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Official Report (Hansard)

Session: 2008/2009

Date: 29 April 2009

NORTHERN IRELAND ASSEMBLY 
COMMITTEE FOR 
FINANCE AND PERSONNEL

Implications of the Chancellor’s Budget for Northern Ireland

29 April 2009

Members present for all or part of the proceedings:

Mr Mitchel McLaughlin (Chairperson)
Mr Simon Hamilton (Deputy Chairperson) 
Dr Stephen Farry 
Mr Fra McCann 
Ms Jennifer McCann 
Mr David McNarry 
Mr Adrian McQuillan 
Mr Declan O’Loan 
Mr Ian Paisley Jnr 
Ms Dawn Purvis 
Mr Peter Weir

Witnesses:

Mr Richard Pengelly ) Department of Finance and Personnel 
Mr Paul Montgomery )

The Chairperson (Mr McLaughlin):

I welcome Richard Pengelly and Paul Montgomery. You have both been here often enough, so members already know you. Please give us a summary of the Budget implications before we then go into the detail?

Mr Richard Pengelly (Department of Finance and Personnel):

Thank you. We are still working through the detail of the Budget. Today, I will run through some of the key headline messages. The Committee requested a paper, but as the Budget was announced only last week, we have been working with the Minister on that paper and we will get it to the Committee as soon as it has been cleared.

I will touch on three main areas; public expenditure implications; UK-wide measures; and the Treasury forecast for the economy. As regards Northern Ireland public expenditure, the outworking of the additional £5 billion efficiency savings in 2010-11 is £122·7 million. Prior to the Budget our expectations were of a worst-case scenario of £140 million, so it was a bit less than feared, but not significantly less.

We were surprised to receive more than £116 million of additional allocations for this year and next. One analysis suggests that setting that £116 million against £122·7 million makes the situation largely neutral. Also, it is estimated that some of the social security measures that the Treasury announced will mean that there will be an increase of around £27 million additional spending in Northern Ireland through annually-managed expenditure.

The other key point about public expenditure is that the Treasury growth forecast has been reduced from 1·2% real per annum to 0·7% beyond the spending review period. A whole raft of UK-wide measures has been announced; increasing capital allowances; increasing winter fuel allowances; and the UK-wide car-scrapping scheme. We will talk about those measures in more detail.

Finally, I will say something about wider economic forecasting. It is forecasted that gross domestic product (GDP) will fall by 3·5% in 2009, which is quite an increase on the pre-Budget report (PBR) forecast of between 0·75% and 1·25%. The Treasury is predicting that we will see signs of growth later in 2009 and early in 2010. I attended a meeting of Treasury officials last Thursday at which the Treasury acknowledged that that prediction is optimistic.

The Chairperson:

That is not the word that I was thinking of.

Mr Pengelly:

There is an element of crossing fingers and hoping for good fortune in that forecast. The other key borrowing forecast is the Treasury’s forecast of a reduction in public-sector borrowing from £175 billion next year to £97 billion in 2013-14. It will be a long path to recovery, and even the figure of £97 billion in 2013-14 amounts to 79% of GDP, which is a quite significant debt burden for the medium term. Those are the key points that I wanted to cover, Chairperson.

The Chairperson:

Are there any obvious implications or impacts at this stage?

Mr Pengelly:

The obvious impacts are the efficiencies and the additional allocations. However, in a sense across the two years, we will be losing £123 million and gaining £116 million, resulting in a £7 million differential. Compared to the most negative forecasts, that is a neutral position. Handling that situation — how to deploy the £116 million and manage the £123 million — will be for the Executive to consider in the June monitoring round. There is an option to set the figures off against each other and leave the situation in neutral, but that is for discussion in June.

Mr Hamilton:

It seems to me that the situation breaks down into two different chunks in the way that it affects us; the more immediate impact of the further efficiencies and the additional allocation, and the long-term, post-2011 impact, which is a little less clear.

The £123 million in further efficiencies will require some adjustments to be made: you said that the Executive will have to consider the impact, and that it could result in an offset. What consideration has been given to achieving efficiencies? If efficiencies are not achieved by taking money from one hand and putting it in the other, where the net effect will be minimal, and if we go down the route of implementing efficiencies and allocating the £116 million to specific projects, how will we achieve that in practice? How can we ensure that we achieve efficiencies rather than cuts? Part of the criticism of the outworkings of some efficiency delivery plans is that they have been cuts, not efficiencies.

Taking one hat off and putting on another, could the performance and efficiency delivery unit (PEDU) be involved in identifying further efficiencies in Departments, if that is the route that the Executive choose to go down? I appreciate that political decisions are involved; but if we were to make efficiencies rather than offset, what would be the practical outworking?

