In light of the public health situation, Parliament Buildings is closed to the public.

No public tours, events or visitor activities will take place, until further notice. 

Assembly business continues, check the business diary for information on Plenary and Committee meetings.

Official Report (Hansard)

Session: 2008/2009

Date: 18 February 2009

JOINT MEETING OF THE COMMITTEE 
FOR 
FINANCE AND PERSONNEL AND THE COMMITTEE 
FOR REGIONAL DEVELOPMENT

OFFICIAL REPORT
(Hansard)

Mitigating the Recession: Options for the Northern Ireland Executive

18 February 2009

Members present for all or part of the proceedings:

Mr Fred Cobain (Chairperson)
Mr Cathal Boylan
Mr Allan Bresland
Mr Willie Clarke
Dr Stephen Farry
Mr Simon Hamilton
Mr John McCallister
Ms Jennifer McCann
Mr Raymond McCartney
Mr David McNarry
Mr Declan O’Loan
Mr Ian Paisley Jnr
Mr Alastair Ross
Mr Peter Weir
Mr Brian Wilson

Witnesses:

Mr Victor Hewitt ) Economic Research Institute of Northern Ireland

The Chairperson (Mr Cobain):

The paper in members’ packs sets out the recession options for the Northern Ireland Executive, and is prepared by Mr Victor Hewitt of the Economic Research Institute for Northern Ireland (ERINI). It provides an overview of the origins and nature of the current economic downturn and the response of the UK Government, and it outlines the public-finance situation facing the Executive. It also includes some suggested options for the Executive in seeking to mitigate the impact of the recession and to prepare Northern Ireland to take advantage of the recovery when it comes. Sections on the state of public finance and possible actions with regard to construction will be of particular interest to members.

I shall now ask Victor to begin his presentation.

Mr Victor Hewitt (Economic Research Institute of Northern Ireland):

Thank you very much, Mr Chairman. I do not intend to spend much time on the fairly obvious fact that we, along with most of the rest of the world, are in a recession. Economies are declining at a rather frightening rate. The transformation south of the border is one example, and the misfortune that has befallen small countries such as Iceland also illustrates that.

The economy of Northern Ireland is structured differently to that of the UK as a whole. Financial services are of lesser importance to us, but nonetheless, once the recession takes hold, there is an ever-widening circle of collateral damage to the rest of the economy, and we are beginning to see that. It may well be that it will be shorter and sharper than we expect, or it may be sustained. In the worst-case scenario, it might turn into some sort of depression. The difference by analogy is rather like a large wave breaking; it causes whatever damage it does, but it passes on. By comparison, a tsunami may not cause a very large wave, but the water just keeps on coming, and it does immense damage. We are not quite sure where we are between those two poles.

The UK Government, along with other Governments, have attempted various rescue packages for the financial sector because the banks are seen as absolutely critical to a modern economy. There are now great fears that, if a bank were allowed to go under — as Lehman Brothers in the United States was allowed to — the ongoing damage to confidence in the rest of the system would be so immense that no Government will take a chance that that will happen. The Irish Government have rescued some of the banks in the South. In ideal circumstances they would not have wished to rescue some of those banks, but, in their view, they had really no option.

In Northern Ireland, the banking system is essentially a retail system. When the Ulster Bank was taken over by the Royal Bank of Scotland (RBS) it was essentially stripped of investment-type functions — an irony that has probably protected it a little more than other elements of that banking structure.

We want to do what we can to protect the economy and to get through this particular difficulty. The availability of a devolved Assembly means that there is a measure of flexibility which almost certainly would not have been available under a direct rule Administration. Nothing in the paper is meant to be critical of what the Executive are doing; more to the point, we want to encourage them to be bold in their thinking and not necessarily to accept that certain things cannot be done because it says so in some administrative rule. As we proceed, we will highlight some examples where things that could not be done have been done.

The institute is tasked with trying to stimulate public debate on these matters, and therefore we try to think boldly about issues. That is reflected in the paper before the Committee.

The starting point, for the local material, is the budgetary situation. The Budget for the next three years was set a year ago. It was linked to the Programme for Government. There is an argument that circumstances have changed so drastically that the Programme for Government should be revised. That is an issue to be debated. There is no doubt that the Budget itself has new pressures that have emerged since it was set. I have listed some of the things that impact on the Budget, but by no means all. I will not go through those in detail; we will pick them up as we go along.

One thing that I have not put in, and which has come on the table fairly recently, is the potential effect of the additional efficiency savings that the Chancellor is seeking from Whitehall Departments. Our understanding is that he is seeking an additional £5 billion worth of efficiency savings, and that those will be cash-releasing efficiency savings. In other words, that money will not necessarily be retained by the Departments, but will go back to the Exchequer in order to meet other pressures.

Financial arrangements between Whitehall and the Executive are set using a mechanism called the Barnett formula, which you will have no doubt encountered before. The formula simply says that we can carry a population proportion of any adjustment, up or down, in comparable spending in the rest of the UK, particularly in England. If £5 billion were to disappear from comparable expenditure in the rest of the UK, we would carry a cut to the block of around £180 million to £190 million. The population proportion of that is 3·4%. That is another additional pressure and is not budgeted for.

The issue of water charges is a perennial problem. There have been some changes, which the Committee may or may not be aware of, and that has triggered accounting changes to the way in which the matter is treated. Those changes mostly account for the £900 million that came from the agreement with the Chancellor in December 2008. Around £800 million of that is due to having to meet capital charges that had previously not been there. The other £100 million, it seems to me, is a re-phasing of our expenditure for future years into the current year, along with some easing on our borrowing.

