Official Report: Minutes of Evidence

The Chairperson (Mr O'Toole): We welcome Gareth Hetherington, director of Ulster University Economic Policy Centre (UUEPC); Paul Mac Flynn, co-director of the Nevin Economic Research Institute (NERI); Lisa Wilson, senior economist at NERI, who was involved in the fiscal commission a number of years ago; and Ann Watt, head of Pivotal public policy forum, who is joining us remotely. Thank you all for joining us, and thanks for being patient with our delay. I will invite each of you in turn, starting with Gareth, to give us a brief opening statement. Being brief is important, given that we kept you waiting. We can get to lots of the detail in questions. Members, please indicate if you wish to ask a question. You are first, Gareth.

Mr Gareth Hetherington (Ulster University Economic Policy Centre): Good afternoon, Chair and Committee members. Thank you for the opportunity to present evidence today. First, as I will touch briefly on the need for transformation in my comments, it is appropriate to make you aware that I am a member of the public-sector transformation board. My substantive comments today will focus primarily on the importance of agreeing a multi-year Budget, rather than recommending specific areas where funding should be increased or decreased, but I will return to that at the end.

First, a word on context. Northern Ireland faces profound structural challenges, including the highest economic inactivity rate in the UK at 27·5%, driven largely by long-term sickness and persistent lack of productivity growth. We are also confronting acute and growing demands on public services and in Health in particular. Single-year Budgets act as a straitjacket on our ability to address those issues. They trap Departments in a cycle of reactive spending, sometimes referred to as the "prevention paradox", whereby a combination of short-term Budgets and immediate crises result in funding not being allocated to preventative services that would reduce long-term demand.

A multi-year framework changes that dynamic in several ways. First, it enables genuine transformation. Public-sector reform requires upfront investment and sustained implementation. Those programmes are delivered over a multi-year time horizon and therefore require the certainty that longer-term budgeting delivers. Secondly, it greatly assists with infrastructure delivery. Capital projects operate on a multi-year timescale, and single-year allocations create procurement inefficiencies. If Departments have the security of longer-term funding, they can offer projects that encourage more competitive bidding. It also allows for better supply chain management, potentially purchasing materials at better rates, and gives the construction sector the pipeline visibility needed to invest in capacity and skills. Thirdly, annual Budgets create a higher administrative burden on the public sector as well as other public-service providers such as the voluntary and community sector. Multi-year Budgets allow for multi-year contracts to service providers. That reduces costly annual re-tendering exercises for both sides and, importantly, gives greater employment security to staff. Fourthly, it allows Departments to focus on solving the problems that the public care about, rather than having to spend time competing with one another for money every year. Finally — this is linked to the above point — it can improve scrutiny and accountability. The annual Budget process focuses debate and attention on input — money — rather than outputs and outcomes. As an illustrative example, questions such as, "You have had three years' stable funding, so why have waiting lists numbers not improved?" become more reasonable.

Before I finish, I will return briefly to areas where spending should be increased and reduced. As you may expect, I have a strong preference for prioritising funding in areas that encourage and support economic development. Skills is one area that we have researched significantly, but growing the economy is not just the responsibility of the Department for the Economy. As an example, lack of infrastructure investment in areas such as waste water treatment is holding back investment. Our greatest economic challenge is the need to re-engage the economically inactive, a Department for Communities policy area that requires support from the Department of Health and the Department for the Economy; in short, economic growth requires an Executive-wide effort.

On the spending side, the tendency to salami-slice many individual budget lines has a shelf life. It can be done at the start when inefficiencies may have crept into the system, but that position has long since passed. More difficult decisions are now needed on activities that government should stop doing altogether. Making those decisions requires good information and robust evaluation of programmes that are simply not delivering improved outcomes. As politicians, you will be aware that there is increasing public expectation that government needs to solve every problem, a culture that was likely exacerbated by the pandemic. That approach would be fine if we could afford it, but we cannot. I recognise that stopping funding for a particular area is unpopular and creates obvious challenges. However, there is a need to recognise that, sometimes, unpopular decisions are the right decisions. Greater effort is required from politicians and from the policymaking community more broadly to ensure that the public are better informed about the reasons for difficult spending decisions. That communication effort must be based on solid and robust evidence.

The Chairperson (Mr O'Toole): I do not know whether Paul or Lisa wishes to go next.

Mr Paul Mac Flynn (Nevin Economic Research Institute): I will take it. Good afternoon. I, too, thank the Committee for the opportunity to speak today. I am joined by my colleague Lisa. In our evidence today, we will focus on three areas that, we believe, need to be discussed in order to understand the Executive's draft Budget.

The first point relates to the public spending settlement that underlies the draft Budget. The topic of the block grant and its efficiency for Northern Ireland was much discussed in the lead-up to the restoration of devolved government in 2024. While the deal that followed that secured a recognition of public spending need in Northern Ireland, the model that was arrived at suffered from many issues. Those issues were brought to light in the subsequent report on public-sector need produced by Professor Gerry Holtham.

In the report, Professor Holtham documents the inadequacy of the model that the Treasury settled on and highlights many of the issues that remain unresolved. I will not go into detail on those points now, but suffice it to say that Northern Ireland is not receiving the public spending settlement that reflects its needs and, under the current model, it likely never will. It is important to remember that the Treasury has committed to engaging where Northern Ireland can demonstrate through credible and robust evidence that its level of need exceeds the current 124% settlement. That commitment matters. It means that the Treasury is not unwilling to move or that the existing physical framework is not beyond challenge. The question, therefore, is not whether change is possible in principle but whether the necessary evidence is assembled to support it.

Beyond the issue of Northern Ireland's settlement, we have to address the fact that there are real-term reductions in the draft Budget, and those have been imposed as a direct result of fiscal policy decisions taken by the UK Government. The current pressures need to be viewed in that light. The £400 million additional expenditure requirement for this fiscal year cannot be laid solely at the Northern Ireland Executive's door. It is a natural outcome arising from the gap between public-service provision in Northern Ireland as it currently exists and the level of public services that the UK Government are willing to fund. The Treasury has indicated that it wishes to undertake an open-book exercise on that extra spending. However, it would be far more useful for the Treasury to undertake such an exercise on the totality of Northern Ireland's block grant so as to better inform its commentary on Northern Ireland budgetary matters.

The Chairperson (Mr O'Toole): Sorry, Paul. On that point, you described the open-book exercise as being on the Budget as opposed to the entirety of the block grant.

