Public cuts to bring private pain: Belfast Telegraph
A cut in corporation tax for Northern Ireland of perhaps 10% is on the cards should the Conservatives win the general election. But the sting in the tale is that this would be matched by spending cuts that would be additional to severe reductions government departments already face.
Shadow secretary of state for Northern Ireland, Owen Paterson, explains: “The Conservative Party has been saying for some time that a radical, long-term strategy is required to end Northern Ireland’s dependence on the public sector and to boost private sector investment. Northern Ireland faces some economic challenges that are unique within the United Kingdom.
“That’s why Conservatives and Unionists are currently looking at ways in which we could turn Northern Ireland into an enterprise zone should we win the election. Obviously given the terrible state of the public finances, any changes must be affordable. But we will look closely at [recently published] proposals [from the Northern Ireland Economic Reform Group] which will help to inform our strategy for reforming corporation tax.”
While the strategy would presumably attract greater inward investment, the UK Government’s annual subvention to Northern Ireland would be cut, probably by around £200m a year. This is on top of what the Department of Finance and Personnel calls ‘pressures’ of £367m on departments’ revenue budgets for 2010/11 alone, which arise in part from the impact of an equal pay settlement and departments improving financial controls, so reducing underspends that usually provide financial flexibility. But over £200m arises from the decision not to implement water charges, the revenue from which had been factored into government budgets.
As well as this, UK public expenditure will fall and that will feed into reduced support for Northern Ireland. Richard Ramsey, chief economist of Ulster Bank, explains: “The UK will see public expenditure cuts of about 10% in total from 2011/12 for three years. That is a real term cut of about 3% per annum. That would translate in Northern Ireland to a 10% cut in about half of Northern Ireland expenditure – because only half of expenditure here is under Northern Ireland control. That would mean £500m to £750m in cuts over and above the current cuts the Executive is dealing with at the moment. There will be a significant squeeze going forward up to 2020.”
Ramsey argues this requires radical action. “You need strategies that provide tailored solutions for regional problems,” he suggests. “The merits of having regional public sector pay and regional social security benefits need to be openly debated. Regional public sector pay would be an extremely powerful economic development tool for the Executive and is also attractive from a public expenditure viewpoint, particularly if NI could retain the savings to be invested elsewhere.
“NI must also look at new sources of revenue. If you introduced a public sector pension levy in Northern Ireland, as you have seen in the Irish Republic, could NI keep that and invest that in an infrastructure fund? Social security benefits are set at a national level, whereas pay rates in NI are one of the lowest of any UK region. The gap between the two is narrower in NI than any other UK region: as a result the disincentive to work is greater here than elsewhere. If we introduced regional social security payments, would we be able to keep the savings to pay for schemes to get the long-term unemployed and economically inactive back to work?”
The construction sector is in line for a second severe blow, following the collapse of private sector house building. “A lot of Strategic Investment Board plans going forward to 2020 were predicated on asset sales, which now have to go back to the drawing board,” says Ramsey. “The original ISNI [Investment Strategy for Northern Ireland] plans can’t be delivered in my view.”
Until now, some construction activity has been maintained through the building of roads, the Fermanagh Hospital, schools and social housing. When this slows down, then chartered surveyors and the business services sector will suffer, as well as the construction industry itself, predicts Ramsey.
PricewaterhouseCoopers believes that the severity of the impact on most public services depends in part on whether the Executive ring-fences health spending. If it does, says PwC chief economist in Northern Ireland, Esmond Birnie, “the other departments – roads, schools, universities, social housing, environment and culture – face brutal spending cutbacks of between 10% and 20%”.
The impact on businesses of public sector retrenchment is already being felt. Capita has warned that 65 jobs in Belfast are at risk relating to its contract to recruit staff for the NI civil service. With a temporary freeze on some staff recruitment, there is less need for recruitment support.
Jackie Henry, an associate partner in Deloitte Belfast, suggests that the experience of Capita is a sign of what may be felt across the wider private sector. “This was one of the first [NI public sector] outsourcing contracts”, she points out. “That is really just the tip of the iceberg. We have not seen what all the rebalancing of the books will do. The main impact for the private sector to date has been a slowness in public sector decision-making, rather than actual cuts.”
Henry points out that there are commercial opportunities from the crisis. As public bodies struggle to make ends meet, the attractions of contracting-out shared services to private companies will grow if this cuts costs. “There are positives for the private sector in this,” she says.
PwC’s Birnie agrees. “When a spending ice age descends, the entire public sector needs to be subjected to ‘zero based accounting’,” he says. “Instead of trying to justify individual cuts in service delivery, you take every item of public spending and ask, ‘Should government be doing this at all?’, and, even if it should, ‘Can it be done and delivered in a better way’.”
But, warns Henry, the Executive has little time to make up its mind about how to balance the books. “Those decisions will have to be made,” she says. “They can’t be avoided.”
