Quarterly Economic Observer, Winter 2014
This edition of the NERI’s Quarterly Economic Observer (QEO) outlines our latest expectations for the economic outlook in the Republic of Ireland and Northern Ireland (Section 3). It also presents an analysis of industrial policy in Northern Ireland and proposals for a new approach based on investment in key growth sectors of the economy (Section 4).
Our economic outlook for both parts of the island of Ireland is broadly positive, albeit uncertain. The Republic of Ireland is on course for strong growth in 2014. We are projecting reasonably strong growth in 2015 which we anticipate will slow somewhat in 2016. Continuing improvements in the public finances and the labour market along with stable net exports will contribute to continued recovery up to 2016. While 2014mmarked the return of positive growth in personal consumption, the continuing decline in wages represents an acute challenge. Low inflation has, to some extent, shielded incomes from the impact of declining wages but that effect may well be transitory. Internationally concerns about stagnation or even decline in the Eurozone and lacklustre growth in emerging economies inform our outlook. In Northern Ireland, output remains muted and there is little sign that Northern Ireland is benefiting from recent strong growth in either the UK or Republic of Ireland economies. Output remains almost 12% below its pre-crisis peak and contractionary trends in the construction and retail sectors are a cause for concern.
Based on the assumptions and expectations outlined Section 3, our current projections for Northern Ireland are:
- A modest increase in overall employment of 1.1% in 2015 and 0.6% on 2016, lagging growth in the UK as a whole.
- Increased employment in Construction, Health and Education (in some cases beyond the public sector) and ‘Other Services’ such as Arts and Entertainment.
- Employment projected to fall in both the Wholesale and Retail and the Banking and Finance sectors.
Industrial Policy in Northern Ireland
In section 4 of this QEO we look at productivity in Northern Ireland and the challenges this poses for industrial policy: Looking at how current industrial policies affect Northern Ireland:
- Increases in Total Research and Development Expenditure in recent years hide some important underlying problems:
- By European standards, Northern Ireland has among the lowest Government and Higher Education spending on Research and Development as a percentage of total Research and Development spend.
- Business Expenditure on Research and Development is almost exclusively secondary research that is mostly carried out by large, foreign owned companies.
- Policy may have been somewhat successful in attracting R expenditure into Northern Ireland, but have yet to succeed ingenerating it indigenously.
- Selective Financial Assistance (SFA) has been a cornerstone of industrial policy in Northern Ireland for some years. However the efficiency of SFA grants has been questioned on both the additionality and the productivity profile of the employment created.
- Presently, debates on industrial policy have centred on reducing the rate of corporation taxes in Northern Ireland. Such a policy may suffer from many of the same faults as Selective Financial Assistance.
- In effect it would seek to “buy in” economic success rather than inculcating economic growth by increasing the productive capacity of the domestic economy.
- Furthermore, any cut in corporation tax would require a substantial reduction in public expenditure that would undermine the ability of the state to invest in areas like education and skills that are essential for future growth.
- This QEO proposes an alternative approach based on a more direct role for the state, investing in key sectors of the economy to bridge the gap in productivity. Such a policy is based on international examples of how state financed innovation can bolster the productive capacity of the private sector.
- As European Union rules on State Aid begin to seriously reduce the scope of SFA, we propose diverting existing resources of up to £50m into an ‘innovation fund’ which would seek to channel investment into basic research in sectors of the economy where Northern Ireland has most potential.
- Areas such as Agri-food, Sustainable Energy and Health and Life Sciences all present an opportunity for Northern Ireland to seek out a competitive advantage based long-term endeavour rather than short-term inducements.