Mr Mac Flynn: That is our understanding.

The Chairperson (Mr O'Toole): Effectively, the Budget is the block grant. It is about how the block grant is allocated, so it feels as though that is a slightly strange distinction. Will you explain to me why that is?

Mr Mac Flynn: It is undertaking an open-book exercise on how that £400 million is to be spent. My point is this: undertake an open-book exercise on how the entirety of the block grant is spent if you are looking for an indication of what is waste and what is lack of sufficient funds. Are you happy enough?

The Chairperson (Mr O'Toole): Yes, go ahead. Sorry that I interrupted you.

Mr Mac Flynn: No, it is fine. On the draft Budget, any assessment of the current position must also consider the internal discipline of the Executive's budgetary framework. The absence of clear targets, costed outcomes and defined responsibility for delivery can weaken fiscal control. In the absence of that discipline, overspends are obscured. It is no longer clear whether they arise from conscious policy decisions or from a funding allocation that assumes that Northern Ireland can deliver public services that are on a par with those in the rest of the UK despite different levels of need.

I now turn to revenue matters. The UK Government and the NIO in particular have said that the expenditure settlement for Northern Ireland is sufficient for its needs and that, if the Executive wish to change it, they must do so from within their own resources. When discussing revenue raising in Northern Ireland, we need to make a few things clear. Citizens in Northern Ireland pay their fair share of tax. They face the same rates and allowances on the taxes that they pay as all other UK citizens. Any supplementary revenue raising would be an additional taxation in order to maintain public services at the same level or to fund policy choices and services that the UK does not provide.

One of the main revenue-raising areas that the NIO and others have sought to highlight is property taxes. The point is made that water charges are included in council tax bills in Britain and that such bills in England are higher than domestic rate bills here. That should not be surprising, because property values in England are much higher than they are here, and they are what determines the revenue that arises from rates. Yes, there is room for adjustments to the limited revenue-raising powers in Northern Ireland, but simplistic and inaccurate comparisons do not aid that. The Northern Ireland Executive have power over 6% of the revenue raised in Northern Ireland. To seek to rebalance an entire Budget from that revenue base would be misguided and fruitless. We need to be clearer about the impacts of UK taxation decisions on the longer-run fiscal sustainability of Northern Ireland. Northern Ireland has not weakened its fiscal sustainability profile on the revenue side because of substantially lower locally raised revenue; it has been weakened by UK-based taxation decisions that have disproportionately undermined revenue here.

If we are to look beyond the currently limited revenue-raising powers, we would do well to heed the same caution. Devolving tax revenues is not a simple exercise and, in many cases, carries significant risks, whereas, over the longer term, aligning the revenues raised in Northern Ireland with the resources available for expenditure could bring greater responsiveness to budgetary decisions. The current system of devolution in which we operate is not suited to that goal. Fiscal devolution should only be part of a wider reform to the entirety of the UK's fiscal framework.

The Chairperson (Mr O'Toole): Thank you, Paul.

Ms Ann Watt (Pivotal): Thank you, Committee, for the invitation, and I am sorry that I am not there in person. I have been unwell this week, so I thought that it would be best to stay away and keep that to myself. I have already submitted some written evidence that, I hope, the Committee has seen. Also, I recommend looking at our multi-year Budget report, which we published in December. Obviously, that predates the proposed draft Budget, but it explains a lot of the issues and provides some analysis of the key things that we need to think about as we consider the proposed multi-year Budget.

In these quick comments, I will talk mostly about resource departmental expenditure limit (RDEL). Part of the problem is that we only really talk about resource DEL. Of course, we should talk much more about capital spending as well, but we are in such a repeated series of budget crises that we end up just looking at day-to-day spending. Of course, there are significant shortcomings in our waste water infrastructure, school buildings, housing and other infrastructure needs. To that end, it is really strange that we are looking at a multi-year Budget in the absence of an investment strategy. It makes no sense to me to set a three-year Budget or, indeed, a four-year Budget, when we think about capital, without an agreed investment strategy.

I will move on to think mostly about the resource DEL elements of this multi-year Budget. It is really good to have a draft multi-year Budget. Gareth has set out the benefits of multi-year Budgets clearly, and I will not repeat any of that. It is a step forward in budgetary planning and financial management. I commend the Finance Minister for putting out the proposed Budget. I recognise that it was not agreed and that there was opposition to it, but, without it, we would not be having any proper conversation at all about the situation this year.

The big headline message is that the resource DEL funding available to Departments in 2026-27 is alarming. I thought hard about what word to use, and "alarming" or "unprecedented" came to mind. We have got used to budgetary challenges in recent years, but I stress that this is not more of the same: it is, unfortunately, considerably worse. It will be impossible for Departments to manage their budgets without significant change to their plans. To be clear, I am not saying that the Finance Minister's proposed funding allocations are unfair or wrong in any way — they are a reasonable and justifiable distribution of the funding between Departments — but the total amount available is constrained to an unprecedented extent, and all Departments will face extremely difficult choices.

To explain that a bit more, the figures for total non-earmarked resource DEL show an increase in cash terms of only 0·8% in 2026-27 compared with 2025-26. The increases are a little higher in the next two years. It is a 0·8% increase — less than 1% — in cash terms. Health, Education, Justice and Infrastructure get a small positive increase in percentage terms, and other Departments do not. The recently agreed £400 million reserve claim loan boosts spending in 2025-26 but reduces it 2026-27, and that means, as far as I can see from the numbers that I have looked at, that Health and Education are getting less in cash terms in 2026-27 than they have spent in 2025-26. The key question is this; how will Departments fund existing services and deal with rising costs, especially pay costs, with less funding in cash terms than this year? With inflation at around 3% and staff expecting pay awards at the rate of inflation or maybe a bit more than that, how will that be afforded with a Budget that is lower in cash terms? Making public-sector pay awards will be problematic next year. I note that the pay review body has already recommended a 3·3% increase for Health staff in 2026-27. The pressures are mainly around pay awards, which make up around 60% of day-to-day spending, but it is also about funding other pressures, such as energy costs and increased demands for services in, for example, health and social care as the population ages.

