.

This dissonance may in some measure reflect the lack of any relationship between tax and public expenditure in Northern Ireland, the substantial growth in the public sector in the 70s-when the state successfully alleviated such important social problems as bad housing-and a quarter century in which regional politicians were in permanent opposition. Irrespective of the reason, however, some adjustment will be required in the degree to which the state can be expected to solve the economic and social problems of Northern Ireland.

The establishment of devolved institutions creates the opportunity for regional preferences to determine where public expenditure should be allocated, what services should be provided and the delivery mechanism(s) through which this should take place. Much public expenditure in the regional economy relates to 'transferred' matters and thus comes within the ambit of these new institutions, particularly the Assembly.

This, theoretically at least, raises the possibility that priorities and the resulting pattern of public expenditure could be radically altered. Yet, while there will clearly be greater differences between Great Britain and Northern Ireland, it would seem much more likely that any changes-initially at least - will be gradual and at the margin.

Radical change in the role of the state and the pattern of public expenditure typically takes place with strong governments which have a sense of direction. The Labour government of 1945 ushered in the welfare state, while the Conservative governments of the 80s set the new-right agenda. In both cases, the change in government was the signal for the advent of a new model of the role of the state, a decisive break with the past - a break accepted, albeit with some modification, by successive governments of a different political complexion.

In the devolved institutions of Northern Ireland, no one party has overall control. Indeed, government is by an involuntary coalition which spans parties with quite different ideologies and support bases. Furthermore, it is not clear where the locus of power will reside: the Executive Committee? the minister? the relevant Assembly committee? This suggests that compromise and marginal change will be the hallmark of governance. Indeed, as a leading political scientist in Northern Ireland recently observed, the first and deputy first minister have a vision of moving Northern Ireland politics towards "a middle ground consensus".[5]

In addition, although Northern Ireland will have devolved institutions, it will still be operating within the UK system of governance. To the extent that the policies and priorities of the UK seem attractive to voters in Northern Ireland, there will a tendency to follow that lead. Recall that in the 40s the then Stormont government was reluctant to introduce some of Labour's welfare-state reforms, but the pressure was eventually irresistible.

The strong ties across the UK, in terms of pay and conditions, arising from UK-wide collective bargaining are likely to limit the possibility of a social-partnership model, such as that practised in the Republic of Ireland. Nevertheless, the continued economic success of the republic will likely result in an assessment of how binding such constraints are in applying its social-partnership model to Northern Ireland. The region will still receive considerable fiscal transfers from the rest of the UK, which will mean the Treasury will continue to exert pressure and influence.

Finally, if Northern Ireland were to follow policies that differed radically from those of the rest of the UK, and if these were to fail, then the issue would arise as to who, if anybody, would bail the region out. Given the tight constraints on public expenditure and the above discussion, it would appear the answer would be Northern Ireland voters-in terms of lower expenditure on health and education. Risk-averse politicians are unlikely to follow policies that could result in such an outcome.

Despite considerable theoretical discretion over spending, therefore, it seems likely rapid change will not occur. But politicians need to walk before they can run-to learn the ropes of administration and democratic accountability-particularly when the structures are so novel. Thus while change at first might be marginal, as time elapses and politicians learn their roles better, bolder decisions will increasingly be the order of the day.

Northern Ireland, according to several contributors to the round-table, has done relatively well in public-expenditure terms since 1979. But the changed circumstances of devolution will mean that the current method of allocation across the UK will be reassessed and Northern Ireland is likely to receive less public expenditure than would otherwise be the case. Increased public accountability suggests that the Assembly should have limited powers over regional income taxation, as proposed for Scotland. This would, of course, be in addition to - not a replacement for - the level of public expenditure set by Barnett or any successor. Although the Assembly has theoretically wide discretion over priorities, powerful forces will operate, in the short term at least, to preserve the status quo.

Thus public expenditure in Northern Ireland is taking place in a cold climate. In these conditions, the quality of public-policy decisions becomes very important. Priority-setting and value-for-money considerations come to the fore. And at the forefront, government might wish to promote, according to Vani Borooah, growth with development. The talents and aptitude of each member of society should be given every chance to grow to their full potential and be appropriately rewarded.

Thus public policy should be concerned with more than maximising the growth of the economy as measured by GDP. Attention should be devoted to:

  • reducing unemployment,
  • eliminating educational underachievement,
  • abolishing poverty,
  • securing equality of opportunity, and
  • mitigating inequality of income.

One of the important lessons of a recent study of successful European regions[6] is that the social dimension is crucial if a region is to be considered a success.

