What's in Northern Ireland's new offer to fund public services?

Northern Ireland's leaders are continuing talks with the UK government over a financial package to support the return of devolved government.

The government's offer includes a new "needs-based" funding deal for public services.

There was a growing consensus that a new funding deal was needed whether or not there is an immediate restoration of devolution.

But local leaders say the government's offer isn't enough.

So what do they want - and why does it matter?

This year, about £13bn will be spent on the day-to-day operations of services like health, education and policing.

Some of that money is raised locally through property taxes and other charges but the vast majority - more than 90% - comes from the Treasury.

That central government funding, known as the block grant, is allocated to Northern Ireland, Scotland and Wales on the basis of a calculation known as the Barnett formula.

It is based on the annual changes in UK central government departmental budgets.

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

So for example, health is almost entirely devolved and Northern Ireland has about 3% of the UK's population.

Therefore if the UK Department of Health sees its budget increase by £100m, then Northern Ireland would get approximately £3m extra.

Northern Ireland overspent its budget by £300m last year and is on course for a bigger overspend this year.

Last year's overspend reflected weak financial management in the absence of a fully operating devolved government, public sector pay claims and general inflation.

Those inflationary pressures are still here and the situation is exacerbated by the dwindling of various one-off pots of money awarded to Northern Ireland.

But local politicians say there is a deeper problem with the Barnett formula, that it fails to reflect the real level of need in Northern Ireland.

This is an argument which has already been successfully made in Wales where the Barnett formula is now subject to a needs-based uplift.

In 2010, an inquiry led by the economist Gerry Holtham found that Wales would get a higher level of funding if it was treated in the same way as English regions.

A needs-based formula is used by the UK government to allocate resources such as health spending across England's regions.

That formula takes into account different regional population characteristics, such as the proportion of children and retired people.

The Holtham commission recommended a "funding floor" for Wales, estimating that for every £100 per head spent on public services in England there should be £115 for Wales.

After a years-long negotiation, the UK government accepted the recommendation and agreed that the floor would be maintained by applying a 5% needs-based factor to the Barnett formula.

In other words, if the Barnett formula produced a £100m increase to the Welsh block grant that would be topped up to £105m.

The government has also accepted that Northern Ireland needs a "funding floor" and says it should be set at £124 per head for every £100 per head spent in England.

In the recent past, funding per head in Northern Ireland has been much higher than this, largely as a result of one-off spending packages related to political deals.

Most of that money is now gone and the situation has been exacerbated by a design feature of the Barnett formula, which means per head spending will converge to English levels over the long term.

The new funding offer is worth billions a year, a public finance expert has said.

David Phillips, from the Institute for Fiscal Studies, said it would be the biggest change to how Northern Ireland is funded since the late 1970s, adding that if the fiscal floor works the same way as in it does in Wales, its value will increase over time.

'Funding won't stay on the floor, it will grow relative to England - to maybe 126-127% after 10 years.

"This is because Northern Ireland's population is expected to grow slower than England's and this is ignored by floor," he wrote on X, the social media site formerly known as Twitter.

It comes from work by the independent Northern Ireland Fiscal Commission.

It used the same needs formula as the Holtham Commission and added an adjustment to reflect the impact of policing and justice devolution in Northern Ireland.

But the commission does not claim its calculation is definitive, saying the precise number "depends on the particular assumptions and techniques used".

They have pointed to another calculation by the commission which considers the impact of "taxable capacity".

That is an assessment of the potential of a devolved administration to raise funds locally through taxes and charges.

As Northern Ireland is a low-income part of the UK, its taxable capacity is relatively low so that adjustment would increase the needs-based spending to £127 per head, relative to England.

The Alliance party, which previously held the justice portfolio at Stormont, has said the commission's assessment of justice costs is based on an unrepresentative period.

It is suggesting a recalculation would push the floor to at least £130.

The parties are also pressing for backdating to recognise that Stormont was being funded below its needs floor in recent years.

Stormont's Department of Finance has calculated that to avoid an overspend this year and settle public sector pay claims it would have required £150 per head - but that sort of premium seems highly unlikely to be agreed.