As far as I can see, unless Departments take radical steps to reduce their spending, there will be significant overspends next year. For comparison on the basis of Pivotal's numbers that I have looked at, total spending by Departments has increased by between 5% and 6% every year in cash terms over recent years. As I said, the draft Budget numbers are asking Departments to manage with a falling budget in cash terms. They are used to a situation of having 5% or 6% increases, but they are looking at a falling budget in cash terms. If Departments continue to do more of the same, I estimate — again, this is based on my numbers — an overspend of £800 million to £1 billion or possibly more next year.

In summary, it will not be possible to continue as before and manage within the draft Budget. The Executive as a whole and Departments collectively cannot do as they do now when it comes to maintaining pay parity, continuing to deliver all services and keeping super-parity policies where Northern Ireland is more generous than GB and not raise more revenue. It will not be possible to continue as things are without huge overspends. Radical changes through savings efficiencies, reductions to services and/or revenue raising are needed. Those are significant and potentially unpopular decisions. I do not see much public recognition or conversation about the extent of the issue at present. Obviously, it is known in Departments, their finance teams and the Department of Finance, but, beyond that, we need a much bigger recognition and conversation about it.

All that underlines the importance of the transformation of public services so that they are affordable now and in the future. Pivotal's paper on the multi-year Budget that was published before Christmas argued that public services in Northern Ireland:

which has been proven by repeated budget crises and poor outcomes for the public. Change is overdue and much needed. The commitment to transformation in the Budget documents is welcomed, although it needs to be accelerated across government. To me, it is not clear at present how transformation will be led across the Executive at the scale and pace that is needed.

I echo Gareth's comment about the importance of prioritising economic growth in budget allocations. In the stretched position in which we find ourselves, it is easy to default to thinking that budget setting is only about dividing up the available funding between different public services, but we must also look at how to grow the economy here.

The Chairperson (Mr O'Toole): OK. Thank you all very much. That was sobering evidence from you all, but we will have the opportunity to ask questions.

I start with a broad question, and I will take answers from each of you in the same order. You all have acknowledged, albeit with slightly different emphases, the constraints. What was clear was Ann's point about having calculated a projected £1 billion overspend in resource DEL next year. Paul gave evidence around the Nevin Economic Research Institute's view on the unsustainability of the current Barnett construct. Notwithstanding those challenges and their different origins, are we all agreed that, even if, for whatever reason, the Budget is not enough, setting a multi-year Budget in the first place is better than not having one?

Mr Hetherington: Yes, that is correct: it is. In simple terms, it is about how best to manage public services. There are two things: we have a very tight financial environment, and we have been working from single-year Budgets. Moving to a multi-year Budget will not change the tight financial environment, but it will make it much easier to manage that difficult financial environment and allow Departments to plan which areas to prioritise in the years ahead and where funding should be pulled back, if, for example, programmes are not delivering the outcomes that they were intended or designed to deliver.

The Chairperson (Mr O'Toole): OK. Do Lisa or Paul wish to come in on the question of the desirability of a multi-year Budget in the abstract, notwithstanding the specific challenges, versus not having a multi-year Budget at all?

Mr Mac Flynn: It is desirable, but we are sometimes in danger of slightly over-egging the pudding. It is a multi-year Budget, insofar as we have committed to spending totals over the next three years. We cannot have a multi-year Budget in the same way as you would think of a national Budget. It is good for signalling what the priorities are. That could change at our end: priorities might change at certain points as the Budget goes forward. We keep being told how tight the UK fiscal settlement is, but we know that rabbits are pulled out of hats in UK national Budgets and at other events such as autumn statements, so our spending totals, which, we are told, are set in stone, could be in a different scenario in six months.

It is good as an exercise to try to get control over what we are dealing with now. As Ann said, however, with our types of settlements, no amount of certainty will get you ahead of the squeeze of the spending amounts that are coming down the tracks.

The Chairperson (Mr O'Toole): Indeed. In the context of the squeeze, which clearly is there, workforce planning is one example in which a multi-year Budget is usually cited as being important, because it would make it much easier than the alternative scenario. With workforce planning, you can be fairly certain of what the overall pay envelope will be, and, even if that is not enough, it will at least enable health trusts, for example, to have a broad sense of how many nurses they will have in three years. Even if we agree that the Budget is suboptimal in terms of the quantum and the structure of the block grant and the current devolved funding settlement, it is clearly better than no Budget at all. Is it better to have that than not have it?

Mr Mac Flynn: Yes, but filling in the blanks would be better. There is no point in setting unrealistic budget targets for certain Departments — budget spending totals that nobody believes they will be able to keep to — over the three years. It would be better to ask what it would actually mean for the spending and commitments of a Department if we were to have to go with this Budget in years 2 and 3. A discussion about the sufficiency of Northern Ireland's public finance settlement would be better informed by being able to put realistic outcomes of that Budget settlement to those who will ultimately control what it is.

The Chairperson (Mr O'Toole): Are you talking about Treasury in the UK?

Mr Mac Flynn: Yes. We talk about abstract calculations of public-sector need, but, under this exercise, we can now say what the public spending settlement will achieve in Northern Ireland over the next number of years, and, if somebody wants to dispute that, they can.

The Chairperson (Mr O'Toole): We may come back to that. That is an interesting point.

Ann, you articulated a projection for an overspend of £800 million to £1 billion in the first financial year. We talk about between 5% and 10% of the overall RDEL budget being overspent in year 1. Can you give us a sense of how you arrived at that figure? Is that based on a projection of the behaviour over the past couple of years? Further to that, do you think that some of that is behavioural? Is it because the pressures are genuinely inescapable or because it has become a behavioural thing — a learned behaviour, as it were — for Departments to profile overspends that are met in-year or for which there is a way of dealing with them at the last minute? Give us a sense of how you arrived at that figure of £1 billion overspend.

Ms Watt: Yes, sure. This is a back-of-the-envelope calculation. If you want a better number, it would be much better to ask the Department, which will have all the numbers at its fingertips. I took the non-ring-fenced resource DEL number for this year and included the loan of £400 million. That boosts spending this year to £15,932 million, so £15·9 billion. That is the number for spending this year. For next year, I took the non-ring-fenced DEL number and took out £80 million, which has to be repaid, and that gave me £15,570 million. That sees you with a falling amount of RDEL available to spend. It is basically 2% lower.