Mr Pengelly:

The issue is always difficult, because organisations always claim that they are reasonably efficient, and one really needs to bring external forces to bear. Whitehall established the operational efficiency panel, which produced a report that gave rise to the additional £5 billion of efficiencies. The panel identified that considerable efficiency gains could be made through items such as the shared-service approach and the rationalisation of back-office functions; the sorts of things that have been happening here over the past number of years. It is fair to say that we have still to capture the real benefits of Account NI and HR Connect, but we are further down the path. There is a fair bit of work to be done on that aspect.

To put Northern Ireland efficiencies into context, we should not forget that the 2004 spending review put 2·5% cumulative efficiency targets in place, which ran for three years through the Gershon work. The 2007 comprehensive spending review (CSR) layered another 3% of cumulative efficiencies on top of that. Therefore efficiencies have been carried out for five or six years here, at a rate of around 2% to 3% per annum.

Instinct suggests that all of the low-hanging fruit has been grabbed, so we will need to work hard. There is scope for efficiency in the system: I defy anyone to appear before a Committee and say that the system is completely efficient. The question is whether £123 million can be eased out in the period under discussion. It could be achieved through a rigorous internal examination at departmental level, with the external scrutiny that PEDU provides. Also, in the last week or two, the First Minister and deputy First Minister announced the efficiency panel, and I think they are currently working on that. There is need for an external perspective when looking at the system and considering how efficiencies can be achieved.

It is always particularly problematical when efficiencies cross the line and become cuts. The approach adopted by the Executive last time was to require each Department to publish a detailed efficiency delivery plan, which was subject to scrutiny by the relevant Assembly Committee and the public. That allowed the debate to start. However, more work needs to be done, and Departments need to be clearer about what they are doing in relation to efficiencies.

There is need for a clear and ruthless prioritisation of front line services so that they can be protected and that efficiencies can be made on the input costs of service delivery. However, it is inevitable that, given the figures involved, there will need to be some consideration given to the cessation of low-priority programmes. The trick is to make sure that the programmes are of low priority.

We can debate about when the Treasury growth forecast will begin to take effect, but economic recession is inevitably followed by growth. It may be the case that some programmes should be deferred and not stopped. In the current climate it could be decided that some programmes should be deferred this year and next year but reinstated the year after. That debate needs to begin in Departments so that programmes can be identified and a long list of options created.

Mr Hamilton:

A change in mindset is required. Whatever way one looks at the situation, there will be downward pressure on public spending generally. Some efficiencies in Government have been made over the past number of years, but it is tempting to say that everything that is there must be protected. The point is that we should not consider cuts; we should consider the usefulness and benefit of programmes and ask whether they need to exist or whether they are being duplicated elsewhere. Things are going to get tougher, and even though one would think that public expenditure has been cut, it is still growing, but at a much lower rate.

The Chancellor has spoken about a further £9 billion worth of efficiencies during the period 2011-14. Some crude calculations have been made suggesting that that will have an impact of £75 million on the block grant here. Has the Department analysed that and worked out what the impact might be, or is it too early to think about it?

Mr Pengelly:

No. The Treasury is keen to emphasise that the £9 billion is the conclusion of an external piece of work as opposed to a Treasury target for additional efficiencies. The problem with formulating models based on that figure is that we do not have any allocation beyond 2010-11 so we do not know what we would be measuring such a figure against.

Mr Hamilton:

Do you still have still to negotiate for that period?

Mr Pengelly:

Yes. When we talk to the finance directors we will need to think long and hard about what we are doing and about winding up programmes that have run their course. Every time a spending review is carried out, Departments put proposals to DFP for lots of new and exciting things. However, new and exciting things tend to run their course, and it is never recognised that, 10 years after their introduction, they have become old and dull and should be stopped. We need to get into that mindset.

We have had a period of public sector growth that has been unprecedented in living memory, going back to the 2000 spending review. From a cultural and behavioural standpoint, we are still in that mindset. Frankly, during the last half a dozen years we had situations in which money chased problems, and the question asked then was how the money could be spent. However, we are now in territory in which we need to think carefully about every penny we spend and the structures supporting that spend.

Mr Hamilton:

I could not agree more.

Dr Farry:

I want to pick up where Simon left off. It was stressed that the future £9 billion efficiency savings were not calculated by the Treasury but by someone else. Are the underlying assumptions about the state of the economy, for GDP growth and public-sector borrowing, the same as the Treasury projections in the Budget? The figure of £9 billion is looming on the horizon, and many people, including most of us in this room, have major doubts about the figures that the Chancellor put forward.

Mr Pengelly:

The Treasury cannot totally disassociate itself from the £9 billion efficiency because it commissioned that piece of work and brought in external people to work with it. The Treasury is saying that the £9 billion is a consequence of the external report and is not yet a firm figure. It is an asspiration rather than a target.

