esmond birnie's slides from his presentation at the nevin economic research institute's...
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Northern Ireland – the devolution challenge posed by Scotland et al
Dr Esmond Birnie, Chief Economist in NI and Scotland
NERI 18 November 2014
www.pwc.co.uk/ni
PwC
Summary of my argument
18 November 2014NERI
Slide 2
An economic recovery in NI – but limited1
External threats – beyond our control2
Is devolution in NI working?– uncertain policy response3
Devolution in the air – everyone’s at it except us4
Sign-up or sign-off – doing nothing is not an option5
PwC
ECONOMIC UPDATE: Economic recovery in Northern Ireland continues…
18 November 2014NERI
Slide 3
Output is growing…1
Unemployment is falling…2
GDP growth (%) 2012 2013 2014 2015
NI* -0.3 1.1 2.2 1.9
United Kingdom 0.2 1.7 3.0 2.5
RoI 0.4 0.2 3.1 2.9
Note: *NI output growth measured by GVA.Source: Office for National Statistics (ONS), Central Statistics Office (RoI), PwC (NI, RoI and UK 2013-2014).
Source: ONS Labour Force Survey, 16+.
2
3
4
5
6
7
8
Jul-0
7
Jan
-08
Jul-0
8
Jan
-09
Jul-0
9
Jan
-10
Jul-1
0
Jan
-11
Jul-1
1
Jan
-12
Jul-1
2
Jan
-13
Jul-1
3
Jan
-14
Jul-1
4
(%)
Northern Ireland United Kingdom
Business confidence is positive…
16 consecutive months improvement as per the Purchasing Managers’ Index
3
PwC
But we remain towards the bottom of the UK regional performance league table…
18 November 2014NERI
Slide 4
Economic indicator NI Wales Scotland South East
England
Output per head 2012 10th 12th 3rd 2nd
Economic growth 2014 12th 10th 10th 2nd
Employment rate
Feb-Apr 2014
12th 9th 5th 1st
Employment growth
Mar 2007-Mar 2014
10th 6th 11th 2nd
Earnings levels 2013 12th 10th 4th 2nd
PwC
Two speed economy in terms of sectors…
Employment levels by selected sectors, June 2014 vs. June 2012
18 November 2014NERI
Slide 5
Sector June 12 June 14 Change
Public sector 214,310 212,210 -1.0%
Construction 31,370 30,270 -3.5%
Tourism and Leisure 53,880 54,970 2.0%
Food processing 17,020 18,360 7.9%
Financial services 18,960 17,700 -6.6%
Business services 31,140 34,340 10.3%
Retail 112,050 113,780 1.5%
Manufacturing (excluding food) 58,430 59,110 1.2%
Total 692,780 711,920 2.8%
PwC
THREATS: Even this partial recovery is subject to significant threats…
18 November 2014NERI
Slide 6
What could go wrong?
• International disruption, e.g. Eurozone or China.
• Increased inequality, social and FDI consequences.
• Crunch in UK property market.
Increased exchange rate volatility and a lower Euro very likely. Also, higher Bank rate, though probably not until mid 2015-ish.
PwC
IS DEVOLUTION WORKING: Has NI devolution been working in any case…
Slide 7
18 November 2014NERI
Have the series of high profile events created a real global brand NI?
Exports to BRICs/emerging markets, growing, but overall exports in Q2 2013 still below Q2 2011.
Mixed messages in tourism particularly from external visitors.
Some policies in lockstep with Whitehall, so no local flexibility.
Keeping taxes and charges low within a £10bn subvention may not be sustainable.
Ironic if ‘solution’ to welfare reform was to ‘undevolve’ social security.
Other policies – Planning, education, welfare, BMAP are deadlocked.
PwC
Stormont’s money problems…
Slide 8
18 November 2014NERI
Complex because of
the following six elements:
Ring-fencing most of DHSSPS and all of Education adds to pressures elsewhere.
Existing 2011-15 Budget was not in reality ‘balanced’ – Inadequate allowance for spending pressures.
Growing ‘penalties’ for non-implementation of welfare reform.
Since the 1970s a situation has developed whereby spending per head substantially exceeds the UK average, whereas taxes paid are lower. (Possible Barnett Formula replacement.)
The 2015-16 Budget still to be confirmed by Assembly.
There has been no attempt to conduct a zero based review of public spending.
PwC
Austerity will now intensify…
Slide 9
18 November 2014NERI
Departmental spending cuts and GB welfare cuts throughout next Parliament – regardless of 2015 General Election –has consequences for NI.