I then considered, if spending increased by, say, 3% overall next year compared with 2025-26, which might not be unreasonable, how much more you would spend above what is available, and I got an overspend of around £800 million. If spending increased by 4% overall, the overspend would be £1 billion. If it increased by 5% overall, the overspend would be £1·2 billion. Again, that is a back-of-the-envelope calculation. I should say, though, that, in the last few years, spending has increased each year by around 5% to 6% overall. That is the pattern. My main point is that, unless we do something radically different, we will continue that pattern and will significantly overspend the funding available, but I have to caveat all those numbers because they are very rough.

The Chairperson (Mr O'Toole): The open-book exercise has been talked about, and we covered that a little earlier with Paul. It appears to be a fast exercise, so how open will the book be, and will they get time to open it in the space of a month? Do you have any sense of what that will yield in terms of better information? Do you have any sense of how it has been arrived at? It seems a slightly strange, last-minute [Inaudible.]

Ms Watt: I have realised that I did not answer the second bit of your previous question, Chair, which was why I think that we will continue to spend at 5% to 6% more than the previous year. That is the established pattern, but the main thing is that we have increasing costs, particularly with public-sector pay. Unless you make radical cuts elsewhere in the Budget, if you are to make pay awards of, say, 3% or more, your overall spending will go up by 3%. Paring it back to less than zero, which is what is available, will be virtually impossible without really brutal cuts elsewhere.

I do not know what the open-book exercise is about. I do not think that there is any information in the public domain about it. I assume that it is a condition of the Treasury's granting of the £400 million loan. Extra funding or loans from the Treasury always have conditions attached that are trying to, in some way, contribute to improved budgetary management in Northern Ireland. You can track lots of deals in the past and see the conditions. I do not think that an open-book exercise has come up before. My best guess is that it will be about advising the Northern Ireland Departments how they can make savings, operate more efficiently and raise more income — the core questions that you would expect anyone to ask if they were looking at ensuring tighter budget management. I do not think that we know at the minute. I note that the Finance Minister has said that it is all being done with strong understanding of the devolution settlement and the autonomy of the Northern Ireland Executive to make their own decisions. If you were being cynical, you could say that the Treasury may make a set of recommendations for every Department and the Departments will have no obligation to take those on board. I also query how it can be done in four weeks or less, but we shall see.

The Chairperson (Mr O'Toole): Indeed. I will bring in members. A lot of members want in: thank you, all, for indicating. Deputy Chair first.

Ms Forsythe: Thank you, Chair, and thank you, panel, for coming to the Committee meeting.

Gareth, you declared your membership of the transformation board, but, from where I am coming from, this crosses over both. We saw the restoration package come through with the requirement for transformation and the big commitment there, and now we are looking at the reference to the open-book exercise. It seems like a big opportunity and that there is a clear desire to have transformation, to get to grips with why we spend more per head and to let us make a difference and not just continue rolling the same things forward. Practically, what can we do to make an impact in the short and medium term — to make a difference in the 2026-27 financial year?

Mr Hetherington: I agree with the premise of your question. It takes time to deliver material transformational change. It will take several years; it is not an exercise that can be undertaken and deliver efficiencies or a higher-quality service in a short time. Some of the specific transformation projects that have been identified are in the process of being implemented, and some benefits will flow, but it will take significant time for those to deliver. Trying to shortcut that process is not an appropriate way to proceed. In simple terms, this is something that we need to get going on. The best time to have started this was five years ago, but the second best time is today: that is my advice. The transformation projects are prioritised in the draft Budget, and the Executive have made additional funding available to supplement them. I very much welcome that. It is also recognised across Departments that transformation is not restricted to transformation board projects. There is a recognition of it at higher levels in the public sector, but it is about being able to get that mindset change — that culture change — across the Civil Service. That is one point.

The second point is that there are things that we will have to stop doing, as I touched on in my opening comments. What are they? At the minute, I do not know and am not sure that many people do know, but you get the answer by carrying out robust evaluations of projects and programmes at a strategic level. Historically, we have looked at and carried out evaluations at a micro level, and each project or programme that is in place can justify its existence. When we look at them at a broader, macro level, we see that, yes, some of them may still be washing their own face, but, if some measures are less effective than others, they may need to be discontinued.

Ms Forsythe: Northern Ireland has always struggled to get across the message about the complexities of our service and where we are compared with other parts of the United Kingdom. It feels very much that we are quick to be shut down and made to feel that we spend too much. However, I feel that the language around this, as the reserve claim came through and talk of the open-book exercise started, shows a willingness at Westminster to work with us at Stormont to get to grips with that. With that and with it going hand in hand with the long-term transformation, I think, as you said, that there is a big opportunity.

Another thing that the Committee have talked about is a review of arm's-length bodies (ALBs). That talk is always going on in the background. What is your view on that? My view is that that should be expedited now as part of the review. Everyone talks about it and collates the figures, but there are opportunities for savings there. Has that fed into the work or thinking of anybody on the panel?

Mr Hetherington: It is not something that we have looked at directly. What I would say about transformation more generally and where we find ourselves is that it needs to be assessed at a much more strategic level. Specific areas have been looked at on an ad hoc basis — there may have been specific reasons driving that — rather than it being looked at from a more holistic point of view.

Mr Tennyson: Thank you, all, for your evidence. Recently, when we have talked about the Executive and their Budget, we have heard two things: that we have a record-breaking settlement and that the Executive have to cut their own cloth and raise more money. Ann, you set out clearly that the projection is "alarming". My first question to all the organisations represented here is this: is it realistic to suggest that Executive revenue raising will be sufficient to plug the gap that has opened in our finances? Ann, you may want to start, as you raised that point.

Ms Watt: The answer is a combination of things, all of which have been mentioned. It is a combination of, possibly, revenue raising, which I will come back to; making savings by looking at what services might be cut, which is unpopular but has to be said, given the numbers that we are looking at; longer-term transformation; and looking at whether pay parity is affordable to the level that we have it at the minute.

The answer to the budgetary problems is a combination of things. It is not one single thing, and it is definitely not just revenue raising. Paul said that revenue raising from Northern Ireland is only 5% or 6% of the total funding available, so there is no way that the gap will be plugged with just revenue raising. That said, we need to acknowledge that we raise a lot less in local taxes in Northern Ireland than is raised in the rest of the UK. We do not have water charges. In England, Scotland and Wales, the combination of council tax and water charges means that, per household, £700 to £1,000 more is raised there compared with here.

