Pay deals dominant reason for Stormont overspends - watchdog

Public sector pay deals are the "dominant" reason for Stormont overspends, an independent budget watchdog has warned.

Earlier this month the Treasury gave the Northern Ireland Executive a £400m repayable bailout to ensure the budget will balance this year.

The NI Fiscal Council said that on paper next year's budget would balance but in reality faces a "credibility challenge".

It comes as an independent think tank has warned that Stormont is on course for an overspend of up to £1bn next year based on recent spending patterns.

Ann Watt, from the Pivotal think tank, told the NI Assembly Finance Committee that unless Stormont departments took "very radical steps" there would be "significant overspends".

She said in recent years departments had been used to annual cash increases of about 5% but next year they would face falling budgets.

"It will not be possible to continue as before and manage within this budget," she said.

Finance Minister John O'Dowd published a draft multi-year budget in January.

It is due to cover the three years from 2026 to 2029 but has not yet been agreed by all the executive parties.

The Northern Ireland budget is largely dependent on the money provided by the Treasury through what is known as the block grant.

There was a large increase in spending after the first budget from Chancellor Rachel Reeves as she sought to give NHS funding an immediate boost.

However spending growth is set to slow sharply over the next few years. That is exacerbated at Stormont due to the end of one-off funding provided when devolution was restored in February 2024.

The NI Fiscal Council said while O'Dowd's draft budget balanced on paper, it is "unlikely to unfold as presented".

"Political disagreement, the overspend recovery and structural pay pressures mean the final budget will need to differ materially from the draft allocations," it warned.

Rising pay is difficult for Stormont to manage as Northern Ireland has a relatively larger public sector than England.

Stormont has faced a series of budget crises since 2022 as rising inflation in the UK triggered a series of public sector pay claims.

The NI Fiscal Council was formed in 2021 and aims to bring greater transparency and scrutiny to Northern Ireland's public finances.

It highlighted the challenges a commitment to pay rate parity with England is having on the budget.

"When the UK government increases spending to finance an x% pay increase for public sector workers in England, the block grant does not increase sufficiently to finance the same percentage increase in Northern Ireland.

"If the executive maintains pay rate parity (equal percentage pay increases as in England) without shrinking the public sector, it is hard to balance the budget."

It added that there was now a "persistent mismatch" between the ambition to match pay rates in the rest of the UK and the way devolution funding works.

An independent pay review body has recommended that most health service workers in NI should get a 3.3% pay rise next year at the cost of £120m.

The health minister said it was his desire to follow that recommendation but needs clarity about his budget first.

Stormont is now in the fourth year of a budget crisis with another year of pain lying ahead.

The problem was not primarily created by executive ministers - they were not responsible for the UK's inflation spike after 2022 which drove wage demands across the economy.

However the Fiscal Council is critical of the executive's reluctance to engage with the trade offs between pay, the size of the public sector workforce and the potential to raise revenue.

There is criticism of the Treasury too, warning that repeated bail-outs will perhaps weaken financial discipline at Stormont.