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Quarterly Economic Observer, Winter 2015

Quarterly Economic Observer, Winter 2015

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Summary

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 the National Living Wage and Tax Credits in Northern Ireland (Section 4).

Economic Outlook

Our economic outlook presents a contrasting picture for both parts of the island of Ireland. Recent data suggest that in Northern Ireland economic recovery stalled halfway through 2015 while growth in the Republic of Ireland looks set to surpass its impressive 2014 performance. In Northern Ireland the announcement of a significant number of job losses in the second half of 2015 compounded the disappointing data for the first two quarters of the year. In the Republic of Ireland, a strong recovery in the domestic economy is now supplementing the robust performance of exports, leading to considerable output growth.

Unemployment remains significantly higher in the Republic of Ireland, but the pace of reduction in Northern Ireland has moderated substantially. Concerns remain over high rates of youth unemployment and structural issues in the Northern Ireland labour market such as increasing economic inactivity.

While increasing tax revenues have boosted the public finances in the Republic of Ireland, the UK government has outlined an additional four years of expenditure cuts and tax increases. This will have a disproportionate impact in Northern Ireland where the scale of recovery in the private sector has fallen significantly behind the UK average.  

Overall Northern Ireland may struggle to sustain growth in the medium term while the Republic of Ireland looks set to consolidate its recent performance.  

Outlook for Northern Ireland

There are tentative signs of economic recovery in Northern Ireland but the outlook has weakened as a consequence of the Conservative’s victory in the General Election and the implications for public spending and aggregate demand in Northern Ireland. The potential collapse of the Stormont executive and the upcoming referendum on EU membership are generating instability and undermining the attractiveness of Northern Ireland as a location for foreign direct investment.

The National Living Wage in Northern Ireland

    • — The National Living Wage (NLW) will become the statutory minimum wage in the United Kingdom for all employees aged 25 and over in April 2016.
    • — The NLW will result in an automatic increase in hourly wages for 13 per cent of employees in Northern Ireland.
    • — The majority of these increases will be for female workers and workers aged 25-34.
    • — The majority of those automatically benefiting from the NLW will be in full-time work.
    • — The Wholesale and Retail sector will see just over a third of all NLW increases, with a quarter of all workers in that sector entitled to an increase.
    • — Almost one third of all Accommodation and Food workers and 27 per cent of all Residential Care workers will also see an increase.

Tax Credits and the National Living Wage in Northern Ireland

    • — Almost 160,000 families in Northern Ireland claim some form of Tax Credits, and some 120,000 would have been affected by the changes proposed to tax credits in the UK Summer Budget.
    • — The National Living Wage was presented by the UK government as a compensatory measure for this loss of income. — The NLW will result in an automatic increase in hourly wages for 13 per cent of employees in Northern Ireland.
    • — Our analysis shows that nearly 77 per cent of working families who would have been affected by changes to Tax Credits would not have seen an increase in income due to the National Living Wage.
    • — 20 per cent of working families affected by changes to Tax Credits would be entitled to an increase in wages from the NLW, but only 3 per cent of families could plausibly have avoided a reduction in income.
    • — These figures correspond with similar analysis for the UK as a whole and may help to explain why the policy was dropped.
    • — However many of the same families that would have been affected by Tax Credit changes will be impacted by similar cuts to universal Credit when it is fully introduced in Northern Ireland.
    • — A strong wage floor is an important policy tool, but it is not a panacea for low pay and in-work poverty.
    • — The capacity of the NLW to compensate for Tax Credits is significantly limited and this need to be recognised in any future discussions of welfare reform.

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