There is an argument for looking at whether those with higher incomes here should pay more. We never seem to talk about that. If you look at the top 25% of income distribution here, you see that there are people here who are doing really quite well. Could those people contribute more? We seem reluctant to ask such questions, but that should be considered, particularly given the circumstances that we are in.

Dr Lisa Wilson (Nevin Economic Research Institute): On the point about a record-breaking settlement, most Budgets are a record-breaking settlement, so that is not a credible place to start.

As for the Executive needing to cut their own cloth and start raising revenue locally, we have got to that place because we have become overly focused on the concept of Budget sustainability. We have become obsessed with making the Budget balance at the end of the year, rather than having a broader conversation about fiscal sustainability and our ability to manage our fiscal resources as a whole on both the revenue and expenditure sides. When we start talking about fiscal sustainability, it leads you into a different discussion where you have to take into account the responsibility of the UK Government and the Northern Ireland Executive to balance the Budget. Northern Ireland's revenue profile as a whole is largely determined by UK-set taxes. The four main taxes that comprise 80% of that are income tax, National Insurance contributions (NICs), VAT and corporation tax. When you look over the longer term, you see that changes to income tax and NICs, in particular, have had a fundamental impact on the revenue side of Northern Ireland's fiscal sustainability picture.

As Paul mentioned, locally raised revenue comprises 6%. We seem to have got ourselves into a situation where all the blame is placed on Northern Ireland and the entire focus is on Northern Ireland raising revenue locally from a really small area of its budget. That is notwithstanding the fact that there are things that the Northern Ireland Executive can do on locally raised revenue. I will hand over to Paul to talk about rates.

Mr Mac Flynn: This is our view on the rates. We keep getting told that the gap between the average bill in Northern Ireland and the average bill in England is somewhere in the region of £800. It seems as though it would be fairly easy to say, "Well, we'll just increase everybody's bill by £800 in Northern Ireland": I can imagine how popular that would be. However, saying that fundamentally misunderstands the issue. It is like saying to the median wage earner in Northern Ireland, "You should be paying the same level of income tax as the median earner in England". They would say, "No, because I pay my taxes as a proportion of my income. The median earner in England earns considerably more than I do, and that is why he or she pays more income tax than me". The figures work out somewhat beautifully, because, if you took the Northern Ireland median wage earner and gave them the median wage in England, they would end up paying £800 more in income tax per year. Therefore, if you actually just said, "We want to concentrate on equalising wage levels between Northern Ireland and England", you would bring in, on average, £800 more per wage earner. That is a way of increasing Northern Ireland's fiscal sustainability.

Our rates charges are based on the fact that property values are significantly lower here. Rates and property taxes are taxes on an asset. A person's income might be the same in Northern Ireland and England, but, fundamentally, the wealth that people in Northern Ireland hold in property is significantly lower. Therefore, the charge that we levy on that is significantly lower as well.

We talk about fiscal sustainability and the gaps between Northern Ireland and England; that is fine, but those discussions have to be based on what the taxes are designed to charge and the fundamental differences between the structure of the Northern Ireland economy and what we are comparing it with.

Mr Hetherington: Rates in Northern Ireland are different from rates across the water in that the ratepayer here gets one bill but it is actually two taxes: the regional rate and the district rate. Roughly half of what we think of as local government taxes fund central government services, and half goes on local government services. In addition, when we compare local government in England and Northern Ireland, we see that local government delivers different services in England than it does here. It is not a like-for-like comparison. I understand Ann's point — it has merit — but it is not a like-for-like comparison.

All that having been said, to answer your original question, nothing can be off the table. Revenue raising cannot be off the table. Looking at what we spend money on and how we spend it cannot be off the table. All of that must be looked at.

Mr Tennyson: That is helpful. I will ask just one more question, because I am conscious of time. I will go to you first, Paul, because this follows up on a point that you made. It is almost a question of incentives. We would not see any improvement in the reserved taxes raised in Northern Ireland being reflected in the block grant. Equally, if we put in place social interventions that decrease our reliance on annually managed expenditure (AME) funding streams, that would not be reflected in what we receive in resource DEL. From your perspective, is there anything that we should look at, through our fiscal framework with the UK Government, whereby we could create an incentive structure to tackle some of those issues or to do transformation that saves the Treasury money in other ways and not through the block?

Mr Mac Flynn: Yes. There are policy moves to make changes on the AME side for any welfare changes made here. Lisa referred to the responsiveness mechanism. There is a policy goal to be had in there being more of a connection between what is raised in local revenue due to economic activity here and the resources that we have available.

On the argument about the devolution of taxes, the main problem is that it is problematic to look at the devolution of taxes as a way of increasing your resource automatically. There is merit in looking at the devolution of revenue as a way of adding a positive feedback loop to the Executive, but you would have to put on significant guard rails, given the example of what happened in Scotland and the fact that the projections of what might happen if you get the revenues devolved and make your own changes to them can be wildly off. Lisa has done a good bit of work on the differences between growth rates in Northern Ireland compared with those in the rest of the UK and what happened to the revenue generated here over that time. It can get choppy. Yes, there is scope to add a bit of that positive feedback loop, but, as with all these things, we would do well to tread cautiously.

Mr Hetherington: I agree with that comment wholeheartedly.

Mr Tennyson: Thank you.

Mr Carroll: I want to expand on what has been said. I always thought that it was inaccurate to compare expenditure per head of population in the North with that in England and Scotland.

Paul and Lisa, you touched on that in your briefing paper and in the presentation today. Some of the graphs in your paper show that Scotland and London are over-subsidised in comparison with the North, if I picked it up correctly. Will you expand on that point?

Mr Mac Flynn: At the beginning of the paper, we look at the block grant from 2010 onwards, which, I think, is what you are referring to, and at identifiable expenditure by UK regions over the same period. Everyone talks about Northern Ireland having the highest or second-highest identifiable expenditure per head. However, when we look at identifiable expenditure per head between 2009-2010 and 2022-23, we see that, of all the UK regions, Northern Ireland had the smallest increase by a considerable margin. Some of that fed into the public expenditure need formula brought in with the 2024 restoration package, but there is a sizeable gap between Northern Ireland and non-devolved regions in England and the devolved regions of Scotland and Wales. The increase here has been significantly less generous over those years, and that precipitates where we are now.

Dr Wilson: On the revenue side, looking at per head comparisons is a really blunt instrument; it does not really tell you what is going on. It is much more insightful to look at the differences across individual taxes and how those have changed over time. When you do that, you start to get a picture of what is driving the differences. The differences predominantly come from, as I mentioned, income tax, NICs and corporation tax.