Dr Farry:

Do the assumptions underlying that £9 billion follow the same growth and borrowing projections that are in the Budget?

Mr Pengelly:

Those are not necessarily factored into the £9 billion. The piece of work said that, given the public expenditure position for 2007-08, £15 billion of efficiencies were achievable by 2013-14. The Treasury thinks that £6 billion will have been achieved by the end of this period, leaving £9 billion for the future. The projections were based on the 2007-08 position.

Dr Farry:

Simon Hamilton asked about the definition of efficiency savings. In essence, there is a declining marginal return from achieving efficiencies through looking at how business is conducted. Theoretically, the graph will eventually reach zero. My understanding is that efficiency savings means examining programmes and determining whether those that were set up in a different context are still relevant. Efficiencies can mean freeing up resources from redundant or less-important programmes in order to invest in new priorities. I do not consider that to be cuts; I consider it efficient government.

My main question concerns the figures of £122 million and £116 million, and I want to make two points. First, will you explain how things will happen? The Barnett consequentials recommended £50 million this year and £66 million next year. How will the efficiency savings be factored in during the next two years?

Mr Pengelly:

All the efficiency savings will be made in 2010-11: it is a one-year issue. Dr Farry mentioned the figures of £116 million and £122 million. The situation appears neutral, but there is a mismatch. Although the deployment of the £116 million will take place over two years, the Executive could decide to identify planned spend for 2010-11 and use it this year. That would consume the £50 million available this year but would free up £50 million next year, which would effectively move the £116 million into the same year. The Executive have options when it comes to managing the situation.

Dr Farry:

We must bear in mind what is happening at UK-wide level. The increased public expenditure that led to the Barnett consequentials for us will not, in UK terms, offset the efficiency savings. Those are two entirely different concepts, and the increased spending is a further part of the UK’s fiscal stimulus. I think that I am right in saying that the main factors that determine those consequentials are investment in training and employment measures, and investment in renewables, energy efficiency and social housing.

Mr Pengelly:

The majority of the consequentials come from areas such as the Department for Work and Pensions and the Department for Innovation, Universities and Skills. Dr Farry used the phrase “fiscal stimulus”. The Treasury is keen to point out that the Budget did not contain a fiscal stimulus; it dealt with discrete spending programmes and managing the wider macroeconomic position. It was not similar to the pre-Budget report, which was a significant fiscal stimulus.

Dr Farry:

That was a £20 billion stimulus: this equates to potentially £2 billion or £3 billion in additional spending.

There is an indication to the Executive that the additional financial windfall is not necessarily intended to be used to offset the efficiency savings that have been asked of Northern Ireland. The purpose of the money is to invest in our economy, services and recovery. We do not have to follow what Westminster has done: we have a devolved Assembly. There is a broad hint that we should be investing the money in our own programmes as opposed to offsetting them against efficiency savings.

Mr Pengelly:

That is so, but these are key issues for the Executive, and I do not want to pre-empt their consideration of them.

As with any normal Barnett-based allocation, we can look at what drove it. For example, one of the more significant issues is that £6 million of the total came from an additional allocation to further education colleges’ capital in England and Wales. I think that there will be a Public Accounts Committee report in early May on FE colleges, and the Audit Office report highlights that FE colleges in Northern Ireland are sitting on bank balances in excess of £50 million, so the Executive may think that that is not an issue here.

The issue will be about considering the benefits of spending the £116 million now on some additional measures and then having to take out £122 million later, or whether to use the £116 million to avoid taking the £122 million out? Those are subjective judgements, and we need to do the analysis and present it to the Executive.

Dr Farry:

Are we looking forward to a super-June monitoring round? Will you provide more background on how this matter will be addressed by Departments making bids? It will not be a particularly transparent process for the bulk of Assembly Members, never mind the general public. In some respects, submitting bids may be a true and tried method for increasing departmental expenditure, but how does one divvy up additional efficiency savings? Are they allocated on a pro-rata basis, relative to the size of the existing budgets, or is a formula used to allocate efficiency pressures on Departments?

Mr Pengelly:

It is difficult to give you a precise answer. This matter is fully in the devolved envelope, and it will be entirely up to the Executive, acting on the advice of Finance Minister, as to how it is approached.

I cannot be more precise. The Budget was announced only last week and we are still carrying out analysis with a view to having substantial discussions with our Minister so that he can frame his thoughts on how to bring the matter to the Executive. Options will include: a pro-rata reduction based on spend; a strong reference to the Programme for Government and getting a sense of the priority programmes in view of the Executive’s aspirations, protect those and apply the efficiencies to other areas; and looking at some programmes that may have run their course. Those will inevitably skew the distribution among the Departments.