Water is a double whammy for the Executive. On the one hand, there is nothing coming across through the Barnett formula because there is no comparable expenditure in England; on the other hand, if water charges are not introduced, there will be a substantial charge upon the rest of the public expenditure block. A lot of other opportunity costs would have to be given up in order to sustain that. I recognise the very great political difficulties around that, but it is a fact of life. Within two years there will not be easement on the capital charges, and those will come into the block.

There are other pressures coming along that have not yet been fully identified, such as policing and justice, and work is continuing on that. The rest of the paper outlines some thoughts about the way in which the Executive can reconfigure expenditure through doing new things, and, inevitably, explores the potential for raising additional resources through the Executive’s own efforts. Some of those ideas may appear a little extreme; however, it is worth stimulating the grey cells to think about what might be possible and what might not be.

The last idea is particularly interesting because it is fiscally neutral and therefore works within the grain of the relationship between us and the Treasury. It is an imaginative way of making use of our share of a stimulus that would otherwise come in the form of a tax cut, that is, the VAT cut. In other circumstances, one might have argued that it would be better if we had the money as additional public expenditure. The simple reason for that is that, economically, we are now in what is called a “liquidity trap”; people will hold onto money rather than spend it. Therefore, a tax cut will not stimulate a lot of consumer spending; people will simply rebuild their savings from that. Governments, of course, can spend directly.

That is merely an example of what we believe is imaginative thinking. It is difficult, I know, in administrative terms; hopefully, however, the Committee finds it interesting. I will leave it there and take any questions that members may have.

The Chairperson:

I have a couple of questions on the issue of water. Clearly, the Executive are going to charge for water and some of the difficulties that we talked about will arise. I am concerned about a scenario in which the Executive decide, for the remaining two years, not to charge for water. When the Minister of Finance and Personnel was asked that question, he said that the reclassification of water is a technical matter. Will you talk a little more about that? In addition, will the £400 million that it cost to restore the original £5 billion capital value be a recurring cost?

Perhaps you could tell us more about the VAT exemption. The Executive agreed with the Treasury that there would be income from water. Reclassification would kill off that idea and bring back the question of VAT, which has substantial financial implications for the Executive. Of course, you raised the issue that, if the Executive does not charge for water, there will be no revenue.

Mr Hewitt:

I will try to shed some light on those matters, but, obviously the relevant Departments are much more familiar with recent developments, and much of the detail is yet to appear in the public domain.

The water issue goes back well beyond this Executive’s mandate. Various options were being considered in the 1990s, prompted by the privatisation of water companies in England and Wales. However, the most recent developments were obviously part of a move to make water the responsibility of a company, putting it at arm’s length from, rather than within, the Department and enabling it to operate it on a more commercial basis.

In public-expenditure terms, such a company is known as a self-financing public corporation. The term speaks for itself: the company was supposed to raise its money from charges to customers. Capital charges on self-financing public corporations are scored into that part of public expenditure known as annually managed expenditure, and, therefore, would not fall directly on departmental expenditure. Furthermore, the capital value of the water estate was written down to approximately £1 billion. Valuing it below that figure would have made the idea of creating the company rather difficult to sell — its credibility would not have been high.

All of that was predicated on the implementation of water charges. In the event, the Executive — for good reasons, I am sure — did not proceed with implementing charges, and that, in effect, left the company living on a subsidy from the block grant. By any definition, that arrangement does not constitute a self-financing public corporation. Consequently, the Treasury is under pressure to properly reclassify the company, which must happen if the Executive want it to remain as a subsidised company.

The need for reclassification triggered the events that we have been talking about, such as taking the capital value of the estate back up to almost £6 billion. That resulted in the capital charges, which, like any other capital charges, must be met from the resource departmental expenditure limit.

The Chairperson:

Will you clarify whether the capital charge is a recurring cost?

Mr Hewitt:

Yes, it is an annual cost of approximately £400 million, which is 6·2% of the capital value of the assets.

The Chairperson:

Does that mean that reclassifying water will incur a recurring cost?

Mr Hewitt:

That sum will have to be found every year.

Mr O’Loan:

Thank you, Victor, for your substantial and interesting paper and for your presentation. Incidentally, I congratulate you on being the first-ever witness to appear before a joint Committee of the Northern Ireland Assembly.

Is the £100 million to which you referred, and which is mentioned in your paper, new money? Is it in addition to the block grant? In your paper, that amount of money is referred to as possible borrowing, and in your presentation, you described it as being a rephasing of future moneys. Will you clarify your understanding of that matter? A couple of days ago, in the Assembly, I asked the Minister about that matter, but I did not get an answer that I understood, so perhaps you could shed some light on that.

Mr Hewitt:

From the public documentation — presentations by officials to Committees and statements from the Minister in the Assembly —I understand that some capital expenditure that would have occurred in future years has been brought forward into this year and reclassified.

I mentioned previously that there are rules about what can and cannot be done. It was an iron rule of the public-expenditure system that funds could not be moved from capital to current. Movement was allowed from current to capital. However, it appears that that rule has been set aside in this particular instance.

An “additional amount of borrowing” is referred to in some of the evidence. I have no clarification about what that means. Therefore, those two things appear to produce the £100 million. Obviously, if money has been moved from future years into the current year, it is not additional money in the context of the overall three-year settlement. Borrowing, of course, must be repaid. In that sense, it is not new money other than for the year in which it will be spent.

Mr O’Loan:

I think that we deserve absolute clarity on that from the Minister. How do you feel about requesting Treasury consent for increasing the reinvestment and reform initiative (RRI) borrowing beyond £200 million per annum?