Footnotes
1This is the author's interpretation of the views expressed by the participants at the seminar and it does not necessarily reflect those of the NIEC. I should like to thank colleagues at the council, Democratic Dialogue and the Eastern Health and Social Services Board for comments on an earlier draft.
2 Financial Times, August 28th 1998
3S Smith, 'Regional government, fiscal and financial management in Northern Ireland', in Northern Ireland Economic Council, Decentralised Government and Economic Performance in Northern Ireland, occasional paper 7, NIEC, Belfast, 1996
4ibid
5P Bew, '100 days of Trimble and Mallon' Belfast Telegraph, October 7th 1998
6 M Dunford and R Hudson, Successful European Regions: Northern Ireland Learning from Others, research monograph 3, NIEC, Belfast, 1996

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Notes on contributors

Robin Wilson is director of Democratic Dialogue.

John Loughlin is professor of European politics, and Jean Monnet chair in European political economy, at Cardiff University.

Vani Borooah is professor of applied economics at the University of Ulster.

Richard Barnett is professor of public finance and management, and dean of the faculty of business and management, at the University of Ulster.

Graeme Hutchinson recently completed his doctorate at the University of Ulster on the growth and impact of public expenditure in Northern Ireland.

David Heald is professor of accountancy at the University of Aberdeen and specialist adviser on public expenditure and government accounting to the Treasury Committee.

Paul Gorecki is director of the Northern Ireland Economic Council.

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DD Publications

Reports are £7.50stg each for individuals, £10 for institutions, £4 for unwaged/students; please add 10 per cent p&p. Any six reports can be ordered for £37.50 net. Papers are £1 each, plus p&p. Orders can be by letter, phone, fax or e-mail; cheques are payable to Democratic Dialogue. Further details of the publications are on the DD web site.

Reports

Report 1: New Thinking for New Times
Report of DD's launch conference in Belfast in 1995, including keynote address on 'the new context of politics' by Prof Anthony Giddens, director of the London School of Economics (June 1995)

Report 2: Social Exclusion, Social Inclusion
An international review of strategies to combat social exclusion, followed by concrete policy proposals to achieve a cohesive society in Northern Ireland (November 1995)

Report 3: Reconstituting Politics
Radical new approaches to constitutional possibilities for Northern Ireland, citizen involvement in policy-making and the reinvention of politics itself (March 1996)

Report 4: Power, Politics, Positionings - Women in Northern Ireland
An assessment of where women stand in the political parties, the voluntary sector and the media, and how their participation in public life can be enhanced (October 1996)

Report 5: Continentally Challenged-Securing Northern Ireland's Place in the European Union
How Northern Ireland can reposition itself regionally in Europe, and articulate a more cohesive voice, against a fast-moving backdrop of change across the continent (February 1997)

Report 6: Politics - The Next Generation
An unprecedented survey of the attitudes of young people, based on questionnaires and focus groups, backing a case for political education and local youth representation (April 1997)

Report 7: With All Due Respect-Pluralism and Parity of Esteem
Setting Northern Ireland's nationalism debate in the wider context of identity politics, and indicating how 'parity of esteem' can promote pluralism rather than polarisation (June 1997)

Report 8: Politics in Public-Freedom of Assembly and the Right to Protest
A detailed comparative study demonstrating how the right to march' is qualified in diverse jurisdictions, pointing to a resolution of Northern Ireland's parades controversy (March 1998)

Report 9: New Order-International Models of Peace and Reconciliation
An assessment of the Belfast agreement in the light of the evolving architecture for security and human rights in Europe, with a focus on non- and inter-governmental organisations (May 1998)

Papers

Media and Intrastate Conflict in Northern Ireland
A paper commissioned by the European Institute for the Media (July 1997)

Making 'consent' mutual
An exploration of the 'consent principle' in Northern Ireland (October 1997)

Making democracy work
A paper commissioned by the Northern Ireland Council for Voluntary Action (February 1998)

Economic governance-international experiences: a new direction for Northern Ireland
A paper commissioned by the Confederation of British Industry Northern Ireland (March 1998)

Two-tier policing - a middle way for Northern Ireland?
An international model which could offer a way beyond a polarised debate (March 1998)

Elections in Northern Ireland-systems for stability and success
A look at options for elections to the Assembly to assist a gender balance (April 1998)

Irish nationalisms in perspective
Torkel Opsahl memorial lecture by Prof Fred Halliday of LSE (May 1998)

The Civic Forum - a consultation document from New Agenda
A discussion, derived from a civil society network, of the role of the Civic Forum (August 1998)

Reinventing government-a once-only opportunity
Proposals for holistic government and a departmental shake-up (August 1998)

Scotland's parliament-lessons for Northern Ireland

A cautionary story of the devolution debate in Scotland (September 1998)