The member talks of a super-June monitoring round. Paul and I would argue that all our monitoring rounds are super for one reason or another. There will be a two-stage process for the Executive. The first will be to decide the extent to which they want to make allocations in the June monitoring round and how to deploy the £116 million — either against the £122∙7 million or for short-term spending. After that, they will have to decide how much money will be available and how it will be deployed. The normal process is for Departments to table pressures and bids that they feel they can drive forward.

I understand the point regarding transparency. The situation is transparent to the extent that Departments submitting the material to us to bring forward through the Finance Minister will engage with their Assembly Committees. In presenting the outworking of this, details of all bids and allocations will be made to the Assembly, so there is transparency in that respect.

Mr O’Loan:

Thank you for your introduction Richard. I want to talk about areas already referred to. Can we be clear about the £123 million? That represents a reduction in the Northern Ireland block grant, and there can be no qualification. Is that right?

Mr Pengelly:

Yes.

Mr O’Loan:

There has to be a discussion about how that is implemented, but there is no question that it means less money in the block grant.

I note a lot of the things that you are saying, and they add very much to the argument that there needs to be a fundamental rethink of the Budget. You refer to the cessation of low-priority programmes, and so on, but it will be no small thing to decide what constitutes a low-priority programme, and it will entail lots of debate. Departments will not offer those up lightly.

I will ask you about the state of this year’s Budget and the pressures on it. When will the hit for the £175 million in respect of Workplace 2010 apply?

Mr Pengelly:

That arose last year.

Mr O’Loan:

Are you regarding that as done and dusted?

Mr Pengelly:

Yes.

Mr O’Loan:

What about the sale of the Crossnacreevy site?

Mr Pengelly:

That will arise in 2010-11.

Mr O’Loan:

Are you anticipating that for next year?

Mr Pengelly:

The Department of Agriculture and Rural Development has identified that there is an issue, and it is working through how the issue can be resolved: it has not brought any additional proposals to the Executive yet.

Mr O’Loan:

The deferral of water charging will bring a hit of £200 million or thereabouts, less yield, per annum. Is that right?

Mr Pengelly:

It is hard to quantify that, because the Executive have not had a substantive discussion about the way forward on water charging. I cannot quantify the implications of a discussion that has not yet taken place.

Mr O’Loan:

The argument was that Northern Ireland Water was to be a self-financing entity and that the necessary finance was to come from water charging. As water charging is not being applied to domestic customers, I assume that the money has been made up by way of a direct grant. Is that correct?

Mr Pengelly:

That is the situation this year.

Mr O’Loan:

What figure are we talking about for this year?

Mr Paul Montgomery (Department of Finance and Personnel):

It is about £80 million to £100 million in the context of the overall starting level of overcommitment being lower than in previous years.

Mr O’Loan:

There is the issue of the central assets realisation team (CART) and the almost-zero realisation — and I could include Housing Executive sales as well. What was the anticipated capital realisation for this year that is not there?

Mr Pengelly:

We do not know yet, because we are still in the first month of the year. We will not know what is not there until later.

Mr O’Loan:

That is why I said “anticipated”.

Mr Pengelly:

That is why we have the June monitoring round: that is the point at which we will ask Departments what pressures they are experiencing. The important contextual point is that it was anticipated that a lot of assets would be sold last year, but they were not sold. Therefore the base from which assets can be disposed this year has grown.

Mr O’Loan:

Do you recall the anticipated realisation figure that was put into the Budget for this year?

Mr Pengelly:

Your question specifically asked what capital realisation has been anticipated and is not there. I cannot answer that question.

Mr O’Loan:

That is why I have altered my question.

Mr Pengelly:

The anticipated figure was £65 million.

Mr Montgomery:

The capital position was presented in a paper, which was sent to the Committee earlier.

Mr O’Loan:

I want to go over those figures again. You previously told us about one gain; it was some capital end-year flexibility (EYF).

Mr Pengelly:

There was £100 million of capital EYF available for this year. Another important point is that there has been a 10% drop in construction prices, so that capital programmes are benefiting to a considerable extent from that.

Mr O’Loan:

Nonetheless, there have been considerable pressures and changes since the Budget was presented. When do you expect the hit for the equal pay claim to kick in?

Mr Pengelly:

That process is ongoing; dialogue is continuing.

Mr O’Loan:

I presume that there is a fair chance of there being a significant hit this year.

Mr Pengelly:

I think that the legal profession will be involved in that issue at some point, and I do not want to tread on its territory.

Mr O’Loan:

The equal pay claim was quantified previously at greater than £100 million. Is there any more accurate quantification than that?

Mr Pengelly:

Not at this time.

Mr O’Loan:

We have been told about the large borrowing that the Chancellor is undertaking, and he has given some indications of the pain that will be involved in paying that money back. Reference has been made to additional efficiencies rising to £9 billion by 2013-14.