Mr Hewitt:

That should be done only if it is really needed. Care must be taken over the use of RRI borrowing, because, in the normal course of events, it will be repaid over 25 years. The Audit Office provided some evidence that we drew down on RRI borrowing at a time when we were underspending on the rest of our capital. That meant that a debt was loaded onto the Northern Ireland public that it need not have incurred at that time. Borrowing is useful, but it must be treated very carefully.

Mr O’Loan:

Your paper to the Committee expresses scepticism about the efficacy of PPPs. In the present environment, there are major issues around the position and willingness of the banks to lend money. There is a reference to changes in international accountancy rules that have some bearing on that. Are you advocating moving away from PPPs? I believe that the Minister said that PPPs accounted for only 25% of our capital programme, which is still a major element and involves a lot of money. Do you believe that there should be a shift away from PPPs as a method to deliver major capital projects? Could those projects be delivered in some other way?

Mr Hewitt:

PPPs have their uses. It depends on whether a choice is made to move away from them, rather than being presented with a fait accompli because no one came forward with PPP bids, which involve substantial spending by the companies concerned. That is a risk that many companies may not wish to take in the present circumstances.

PPPs originated in the private finance initiative (PFI). Part of the reasoning was that it presented a means to procure capital without it appearing on the balance sheet, which was attractive to Departments. The reason advanced to support that was that the private sector would deliver the asset and services more efficiently.

Accounting treatment has changed since those days. It is now rare to find a PPP project that does not appear in the sponsoring Department’s balance sheet and which, therefore, will score against that Department’s capital. The jury is still out on whether the promised private-sector efficiencies have emerged. The one thing with them, of which I have some experience, having been involved in a PFI project in schools, is that you are locked in, and I mean locked in — the design of the building is there, it has to do for 25 years, so the planning must be right at that particular time. Certain things cannot be done, such as removing stack machines because they are part of the contract. Once in place, it is an inflexible instrument. Having said that, the school was built quickly, and it is delivering.

Mr W Clarke:

Thank you for your contribution. We are putting the building blocks in place to come out of the recession, so we have a short-term, as well as a long-term, strategy. A major consideration is that the current situation will create more long-term unemployment, and your paper touches on the vast numbers of people who are coming out of the manufacturing sector and the construction industry. Have you considered developing a work programme to get large numbers of people back to work, whether in implementing energy-efficiency measures, insulating homes or green technologies?

In addition, have you considered developing the tourism infrastructure, which is one of the biggest industries that we, have to get us out of recession? Given the current exchange rate between the euro and sterling, I envisage vast numbers of tourists coming to this area. I am sorry to labour the point, but we must develop our natural assets, and if there is a silver lining to the current economic cloud, it is the opportunity to do so now. We should be developing our forest parks, improving access to the countryside and improving our beaches.

Although I have a couple of other questions to ask, I would appreciate it if you would respond to those points first.

Mr Hewitt:

You used the word “opportunity”, which sums things up perfectly. Obviously, on a personal level, a recession is an unpleasant experience; however, taking a wider view, it enables people to grasp opportunities that tend to be overlooked during the good times.

Frankly, our economy became unbalanced. Thanks to the housing boom, the construction sector grew too large to be sustainable, and the market is presently putting that right in a brutal way. Nevertheless, we have an opportunity to retrain the people who were employed in that sector, giving them more marketable skills for activities that will be available in the future. In other words, we can invest now in the hope of a long-term payback.

That type of investment would need to be supported by schemes such as you mentioned. I am keen on activities such as insulating homes, because that provides upfront employment as well as a long-term payback in saved energy. Opportunities exist, and we must think imaginatively about how to grasp them.

It is absolutely disastrous for people to become long-term unemployed, not only for the individual but also for society; people’s skills quickly atrophy and they lose enthusiasm. In effect, people lose their work ethic, and they can fall into the benefit trap. I know that the unemployment figures do not look too bad, but we already have exceptionally high levels of inactivity, especially among young people, so anything that we can do to prevent that from getting worse would be an investment worth making.

Mr W Clarke:

Young people who wish to buy their first home are surrounded by negativity. Every time they turn on the news, there are negative stories about the housing market. I think that those people are prepared to buy their first home. Have you thought about how we might provide a catalyst to encourage them to do so?

Mr Hewitt:

I have not given a great deal of thought to that specific point. In the housing market, the conditions for accessing mortgages are getting considerably tighter. Mortgages in excess of 95% have now disappeared, and people must pay substantial deposits. We have almost returned to mortgage rationing, which I remember from when I got married, when one had to use whatever contacts one had in order to get a mortgage. We are not quite back there yet, and the slightly greater affordability for first-time buyers is a small silver lining to falling house prices.

The downside is that they will have to find more money upfront to access a mortgage, and the security of employment is a further worry. At the moment, I can see no particular public scheme to address that, although I recognise that that is quite a difficult thing to put in place.

Mr McNarry:

It is nice to renew your acquaintance, Victor. I remember that warm summer a long time ago, when you, and a number of others — some of whom are still about — were doing our best to get this place up and working again. Your expertise was positively recognised and, undoubtedly, you have a unique insight into the financial outworkings of a devolved Government. When you produce a report such as this, it is worth reading. Perhaps you can give us a brief synopsis of your background and qualifications.

Yesterday, in the House, however, the Finance Minister said that your report had no standing whatsoever as far as the Executive are concerned. Such a remark disappoints me, but so do a lot of things that the Minister has said lately. I am not asking you to deal with that, but it is worth noting that that is what he said in the light of this meeting taking place today.

