What will Spending Review mean for NI public services?

Next week the Chancellor Rachel Reeves will reveal the outcome of her Spending Review.

It will allocate money to day-to-day public services for the next three years.

It will also set infrastructure budgets for the next four years.

The review will directly impact on what Stormont Ministers have to spend on public services in Northern Ireland.

Last year Reeves set what is known as the “spending envelope” – the amount by which total government spending will change in a given period.

Day-to-day spending is planned to grow by an average of 1.2% above the rate of inflation each year for the next three years.

Infrastructure spending is planned to grow by 1.3% above inflation a year over the next four years.

These are much lower growth rates than this year and last year, reflecting the new government’s “emergency” injection of cash into the health service and public sector pay deals.

On Wednesday the Chancellor will break it down further, making allocations to each central government department.

The precise allocation of this money matters for Stormont’s spending plans.

More than 90% of what Stormont ministers have to spend comes from the Treasury through what is known as “the block grant.”

The increase in the block grant is worked out using a calculation known as the Barnett formula, which is based on the annual changes in UK central government departmental budgets.

It gives Stormont an equivalent spending increase for the size of the NI population, adjusted for the extent to which each service is devolved.

Some services, like health, are almost entirely devolved but defence is not devolved.

If the government decides it is going to spend more on defence at the expense of other services that will have an impact on the amount of extra money in the Stormont pot.

In simple terms: If the UK Department of Health sees its budget increase by £100m, then Northern Ireland would get approximately £3m extra.

If the Ministry of Defence budget increases by £100m Stormont does not get anything extra.

When devolution was restored in 2024 the government agreed a financial package which included an automatic top-up of any money awarded by the Barnett formula.

The government was persuaded that the level of need in Northern Ireland means it requires spending of £124 per head for every £100 per head spent in England.

As Northern Ireland was funded below that level, the government said that in future every £1 that comes through the Barnett formula will now come with an extra 24p.

That will apply until the overall level of funding need is reached.

The independent Fiscal Council has estimated that will be worth £815m over five years.

The government said the size of the top up could be reviewed if “independent and credible sources” provide evidence.

To that end the Executive commissioned a study from the economist Prof Gerry Holtham, an expert in the devolution of public finances.

The BBC understands that his work has come back with a range of possible funding need.

The central estimates are £123 per head, for every £100 spent in England, if agricultural spending is excluded and £128 per head if agriculture forms part of the calculation.

If the Treasury is persuaded to accept the higher end of the range it will be worth tens of millions of pounds extra over the next five years.

The devolution financial package also brought a large dollop of one-off UK government funding, largely to pay for public sector pay deals.

However that creates a cliff-edge drop in Stormont funding of about £500m in 2026/27 when that short term money runs out.

The government committed to review “concerns about 2026-27 funding” at the Spending Review.

The Fiscal Council has suggested options to tackle the cliff edge could include more one-off funding or setting a new, higher baseline for Stormont’s budget.

However, it is also possible that the normal operation of Spending Review will allocate enough money to largely remove the cliff edge.