Dire interest rates see few saving: Belfast Telegraph
Fewer people are saving and those who do are saving less. Figures from the Government’s National Savings & Investments arm make worrying reading. Average monthly savings have fallen from £90 a year ago to £82 now.
This should be no surprise. Savings rates are low and will remain so following last week’s decision by the Bank of England that the base rate are staying at 0.5%. Yet rates charged on personal loans, credit card debts and mortgages are much higher than this, so it makes sense to use spare cash to pay down debt.
Savers deserve sympathy in this low interest environment. Retired people in particular who rely on income on savings to support state and occupational pensions are having a tough time. The good news is that opportunities for tax-free income on savings are improving.
From 6 April, higher limits for tax free savings come in for ISAs – Individual Savings Account. Savers will be able to put £5,100 a year into cash ISAs, plus another £5,100 in equity ISAs. This will give the whole population the same savings opportunities that have been available to the over 50s since October.
Take-up of ISAs is much lower than policy-makers would like. According to a study by the National Savings & Investments, part of the reason is the lack of knowledge and understanding of ISAs: a mere 15% of people know about the new savings limits. And more than a third of those who do know do not intend to take advantage of them because of the low interest rates available.
Better than nothing
Yet ISAs offer much better returns than some other savings products. While many ordinary savings accounts offer a mere 0.1% interest, the average rate on a variable rate cash ISA is 1.28%. Not great, but much better than the worst savings accounts.
Fixed rate ISAs provide some of the best returns, with the highest at 3% - offered by the Post Office, Britannia, Clydesdale Bank, Yorkshire Bank, Newcastle Building Society, Mansfield Building Society and Julian Hodge Bank, according to Moneyfacts.
Despite the low interest rate environment, returns on fixed rate ISAs have increased in recent months as competition hots up for the new ISA season. Darren Cook of Moneyfacts says: “A fixed rate ISA has become the providers’ preferred growth area, with the number of available fixed rate ISA deals doubling from 41 a year ago to 84 today.” But, he warns, before transferring from one ISA provider to another it is important to check that you will not be penalized by your existing bank for doing so.
Another problem, highlighted by many readers, is the often slow and bureaucratic procedures to transfer ISA accounts between providers. Any delays in ISA transfer that are not fully compensated should be followed by complaints to the banks in the first instance and subsequently, if not successful, to the Financial Ombudsman Service.
Cash ISAs can pay more
Unusually, at present the best instant access cash ISA pays slightly more than the best fixed rate ISA. The best cash ISA is offered by Santander at 3.5% (the same product is also offered by its Alliance & Leicester subsidiary): although this has a variable rate, this is guaranteed to stay at least 3% above base rate. Other attractive instant access ISAs include 3% from the Newcastle Building Society and First Direct and Nationwide Building Society at 2.75%.
But there are problems with obtaining the best possible ISA rates. The market leading rate from Santander is only available to existing Santander savers and new customers – not for transfers from other ISA accounts. However, First Direct’s ISA does allow transfers from other accounts.
It is easy to overlook the benefits of fully utilizing an ISA allowance, but is important to do so.
Kevin Mountford, head of banking at Moneysupermarket.com explains: “Consumers that can afford to save should be looking at ISAs, no question. Even though rates are low, the benefits of a tax-efficient wrapper should not be overlooked. Savers who have funds in older ISA accounts should remember that in most cases they are able to transfer these funds to their new ISA without losing the tax free status. With many older ISA accounts now paying a pittance it is important to transfer your funds to make the most of this pot.”
Question of Finance
Q. I want to ensure that my savings are invested safely. In particular, I want to maximize my protection under the Financial Services Compensation Scheme. I believe that if I put money into two banks that are part of the same group of companies they are treated as if they are just one bank. How do I maximise my protection?
A. Banks and other financial services companies regulated by the Financial Services Authority are guaranteed under membership of the FSCS. But that protection is limited to £50,000 per saver, per institution. This is confusing because some banking groups operate under separate brand names and may not obviously part of the same bank. Examples include Alliance & Leicester, which is part of the Santander group. A saver who has £50,000 in Alliance & Leicester and another £50,000 in a Santander (formerly Abbey) account would have protection limited to just £50,000. Other examples of banking brands that are part of larger groups include First Trust Bank, which is part of the AIB Group; Britannia is part of the Co-operative Group; the Cheshire and Derbyshire building societies are now owned by the Nationwide Building Society; and MBNA Savings is owned by the Yorkshire Building Society. Although Ulster Bank is part of the RBS group, it is separately registered with the FSA so has a separate £50,000 protection limit. Similarly, while Halifax, Bank of Scotland, Birmingham Midshires and Intelligent Finance are all now part of Lloyds Group, all are actually registered under Bank of Scotland.
