A cliche of British politics is that Labour always bankrupts the country. The present government appears in danger of doing so in near-record time.
Chancellor Rachel Reeves keeps trying to fill a hole in the budget with growth-killing taxes that only dig the hole deeper. Attempts to rein in welfare spending have been destroyed by a backbench revolt. London’s borrowing costs are rising as its credibility falls, digging the hole much, much deeper.
The UK is stuck in a “debt doom loop”, US hedge fund billionaire Ray Dalio says. At least this will eventually bring Labour’s profligacy to an end.
Northern Ireland watches all this with an oddly detached complacency. Nationalists cite it to argue for a united Ireland, of course, but that is just political business as usual.
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Nobody seriously expects a punishing cut to Stormont’s £18 billion (€20.8 billion) block grant or to overall public spending in the region. Northern Ireland is too small and awkward – any savings would not be worth the grief.
History bears this view out. After the UK was forced to take an IMF bailout in 1976, public spending in Northern Ireland stalled in real terms for almost a decade, but it did not fall. Security costs during the Troubles did not explain this: ordinary decent public spending held up as well.
Much the same happened after the 2008 financial crash. The UK’s net transfer to Northern Ireland, known as the subvention, even increased during the Great Depression of the 1930s.
Reeves has promised to maintain Stormont’s block grant until 2029 under a UK-wide spending review published in June. There is no suggestion the budget might then fall – 2029 is simply the end of the review period.
Although that promise could be derailed by events, devolution offers some protection. It would look strange to cut spending in Northern Ireland without matching cuts in Scotland and Wales, where Labour holds two-thirds of Westminster seats. Conversely, Scotland and Wales will tolerate some favourable treatment of Northern Ireland. Stormont can still count on its status as a special case.
Northern Ireland’s £9 billion annual welfare bill is paid directly by London, separately to Stormont’s block grant. This confusing arrangement is unique in the UK, a legacy of when Northern Ireland was the only devolved region. It can cause political instability when welfare spending falls, as Stormont is expected to administer cuts. Sinn Féin blocked executive business for three years from 2012 rather than implement modest welfare reforms.
There would have been consternation at Stormont had Reeves succeeded in her initial welfare reform plans, which focused on disability benefits. The backbench revolt appears to have postponed that idea for the foreseeable future.
Now the chancellor is looking at the state pension to find major savings. Although this will also cause consternation, few people think of the state pension as a benefit and any changes might not come into effect for years, so Stormont could escape any political fallout.
The missing part of this equation is tax. As Labour seems culturally incapable of cutting spending, taxation is bound to go through the roof. Stormont has no significant taxation powers and little interest in acquiring them, rendering itself a spectator as Reeves desperately casts around for revenue.
However, Northern Ireland’s middling incomes and low house prices put it on the edge of her fiscal firing line.
The chancellor is reportedly considering a sales tax on houses worth more than £500,000. That would have applied to only 85 sales in Northern Ireland last year.
Labour has a manifesto commitment not to raise taxes on “working people”, including income tax and VAT.
Reeves got around this in her first budget last October by raising taxes on employers, needlessly damaging the job market, especially at its lower-paid end. While this has harmed Northern Ireland, its 2.4 per cent unemployment rate remains the lowest in the UK.
Plans have also been reported to raise council taxes in wealthier parts of England. This would have no direct bearing on Northern Ireland and might indirectly put up Stormont’s block grant, due to the complexities of devolutionary accounting.
A common nationalist hope and unionist fear is that English taxpayers will resent Northern Ireland’s well-insulated existence and demand funding be cut.
There is no sign of this to date, although patience will be tested as Britain runs out of money. Stormont may well be denied extra funding it would otherwise have received. But there is no plausible mechanism by which such resentment could slash the subvention, certainly while Labour is in power. That is not how devolutionary accounting works.
The most significant impact in Northern Ireland from Labour’s economic mismanagement could be the psychological effect of watching the UK falter under yet another hapless government. Unionist demoralisation and nationalist exasperation can only deepen as Reeves keeps digging the hole.