It is obvious that there will be hard times ahead. There is a strong argument that we need to start looking again at how we strategically align the Budget during this three-year period to prepare for the quite different budgetary situation in the next three-year period. Do you agree?

Mr Pengelly:

There is no Budget for the next three-year period. Perhaps there has been a misunderstanding. If the question is whether we need a Budget for the next-three period, which will be a difficult period, the answer is yes. There is not a Budget as yet, so the Executive will need draw one up.

Mr O’Loan:

Yes, clearly, there is not a Budget, but we know that there will be a different and very difficult context in the next three years.

Mr Pengelly:

Yes, but we do not yet know what that will be. It is difficult to run a process when there is not an envelope within which to work.

Mr O’Loan:

Therefore, you are saying that we should run our financial affairs and public administration by putting on the blinkers; that we should not look to see what is further down the road; that we should just hammer on, using the accelerator and brake as normal, and approach the wall. Then, we should turn the corner and discover a totally different situation, and we should make no attempt to anticipate that?

Mr Pengelly:

Perhaps I am confusing you, or I am confused, and I am sorry if that is the case. Allocations exist up to and including 2010-11. The current year’s allocations will be reviewed in the accepted in-year process. With regard to Treasury forecasts for 2011-12 and beyond, if one reads the newspapers one will see that there is a very wide spectrum of informed view about what the wider economic and public expenditure situation will be. The Treasury has adopted a position in one place. The variability and sensitivity around that is enormous.

It is for the Executive to determine how they will consider that. In the current climate, when there is such uncertainty, I wonder about the value of having a very significant process now that is focused on 2011-12. The one thing that we do know with certainty is that regardless of how we think 2011-12 will play out, it will be different when we get there.

As regards investment, it is the law of diminishing returns. There are firm allocations for this year and next. Perhaps a better investment in time would be to focus on managing those issues in the context of a Programme for Government that prioritised economic growth.

Mr O’Loan:

To summarise what you have said: as a very senior official in the Department, your advice to your Minister is that because the situation in the next three-year period is unknown and uncertain it is better not to think about it, make no plans for it, make no attempt to align the Budget and the Programme for Government for this three-year period, and do not rethink it in any way. Your advice is to let that three-year planning happen when it comes along. In relation to prudence or preparation, that is a surprising stance.

Mr Pengelly:

I am not sure that that is what I said at all. [Laughter.]

Mr Paisley Jnr:

I think that it is a fishing exercise that has run on to the rocks.

Mr Hamilton:

That is what he hoped you would say.

Mr O’Loan:

OK, sir. [Laughter.]

The Chairperson:

On behalf of the Committee, I thank Mr O’Loan for the preview of his next press statement. [Laughter.]

Ms J McCann:

With regard to the lack of clarity surrounding the efficiency savings, you said that there will be a cut in the block grant. How much you talking about?

Mr Pengelly:

The impact will be the £122·7 million. However, it is important to recognise that although that is a reduction in the block grant, the £116 million is in addition to the block grant, which was unexpected.

Ms J McCann:

I am talking about beyond 2010.

Mr Pengelly:

We do not know what the position will be beyond 2010-11. One of the areas of uncertainty is that, in the normal turn of events, when we go to the next spending review period, 2010-11 would form the baseline. It would just roll forward from that, and the debate would be about increases to that baseline. In the 2007 process, the Treasury deployed very fancy footwork shortly before the announcement.

We cannot say with certainty what the baseline will be for future years because that is inextricably linked to the election cycle across the water. In the normal turn of events, there would be a national spending review in 2009, in which case we would be talking to the Treasury now about our baseline and likely allocations. The Treasury has not indicated that it wants to undertake a spending review next year. The latest date for an election is May 2010, and that is influencing the Treasury. There has been no clarity about an election date.

Ms J McCann:

To return to efficiency savings, most parties in the Executive and Assembly thought that they would have been able to retain the money saved for redistribution here. How will not being able to do that impact on the budget allocations for individual Departments?

Mr Pengelly:

The allocation to the Executive for 2010-11 has been reduced by £123 million. Therefore, the key challenge for the Executive is whether they take the £116 million of additional money and use it to plug that gap or spend it on additional unplanned measures. The Executive could announce a new package and seek to plug the £123 million gap through requiring Departments either to cease low-priority programmes or put in place additional efficiencies. The Executive will have that substantive debate in June.

Ms J McCann:

Given that we were unable to retain the efficiency savings for redistribution here and did not retain the windfall tax and fuel increases last year, is there any move towards thinking outside the box about how, for example, to attain greater fiscal freedom? Is there any departmental structure to consider that, compare our position with that of Scotland, for instance, and determine whether greater fiscal freedom would improve our position?