On the issue of generating extra resources, or making better use of what there is, can you put your finger on how deep the difficulties go? What are the ramifications and repercussions of underspend, current shortfalls and pressures?

I will give Victor a chance to respond, and then I would like to come back with one final question.

Mr Hewitt:

I will pass over the first question; I do not want to bore you with the long saga of my background.

Underspends have been a feature of the block for many years, going back well before the Executive came back, and they feed through into end-year flexibility. The deal with multi-year settlements is that those are combined with the ability to carry unspent money over from one year to another. As far as Northern Ireland is concerned, the block, as a whole, is regarded by the Treasury as a Department. Therefore, the ability to carry money from one year to another is a block issue; it is not cascaded down into Departments. Departments may not hold onto their underspend automatically and get it the next year.

The rules for accessing the underspend at Treasury level have been tightening. One can see that from its point of view — the Treasury is desperate for money; it has a few wars to fight and a bank or two to buy. If money has been allocated and is not being spent, that is seen as dead money. Departments run a considerable risk, year after year, returning substantial underspends. No matter what agreements they may have with Chief Secretaries, those would be limited in time and scope.

Capital is a vulnerable area. I understand that capital has slippages; however, it is very important that we try to keep up to the mark in our spending on capital. Currently, I think resources are covered by an agreement for access.

The financial situation in the UK as a whole is tightening day by day. The Treasury will be looking for any opportunity to claw back what it sees as underspend, or dead money. I think that it is in everyone’s interest to try to get our estimating as precise as possible and that we have proper delivery mechanisms for the projects in the Programme for Government.

Mr McNarry:

In the report, you suggest that we need to somehow reconfigure, to look at where we started from, and, as you said in your introductory remarks, find out whether we are heading in the right direction. If we are not, what do we need to do to level things up? What can we introduce to get balance back and tilt it to ensure that we are dealing with the right sort of things?

You talked about, and gave the Committee an example of, an “imaginative, though fiscally neutral, argument”, and you suggested options that the Executive should pursue with the Treasury. In case it turns out that we have not corrected the current bad run, have you any further suggestions? The situation seemed to be all right in 2008, but circumstances have dramatically changed since then.

Mr Hewitt:

We must not put the cart before the horse. There must be a clear view of whether the priorities that have been set remain valid and whether the targets that have been attached to those priorities are deliverable in the current circumstances. Given that foreign direct investment has more or less dried up over the past year, one may question, for example, whether some of the targets for creating additional jobs, particularly those of a certain quality, remain valid. Consequently, should money that has been allocated to meet those targets be reallocated to another use? It is a matter of revisiting the priorities and checking how realistic the targets are.

The next step is the difficult one: if you decide that the priorities or targets need to be altered, money must be reallocated. A standard principle of budgeting in Northern is that all the money is allocated; there are no reserves. That means that if someone has received more, someone else must receive less. As members saw during the debate on the Budget, there are some easements at the margins, which meant, for example, that health was given first access to any underspend, and so forth. However, if you intend to make major changes, those are only minor easements.

Mr McNarry:

In the document, you state that some Departments need more money than others during a recession. Is that the kind of thinking that would bring about the adjustments? You state that a strategic cuts exercise would be required to facilitate that kind of redistribution; will you elaborate on that?

Mr Hewitt:

Those are precisely the circumstances in which one would undertake the difficult task of conducting a cuts exercise. On paper, that is relatively straightforward: impose a 5% cut on everyone, assemble a pool of money, allow Departments to submit bids to win the money back, and wait to see how imaginative those bids are. When that exercise was carried out in the past, one interesting feature was that the Departments identified certain plans that they would have to give up should a 5% cut be imposed, but they did not submit bids to retain those bids — and that demonstrates some confused thinking.

Although one option is to assemble a pool of money and reallocate it by means of a mini-Budget, it is not an easy one, particularly if Departments have a silo mentality when it comes to their budgets, and I consider that many of them do.

Mr Paisley Jnr:

Victor, I am more than happy, as were Mr O’Loan, Mr Clarke and Mr McNarry, that you could come to today’s joint meeting, which represents an interesting and creative way for the Assembly to work. However, unlike the three previous speakers, I want to put some distance between my party and those whom it represents, and some of the suggestions in your report. I will try to explain why the Government’s response to your suggestions is lukewarm.

For the past two years, the Government have sought to try to put money back into people’s pockets by waiving water charges, freezing domestic and non-domestic rates, introducing free prescriptions, and examining ways to ensure that elderly people can be helped. The silver bullet, or clear blue thinking, that you present in your report is to introduce water charges, stop the freeze on domestic and non-domestic rates, introduce more prescription charges and remove the benefit of free travel from elderly people.

You go as far as to say that these benefits should be phased out because they are subsidies. Those subsidies are one of the things that devolution delivers for the people. We calibrate the economy to help them, because, ultimately, we are their servants, not the other way around. By being servants to the public, we believe that we should help them where they hurt most — in their pockets. These subsidies are helping them the most, yet your action plan is to introduce all of those charges again. Maybe you can understand why I am lukewarm about the proposal, and why I want to put some distance between your proposals and your action plan.

You suggest two other, very specific, action plans in paragraph 41(vi) and 41(vii) of your report. You suggest that we should increase the cost of MOT testing to a flat-rate charge or fee of £100. Again, I do not think that taxing people at this time is the way forward. As well as that, the downside of such creative thinking on your part would be that many people could not afford to pay £100, but would still need to be able to use their vehicle. That may lead to an increase of vehicles on the road that are not fit for use, and if they are involved in accidents, the culminating expense of that would be even bigger than at present.

