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From Strabane to Strangford Lough

Posted on March 07, 2015 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Northern Ireland rests on a very precarious political balance involving internal community relations, external relationships, social well-being and economic progress. In terms of overall size of the economy, including public spending, it accounts for a relatively small slice of the total UK picture. Yet, as a regional economy and polity it is highly vulnerable to fiscal, political and economic trends not only in the UK as a whole but in Europe and the world.

Think of the sharp rise in the value of sterling against the Euro in recent times. Sterling traded at around €1.45 per pound sterling in the years up to mid-2007. It plunged close to parity towards the end of 2008. Then, it followed a gradual recovery over the next years to reach, last week, €1.38.  Volatility and uncertainty is one thing. A marked appreciation in sterling spells trouble for Northern Ireland exporters into the Eurozone area. Since 16th December sterling had appreciated by just under 10% as of last week.

The unrelenting march of UK fiscal austerity has outlived the recent recession and has become a totem pole of political correctness for shrinking the size of the UK state and further liberalising labour and product markets. A shift in UK exporting towards countries outside the European Union has not attracted much attention. Yet, the UK remains aloof and semi-detached from the wider European Union project. Northern Ireland is caught up in the uncertainty not only around political outcomes later this year in Westminster but later on if and when an ‘in-out’ referendum will be put to the British people. (The last time such a referendum was held was in 1975.  The overall result was 67% across the UK in favour of staying in. However, the vote in favour of staying in the European Economic Community was only 52% in Northern Ireland.)

The key economic issue facing Northern Ireland is not the size of its public sector or the amount of subvention from Westminster. The key economic issue is enterprise. Will there be a sufficient emergence of new enterprises to replace declining sectors and provide the jobs, productivity, innovation and exports that the region needs in order to develop? A constricted debate on ‘rebalancing the economy’ neglects the wider role of enterprise by focussing on just one aspect – namely the impact of corporate taxation on direct foreign investment.  Unlike Southern Ireland, the decline in manufacturing that occurred in Northern Ireland in the decades following the second world war was not accompanied the birth of new sectors in manufacturing. Instead the state – locally or at UK level – stepped in to provide the employment, income transfers and security especially as the conflict escalated in the 1970s.

Claims that a cut in corporation tax in Northern Ireland will turn the economy around are greatly misplaced. There is a large literature on the determinants of foreign direct investment. While rates of corporation tax are significant factor, many other factors are relevant. In a detailed study of regional impacts by researchers in the Research and Information Service of the Northern Ireland Assembly (‘FDI determinants in European Regions’) they concluded that business climate, investment promotion, human capital, quality of life, internet connectivity were also important.  Any reduction in the total amount collected in corporation tax as a result of an alteration in the headline rate applicable in Northern Ireland would trigger reductions in other areas of public spending – especially in the absence of counter-balancing revenue flows. Estimates vary between £450 million (HMRC) and £650 million (DFP) for the total amount of corporation tax collected per annum. These may be under-estimates to the extent that corporations with HQs in Britain may extract profits in Northern Ireland but book them in Britain.

A cut in this tax could cost well over £100 million per annum. It will be difficult to regulate and account for gaming behaviour where corporations shift their profits and try to avail of lower taxes in Northern Ireland.

As shown in a previous Blog, Northern Ireland public agencies (the Executive and the District Councils) have very limited discretion and control over local revenue (In total it is estimated at around 91% of total government revenue collected in Northern Ireland).

Claims that a large public sector ‘crowds out’ private sector job growth are misplaced. Evidence considered by the Sheffield Political Economy Research Institute (SPERI) shows that UK regions such as North-East England and the South-West with a high proportion of public sector jobs experienced the greatest fall in employment in the public service since 2008.

Future cuts in public sector employment will have a disproportionate impact on Northern Ireland as a whole where public sector employment is around 27% of the total workforce [215,000 out of a total of 790,000 employees in 2014 – see ONS data here Tables 6 and 7]. However, it will also impact disproportionately on young people because of the traditional route into public sector employment for many young people. In the case of higher education graduates it is estimated that around 35% of Northern Ireland graduates enter the public service (including education and health) after graduating. Jonathan Wright of the UK Work Foundation has commented:

The ‘clustering’ of talented people has many local economic benefits. Places that have more talented people experience more innovation and higher economic growth.  Even the lower skilled benefit from the presence of highly skilled individuals as they create more jobs for the local economy. Graduate retention is therefore very important. If those places that have experienced a growing share of young graduates in recent years lose them to other cities and regions, regional disparities will continue to grow in the UK.

Using ONS estimates, total public sector employment, in Northern Ireland has fallen from 29% of the total employee workforce in 2008 to 27% in 2014. A planned net reduction of 20,000 in the workforce would represent a cut of 9.3% on the current level. This would be very roughly equivalent to the percentage reduction that took place, in the Republic of Ireland’s public sector between the final quarter of 2008 and the final quarter of 2014 (when there was a 9.6% reduction).

No analysis of the local economic impact (let alone social and political) of such a reduction has been undertaken. My colleague, Paul MacFlynn, in a recent NERI Research InBrief (“Public Sector Employment in Northern Ireland”) has drawn attention to UK research which indicates a high local multiplier effect. He also cites Office of National Statistics ONS) data which shows concentrations of public sector employment (as percentage of total employment) in Belfast (not surprising) and in West Tyrone and West Derry (surprising perhaps). The local economic impacts are likely to be very significant and difficult to predict. By way of comparison, a reduction of 10% in public sector employment in a town such as Castlebar in the West of Ireland is likely to have a very different impact to a reduction of 10% in public sector employment in Strabane where the local constituency area proportion of public sector jobs is 35% (compared to 21% in the neighbouring constituency area of Mid-Ulster). Refer to ONS/DETI data here.

A little commented aspect of public sector employment in Northern Ireland is the very unusual gender pay gap. Almost everywhere in the world women’s pay is lower than that of men. However, female pay in the Northern Ireland public sector is higher that than of men. This reflects the composition of the workforce in the public sector as well as the mix of skills and occupations especially in sectors such as health and education. As Paul MacFlynn shows in the NERI Research InBrief the pay gap in the private sector, in Northern Ireland is very much in favour of men. There is a high concentration of women workers in (i) poorly paid jobs in the private sector (especially accommodation, food services and retail) as well as (ii) relatively better paid jobs in the public sector (especially health and education). Large shifts in the level and regional distribution of public sector employment in Northern Ireland will have significant impacts not only regionally but in relation to female employment and conditions where the pressure of ‘welfare reform’ and reduction in public services is likely to impact disproportionately on women.

In the maelstrom of political uncertainty, the fall-out from continuing UK austerity (as mirrored in the Stormont House Agreement of last December) and the impact of European stagnation fresh thinking and creative policy initiatives are required. This is an opportune time for activists and researchers to explore how an enterprise economy can be created in Northern Ireland. There is a case for a stronger and better equipped public sector to lead on, and work with the private sector, when it comes to housing, transport, social economy, research, innovation, renewable energy and many other areas. Instead of draining more blood out of the Northern Ireland public sector in the vain hope that it will transfer over into renewed private sector body growth, policy makers and their masters would be advised to give a blood transfusion to both bodies working together.  Austerity whether in Strabane or in the Strangford Lough area will not help businesses, shops and communities in those areas.

 

Posted in: Government SpendingInvestmentNorthern Ireland Taxation

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