Towards a world class economy
It’s been delayed a number of times but will come eventually. As a decision on corporation tax edges closer, Peter Cheney talks to PwC’s Paul Terrington and Esmond Birnie about an effective range of economic measures that could boost FDI, R&D, skills and productivity. Despite the current economic challenges, the pair remain convinced that a world class economy is achievable if Northern Ireland takes the long-term view and agrees a vision for success by 2030.
When it comes to economic analysis, Northern Ireland has few rivals. Some 16 full-blown economic reviews since the 1950s agreed that most of the main ingredients for world class economy either exist or could be developed. What the region lacks is a consensus vision for what a dynamic, world class economy might look like by 2030 and the courage to pursue it.
PwC’s Northern Ireland Regional Chairman Paul Terrington and Chief Economist Esmond Birnie are believers and put their perspective on how to transform the province’s performance to agendaNi.
PwC is the main sponsor of this year’s Northern Ireland Economic Conference, which takes place on 19 September at Titanic Belfast. The conference, unsurprisingly titled ‘Creating a world class economy by 2030’, will put the case for accelerated progress arguing that a step change is needed across four areas: exploiting devolution; attracting higher levels of FDI; enhancing skills and productivity; and expanding the private sector.
The conference has already attracted a high profile range of speakers, including Secretary of State Owen Paterson, Irish Minister of State for Small Business John Perry and Gerry Holtham, who chaired the Independent Commission on Funding and Finance for Wales.
Birnie points out that if Treasury were to give the green light to a cut in corporation tax, the change would take three to four years to implement and would be very costly. And while welcoming a cut, PwC has never seen low corporation tax as the ‘silver bullet’ to solve Northern Ireland’s economic problems. Instead, it perceives any reduction as one of a wider range of economic reform measures and emphasises, not unreasonably, that the region has not given any serious consideration to a Plan B if the devolution of corporation tax is vetoed.
The two are not necessarily in conflict, Birnie contends. “The UK is already one of the most attractive business tax regimes in the world,” he comments, “so if we can add a distinctive local offering such as incentives to upskill the workforce, invest in R&D, or export marketing, a lower rate of corporation tax creates a compelling offering to attract inward investment and promote more investment from the firms already here.”
While much of the media and political focus has been on changing tax rates, PwC also points to a much less reported advantage: the competitiveness, simplicity and transparency of the UK’s tax regime. PwC’s unique study ‘Paying Taxes’ (co-authored with the World Bank and International Finance Corporation) ranks the UK as 18th out of 183 economies.
Pointing to the recently enacted Scotland Act, Terrington affirms PwC’s consistent view that a package of tax incentives will “genuinely allow us to be distinctive and capitalise on the opportunities.”
Warning that whatever is done to rebalance the economy, it will happen in a climate of sustained austerity, PwC estimates that Northern Ireland will exhibit no growth in 2012 and, in its most optimistic scenario, grow by 1 per cent in 2013.
That said, Terrington also suggests that the region still has to experience the full impact of public spending cuts, where local government in England and Wales has felt the sharpest impact thus far, with around 240,000 public sector jobs lost in 2011 alone.
A more optimistic picture emerges when the analysts look behind the headline figures. It is far from accurate to say that every sector is in trouble. “The danger is that you can talk yourself into almost a worse position than you are already in,” Terrington states.
Wrightbus’ potential order for another 600 London buses is a case in point. The policy challenge and, indeed, the challenge for the rest of the private sector is to spread that behaviour throughout Northern Ireland’s 70,000-plus private firms and enterprises.
“That shows how a propensity to be an export-orientated, internationally competitive business flows from your investment in R&D which drives innovation and, in turn, new product development. If you’re in that space, your ability to export is massively enhanced,” Terrington comments.
But Terrington warns that a common misconception is that R&D and innovation is solely product- and manufacturing-orientated. “Innovation can take place anywhere in the business’ process. Take Chain Reaction Cycles; that was a Ballynure family bike shop that pioneered internet sales. It’s is now one of the world’s largest online bike retailers”.
Learn from the past
After more than half of century of analysis, the province’s economic problems are well understood. Fifteen independent reviews were published in the half century between Isles and Cuthbert’s 1957 Economic Survey of Northern Ireland and Richard Barnett’s Independent Review of Economic Policy in 2009, which in turn formed the basis of this year’s Executive’s Economic Strategy.
Each report concluded that foreign direct investment, R&D, productivity, exports and skills would lie at the heart of any economic renaissance. Indeed, many of PwC’s clients are taking action on these themes intuitively. u
“They see it as good business sense,” Terrington states. “Extract the elements of how good businesspeople run their companies, extract the conclusions and recommendations of the various reports and studies that have looked at the economy, match the two things up and they correlate.”
Birnie finds an “interesting tension” between the Programme for Government (effectively covering three years to 2015) and the Economic Strategy which rightly looks at how the economy could develop by 2030.