The other issue is the proposal of an annual fee on car-parking spaces in town centres. Town centres rely on footfall generated by shopping and by people getting into those towns. With the lack of public transport for the many hundreds of thousands of people who live outside our cities, the car is the only way in which they can get into town centres. Putting a tax or annual fee on that would be a tax on shopping. In the current climate, those measures would be draconian, and would not be the way forward.

In the report — in paragraph 41(viii) and paragraph 28 — you have demonstrated some creative thinking. One of the ideas is to have capital allocations brought forward. That is very creative. The idea of asking the Government to give us the VAT charge back as a lump sum, as opposed to taking that sum off the VAT charge at the counter is creative thinking. However, that thinking relies almost exclusively, but not entirely, in the gift of the Treasury. I know of your background and expertise in these matters, but as you are aware, fighting with the Treasury is almost asking for a punch in the face whenever you ask for things like that.

The consequences for the Treasury are that, if it were to do that for Ulster, it would subsequently have to do the same for Scotland and Wales. The implications are that it would be a huge hill for us to climb. Is there anything else that we could do that would not reverse what the four-party coalition has put in place? Could we do anything else to generate some additional revenue to help to get us out of this curve, or set us on the right track to getting out of this economic decline?

Mr Hewitt:

I think that there has been a misreading about the car-parking issue. The car-parking levy was directed toward the public sector. Take the car-parking spaces on this estate: if you went into Belfast and attempted to buy one of those spaces for a year, it would cost £1,000 plus rates. You are conveying a benefit to the users of those car-parking spaces. They do not have to use them if they do not want to, but even places such as the University of Ulster have introduced car-parking charges.

Mr Paisley Jnr:

Are you seriously saying that public-sector workers, who are amongst the lowest paid, whether they are in the Civil Service or nurses at hospitals, should then take the hit of having to pay for taking their car to work? If you were to charge for the car-parking spaces in front of Stormont, irrespective of the 108 Assembly Members who could suffer a charge, the issue would be for the ordinary civil servants who work here. There are 400 civil servants in this Building alone, and there would be many more thousands who would have to pay for car parking. Some of them are among the lowest-paid workers; some are on family tax credit. That is not feasible in the real world.

Mr Hewitt:

Those things should be looked at in the round. The other side of that particular coin is that the security of employment for public-sector workers is almost absolute and their pension arrangements are considerably better than those in the private sector. Therefore, if you are in a situation in which the entire weight of the recession is essentially going to fall on private-sector workers, you might be asked whether the public sector, including its employees, could make some contribution to easing the hardship that we are going to be facing. That is a fair, moral argument and is a fair question.

On the question of subsidies, economists are very keen on the concept of opportunity costs — translated, that concept means that nothing is free. The benefits that are obtained by giving out subsidies have to be weighed against what has been given up; that is, what could otherwise have been done with that money but is no longer possible because the money cannot be spent twice. Many subsidies are extremely valuable to people, but blanket subsidies will always carry what economists call deadweight. For example, the scheme providing free transport for the over 60s will allow quite a few under secretaries earning £100,000 to get a free bus pass. You may think that that is a good use of public money; I do not concur.

Subsidies need to be looked at very carefully. They are popular for the people who receive them, but the true cost of them is never really seen. It is important to consider what is being given up and who is suffering as a result of the cost of a particular subsidy.

Mr Paisley Jnr:

If we only see this as pounds, shillings and pence, we miss the vital component — the Northern Ireland people for whom we are working. They are entitled to this; it is their country, and it is their money. We are entitled to distribute it in a way that helps them, irrespective of whether they have been incredibly successful or if they have not been as financially successful as they may have wished. The point is that we should be helping them. Any policy must be given the personal touch and be considered from the perspective of the people as opposed to simply a financial perspective.

I would have thought that the way to get more resource into the Government is to make our Government work more quickly. I often disagree with some of my colleagues, but one of the points that always comes up in the Committee for Finance and Personnel is whether we can encourage Departments to implement faster, think quicker, turn things over and have a churn that is much faster. If a Department says that it is going to do something — whether it is a capital works programme or a land-sale programme, for example — it should be done quickly, rather than it taking years and years for things to work out.

There is now the six-month rule in relation to planning; if there are jobs associated with a project, a decision on it will be reached quickly. Six months is still a lot of time, however, for a company to wait to get planning permission. Surely, getting Government to act quickly is the way to get the churn going and get more money into the economy, rather than trying to claw back the subsidies that we — I say “we” because the subsidies were agreed collectively, as the Assembly voted for every single one of them — have given to the people because we want to help them. I do not believe that taking the subsidies off those people is the answer.

Mr Hewitt:

I am all for speeding up the mechanisms of Government and generating as much efficiency savings as possible from within the machine. That said, you have to recognise that it is not simply a matter of urging people on; it is a matter of changing the culture and attitude towards risk. Civil servants operate under the threat of being gutted for getting something wrong, while rarely getting any praise if they get something right. That is almost the opposite of the bonus culture in the banks. People are encouraged not to take risks in the public sector. It should be recognised that there needs to be a change in culture, and the Assembly needs to recognise that some risky things may be done and some of those will go wrong.

Dr Farry:

Ian talked about the potential for reversing the VAT cuts and generating resources, while at the same time defending freezing the regional rate. In economic terms, is there any difference between those two measures? The only difference that I can see is that one is from London and one is from here.