Mr Pengelly:

When comparing Scotland with other devolved Administrations, the only difference in fiscal flexibility is that Scotland has income tax varying powers of 3p in the pound. Interestingly, Scotland has never sought to use that power. Fiscal freedom is a question of fine judgement. If Northern Ireland opted for complete fiscal freedom and independence, the gap between the taxation raised and public expenditure in Northern Ireland would be considerable.

Mr Montgomery:

The differential would be approximately £8 billion.

Mr Pengelly:

Therefore, there would have to be a halfway house providing continued support, which brings us to the heart of the Barnett formula and whether an alternative mechanism exists. The Scots and Welsh are examining that, and one commission came to talk to the Committee about it recently. It can only be a judgement call. The Barnett formula is highly mechanistic, and our additional allocation of £116 million was because new programmes were being launched in England, for which we automatically receive consequential funding. In the current climate, if the Barnett formula did not exist, I would be surprised if the Treasury, on the basis of a negotiated outcome, would have allocated any additional money to Northern Ireland, because its view is that public expenditure in Northern Ireland is too high.

It is a case of trying to balance the risks and rewards of entering such a negotiation with the Treasury. In my experience, negotiations with the Treasury tend not to have a satisfactory outcome. We are monitoring the debate in Scotland and Wales, as part of which the Treasury is giving evidence. It is not a case of nothing happening, but of being careful what you wish for.

Mr McNarry:

In studying the responses to the Chancellor’s Budget, the Welsh Assembly was up in arms yesterday, and Ministers in the Scottish Executive expressed similar concerns. The Welsh Assembly, unlike us, has had an opportunity to debate the Budget. I compare that debate with our Minister’s press release of 22 April 2009 in response to the Budget, ‘Dodds responds to better than feared budget outcome.’ You have told the Committee that you are preparing papers for the Minister, and I hope that the Committee will get sight of those. Compared with the responses from Wales and Scotland, is that press release the sum total of the Department of Finance and Personnel’s response to the Budget? If it is, does that not sit rather awkwardly?

Mr Pengelly:

Off the top of my head, I cannot recall the position for Wales. I recall the position for Scotland. Under the outworking of the Budget, Northern Ireland is subject to £122 million in efficiency reductions and £116 million in additional allocations.

Mr McNarry:

You are rather keen to offset the reductions against the allocations.

Mr Pengelly:

You asked a question about the comparison with Scotland. Our Minister’s response was that there is a net differential of around £6 million or £7 million. It is my understanding that the efficiency reductions in Scotland have been set at around at £392 million. The additional allocations for Scotland amount to around £100 million. Scotland faces a gap of around £290 million, so I expect that the Scots would react vociferously.

The Finance Minister in a devolved Administration is pushed for a reaction within an hour of the Chancellor resuming his seat. The reaction of our Minister was fair and reflected the numbers involved. The natural outworking is for mature consideration by the Executive, which will happen in the June monitoring round. Ongoing analysis and advice will take place to support a substantive and mature consideration of the position in June, as opposed to immediately responding to a position on which the Treasury is still providing us with full details.

Mr McNarry:

I take your point about Scotland, but all things are relative. As a member of the United Kingdom nation, I am interested in the reactions of Scotland, Wales and England to the Budget. It is not a question of protectionism for Northern Ireland; I am making comparison for the sake of relevancy. I assure you that the Welsh Assembly debated the issue yesterday and that the reaction to the Budget from all parties there was very hostile. I am making that comparison. I know that you do not know the answer, Richard, but that makes me ask whether there is any likelihood that the Minister of Finance and Personnel will bring forward a debate on the Budget between now and the June monitoring round.

Mr Pengelly:

That is an issue for the Minister.

Mr McNarry:

I hope that such considerations will not be left to the June monitoring round. It seems that from the type of preparations that are going on, the Minister will not be moved to bring anything forward. That is of concern.

We are all concerned about the public sector, and we have all been mindful of the comments on how the private sector had been hit very hard before the Budget and how that looks set to continue. The public sector had been protected, which was good for Northern Ireland, but a lot of economists who do not sit in ivory towers have suggested that the public sector will face some critical moments. From the information that you have gathered for your analysis in the paper that you have mentioned, is it too soon to say whether you can envisage, rather than predict, job losses in the public sector, particularly in the Northern Ireland Civil Service?

Mr Pengelly:

That depends, fundamentally, on how the Executive want to respond. If the cessation of programmes is part of generating efficiencies, the people who were delivering particular programmes one day will not be needed the day after. The question also needs to be considered in the context of normal staff turnover. The public sector in Northern Ireland employs more than 200,000 people, and there is a considerable churn and opportunities for redeployment. Against that, there is the issue of cost. As far as redundancies are concerned, there is a significant up front cost to reducing staff numbers and, therefore, spend can be increased at a time when the aim is to reduce it. Those differing aspects must be managed.

