Letter from... Ireland

Paul Gosling reports on the historic restoration of devolved government in Northern Ireland

Restoration of devolved government in Northern Ireland has been widely hailed as historic. And it is. But while it is one of the most important steps in the continuing peace process, the problems are far from over. Now the focus is on getting the province's public finances sorted out.

There is a real sense of optimism across Ireland that the latest arrangements offer the best prospect for generations of lasting peace and stability. Ironically, this is because the political extremes have entered government together.

Ian Paisley's Democratic Unionists have accepted that they must deal and share power with Sinn Fein, the political arm of the Irish Republican Army (IRA). The new Deputy First Minister is Martin McGuinness, a former IRA commander; Conor Murphy, once an IRA prisoner, takes charge of the department for regional development; and Gerry Kelly, convicted of bombing the Old Bailey courts in London, is another minister.

If the more militant arms of unionism and republicanism can work together in government - and the signs are that they are determined to do just that - then devolved power in Northern Ireland will work.

But there is a serious obstacle; the financial pressure on the smallest of the four constituent nations of the UK. It has just 1.7 million citizens, who receive an above average financial subsidy from the UK Government (and, in particular, London). While public sector spending is responsible for 42% of the UK's GDP, the figure in Northern Ireland is over 60%. The explanation is that the public sector is proportionately larger and less efficient, while the private sector is small.

Add to this that Northern Ireland taxpayers pay much less in local taxes than their counterparts in England, Scotland or Wales, and it becomes obvious that there is a financial deficit that will have to be plugged one day. Uncomfortably for the newly formed Executive, the UK Government indicates that day of reckoning is not far away - April next year, in fact.

Not that the entire fiscal deficit will have to be wiped away in one year, but it looks as if 2008 will be the starting date for getting the province's financial house in order. The biggest financial headache for the new Finance Minister, Peter Robinson, deputy leader of the Democratic Unionists, is water charges. Traditionally, Northern Ireland residents have paid for water as part of their domestic rates bills, except that council rates have been much cheaper than council taxes in the rest of the UK.

The solution imposed by the UK Government was the introduction of domestic water charges, at a level of £150-£770 a year, according to the size of a home. These are so unpopular that they were the major issue at the Assembly elections preceding the re-establishment of the devolved Executive. As part of a financial deal to help the Executive to set up, the UK Treasury agreed to provide enough money to delay their introduction for a year. This gives the Executive the major challenge of what happens in 12 months.

Nor is this the only financial challenge facing Peter Robinson and his new colleagues from four different parties. With falling pupil numbers, hundreds of - as yet unidentified - schools must close. Many public bodies are merging to save money but, in the short-term, the reform programme will cost money before it achieves savings - and that programme is, at present, unfunded. Long-term solutions may include privatisations and public-private partnerships, though the politicians do not like it.

When the ceasefires were agreed, there was much talk of a Northern Ireland 'peace dividend'. Ulster's politicians are beginning to suspect that the dividend has quietly shifted from the income to the expenditure column.

Paul Gosling is contributing news editor of accounting & business and is a specialist public sector journalist.