Mr Hewitt:

The regional rate is entirely under our control; VAT is entirely under the Treasury’s control. That issue should be considered as part of a wider agenda, by considering the relationship between the regions — especially the devolved regions — and the centre. Currently, our regional policy means that we have essentially agreed to operate within quite binding constraints, so large financial transfers will be made from the centre to make sure that our standard of living does not fall below a certain level. That is one model, but I do not think that it is particularly good because it does not provide incentives for people to innovate.

Over time, there will be a movement towards a demand for more autonomy, and more of a willingness to take risks to sacrifice our grant from Whitehall for greater freedom to alter taxation. A different balance will emerge. That sort of argument is part of a wider agenda and debate that has been suppressed for a long time, but it will break through eventually.

Dr Farry:

I have a question about our wider relations with the Treasury and a few others about income-generating issues and the subsidies that people pay out. You suggest a figure of £40 million as regards the lost revenue on the regional rate. Will you outline how you came to that figure? What assumptions did you make that led you to that figure?

Mr Hewitt:

That is the Department’s figure.

Dr Farry:

What level of regional rate is that figure based on?

Mr Hewitt:

It was based on the steps that were taken to freeze the regional rate.

Dr Farry:

Is it based on the saving from the previous level?

Mr Hewitt:

Yes.

Dr Farry:

OK. As attractive as the £150 winter fuel payments are in the short term, is there an opportunity cost in relation to that, particularly bearing in mind the points about energy efficiency and employment that could be provided if that money were spent on insulating people’s homes? Have we potentially made a very short-term fix and missed a longer-term opportunity?

Mr Hewitt:

Clearly, that is a short-term measure. It also brings to mind the fact that money is fungible — it may be provided for one purpose but used for another.

If I got it right, I was slightly puzzled that that measure would be conducted by the Office of the First Minister and deputy First Minister (OFMDFM), which I do not think has a great deal of experience of making grant payments. It certainly does not have —

Dr Farry:

To be fair, the responsibility will be the Department for Social Development’s (DSD).

Mr Hewitt:

DSD will have the databases and so on for the operation of the scheme, but I wondered about the administration of the subsidy.

Dr Farry:

As far as our relations with the Treasury are concerned, are we running a certain risk of diverging too much regarding matters such as the level of household taxation — whether that is through water charges or regional rates — in relation to pleading the case for money and the application of the Barnett formula?

Mr Hewitt:

Inherent in a devolution settlement is the fact that there must be flexibility to depart from national norms. That said, it is still the case that Northern Ireland receives a substantial subsidy from the central Exchequer. From time to time, questions are raised as to why people in Liverpool who have to pay for their water effectively subsidise people’s water here. Clearly, there is no particular benefit to people in Liverpool from having a good water system in Northern Ireland, but, in principle, the payment falls upon them.

Dr Farry:

My final question is a very broad one. In relation to the Northern Ireland Executive’s response to the downturn, are there any lessons that we should draw from the responses of the Scottish and Welsh Executives? Essentially, they operate in an almost equivalent situation to us regarding powers and responsibilities. Have they taken actions that we should also take so that we do not miss out, or is the situation the opposite? Perhaps we are setting the pace and there are things that they could learn from us.

Mr Hewitt:

Broadly speaking, we are reasonably well ahead of the game. At least one proposal in the paper was drawn from some of the ideas in Scotland — that of having a single electricity tariff for the public sector using purchasing power to, essentially, try to get the prices down, provided that that will not shift costs onto other electricity consumers. One seeks efficiencies from the suppliers, and so on.

The Scottish Executive have six proposals that more or less mirror what we are doing. They involve the usual standard ideas of advancing capital projects, evaluating what can be done in relation to retraining people, and so forth. So I do not think that we have fallen behind the rest of the UK in any way.

Dr Farry:

That is with respect to concepts. What about relative spend, or diversion of resources from existing baselines? Have you any indication of how their finances lie?

Mr Hewitt:

From memory, the Scottish Government have put together a package of about £250 million. Like all packages, one must look at it carefully to see what is in it. There is a tendency in all Governments to announce things multiple times — that is something for which Gordon Brown became famous. Without having the details of those packages to hand, I hesitate to say much more about them.

Ms J McCann:

Thank you for your presentation, Victor. I want to return to the subjects of bringing forward capital projects and advance payments for public-procurement contracts. Both these Committees recently received correspondence from representatives of the quarry industry, who wanted to do work on the roads and retain in employment their skilled workforces. Treasury accounting rules were cited by the Minister of Finance and Personnel as the main reason that that was not possible. You referred to the fact that Scotland has done that in the past. Is there room for flexibility to negotiate with the Treasury on that?

You mentioned the single electricity contract for the public sector. I know that we have spoken about this before with respect to delivering electricity for the social-housing sector. Have there been negotiations with the energy companies? There is only one main supplier here, NIE Energy Limited, whereas Scotland may have a more competitive market.

Mr Hewitt:

I am not aware that there is any negotiation on electricity. We are in a particularly difficult situation with regard to electricity: part of the market has been liberalised and you can buy from providers if you can find them. The domestic market is tied into a monopoly supplier which, in turn, is linked to very long-term contracts that date back to privatisation. There is relatively little room to manoeuvre for individuals: that is why I spoke about collective bargaining. An individual going to an electricity company asking that something be done about his or her tariff would not work, but a substantial block of consumers demanding a better tariff deal would be more effective.

I could not resist the temptation to add the bit about advance payments. It is an example of accounting practice and audit practice coming up against the real world. It is about protecting public money. The public sector is averse to risk. The rules are intended to ensure that one does not make payment for something that may not turn up, and the usual advice is against advance payment. No official could authorise it.