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Recent NIEC Publications

Reports

104 Northern Ireland and the Recent Recession: Cyclical Strength or Structural Weakness? (August 1993)
105 Annual Report 1992-93 (October 1993)
106 Autumn Economic Review (October 1993)
107 Transport Infrastructure and Policy in Northern Ireland (November 1993)
108 Economic Assessment: April 1994
109 The Impact of CAP Reform on Northern Ireland (June 1994)
110 The Reform of Health and Social Care in Northern Ireland: An Introduction to the Economic Issues (July 1994)
111 The Implications of Peripherality for Northern Ireland (August 1994)
112 Annual Report 1993-94 (October 1994)
113 Autumn Economic Review (October 1994)
114 Annual Sir Charles Carter Lecture, 'Britain and Northern Ireland, The State We're In- Failure and Opportunity', by Will Hutton, economics editor of the Guardian (November 1994)
115 Annual Sir Charles Carter Lecture, 'Competitive Dynamics and Industrial Modernisation Programmes: Lessons from Japan and America', by Michael H Best, Centre for Industrial Competitiveness, University of Massachusetts, Lowell (September 1995)
116 Annual Report 1994-95 (October 1995)
117 Taxes, Benefits, Unemployment and Poverty Traps in Northern Ireland (November 1995)
118 The 1995 UK Budget: Background and Implications for Northern Ireland (February 1996
119 Annual Report 1995-96 (Oct 1996)
120 Annual Sir Charles Carter Lecture, 'Reforming Education in the United Kingdom: The Vital Priorities', by Sir Claus Moser KCB CBE FBA, The British Museum Development Trust (January 1997)
121 Rising to the Challenge: The Future of Tourism in Northern Ireland (February 1997)
122 The 1996 UK Budget: Implications for Northern Ireland (March 1997
123 Industrial Policy Assessment and Performance Measurement-The Case of the 1DB (April 1997
124 Annual Report 1996-97 (October 1997
125 The 1997 UK Budget: Implications for Northern Ireland (November 1997)
126 Annual Sir Charles Carter Lecture, 'Setting Priorities for Health Care: Why Government Should Take the Lead', by Chris Ham, Professor of Health Policy and Management and Director, Health Services Management Centre, University of Birmingham (January 1998
127 A Framework for Economic Development: The Implications for Northern Ireland of the 1998 UK and EU Budgets and the Chancellor's Economic Strategy for Northern Ireland (June 1998)


Occasional paper series

1 Reforming the Educational System in Northern Ireland: A Comment on 'Learning for Life' and Recent Developments in the Education System (January 1995)
2 Demographic Trends in Northern Ireland: Key Findings and Policy Implications (March 1995)
3 'Through Peace to Prosperity', proceedings of the peace seminar hosted by the Economic Council (April 1995)
4 The Economic Implications of Peace and Political Stability for Northern Ireland (June 1995). A supplementary paper to NIEC Occasional Paper 4: The Implications of Peace and Political Stability in Northern Ireland for Selected Sectors: Inward Investment, Tourism and Security (June 1995)
5 Health and Personal Social Services to the Millennium: A Response to Regional Strategy for Health and Social Wellbeing, 199 7-2002 (December 1995
6 Building A Better Future: A Response to Building on Success. Proposals for Future Housing Policy (May 1996)
7 'Decentralised Government and Economic Performance in Northern Ireland' proceedings of the seminar sponsored by the NIEC in association with the University of Ulster on 19 June 1996 at the University of Ulster at Jordanstown (December 1996)
8 Towards Resolving Long-Term Unemployment in Northern Ireland. A Response to the Long-Term Unemployment Consultation Document (June 1997)
9 The Impact of a National Minimum Wage on the Northern Ireland Economy. A Response to the Low Pay Commission (February 1998


Research monograph series

1 Demographic Review Northern Ireland 1995, by Paul Compton (March 1995)
2 The Arts and the Northern Ireland Economy, by John Myerscough with a statement by the Economic Council (January 1996)
3 Successful European Regions: Northern Ireland Learning From Others, by Michael Dunford and Ray Hudson with a statement by the Economic Council (November 1996)
4 Educational Achievement in Northern Ireland: Patterns and Prospects, by Tony Gallagher, Ian Shuttleworth and Colette Gray with a statement by the Economic Council (December 1997)
5 Competitiveness and Industrial Policy in Northern Ireland, by John H Dunning, Edward Bannerman and Sarianna M Lundan with a statement by the Economic Council (March 1998)
6 Regional Economic and Policy Impacts of EMU: The Case of Northern Ireland, edited by John Bradley with a statement by the Economic Council (April 1998)
7 Improving Schools in Northern Ireland, by Tony Gallagher, Ian Shuttleworth and Colette Gray with a statement by the Economic Council (August 1998)

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