“You do need that 2030 vision. However, there is a dilemma about how you consistently deliver that across a series of budget periods and successive assemblies,” he notes. From about 1987 until relatively recently, Irish governments maintained a long-term vision and sense of purpose, which is still paying off with record levels of inward investment.
By definition, the implementation of a long-term vision must start soon. The Republic established its first institutes of technology in the early 1970s, almost twenty years before the Celtic Tiger roared. For a decade, that investment seemed misplaced as emigration took graduates to Boston and New York, only for them to return home two decades later, bristling with international management experience, confidence and contact books full of potential customers.
As Northern Ireland’s largest graduate employer, PwC is pleased to see the emphasis that local universities are placing on overseas exchange visits: “We want people who come to us with that way of thinking. At an individual student level, that’s an important piece for us in terms of how well they are able to meet the business needs we have.”
“For me, it’s part of a kick-start attitude,” Terrington remarks. “If at that stage, in your education, you look beyond the narrowness of your local horizon, grab some wider experience, then, when you come to work for us or other organisations, you’ll bring a wider, export orientation.”
The province’s existing success stories prove that any product can be manufactured in Northern Ireland and exported globally, thanks to locally generated R&D, infrastructure and skills. “How else,” says Terrington, “could you have worldwide markets for things like buses and aircraft? It’s about skilfully producing really innovative products that command a premium in export markets.”
PwC is also encouraging the Northern Ireland public sector to branch out and become more entrepreneurial. Terrington contends that if a public sector shared service can deliver back office services to 26 councils here, why should it not replicate that success and sell the same services to the public sector in the Republic or Great Britain?
Holtham and Barnett formula
Over in Wales, the Holtham Commission’s report (July 2010) affirmed that the country would remain reliant on long-term subvention from Westminster and proposed a new, needs-based formula. The Silk Commission has picked up that challenge and is now considering how more of the Welsh Budget can be raised in Wales.
This will influence the future of the Barnett formula; alongside that, welfare reform will have a long-term impact due to the Northern Ireland population’s higher dependency on benefits.
“We can get overly focused on the current Budget period through to 2015,” Birnie says, “but we know now there are going to have to be further UK-wide spending reductions in 2016, 2017 and possibly even beyond that. The wise thing to do would be to prepare now for that rather than waiting for the Assembly to get an unpleasant surprise.”
Ironically, it was the 1976 Quigley Report that made Northern Ireland the first UK region to consider its fiscal future, but Scotland and Wales are now moving ahead of us. Direct rule thinking was based on reliance on Whitehall and change has been modest since the restoration of devolution.
“With year-on-year growth in public spending, reshaping the Northern Ireland economy was an aspiration but not an imperative,” Terrington reflects. “It’s an imperative now.” PwC highlighted the underlying structural economic problems in its 2006 Economic Review, describing the local economy as merely having ‘a veneer of prosperity’ but he appreciates that the new devolved government’s attention was focused on a wider range of political and social challenges.
“It’s difficult to say for sure that you would have done anything different,” he comments. “Nobody saw the crash coming.”
Back in 2001, the Milford Group (a business-led think tank) recommended tax incentives to stimulate and reward investment in R&D, training and marketing. It gained support from the then Finance Minister Seán Farren and Enterprise, Trade and Investment Minister Reg Empey.
Milford recognised the long-term strengths of Northern Ireland but emphasised three key themes:
• attracting globally competitive foreign direct investment;
• an outward-looking, internationally competitive group of indigenous business exporters; and
• an entrepreneurial and dynamic micro-business sector.
The report was independently evaluated and endorsed by the Ulster Society of Chartered Accountants and seemingly faced no adverse consequences under EU law, when examined by the Treasury. PwC contends that the Milford recommendations should be revisited as part of the debate over any Plan B.
Communicating the vision
2030, though, still remains far on the horizon. This brings Birnie back to the need for periodic reviews. The absence of these was a major weakness in the 2007-2011 Programme for Government, and resulted in most of its targets being “knocked off-course” by the economic crisis: “There’s no point of setting yourselves targets which you’re strait-jacketed into when the world changes.”
The next step from a mid-term review is the ‘recognition event’ i.e. a distinct marker on the way to a world class economy. Such events could include attaining certain minimum education standards, increasing numbers of STEM graduates, or becoming one of the world’s 10 most competitive taxation regimes.
One more gap needs to be bridged: between economic goals and the person on the street. Targets must resonate with factory workers and with potential entrepreneurs. Society as a whole needs to understand how the 2030 vision will impact on them, their families, children and their livelihood.
The Belfast Agreement, for example, set out a vision for Northern Ireland which was only realised in part later in the peace process. An effective economic strategy, in PwC’s view, would have real ‘recognition events’ be signed-off by all sectors and even, Terrington speculates, could even be distributed to every school and household.
“For a regional economy with devolved powers, I think that’s something we should strive towards,” Terrington surmises. “Our size and scale makes that something to aspire to. If we galvanise ourselves around that, draw together the different influencers and different pieces of infrastructure and build towards it, I think that gives us a chance to be competitive in ways that others can’t do.”
