Article appears in today’s Belfast Telegraph also available on www.ulstereconomix.com
Sustaining the unsustainable?
It was Angela Merkel who linked social welfare spending and economic competitiveness in a speech two years ago, intended to broach the subject of Europe’s current model of the welfare state being unsustainable.
She laid out that whilst Europe makes up 7 percent of the world’s population and 25 percent of its GDP, it accounts for 50 percent of global welfare spend.
Perhaps inspired by this, George Osborne, in his pre-Emergency Budget PMQs debut, pointed out that the UK is home to 1 percent of the world’s population, has 4 percent of global GDP, but has 7 percent of international welfare spend. He too was making the link between the reform of the welfare state and wider economic competitiveness and fiscal sustainability.
No one in the local political arena seems to have applied the same formula to Northern Ireland. But it is perhaps worth doing so in order to increase understanding in the context of the welfare reform debate.
Doing so reveals that Northern Ireland’s share of global welfare spending is almost nine times larger than its share of the global population. This is more marked than Europe and the UK – both of whom are seen by their respective Chancellors as being in a very unsustainable welfare spending position.
Northern Ireland receives the highest levels of social protection expenditure in the UK. The £8.5bn of social protection spending (25% of GDP) in 2013/14 equates to £4,622 for each man, woman and child. This is 20% above the UK average and over 5% more spending per head than the next highest region – Wales (£4,384). When Northern Ireland’s enhanced welfare package (through not introducing reform) is taken into account, the gap widens further.
Merkel’s wake-up call for Europe should therefore perhaps resonate in Northern Ireland more than elsewhere. So should the themes of the best-selling book, “The Fourth Revolution: The Global Race to Reinvent the State” which argues that the democracies in the West are being outpaced by leaner competitors, largely to the East, and should learn from their ‘small state dynamism’. Furthermore, the authors say that, in the West, the “era of more” is coming to an end, and that: “For the foreseeable future the Western state will be in the business of taking things away – far more things than most people realise”.
On the latter point, half the countries in the EU have increased their health-care charges since the financial crisis began, with Northern Ireland one notable exception, having lowered charges with the abolition of prescription charges in 2010.
So is Northern Ireland sustaining the unsustainable?
Disability Living Allowance (DLA) is one area where this appears to be the case. The number of people claiming DLA has increased by 22,700, or 12.4 percent, over the last five years. DLA is an extremely important benefit, and many people are very deserving of it. But the number of DLA claimants has grown at six times the rate of employment growth (+1.9% or +13,440 jobs) and almost five times the rate of population growth since 2010.
Over the last decade, the number of jobs in Northern Ireland has increased by 25,360 jobs, or +3.6%. Meanwhile the number of DLA claimants has risen by one quarter (+40,500) in the same period and by 71% (+85,410) since the Good Friday Agreement. As a result, the number claiming DLA is now 206,000, which is broadly the same number of people employed in Northern Ireland’s entire public sector. Northern Ireland’s top 100 private sector firms currently employ 130,000.
It is striking to note that the incidence of DLA per head is still growing. Is this a symptom of ineffective public expenditure interventions elsewhere? Twenty years ago the figure was less than 5%, or 1 in 20 people. Today it is 1 in 9, with some Parliamentary Constituency Areas numbering 1 in 5. These rates compare with 1 in 20 for GB. If the current growth rates for Northern Ireland were to continue, assuming no reforms were adopted, this would be 1 in 8 by 2019 and 1 in 7 before 2024. At the current rates of growth, DLA claimants would rise by 40% in the next 10 years - an additional 82,000, which is above the number of people currently employed within the manufacturing sector.
Rising DLA claimant numbers come with a financial cost. In spending terms, Northern Ireland’s outlay on DLA has increased by £228m (which broadly equates to DETI’s annual budget) over the last five years (a period of austerity). This is an increase of almost one third, or 19% in real terms.
The average annual increase in DLA expenditure in the five years before austerity up to 2009/10 was 3% in real terms. In the five years that have followed, it has ‘increased’ to 3.6% per annum in real terms but accelerated in the last financial year to 5.0%. Imagine if our ability to create wealth, rather than spend it, could grow at such rates.
Over the last decade, DLA expenditure has increased from £549.5m to £956.1m in 2014/15. The current financial year will see Northern Ireland’s DLA expenditure breach the £1bn barrier. The latter represents almost half of the Department of Education’s annual budget.
So why hasn’t more been done about this unsustainable situation?
One reason is that it is a politically difficult subject to broach. Bear in mind that more people claim DLA here than voted for either of Northern Ireland’s two largest political parties in the last General Election.
However, is sustaining the unsustainable, even if popular, possible? According to Stein’s Law, formulated by Herbert Stein, an adviser to Richard Nixon and Gerald Ford, “if something cannot go on forever, it will stop”. Or alternatively, trends that can’t continue won’t. Northern Ireland should take note.