On income tax, the increase to the personal taxation allowance in 2011-12 had a significant impact on income tax raised per head in Northern Ireland.

The Chairperson (Mr O'Toole): That is because we have lower earners, generally.

Dr Wilson: Yes, so it wiped out a big pool of people paying income tax. That has had a much bigger effect on our fiscal deficit per head than anything else, and that has remained the case. In many cases, we constantly come back to the point that the economic structure of Northern Ireland is fundamentally different. A possible policy answer to that could be that we could seek to devolve taxation, as in Scotland, and seek to lower the personal tax allowance or increase the tax rate at different bands and that would more efficiently match our income levels. Ultimately, at the minute, we do not have responsibility for income tax and the UK Government are making those decisions. When they sought over the past year to start to make some increases in income tax, they did not follow through with that. There would be fruitfulness in the UK Government being able to increase income tax or to make changes to the personal tax allowance because that would bring a positive feedback loop in improving our fiscal performance.

Mr Carroll: Thanks. I think that Paul's point that rabbits can be pulled out of hats is really important. I think that an example was used that people compare economies and government expenditure to households but do not mention that most households are in debt. As a general point, the comparison does not really stand up.

The issue of company revenue and company profits does not really factor into the debates generally. In the past year and a half, there has been an increase in the income that the top 100 companies have taken in, and that is now at £1·8 billion. Do you have any comment on that? As a final segue from that, do you have suggestions on progressive ways of raising income? When I hear proposals on raising income, I become concerned and oppose water charges and regressive forms of raising income. We should be looking at an empty homes tax and such issues. Does anybody have suggestions for progressive forms of raising revenue?

Mr Mac Flynn: Without getting into other discussions on corporation tax, there are certain taxes that should be collected at the national level because that is the more efficient way to do that. The distortions that can take place when they are devolved can become problematic quite quickly.

The Chairperson (Mr O'Toole): Would that be the case if, for example, you did not create a separate NI HMRC but just had HMRC? Scotland has not created a new HMRC. I know that there are some new structures, but it is still HMRC that collects the taxes.

Mr Mac Flynn: Colleagues in the Scottish Fiscal Commission, given the level of information exchange in that process, will wave you away from that model quite quickly.

On other distributional tax changes that can be made, in the most recent UK Budget, changes were made to council tax that sought to increase progressive measures. Whilst, as Gareth said, the two are not directly comparable, there are issues that could be explored to introduce greater progressiveness to our system here.

The Chairperson (Mr O'Toole): In the local rates system, do you think?

Mr Mac Flynn: Yes.

The Chairperson (Mr O'Toole): Do you want to set out briefly what you think there?

Mr Mac Flynn: Because the design is different, I would have to get into the figures on that. I am just saying that that is definitely an area that could be explored.

The Chairperson (Mr O'Toole): OK. Thanks.

Brian Kingston is next.

Mr Kingston: Thank you, Chair.

The Chairperson (Mr O'Toole): Apologies; I am going to interrupt you. Ann Watt wants to come in on that. Ann, please be relatively brief, and we will then bring in Brian.

Ms Watt: I will be quick. On more progressive ideas for taxation, obviously, the Executive have extremely limited tax-raising powers at present, but there are things that they could do through the rates system. At the minute, we just apply the same increase across the board, but, of course, properties are put into different bands and so you could look at doing something much more progressive about higher-value properties. Although it would have raised a tiny amount of revenue, it is disappointing that the proposal to remove the upper limit — the cap — has not been taken forward. There is something that could be looked at there, coming back to the fact that there is a top end of the income scale in Northern Ireland that has quite broad shoulders and could pay more.

The Chairperson (Mr O'Toole): OK. Thank you, Ann, that is helpful.

Mr Kingston: The multi-year Budget is certainly desirable, but it is of benefit only if it is workable. The overspend this year suggests that our current model is not sustainable. That is the challenge for us all. We all agree on the campaign for increased funding for Northern Ireland in the block grant, and we are all part of that lobby, due to a range of circumstances here. However, we must also be up to the challenge of trying to reduce spend through reform and transformation and finding ways to increase our income. The Communities Minister has highlighted the benefits of tackling fraud and error as a way of increasing funding for public services in Northern Ireland.

I want to ask Gareth, in particular, about the transformation fund. The argument was accepted by Treasury that you have to invest to save. Can you say more about your experience on that and whether you feel that Treasury will see the logic of that? In making changes, you have to invest in systems to make real, more efficient systems.

Secondly, we earlier about the open-book exercise. I think that it is on the entire Northern Ireland block grant across all Departments. With the Northern Ireland Civil Service (NICS) being separate from the Home Civil Service elsewhere in the UK, we have often thought about how we can make the most of that opportunity for them to come in to examine and challenge where more efficient practices could be brought in.

Mr Hetherington: I will comment on the transformation board initially. I will talk in the round about transformation, rather than any specific project.

One of the key drivers from a Treasury perspective is a desire to see Northern Ireland do more to help itself in how it spends money. It has been accepted by Treasury that there is a greater need here. The Minister has done significant work in order to secure additional funding around that need. However, transformation is important from a Northern Ireland perspective in that it is us demonstrating to Treasury that we are not just asking for more money: we want to be able to deliver more effective public services with that, and, if that means making difficult or unpopular decisions, we do not shy away from it. Therefore, that invest-to-save principle has been well accepted.

The £235 million that the Treasury has made available is just a five-year funding programme. I speak personally here, not on behalf of the board. It would be my desire to see an ongoing transformation programme. Transformation is not something that you do for two years or five years; it is an ongoing endeavour, because our target keeps moving further away. In Health, for example, the demand for health services will continue to increase at a rate greater than we are able to fund. Therefore, we have to keep transforming and working harder just to stand still, relative to the scale of the problem. My personal view is that, if Treasury sees us making reasonable progress on that transformation journey, it is a conversation that it would be prepared to continue.

The Chairperson (Mr O'Toole): I will bring in Ann Watt. She has her hand up. I do not want her to get a sore arm in addition to the head cold.