However, extraordinary times sometimes require extraordinary measures and it would be worth exploring, with the Audit Office and the Ministers whether or not, in exceptional circumstances, a direction could be given by a Minister that would effectively override the accounting treatment — for a very good reason. There might be situations where there is a crying need to get money released now, but the full procedure cannot be completed in time, or within the financial year. We are now very close to that. It is an example of urging people to be bold in their thinking. They should not accept that, because something has always been done one way, that is the way it always will be done.

Mr McNarry:

What happens if one is bold? What are the repercussions? Does one get a slap on the wrist, or is any action taken?

Mr Hewitt:

The Audit Office would probably qualify the accounts of the Department and make note of the fact that a payment in advance of need had been made. Therefore, officials would take action, as has happened in other instances where, on value-for-money grounds, payments have been made where there was not a particularly good value-for-money case, and the Department would need the protection of a ministerial direction. There have been such examples under direct rule, when quite a lot of ministerial directions were given. I am sure that one was given for the spend on the City of Derry Airport because the cost-benefit analysis and the value-for-money analysis tended to show that that was not a worthwhile thing to do. Nonetheless, it was done.

Ms J McCann:

Are you saying that there is room for manoeuvre and that individual Ministers, or the Finance Minister, here can negotiate with the Treasury around Treasury accounting rules?

Mr Hewitt:

I am not sure that it is even a matter of negotiating with the Treasury. It is more a matter of dealing with the Audit Office, because the Audit Office is there to report back on the proper spending of public money. It is not necessarily a matter for the Treasury. However, those are issues to be explored, and not simply put to one side because it is too difficult — we would have a very large box marked “too difficult” if we did that.

Mr B Wilson:

I found your paper extremely interesting, particularly the way in which you question how we are using our scarce resources. If we look at things such as freezing domestic rates, prescription charges and free travel for the elderly, while they are welcome, I am not sure that that is the best use of our resources or whether they should be a priority. I suggest that there are more important issues to be tackled, particularly with the present unemployment situation.

We need to release more cash. I found the change in VAT interesting. When that was announced, the general consensus was that it would not have an impact. If it is not going to be changed and we could get an extra £240 million, we could put it to good use. There are ideas to get people off the dole queue, and insulation, and so on was talked about. However, I am surprised that that would result in £240 million. Are there any practical problems in obtaining that money from the Treasury? Would there be any procedural problems?

Mr Hewitt:

Oh yes. That is put in as an example of closing the stable door after the horse has bolted. There is no chance of getting that now, because it is under way. Innumerable administrative difficulties will be raised about having a different VAT rate in one part of the United Kingdom as opposed to another part. What about Internet purchases, and so on? I tended to approach the issue a little too cavalierly, but I hark back to Churchill, who often said that the difficulties would argue for themselves. It is important to focus on moving things on.

Again, it is an example of trying to think outside the standard processes. We get our money through Barnett, and we cannot do this or we cannot do that. As I have pointed out, some of the rules that seem to have been set in tablets of stone are quite readily amended when it is to the Treasury’s advantage to do so. The convergence from capital into current is a good example of that. If that had been suggested at any time in the past, one would have been shown the door.

Mr B Wilson:

To come back to PPPs, I am aware of a school that has been in the pipeline for six years and is almost ready to go, but the developer cannot raise the finances. You suggest that we should proceed with conventional procurement methods, but how can that money be obtained for developers?

Mr Hewitt:

It is hard to know what the exact situation is. The difficulty for developers is that they have trouble borrowing from banks. Whether or not there is enough conventional procurement in the pipeline to move that forward and to move back the PPPs is an issue for DFP. However, some flexibility has been given to move capital around: up to £76 million can be moved from the end-year into earlier years, so there should be some opportunity to do that. I understand that £9∙4 million has already been moved, although I put a health warning on that.

The public-expenditure cycle runs for three years. The third year tends to become the baseline for the next three-year cycle, and so on. If one reduces the third-year baseline, by taking money out of the third year and moving it into earlier years, one starts the next public expenditure cycle with a lower baseline than was previously the case. That money is lost, not just for that year, but forever. So if one takes £30 million out of the last year, there will be £30 million less than would have been there when it comes to negotiating the additions in accordance with the Barnett formula. That £30 million goes on forever, so it is important to be very careful about moving money from the last year into earlier years.

The Chairperson:

I have a broad question. We are in deep recession at present. Should we be looking to stimulate the economy? If we were to reprioritise some of our spending, it is obvious that we could create jobs quickly. Some of the issues you have raised illustrate that. Spending cuts on house building will be disastrous for us. We will build only 700 or 800 houses in the next financial year. Housing maintenance schemes, kitchen replacement schemes and external cyclical maintenance (ECM) schemes can be done almost overnight by construction companies. By creating jobs, we can increase spending in the economy. Is that better than proceeding as we do at present?

Mr Hewitt:

It is one way of getting action reasonably quickly. Big projects take a lot of time to get moving, in assembling the necessary equipment, and so on — quite apart from obtaining the planning permission.

Housing expenditure is interesting. Obviously, the housing targets and budget were predicated on substantial sales of houses. Those have not materialised. Two years ago, 2,000 houses a year were sold; that is now down to 50. That is the order of the collapse, and it leaves a very large hole in that budget. The full risk lies with one Department. I have a question: if it is a strategic priority of the Executive as a whole that social housing be improved, should there not be a sharing of that risk across the entire Executive, rather than have it fall on a single Department? To some extent, that has been done because additional moneys have been provided through monitoring rounds, and so on —

Mr Paisley Jnr:

It has also been done through the investment strategy for Northern Ireland (ISNI).

