There remains some confusion as to quite why the Renewable Heat Incentive ended up being financed as it was.
Necessarily, this is a somewhat simplified explanation.
Essentially, there are two types of public spending in the UK – that falling under “Departmental Expenditure Limits” (budgeted, in other words) and that falling under “Annually Managed Expenditure” (estimated, in other words). [The former is also split between “capital” and “revenue” spending, but that is not relevant here.]
Education, for example, is budgeted – a budget is set for the financial year (or financial years) and that is deemed the Departmental Expenditure Limit.
Welfare, for example, can only be estimated – it depends ultimately on how many claimants there are. A marked economic decline (as, for example, in 2008/9) can mean the amount required goes up swiftly and otherwise unpredictably. This, therefore, has to be “annually managed”.
In the case of DEL expenditure, because it can be budgeted, the UK Treasury allocates the money for “geographically identifiable issues” (health, education, infrastructure) to each devolved Finance Department in advance. In the case of AME, however, the UK Treasury pays (albeit via a local Department) as the expenditure is accrued.
However, “parity” applies. This is the concept that the UK Government will cover all spending (whether DEL or AME) on the same basis, provided no part of the UK seeks an advantage either by changing main taxation or by changing policy in an area funded under AME. Where such a change is made by a devolved Government or Department, any extra expenditure must be paid from its own devolved Budget. As is well known, that is the issue with corporation tax and welfare reform.
Schemes encouraging a particular behaviour, for example the use of renewable heat, would fall under the latter – as you do not really know how many claimants there will be, you cannot put in place a “budget” as such. The idea is, provided the scheme is properly managed, that it will reap long-term benefits (though, say, improved energy efficiency, or improved public health due to lower pollution or cleaner power).
That is why, when you operate such a scheme without being able to budget, you implement appropriate cost controls and annual reviews. With regards to a Renewable Heat Incentive scheme, it would therefore be the height of lunacy in Northern Ireland to remove cost controls from the model legislation and not ensure annual reviews were implemented. Not least since it thus renders and policy different and breaches parity, and thus it falls to the people of Northern Ireland to pick up the tab, which was the whole reason we had to implement welfare reform after all…