Ms Watt: Thank you, Chair. I agree very much with what Gareth has just said. The Treasury will be open to Northern Ireland showing ways in which it can deliver things more effectively to be more prepared for the future. For there to be any conversation at all with the Treasury about increased funding or changes to the needs assessment, we will need to demonstrate what we are doing to manage our finances, deliver better public services and address the many problems that there have been in recent years not just in budgetary management but in public service delivery and the outcomes that people experience. The Treasury always wants to see Northern Ireland taking steps to improve things, so it will be receptive to that.

I cannot underline more clearly the importance of transformation and how that has to be at the centre of everything in the multi-year Budget across Departments, not just through the transformation fund but more broadly. We need much clearer leadership of that across government. There is the transformation board, but we need much more leadership in the NICS and across Departments as well.

Transformation is about lots of things but particularly about doing things differently. It is about innovation, early intervention and prevention. There already are some really good examples of that in health, justice and other public services. It also has to be about reconfiguring services to do things differently, looking at examples elsewhere. Hopefully, the open-book exercise will not just be a case of the Treasury saying, "Here are things that are wrong that you need to change", but will be a much more positive exercise in which it says, "Here are good examples that you could follow and learn from. Here is how things have been changed elsewhere", showing where people have gone on a transformation journey ahead of us so that we can see good examples that we can follow. The Treasury will look on Northern Ireland's efforts positively if we are making progress on transformation and addressing some of the problems that we have had in recent years.

Mr Hetherington: From a Treasury perspective, Northern Ireland is of a scale that it could be considered a pilot area for some innovation that, if successful, could be rolled out across the rest of the UK. That might take a bit of a mindset change, but there are areas that we could and perhaps should be leading on from a transformation perspective. Receiving pilot funding could be one way to achieve that.

The Chairperson (Mr O'Toole): Paul, do you want to comment on that briefly?

Mr Mac Flynn: I will make one brief point. I referenced the open-book exercise because the idea that UK Government Departments are somehow paragons of efficiency and never overspend their budgets and that we, almost as the country cousins, need to be told how to run Departments is not accurate. If the Treasury understood the pressures that services are under here and the unique circumstances that underpin that, it would better inform discussions between both levels of government and the joint responsibility that they have for public services here.

Dr Wilson: May I add something?

The Chairperson (Mr O'Toole): Very briefly, please.

Dr Wilson: We need to be careful with the idea that we will get a needs assessment only if we prove to Treasury that we are acting properly. We need to be careful that, in any conversation, we do not over-egg what we can do with transformation and that the needs assessment remains core. Northern Ireland as a whole could do much more to look at the implications of UK budgetary decisions on Northern Ireland's fiscal position. We could do much more to get more information on the impact of UK and Treasury decisions on our budgetary position.

The Chairperson (Mr O'Toole): Thank you.

Following Paul's comment and in case we have not seen it, given that it is a fiscal matter, I note that the UK Government have shelved their £110 million project on the EU-UK border — not the border that gets highly controversial here but the other one: the Dover-Calais one — when it comes to misspent money. I just say that cheekily.

Miss Hargey: Thanks very much for all your contributions. Paul raised an important point that citizens here pay their fair share. That point is often lost in the conversation and the debate on fiscal policy. As I see it, successive British Governments have been like the classic narcissist: on the one hand, they tell you how much they love you and care for you and give you resources, but, on the other, they have your two hands tied behind your back, stripping you of those resources through policies such as austerity. People here are not angry enough about those issues. Ann touched on the need to do something radically different: I see constitutional change as that radical difference.

My question feeds into some other areas that you covered. Is this place sustainable when it comes to its population and economies of scale? While not everybody agrees on constitutional change, what can we do in the interim, while bigger political issues are in play, to have greater planning and cooperation North/South and east-west? I am keen to hear your opinions. I attended a health event last week that looked at health systems on the island. The key thing was about not having a population of sufficient scale in the North, Northern Ireland or whatever you want to call it. That is challenging for workforce planning and outcomes for people. I am keen to hear your broad views on those areas.

The big thing that you are saying is that we should not over-egg things and should be realistic about what can be done. Are there things that we can do in the short term? What could the radical difference be?

Mr Hetherington: In answer to your question on whether these six counties are an economically and fiscally sustainable entity on their own, no, they are not; nor is it realistic to expect them to be. When you look at economics at a national level and particularly at all the regions of the UK, you see that the fiscal transfers are from a relatively small number of wealthy regions, such as London and the south-east, to most of the other regions across the UK. Without opening up the constitutional debate, there is an argument about whether, in a united Ireland, these six counties might require a fiscal transfer from Dublin in order to deliver public services. The answer to that is probably yes. That is not to say that we cannot do more to close that gap from an economic perspective, irrespective of where we sit constitutionally.

You raised a good example from the health event that you were at. Again, we need to look at how we deliver public services on the island as a whole and across these islands as a whole. Health is a really good example of where there may be sufficient scale or population to sustain only one centre of excellence on this island. More broadly, the UK and Ireland may have the scale of population — 75 million people or whatever it is — for only one or two centres of excellence. We need to see how we deliver the best service outcome for the population, irrespective of whether that means working in partnership with Dublin, London, Scotland or wherever. I look at it from both those perspectives. Yes, it is about public service delivery in partnership with whomever, but it is also about how we improve our economic performance while accepting that this region, whatever jurisdiction it is in, will likely need subvention from the capital.

Mr Mac Flynn: You asked whether Northern Ireland, as it currently is, is fiscally sustainable: I argue that the UK, as it is, is not fiscally sustainable. There was a Budget last year in which decisions could have been made to have small increases in taxation that would have given greater scope for longer-term public spending. For political reasons, that decision was not taken. That comes directly to Northern Ireland's door, when we have to look at our Budget settlements. That happens only in devolved parts of the United Kingdom: regions in England do not need to worry about it. If Northern Ireland's devolution settlement were purely about us being the handmaiden of UK Government fiscal policy decisions, who would want to do it? In a sense, we are having our institutions take the blame for a fiscal policy over which they have no control. The question of fiscal sustainability is not of our creation; it stems from UK fiscal policy. As Lisa said, we in Northern Ireland need to have a greater voice about the impact that those UK decisions have on our position here. It would be useful if the Fiscal Council or an organisation such as that were to undertake analysis of the impact of UK Budget decisions on the bottom line in Northern Ireland, so that we can feed back what the impacts are here.