Mr McNarry:

The private sector must also manage those aspects, and it faces the same implications. It must shoulder the costs when redundancies are, unfortunately, inevitable. There is also cost ride-out — the hope that the redundancy decision was right. Somewhere along the line it would be useful to weave jobs losses into the Department’s considerations. It would be good for open and transparent Government to let people know what is really being considered.

Is the Minister’s talk about potentially cutting back on the number of Departments to obtain a £50 million saving being factored into preparations, which you have told Mr O’Loan are not really being considered, for the next three years? At this early stage, are the consequences in job losses being factored into that £50 million saving? It is an idea from which we cannot escape now that it is in the public domain.

Mr Pengelly:

I return to the point that, if there were a restructuring and reshaping of Departments, the real saving comes from the administrative support structures.

If one assumes that the level of front-facing public-service delivery is fixed in the sand, there would be a lot of churn of people moving between Departments. If it were deemed that the administrative structure was no longer needed, questions would arise over whether staff could be redeployed rather than new staff recruited, which takes us back to what we talked about previously. It is not an issue, in general terms; the Minister made the point that this was his personal view.

Mr McNarry:

The First Minister has made similar comments. Perhaps it is a party political view.

Mr Pengelly:

The First Minister is not Minister of my Department, so I cannot comment on that.

Mr McNarry:

OK.

Mr Pengelly:

However, put simply, as officials we work within the current structures in providing advice in response to questions for our Minister. I suspect there will be more debate about a reduction in Departments as we move forward.

Mr McNarry:

I thank you for that. I have apologised, because I must leave at 11.00 am, but that is not a sign of disrespect to any of my colleagues or the witnesses.

Mr McQuillan:

I want to be clear. Is the member saying that there should be jobs cuts in the Civil Service; is that what he is getting at, that the Civil Service should start cutting jobs? I find that a wee bit bizarre.

Mr McNarry:

I am glad that the member is asking me to qualify what I said. Jobs cuts could be a consequence of the policies that his party develop in this Government. It is about time that the DUP opened its mouth loudly to say that that will be the consequence.

Mr McQuillan:

I do not think that the policy will lead to job cuts. It is one statement after another, you know —

Mr McNarry:

I was only asking the officials to clarify that that is the position.

The Chairperson:

Members will address each other through the Chairperson.

Mr McNarry:

From our point of view, I do not welcome any job cuts at all under any —

Mr McQuillan:

Mr McNarry wants to mortgage Stormont and now he is advocating job cuts in the Civil Service.

Mr McNarry:

All that I am saying is that the private sector is taking the hit on this as well.

Mr Hamilton:

Adrian , he was going to leave; why did you keep him here? [Laughter.]

The Chairperson:

Order.

Ms Purvis:

I thank Mr Pengelly for his evidence. I want to clarify a couple of things. May I take it that the process for the June monitoring round remains the same — Departments will be asked for their returns and bids?

Mr Pengelly:

Yes.

Ms Purvis:

Aside from that, will officials be preparing a paper for the Minister of Finance and Personnel on options regarding efficiency savings and new allocations?

Mr Pengelly:

I do not want to suggest that there are two parallel tracks. There is constant preparation for the June monitoring round, discussion of which by the Executive will be based on a paper from our Minister. In developing that paper, we will talk through the options at the relevant point.

Ms Purvis:

Following on from what Dr Farry said earlier about the £50 million that has been allocated for the current year; you said that there is the potential to bring forward programmes from next year’s Budget — totalling around £50 million — to this year, so the efficiency savings could be made in the one year. Is there any stipulation as to how that £50 million, or the total £116 million, should be spent, or is that up to the Executive to decide?

Mr Pengelly:

The £116 million is split between current expenditure and capital investment. The capital investment allocations must be spent as capital; however, the current expenditure can be spent as either current expenditure or capital investment. There is some flexibility.

The Chairperson:

Is there any autonomy regarding that spend?

Ms Purvis:

What is the amount of the current and capital spend?

Mr Pengelly:

I will give you four figures: the current expenditure allocations are £26·5 million for this year, and £60·7 million for next year. Capital allocations are £23·8 million for this year, and £5·4 million for next year.

Ms Purvis:

I am sorry, what was the last figure?

Mr Pengelly:

It was £5·4 million.

The Chairperson:

Dawn, just to clear this up; are those Barnett consequentials?

Mr Pengelly:

Yes.

The Chairperson:

Do the Executive have autonomy as to how those are deployed?

Mr Pengelly:

Yes, they have complete flexibility.

Ms Purvis:

So, there is nothing barring the Executive from using the £50 million this year, both current and capital, as a method of assisting the economy here.

Mr Pengelly:

That is correct.

Ms Purvis:

There is nothing barring the £23 million capital investment from being used for new house builds.

