Department of Finance and Personnel

Government Spending – An Insight

3 September 2014

Mike Brennan

Outline

• UK Public Expenditure Environment• How Northern Ireland is Funded• In Year position 2014-15• Local Budget Process 2015-16• Long Term Financial Challenges for the

Executive

UK Public Expenditure Environment

£ Billion 2015-16 2016-17 2017-18 2018-19

Resource DEL

312.5 302.5 292.1 289.1

% change -3.2% -3.4% -1.0%

Capital DEL 36.7 38.0 37.2 39.1

% change 3.5% -2.1% 5.1%

OBR Forecast for UK

Source: OBR Economic and Fiscal Outlook – March 2014Note: Cash Terms

UK Public Expenditure Environment

• UK Government deficit reduction strategy set to continue

• Prioritise Capital Investment

• Constrained Resource DEL

• Measures to control growth in AME spending

- Welfare Reform

- Welfare Cap

- Public Sector Pension Reform

How Northern Ireland is Funded

• HMT DEL• 93%

• Regional Rates• 5%

• RRI Borrowing• 2%

Source: Budget 2011-15

NI Fiscal Deficit - Trend

0

2,000

4,000

6,000

8,000

10,000

12,000

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

£000

s Fiscal Deficit

Evolution of RDEL

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-157500

8000

8500

9000

9500

10000

10500

NI Resource DEL

LATEST RDEL RDEL at March 2011£ m

illio

n

Evolution of CDEL

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15600

700

800

900

1000

1100

1200

1300

NI Capital DEL

LATEST CDEL CDEL at March 2011

£ m

illio

n

Barnett Formula

• Changes in NI DEL funding determined through the Barnett Formula

• Uses population and comparability factors to determine impact for NI public expenditure decisions in England/Great Britain

• Protection for Health and Education in England has benefited Northern Ireland in recent years.

In-Year Monitoring Process

• In –Year Monitoring Rounds provide the Executive with an opportunity to redistribute surplus funding across departments in line with its priorities;

• Helps to ensure no funding is lost to Northern Ireland in the form of underspend by departments;

• 3 Monitoring rounds each year in June, October and January;

In-Year Budget Position – 2014-15

• Significant Resource DEL pressures in 2014-15;

• In-Year reductions of 2.1% agreed in June Monitoring;

• Protection for Health and Education;

• Welfare Reform penalty of £87 million unaddressed;

• Further reductions needed in October Monitoring round;

• Impact on public services

Local Budget Process

Key ActionDate

Executive Agree a Draft Budget Outline Position September 2014

Draft Budget Published End-September 2014

Ministerial Bi-Laterals and Public Consultation Sept - December 2014

Revised Proposals presented to Executive Mid December 2014

Revised Budget Published Early-January 2015

Timetable for NI Executive Budget 2015-16

Budget 2015-16 Settlement

Resource DEL – Real terms reduction of 1.6 %

NI Resource Non Ring-fenced Resource

(£m)

2014-15 9,691.3

2015-16 9,691.1

Difference -0.2

Budget 2015-16 Settlement

Capital DEL – Increase due to Financial Transactions Capital

NI Capital Conventional

Capital (£m)

Financial

Transactions

Capital (£m)

Total (£m)

2014-15 988.3 62.8 1,051.1

2015-16 964.6 127.7 1,092.3

Difference -23.7 64.9 41.2

Budget 2015-16 Challenges

• 1.6 % Real Terms reduction in Resource DEL

• Pay and pension cost pressures

• Welfare Reform Costs - HMT penalty £114 million

• Healthcare pressures

• Potential for significant percentage reduction to departmental Resource DEL budgets

Budget 2015-16 Challenges

• Reduced Conventional Capital funding

• Financial Transactions Capital increasing

- Loans or equity investments to the private sector

- Partially repayable to HMT

- State Aid issues

- Proving challenging to establish suitable schemes

Long Term Financial Challenges for the Executive

• Addressing Continued Budget Constraints– Delivery of more with less– Public Sector Reform– Asset Management Strategy

• Welfare Reform• Financial Transactions Capital• RRI Borrowing• Corporation Tax?

NI Population Projection in the context of Public Expenditure Constraints

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 20251,700.0

1,750.0

1,800.0

1,850.0

1,900.0

1,950.0

2,000.0

Source: NISRA

Workforce Reductions…..NI Public Sector Employee Jobs

210,000

212,000

214,000

216,000

218,000

220,000

222,000

2010 2011 2012 2013

Source: Quarterly Employment Survey

But less than the rest of the UK

Public Sector Employment - % Change 2010 to 2013

-12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0%

England

Wales

Scotland

NI

UK

Source: Quarterly Employment Survey

Public Sector Reform• High priority for the Finance Minister.

• Scope to utilise the experience of OECD.

• Many areas provide scope for reform:- Greater Digitalisation of services.- Asset management.- Early intervention / prevention.- International Benchmarking.- Innovative approaches to public service delivery.

Asset Management Strategy

Objectives: 1. To reduce net cost of service delivery through efficient use of assets; and2. To promote effective asset management processes that unlock value. Costs:• Annual running cost of public sector assets – £1.2bn.• Significant scope for efficiency savings:

- Offices: £54m of annual lease cost liabilities expiring by 2022. - Procurement: 5% saving = £44m.- Social Housing stock: Maintenance £150m pa; stock valued at £225m.

Funding:The Executive agreed £3.6m Resource DEL and £23m Capital DEL in the 2014-15 June Monitoring round to progress schemes aligned to the Asset Management Strategy.

Welfare Reform

• Contentious issue with a very substantial price tag.

• HMT Penalties of not progressing Welfare Reform of £87 million

this year and £114 million in 2015-16, rising quickly to more than £200 million per annum.

• Potential loss of some 1,400 DWP jobs located in Northern Ireland.

• Costs associated with procuring our own IT system prohibitive – some £1.5bn.

• Ability to process payments to claimants will be impacted from 2016.

Financial Transactions CapitalFinancial Transactions Capital

£000s  2012-13 2013-14 2014-15 2015-16   Total Funding Available 11,839 46,755 68,625 127,672   Invest NI - Agri-Food Loan Scheme 10,000 NI Science Park 400 2,100Dental Practices 2,500 GP Premises 2,500 Get Britain Building 11,839 7,200  Affordable Home Loans 5,000 7,500 Empty Homes Scheme 3,700 5,500 University of Ulster 25,000 10,000    Total Projects: 11,839 40,900 38,400 0   Residual Available 0 5,855 30,225 125,572

Continued use of RRI Borrowing

• Provides for around £200 million of additional Capital expenditure by the Executive each year,

• Has delivered significant improvement in infrastructure;

• Outstanding debt around £1.6 billion;

• Interest cost of £54 million this year and rising;

• Executive to consider future levels of RRI borrowing in the context of rising interest costs and constrained Resource DEL allocations.

Corporation Tax

• UK Government to provide clarification on the devolution of Corporation Tax in the Autumn following the outcome of the Scottish referendum on independence;

• Any decision to devolve Corporation Tax to the Executive and subsequent reduction in the rate of Corporation Tax will cause HM Treasury to reduce the NI Executive’s Resource DEL budget;

• Extent of reduction not yet agreed but may well be hundreds of millions of pounds;

• Costs need to be weighed against potential economic benefits.

Questions?