Mr Hewitt:

Yes. However, it might be necessary to take the time to consider whether we have the right way of financing social housing. Is the market now so volatile that the system is no longer satisfactory? We cannot always depend on DSD selling 2,000 houses each year as a means of raising money.

The Chairperson:

I have two points to make. It would not be possible to sell 2,000 houses each year, even if times were good. The number of houses that the Housing Executive has in that system is reducing quite quickly, and demand for housing is growing substantially. That reservoir of funds will dry up shortly.

I was making the point that there are ways to quickly stimulate the economy, including a re-prioritisation of how we spend our money. Housing and road-maintenance schemes can be implemented quickly and will have a multiplier effect, because people will be employed as a result. Is it possible for us to do that, regardless of the outside pressures on economies across the world?

Mr Hewitt:

A balance must be struck between short and long-term measures. Short-term measures will provide short-term relief by keeping people in employment and retain certain skills in the economy. However, with such measures, one is betting on the recession not being long enough to render them unsustainable.

We also need to keep an eye on the long term; as I said, recessions are an opportunity as much as they are a threat, so we need to think about how we can best configure ourselves so that we can take full advantage of any upturn in the economy. That is important because, if the recession lasts for a long time, the structure of the economy will be rather different, yet we do not have the mechanisms to make the shifts in the skills sets required to meet that change. Therefore, it is a matter of balance. With short-term measures, you are betting that the recession will not last so long that they run out, and you must also keep an eye to the longer term.

The Chairperson:

Water presents a huge financial difficulty for the Executive. Suspending water charges will cost almost £0·5 billion a year. Is there no escape from that cost, other than charging?

Mr Hewitt:

Funding for Northern Ireland Water has to be found from somewhere. It will either come from the existing block grant, which will mean sacrifices in other areas, or it will come from charging customers.

The Chairperson:

To clarify, the Finance Minister said that water charges are a technical issue. Is it a technical issue that will cost £400 million a year?

Mr Hewitt:

We must be clear: the £400 million is not a cash payment, but it does, nonetheless, score into the resource departmental expenditure limit. Therefore, unless the resource departmental expenditure limit is raised, at least initially, to meet that £400 million, any additional investment in the water system would have to be found elsewhere. It is reasonable to insist that HM Treasury ensures that the baseline for the resource departmental expenditure limit takes account of the initial position of the water company. I do not know if HM Treasury has done that in the past few years and is now seeking the money back through other means — you will need to raise that with DFP and DRD.

The Chairperson:

Those are mysteries that ordinary MLAs would never be able to find out.

Mr Hewitt:

I warn you that you will lose the will to live if you delve into the matter too far.

The Chairperson:

What about the issue of VAT?

Mr Hewitt:

I am not an expert on VAT on those issues. Different classifications in the public sector attract or do not attract VAT. There is an arrangement in the Value Added Tax Act 1994 whereby Northern Ireland Departments can reclaim VAT, so it is not an issue for Departments. However, bodies that are outside Departments, such as non-departmental public bodies, receive no concession. The classic example of that is Invest NI, which used to comprise the Industrial Development Board (IDB) and various other offices in the Department. Invest NI was taken out of the Department and consequently incurred an ongoing VAT bill. However, VAT is not usually a huge amount of money in such matters.

The Chairperson:

The reason that I ask is because we have received correspondence about VAT from the Department. Obviously, as you have said, the issue is highly complex. The Department states that additional VAT costs could be up to £60 million in 2009-2010 if existing arrangements are no longer in place. Up to £130 million would be involved. Her Majesty’s Government would recover VAT payments to that amount for 2007-08.

Mr Hewitt:

I am unable to respond to that. If I could examine the correspondence, I could provide analysis. I am not particularly au fait with the VAT treatment of the arrangements with regard to water at this time.

Mr McNarry:

Is there any chance that I could ask one more question, Chairman?

The Chairperson:

We must be careful, because we may not have a quorum soon. You can ask one question.

Mr McNarry:

It is just a quickie. On 16 February, the Minister of Culture, Arts and Leisure said that even if a decision had been taken to proceed with the failed Maze-stadium project, not a single brick would have been laid for 18 months. How are people expected to cope with that when money has been committed for such projects or for roads, but they are not started?

We look at budgets of millions of pounds for which commitments have been made, but projects do not eat into them; for example, for 18 months, as would have been the case with the Maze or, later, with roads. Can you vire that money at all, or is it the case that when it has been committed to a project, it could sit there for 18 months, which would have happened at the Maze? It is difficult to understand.

Mr Hewitt:

As I have already said, if money is left to sit, it becomes a tempting target for our friends across the water. Quite often, it takes an extraordinarily long time to plan and begin to deliver projects. I heard of a road project that started six years after its inception. That time frame is extraordinarily long. Departments tend to try to take a longer-term view and have a stock of projects coming forward. The education system is a good example of that, in terms of schools.

Mr McNarry:

At present, skilled workers are being lost even though projects are sitting down the line.

Mr Hewitt:

Indeed. However, procurement and planning issues seem to be almost insurmountable at present.

The Chairperson:

Thank you very much, Victor.

Find MLAs

Find your MLAs

Locate MLAs

Search

News and Media Centre

Visit the News and Media Centre

Read press releases, watch live and archived video

Find out more

Follow the Assembly

Follow the Assembly on our social media channels

Keep up-to-date with the Assembly

Find out more