Mr Pengelly:

Absolutely.

Ms Purvis:

There is nothing to suggest that the £26·5 million current expenditure allocation could not be used to help small businesses in loans and such like.

Mr Pengelly:

That is correct.

Ms Purvis:

If the Executive decided that the £50·3 million could be used for help, newbuilds and construction, could that money be found next year or this year through in-year monitoring going towards efficiency savings for next year?

Mr Pengelly:

It is possible. In conceptual terms, the answer is yes. The difficulty we face is that the amount of money that comes back to the Executive for reallocation through in-year monitoring is declining as the general public expenditure position tightens. The total amount that came back for reallocation this year was just over £108 million.

Mr Montgomery:

Yes, there was £108 million in capital and £150 million in current expenditure.

Mr Pengelly:

If £150 million in current expenditure comes back, the Executive will start next year with £60 million over-committed, which means that a net £90 million will be available to spend. That could go a long way towards covering it.

Ms Purvis:

However, the potential is there to use that £50 million.

Mr Hamilton:

The point has been teased out a bit, and Dr Farry touched on it. There is an attraction in taking additional funding that is non-hypothecated and say that we will stimulate the economy by using it to do this and that. However, there are consequences. This is not additional money, and the argument will be made that money will have to be taken out of current expenditure plans that are focused on certain programmes to do what Dawn suggests.

Ms Purvis:

I clarified that when I mentioned trying to find the efficiencies through in-year monitoring. I am aware that the money has to be found.

Mr Hamilton:

I know, but it is worth clarifying that point. It is not as simple as saying that this is something we should focus on: the money will have to come from somewhere else.

Dr Farry:

There is a choice.

Ms Purvis:

We are aware of that: I think the point was made.

The Chairperson:

Richard, we cannot crystal-ball gaze about this all the time. We know that the Chancellor has indicated that there will be £9 billion savings going forward into 2014. Some local economists have projected that that will mean another £75 million hit for the Executive. That may or may not be a figure that you would agree with.

You have acknowledged that we are now at the end of the growth period of public expenditure. Again, the worry is that, because of our dependence on the public sector, we will receive a disproportionate hit. Although I do not expect us to crystal-ball gaze to the extent that we can start to frame up the next Budget discussion, there is a legitimate issue of whether someone in the Department is taking a strategic perspective on that landscape in the future. It is certainly going to be challenging, and the ideas need to be ventilated, discussed, with all the parties getting their heads around what issues we are dealing with.

Mr Pengelly:

The Department thinks, and importantly worries, about that issue on a daily basis. We have also held discussions with the Minister on it. Indeed, we are holding a series of discussions in the Department and with the Minister on this and next year’s position, and the longer position.

The other point that I would emphasise — and I am aware that I am preaching to the converted here as the Committee has previously talked about it — is that the amount of public expenditure available is only one part of the equation. The bigger issue is about what we do with the money: prioritisation and process. Although the amount of money available to the Executive will come under pressure, there are at least similar gains to be achieved through better performance and programme management, and delivery of services. Layered on top of that is the need for a strategic prioritisation and a sharp focus on what intervention programmes the Executive want to put in place. When one factors in those two very significant elements, the picture is not the complete doom and gloom that purely focusing on the numbers would lead one to believe.

The Chairperson:

I think that there is evidence in the tendering process that the bids are reflecting a certain levelling-out. The Executive will also have to consider how to apply that resource. I am aware that that is quite a volatile scenario, and I suspect that the parties in the main will want to be informed and will comment constructively on it. This has been a helpful rehearsal of the issues for the Committee, and I am aware that the detailed analysis is yet to emerge and be considered by Ministers. That is something that the Committee will return to in the future.

A peripheral issue, and something that the Committee will be coming to when planning its forward work programme and other matters, is that this year’s June monitoring round will be taking place at the same time as the European election. Indeed, some Committees have already decided to postpone meetings because they fall on, or approximate to, election day. Has the Department taken that into consideration? Should the Committee flag up that its normal schedule of meetings may be impacted by the June monitoring round and subsequent consultations with Committees?

Mr Pengelly:

One of the other constraints that we have in relation to the June monitoring round is ensuring that the outworking can run its course before the summer recess. I believe that the date of returns for Departments is in early June, pointing to a late May dialogue with Committees.

The Chairperson:

OK. Let me flag that up, because I have not worked it our either. It seems to me that there may be an anomaly emerging, but we should not disrupt the dialogue, discussion or interaction between the Departments and the Committees as that will only create problems; it will only add to whatever frustrations there are. The Department may, in practice, not be able to do everything that could or should be done. I want to flag that issue up at this stage, and the fact that the Committee will also be considering it.

Thank you for appearing before the Committee today. The Committee looks forward to your considered deliberations and analysis.

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