Miss Hargey: Another point that a couple of you touched on with regard to what an Executive can do on any Budget, going forward, was that of prioritising economic development and growth. My concern about doing only that, in the context of current policies, is that it will not improve outcomes but will increase inequality. That is in the context of the current model of economic development. A rising tide does not lift all boats: if there is a hole in your boat, you do not rise; you sink. My concern is that, if we prioritise economic development within the current framework, we will not make the changes. It may enhance some areas but not other areas, particularly in terms of productivity and economic inactivity. Inequality is linked directly to those two areas, and we are not performing well in them. What are your thoughts on alternative economic models with inclusion and sustainable growth at their core?

I am conscious that I have to declare an interest: in the previous mandate, I started a community wealth-building model. Scotland is progressing such plans, and I know that councils in England have done that, as well as some states in America. That is about shifting the economic model and what we mean by "community development": looking at locality, supply chains and the role of anchor institutions and rethinking what we mean. It is also about greater democratisation of the economy that we have around workers' rights. Paul, I heard you talk, yesterday, about the 'good jobs' employment rights Bill and all of that. It is also about looking at diversifying the economy. Small to medium-sized enterprises are our bedrock, but how can we have more cooperative community ownership models? For me, it is about having a different economic model that is fair, particularly in a global environment where shifts in wealth inequality mean that the gap is widening rather than narrowing. When you say that we need to prioritise economic development, do you have suggestions for how we ensure that it is not just about equality of opportunity but about equality of outcome? How do we ensure that we achieve the outcomes and close that inequality gap?

Sorry, I know that that was long-winded.

The Chairperson (Mr O'Toole): It is an important question, but I should say to members and witnesses that it is important that we quickly get on to our evidence session with departmental officials. The current witnesses have given us lots of good food for thought, and we need to put that to the Budget officials who will be in front of the Committee in the next session. I needed to say that, but please answer Deirdre's question, and then we will —.

Miss Hargey: That could be in written form.

The Chairperson (Mr O'Toole): You can make initial points now, if you have them, and you can follow up in writing.

Mr Hetherington: I will be brief. I look at it from the individual's perspective. When I think about economic development, I always think, "Let's target the individuals who are most disadvantaged". Those who are most disadvantaged, typically, are the economically inactive, those whom the education system has failed and those in lower income groups. It is about putting in place the programmes and interventions that best support those people specifically.

Mr Tennyson referenced the issue of incentives. There is a huge incentive misalignment when it comes to dealing with people who are economically inactive. That is at Executive level, in that the fiscal benefits go to Treasury and do not come to Northern Ireland. There is also a big disincentive for the individual. An individual may be in receipt of benefits and want to improve themselves and raise their skills, but, in order to do that, they have to give up their benefits. If you have a young family or are vulnerable, that is not a realistic expectation. When I think about new models, I think about designing programmes that address disincentives and issues that negatively impact on the most disadvantaged.

Mr Mac Flynn: When it comes to a whole new economic model, you would have to keep me here all night.

The Chairperson (Mr O'Toole): You will be here all night anyway at this rate, Paul.

Mr Mac Flynn: As I said earlier, one key element is a different type of growth: wage-led growth. I talked about how much extra revenue we would generate and how much more fiscally sustainable Northern Ireland would be if our growth was wage-led. That is just one point of many that I could make, but I will leave it at that.

Miss Hargey: We are likely to meet societal economic shocks in the time ahead. Ann touched on the ageing population, climate, inequality, data, AI and stuff. We need to do transformation and look at the siloed approaches, but, when it comes to building resilience as part of that, what do you see as the priorities? When it comes to transformation, what should we prioritise, taking account of how we mitigate or build resilience around future societal shocks that will have an impact on budgets and on demand for public services?

Ms Watt: That is a really good question. Everything that we are talking about when it comes to budgetary management is very short-term at the minute, and, of course, we should look to the longer term. We should look at our capital spending, which we have not really discussed, and, as I said at the start, there is no investment strategy. Look at the demographic projections for Northern Ireland: we have a rapidly ageing population, which means hugely increased demand for health and social care. There was a really scathing report today from the Commissioner for Older People about whether the health service is providing for our older people. It is really shocking that people are not getting what they need.

We need to look at different models of service delivery for a population that is increasingly old and has multiple health issues. We need to look at things such as preventing people having to go to emergency departments (EDs), because, in many cases, that is not the best place for them. We need to consider how we can have more treatment in the community and at home. Obviously, the answer to most policy problems is preventing the thing in the first place, so there should be much more early intervention and prevention. The other thing that we have to be realistic about is the falling number of children in our society and the impact that that will have on how we provide education. We need to make some difficult and, I suspect, unpopular decisions about how we deliver through our schools.

Dr Wilson: Notwithstanding what you said about inequality, sustainable economic growth over the longer term is key to building resilience. A very important benefit of devolution is those areas of super-parity. In many cases, areas of super-parity in policy choices have been used to protect the most vulnerable in our society, and that important fight should continue. That applies where we have spending power and can make spending decisions. On the fiscal devolution side, one of the main advantages of being able to devolve taxes, in terms of creating accountability, is about being able to insert the equity principle more strongly into policymaking.

Miss Hargey: Thank you.

Mr Harvey: Gareth, I am looking through this. Can you elaborate on your data dashboard and tools? How useful is that, and how often is it used?

The Chairperson (Mr O'Toole): Do not elaborate all that much, Gareth. [Laughter.]

If you could elaborate in a concise and time-bound way, that would be good.

Mr Hetherington: Your question is timely. I am talking to people in the university about the usage of the tool, so the fact that it is being raised at the Finance Committee is fantastic. Thank you.

Mr Kingston: You have made his day. [Laughter.]

Mr Harvey: Take your time.

Mr Hetherington: Ultimately, the difficult decisions that you in the Assembly and the Executive are required to take are best made with good information. Making the decision is one thing — that is fine — but, in a democracy, you need to sell that decision to the wider population. Doing that is about good communication and good information. Perhaps I am being naive about it, but a well-informed or better-informed population is more likely to accept difficult, unpopular decisions than a population that operates in an information vacuum. That is one reason why we make relevant labour market and enterprise information available.

Mr Harvey: Good. Thank you very much.

The Chairperson (Mr O'Toole): There was lots of important food for thought there, and we ended up getting deep and meaningful, with lots of broader context about the fiscal set-up in Northern Ireland, in the UK and on this island. It is all relevant to the Budget, obviously. We will have the officials come in now. Thank you very much, Paul, Lisa, Gareth and Ann. We appreciate that and your patience in waiting for us earlier.