Autumn Statement 2016: a fiscal molehill?

Has the Chancellor’s statement had the mountainous impact on the Executive’s budget that was expected?

On 23 November 2016, the United Kingdom (UK) Chancellor Philip Hammond made his first, and what turns out to be the last ever, Autumn Statement. This was to be a ‘fiscal reset’, overhauling the fiscal policy set by George Osborne. Mr Hammond took the opportunity to set out three new fiscal rules, confirming the UK Government has abandoned its plan of reaching a spending surplus by 2020.

The Government’s change in fiscal ‘direction of travel’ should come as a surprise to no-one at all. After all, it had been widely trailed in the wake to the European Union referendum. In addition, as the Institute for Fiscal Studies (IFS) has pointed out, the UK Government had ‘the unimpressive record of meeting nought-out-of-three of its fiscal targets’.

Impact on Northern Ireland

In Northern Ireland (NI), the Executive appeared to be concerned that the fiscal reset would wreak havoc on its carefully laid budget planning for the 2017-18 year and beyond. In September 2016, the Department of Finance wrote to the Committee for Finance stating that the prospect of a fiscal adjustment introduced ‘significant public expenditure uncertainties’. The Executive, therefore, decided to restrict its forthcoming draft budget to a one-year exercise for Resource DEL. (However, for Capital DEL, it is to set out budget plans for a longer period.)

The uncertainties noted by the Executive were presumably fears that there might be further reductions to the Executive’s Resource DEL for the coming years. Finance Minister Máirtín Ó Muilleoir noted that the Autumn Statement ‘did not reverse the 4.1% real terms reduction in our Resource budget’. In other words, the uncertainty did not translate into further reductions to Resource DEL. So, it appears the Executive may have been overly cautious by not bringing forward a multi-year Resource budget; admittedly this is easy to say after the event.

Additional Capital Investment

In the end, the Chancellor appears to have heeded the advice of many, such as the Organisation for Economic Cooperation and Development (OECD), which recently stated:

OECD governments could finance a ½ percentage point of GDP productivity-enhancing fiscal initiative […] Such an initiative could encompass high-quality spending on education, health and research and development as well as green infrastructure that all bring significant output gains in the long run.

So in terms of Northern Ireland, the Autumn Statement 2016 has delivered some additional Capital DEL for the Executive: it will receive an extra £250m between now and 2020-21, through Barnett Consequentials. It is for the Executive to decide how to spend this money.

It is worth noting for context that while £250 million is a significant sum, it is spread over a number of years (see Table below). The UK Government’s Spending Review 2015 gave the Executive for each year up to and including 2020-21 a Capital DEL allocation of around £1.1 billion, i.e. approximately £1,100 million per year. In this context, the additions are not mountainous, though they are, no doubt, welcomed by the Executive.

Table 1: 2016 Autumn Statement Barnett Consequentials (Source: Department of Finance)

Reductions for 2019-20

The Chancellor also confirmed that spending reductions announced in the Spring Budget 2016 for the 2019-20 year will go ahead. The Autumn Statement document states:

As announced at Budget 2016, the government intends to identify £3.5 billion of savings in 2019-20. The government intends to allocate £1 billion of these savings for re-investment in priority areas.

If the full £3.5 billion of identified savings actually materialises, and is applied through the Barnett Formula, this could imply a maximum reduction in the Block Grant of approximately £118 million. But, if the UK Government chooses to protect areas such as health and education, the properties of the Barnett Formula will shelter Northern Ireland from some of those reductions.

On the same basis, if the Executive received Barnett Consequentials on the full reinvestment of £1 billion, that would result in a maximum addition of about £34 million, i.e. a net reduction of approximately £84 million.

Compared to the additions announced on 23 November, even £84 million does not perhaps appear overly mountainous. The Table shows additions of £87.4 million for 2019-20. The difficulty for the Executive, however, is the fact that the Chancellor said these further changes will not be formally confirmed until after an Efficiency Review reports in autumn 2017.

Corporation Tax

The other issue of note for the Executive’s budget going forward concerns the UK Government’s announcement that the UK main rate of corporation tax will fall to 17%, as confirmed by the Chancellor. Two potential impacts of this change, if the Executive sticks to its plan in 2018 and cuts Northern Ireland’s corporation tax to 12.5%. First, on a positive note, the cost of that reduction to Northern Ireland’s block grant would be expected to be lower, given the forthcoming drop in the UK rate. And the second potential impact, less positive, may be the competitive advantage that Northern Ireland corporate taxpayers might get over those based in other parts of the UK would be reduced. Whether each impact materialises rests on how the Executive responds.