Can we cope with cuts?
In a challenging forecast, the Ulster University Economic Policy Centre’s Neil Gibson warns that Northern Ireland’s policy-makers must take a realistic view of spending cuts and corporation tax as a game-changer as the new Parliament starts work.
Cuts dominate the economic landscape, the Conservative majority in the UK general election ensures this will be the case throughout the next parliament. The Northern Ireland economy is not awash with Tory sympathisers; any mention of cuts (of any kind) plays poorly with almost all of the political parties suggesting a difficult Parliament lies ahead. Looking ahead at forecasts for the Northern Ireland economy, the critical question hanging over the outlook is the extent to which the region can cope with the cuts.
At the outset, it is worth drawing attention to some dissention in the forecasting ranks. The latest forecasts from the research centre I am fortune enough to lead – the Ulster University Economic Policy Centre (UUEPC) – suggests a tough period ahead for Northern Ireland as the cuts begin to bite. The majority of the other commercial forecasters suggest the region will cope just fine. As is always the case, forecasts rely on certain assumptions and much could change between now and 2016-2017. Critical areas to consider in assessing prospects are:
• Extent of the cuts: Until plans are laid out in detail, it is not clear exactly what the extent of government cuts will be nor where they will fall. Inflation levels will also impact how damaging they prove to be given that expenditure plans are set in nominal terms for most departments.
• Level of pay rises in the private sector: The consensus view that cuts will be only mildly damaging is due in large part to confidence that the private sector will both continue to create employment but also begin to pay well above inflation average pay increases. This is not an outcome from the UUEPC forecasts.
• World trade: A critical driver of the performance of exports is the rate of growth in world trade which has underwhelmed recently as China enters a more modest phase of growth and many emerging economies suffer growing pains. The long run average growth in the UUEPC models is taken from the Oxford Economics world model and is currently 4.5 per cent, any improvement on this would bolster growth.
• Consumer confidence and borrowing: The level of borrowing in the economy, and in particular loans for housing, is a crucial factor in supporting consumer spending. If the housing market booms, in transaction terms, then this could also improve the forecast outlook.
The current projections from the UUEPC model suggest growth will slow markedly with the labour market contracting modestly in 2018-2019 as the public sector cuts bite. This presents a strikingly different view of the world from the standard ‘trend growth’ trajectory and reflects an underlying weakness in the scale of the Northern Ireland private sector.
Private sector response
Can the private sector deal with cuts on the scale proposed? One reason to think that it might is to look at the experience of the last five years when austerity has been in place. During this period, the private sector has reached record employment levels in the UK, though Northern Ireland’s performance has been rather more muted.
If it could cope before, what has changed in this Parliament? For one thing, the scale of cuts is more marked. As local economist Richard Ramsey often says: “Elections have acted like a speed camera for austerity” – meaning the pace of cuts is now set to ramp up with the next general election five years away.
In headline workforce job numbers, the official data suggest Northern Ireland employs just 1,000 fewer public administrators than three years ago, and 5,000 more in education and 3,000 more in health. However, the official public sector jobs series does report a loss of nearly 4,800 jobs over the three-year period, suggesting growth in private health and education.
The private sector growth has, pleasingly, been across a broad range of sectors which has helped bring job growth to all parts of Northern Ireland. The fear that most employment opportunities would be confined to Belfast has proved unfounded as job creation in manufacturing, agriculture, tourism and construction has helped spread the growth. On the face of it, job performance has been impressive, though it has struggled to keep pace with the rest of the UK, most disappointingly in ICT and professional services. It is also cause for concern that the three main public services have also outperformed their UK equivalents in job terms, suggesting a more limited austerity impact to date and the possibility of greater cuts to come.
The wonderful performance figures from Invest NI suggest record jobs promoted and it is clear many of these have not yet reached the official data. Although jobs promoted will fall markedly in this current year due to the changes in state aid rules there should still be a bank of private sector jobs coming to the market during the very tough 2016-2017 period. This gives some hope that we might be looking at a more positive outturn for jobs than the UUEPC model predicts.
Self-employment is a further way in which the private sector may be able to offset the cuts as more individuals set up their own business and create wealth. In Northern Ireland, the self-employment performance has been unfathomably poor. It has trailed the UK markedly; there are 35,000 fewer self-employed jobs today in Northern Ireland than would have been the case if Northern Ireland had tracked UK performance since 2008.
Given the strength in the agriculture sector and the recent turn around in construction sector this outturn is very puzzling, though undoubtedly the scale of construction self-employed job losses will have impacted during the 2008-2010 period. It may be a data issue but it certainly warrants further investigation.
Public sector
Perhaps the most important feature of the next five years will be the transformation of public services. Cuts will guarantee change, but not in and of themselves transformation. From the outside looking in it is worrying. A voluntary exit scheme (paying public money to bring forward what was going to happen anyway) does not seem the most radical or service delivery focussed path to reform.
Equally looking at my own sector, academia, cutting courses does seem a worrying place to go to first when faced with cuts. The thorny issue of public sector pay seems to be off the table –“Could we pay everyone just slightly less and protect services?” – and alternate methods of funding or delivery also seem to be rarely considered. It may be the case that much of the real reform is behind closed doors and not apparent to the outsider, but one has to hope it is happening.
Protecting outcomes, not inputs, must be the approach during the challenging period ahead. If we are really sure nothing could be done better, then perhaps it is time to consider local tax rises to maintain services? Set in the context of finding money to pay for a reduction in corporation tax, it is clear this is a time of very tough choices indeed.
Skills implications
The UUEPC is currently working on a skills barometer project for the Department for Employment and Learning, assessing the quantum and subject profile of future skills needs. The results will be available later in the year but provisional findings point to a further important aspect of the likely austerity path. The current skills pipeline in Northern Ireland is geared towards a job hungry public sector – no surprise given its dominance in the labour market.
It is impossible to say how the balance of cuts will fall between education, health and public administration and defence, and the extent to which the private or voluntary sectors will step into delivery but the potential for graduates misaligned to the labour market needs is stark. Currently, Northern Ireland turns out in the order of 4,600 graduates in broadly defined health subjects (allied to medicine, social studies and medicine and dentistry), 1,300 in education and a further 2,900 graduates in business and administrative studies, a popular subject for public administration workers.
It is dangerous to suggest there will be oversupply in critical front-line service subjects but there is a very real question to ask as to how the education pipeline will react to a more private sector orientated demand pool. The potential risk of shortages in particular skills stalling private sector growth – particularly if the corporation tax reduction becomes a reality – is a very real one given both the current orientation of subject delivery and the impending cuts in the education budgets.
Is confidence justified?
The challenging UUEPC forecasts sit in contrast to the positivity reported in the consumer and business confidence surveys. Perhaps this optimism can see the Northern Ireland economy through the challenges ahead? Confidence measures are critical in assessing the economy but they can also switch course very swiftly, looking at the economic fudnamentals remains an important science that helps when setting expectations for the future.
A country with a persistent trade deficit, planned government cuts on a historic scale and a consumer sector burdened with high levels of debt does not seem to be the most encouraging of economic cocktails. The UUEPC forecasts look sluggish in sectoral terms if the government cuts take place as planned.
In purely arithmetic terms, the cuts are taking money out of the economy, and in the case of welfare, off people who predominantly spend that money. To offset this turn of events, more money needs to be spent by consumers (perhaps by borrowing more or earning more) and by business (by investing more); these are the indicators to watch for in the coming months. New mortgage lending, capital investment by firms, pay settlements and overall employment levels. Without positivity in these, the outturn will be every bit as challenging as the UUEPC forecasts are predicting.