Current funding difficulties in health were very predictable – A number of reports in 2011 suggested:
• Rate of cost increase in health exceeds the NI average.
• NI per capita healthneeds greater than theUK average.
Additional penalty for non-implementation of welfare reform, £87m in 2014 and £114m expected in 2015.
By implication, in the absence of fundamental reform, demand for healthcare will always outstrip resources.
Already in 2014-15 current spending in some Dept. reduced by about 4% with a further 1.5-3.5% to come.
Departmental bodies have been warned to prepare for cuts of up to 15% in 2015-16.
2015-16 budget 3%+ real cuts.
In that absence of political agreement, medium-term picture is therefore quite bleak.
The measure of agreement in the 2015-16 “Halloween Budget” may not last. Still no agreement re. welfare. Increasing borrowing to cover short-run shortfalls.
PwC
The £100m “loan”: Public finance meets Mr Micawber…
• Executive didn’t get the £150m it asked for.
• Was made clear further requests to the National Reserve may be refused.
• Has to be repaid in 2015-16.
• Conditional to some degree on Treasury oversight, e.g. in terms of a credible Budget for 2015-16 being struck (and passing through the Assembly in the early Spring).
• The Executive now proposing a further £100m of borrowing- using RRI- to cover cost of voluntary redundancies.
18 November 2014NERI
Slide 10
PwC
DEVOLUTION IN THE AIR: Pre devolution vote – the Scotland Act 2012
Powers to be devolved (and may be more):
• Land & Buildings Transaction Tax
• Scottish Landfill Tax
• Scottish Government Borrowing Powers for capital schemes
• Scottish Rate of Income Tax
• The power to create or devolve other taxes (with agreement of UK Govt)
Slide 11
18 November 2014NERI
PwC
Post Scotland’s vote – Decentralisation decade…
Slide 12
18 November 2014NERI
Possible challenges – What happens to the Barnett Formula and resolving the ‘West Lothian Question’. 5
The 18 September 2014 vote does not imply business as usual.1
Scottish Government already has the 2012 Scotland Act and likely to have further powers, such as Income Tax and Air Passenger Duty. See forthcoming Smith report.2
Implications for Cardiff’s Assembly, City Deals to big English urban centres and London.32
‘Wales Act’ goes to consultation – Pressure for ‘whatever Scotland gets?’4
Not just an ‘English question’ but a ‘London question’ – Hitherto, London has generated the net fiscal transfers going into the other UK regions (including NI) – How long and how far can that continue?6
PwC
Home Rule all round? Everybody’s doing it
Slide 13
18 November 2014NERI
Next stage of devo proposals
to be announced by 25 January &
will be key in 2015 General
Election
Hague review – to consider further devolution for Wales, N Ireland & English regions
Smith Commission – parties’ proposals published on 14 September
Wales Bill –consultation now out with deadline of 12 December 2014
New City States – Govt re-announce £12bn to English cities like Manchester, Liverpool & Leeds
“English votes for English regions” – solving the West Lothian Question
NI still hoping for Corporation Tax - but if we get it, can we afford to use it? Possible end of Barnett Formula.
PwC
A worrying likelihood that NI will lag behind…
Slide 14
18 November 2014NERI
As decentralisation becomes the normelsewhere in the UK, five possible responseson part of Stormont:
1. ‘Don’t talk about it – Will only encourage the Treasury to cut the block grant’. But, Treasury hardly needs encouraging.
2. ‘Let’s not ask for extra powers – We can hardly manage the ones we have’. A counsel of despair, or permanent ‘irresponsibility?’
3. ‘Corporation Tax powers would be enough – They are the game changer’. But, will the Executive be able to agree the consequent funding cuts and are such powersa game changer by themselves?
4. ‘A devolution holiday’ would let Direct Rulemake the hard choices’ Switching off system temporarily but is re-writing of the software required?
5. ‘Let’s have an independent review of scope for extra fiscal powers like Wakes & Scotland’. Would we want to know the outcome?
PwC
SIGN UP OR SIGN OFF? Northern Ireland cannot afford to ignore what happens elsewhere…
18 November 2014NERI
Slide 15
Economic Update – where are we now?1
External Threats – beyond our control2
Is devolution Working?– uncertain policy response3
Devolution in the air – everyone’s at it except us4
Sign-up or sign-off – doing nothing is not an option5
PwC
Thank you, looking forward to discussion…Dr Esmond Birnie, Chief Economist in NI and ScotlandPwC | Chief EconomistDirect: +44 (0)28 9041 5808Mobile: +44 (0)7850 907892Email: [email protected]
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Slide 16
18 November 2014NERI