Contrasting fortunes

Gareth Hetherington highlights the prospects for private sector growth and considers the impact of spending reductions on the regional economy. The debate on our fiscal future must take all options into account.

The headline economic data for Northern Ireland remains positive. Employment is growing, unemployment is falling and business surveys all report high levels of confidence and growing order books.

The private sector has enjoyed a broad-based economic recovery both sectorally and geographically. Fourteen of the 19 sub-sectors in the economy have seen employment stabilise or increase in the last 12 months and unemployment has fallen across local council areas.

The Northern Ireland Centre for Economic Policy forecasts growth at approximately 2.2 per cent this year falling slightly to 1.9 per cent in 2015, but thereafter a challenging economic environment awaits. Continued downward pressure on public spending and higher interest rates (albeit moderate increases) will affect growth in the medium to longer term. Despite the challenges facing the public sector, it is anticipated that the private sector will create over 20,000 new jobs over the next four years.

Unfortunately, the positive news in the private sector has taken a back seat to the very high profile ‘public sector cuts’ debate and the significant challenges faced by the Executive in reaching an agreed draft Budget. The spending reduction incurred in the UK as a result of welfare reform is only the tip of the iceberg and the reality of the post-election spending plans proposed by the Coalition Government (and broadly supported by the Labour Party) is beginning to set in. UK central government expenditure is forecast to fall by approximately 9 per cent.

Although the specific impact on Northern Ireland beyond next year has yet to be determined (via the Barnett formula), it will be significantly greater than the Executive has experienced to date.

Full debate

Against this backdrop, overall public spending in Northern Ireland is still generous relative to other regions in the UK. Total expenditure was approximately £19.8 billion in 2012-2013 and tax receipts were only £10.5 billion therefore we remain very dependent on financial support from Westminster. One consequence of the Scottish referendum is the heightened awareness among English voters of the cost of supporting the devolved regions. Therefore, it is unlikely that Northern Ireland would be better off following any renegotiation on the current approach to allocating funding across the UK regions.

In this context, delivering ‘more for less’ will be essential to meet public expectations in terms of service delivery. Moving forward, the public policy debate must focus on the facts rather than ideology and therefore everything must be on the table in these conversations. For example, the issue of delivery structures in place to provide public services, whether those are in the public, private or social economy sectors, should be secondary to the quality of service provided. It should be about how well a service is delivered, not who delivers it.

Cuts will hurt (at least in the short term) but may provide the catalyst for reform. Maintaining budgetary discipline is important but reductions in public sector spending will have a negative impact on the economy. Opponents to austerity are correct to highlight that during periods of low or negative growth, removing money from the economy will only depress demand further. Taking a longer term view, the argument is made that benefits may accrue if spending reductions act as a catalyst for change through reducing structural inefficiencies and redirecting resources towards higher productivity activities.

Can the forthcoming spending squeeze be used as a catalyst for change? In short yes, but it will take courage from our political leaders and understanding from the electorate. Reform will require a detailed analysis of all expenditure areas and if the planned outcomes are not being delivered, then funding should be questioned.

The decision to protect specific budgets from spending cuts may bring some relief to those areas but it has a number of negative consequences. Firstly, it places a significantly greater financial burden on other parts of government and secondly reduces the catalyst for reform in the areas protected.

The public sector employs large numbers of talented and innovative staff who could thrive in an environment of lower bureaucracy and an outcome-driven culture. Just as many private sector firms had to fundamentally review their activities and delivery structures following the start of the recession in 2008, the public sector is now heading into its own recession and will need to travel that same difficult journey.

Northern Ireland finds itself with an identity crisis. It is not clear if we should follow the high tax, high public spending model of Scandinavia or a lower tax, lower public spending model seen in the USA. Many people seem to be of the view that we can cherry-pick the best elements of both systems.

An increase in taxes seems inevitable, either to pay for services we wish to retain or for tax cuts elsewhere. However, the challenge is to agree who should pay. Prescription charges could provide additional funding for health and water charges could fund a more generous welfare system but are the public prepared to pay for it? Solving the identity crisis requires the public to join both the tax revenue and government spending elements of the budget equation.

The decision to devolve corporation tax has been made in principle but, at the time of writing, the UK Chancellor has made it conditional on the Northern Ireland Executive agreeing a Budget. Therefore we await with interest the outcome of the current all-party talks process. Lower corporation tax should have a significant impact in attracting inward investment to Northern Ireland as well as encouraging indigenous businesses to increase their investment. The evidence from the Republic of Ireland is clear. The Dublin Government faced considerable pressure from Brussels to raise its corporate tax rate as part of the troika bail-out programme but, recognising the importance of this policy lever, it held firm.

Assuming the power is devolved, the Executive will be faced with a critical debate over how to pay for it. What other incentives might go or where can additional savings be made? In the current fiscal environment this will not be an easy conversation, but fear of having that conversation does not justify spurning the opportunity to take the power when it is offered.

One note of caution. Do not underestimate the importance of the Republic of Ireland’s highly skilled workforce in their inward investment success story. This is an important lesson. Northern Ireland needs to sell both tax and talent to the international corporates and as such, investment in skills development must not be compromised.

Gareth Hetherington is Associate Director of the Northern Ireland Centre for Economic Policy.

Key regional forecasts (%)

Gross value added excludes the impact of taxes and subsidies. Unemployment: claimant count rate as a percentage of the population aged 16-64. Inflation: consumer price index