Posted on Monday 22 November 2010 by Ulster Business

John Simpson

Enterprise Minister Arlene Foster, pictured announcing new jobs at ATG in Belfast, has assembled a team of experts to give advice on developing public policy on the local economy

After the CSR the focus has shifted to growing the private sector. John Simpson offers his views on who can make it happen and how

The private sector of the Northern Ireland economy is frequently and sometimes misleadingly described as being too small, too dependent on government support and being insufficiently competitive in comparison with other regions or countries. Each of these terse conclusions contains an element of truth, conveys degrees of misrepresentation, and, by the simplification embedded in such a summary, obscures important conclusions affecting decision making and policy developments. The objective that the private sector should be encouraged and incentivised to grow is not controversial. Neither is it a new idea! Every official report, plan and programme for Government implicitly links to encouraging enterprise, incentivising investment and expecting increased employment opportunities. However, responsibility and understanding of the dynamics and causation is critical if some form of constructive intervention is wanted. There are two extremes in a debate about intervention. One is that the businesses in the private sector should themselves take more steps to expand. The other is that, to offset the degree of existing market failure (or make expansion more profitable), government should devise well-chosen incentives to business expansion. Neither of these extremes is attractive. Some elements of self-help must be engendered but there are aspects of the environment for business where initiatives need to come from agents of Government. Not a Whitehall task Signs of confused thinking and unrealistic expectations can be found in some of the political pleas on actions to grow the private sector. The hope, since growing the private sector is a key objective, that Whitehall departments will prepare a coherent implementation plan (with extra funding) for the NI Executive is mistaken and a dangerous illusion that the initiative does not lie with the Executive. Whitehall departments may have a part to play but this must be in a supportive role. The key levers to improve the economic infrastructure are all delegated to Stormont. Only through variations in taxation is Whitehall involved. Growing the private sector (where it merits Government action) is a devolved administration-led responsibility which could be supported by Whitehall taxation measures. Of course taxation measures can be significant as the debate on possible corporation tax devolution, tax allowances for innovation and R&D, and enterprise zones have shown. Home grown responsibilities While the advantages and disadvantages of seeking the devolution of corporation tax do need to be carefully evaluated, that debate should not obscure the importance of the full range of topics which determine the underlying competitiveness of local business, whether in labour costs and skills or other operational costs and charges (such as rates, energy, water, transport and the whole spectrum of endogenous business services). Even if corporation tax becomes devolved, on its own it would not offset an uncompetitive structure of costs and poor productivity. The tax debate is not a single 'magic potion' and the costs of reduced public sector revenue, along with the diffuse spread of the tax beneficiaries in existing businesses, poses a trade-off with an uncertain outcome. Growing the private sector remains, whatever the qualifications, an important objective. Misrepresentations The misrepresentations of the current state of the private sector do not help in contributing to an informed debate. First, the private sector is, even now, a much bigger player in the economy than the public sector. Private sector employers provide 68% of all jobs: the public sector provides about 32%. The careless language that repeats a claim that the public sector is 70% of the local economy is unhelpful. The public sector total spending, including funds for things such as social security is equivalent to about 70% of GDP. The public sector itself directly contributes just over 30% of GDP. Second, the suggestion that the private sector is too dependent on public sector support is a generalised subjective statement that is difficult to quantify. Suffice to add that support from public funds for business (excluding farming) is only marginally higher in Northern Ireland than in other regions. Third, the most critical comparator, suggesting that the productivity in the private sector is too low, is complex and ambiguous. The restatement of this feature in a form that points to lower productivity than in other regions lends itself to worrying conclusions that, almost an evitable consequence, private sector businesses will be less profitable than elsewhere. While some businesses may operate less profitably because of organisational or productivity failings, the more important conclusion is that Northern Ireland has a business sector structure which relies, more than elsewhere, on lower value-added occupations. The structure of the sector generates a lower output per employee but that is not necessarily lower output in like for like occupations. Strategies without implementation Growing the economy is not a new objective. Enterprise Minister Arlene Foster, chairing the special sub-committee of the Executive, has assembled a team of experts to give advice on developing public policy and strategic thinking on the local economy. Led by Kate Barker, with six colleagues, this expert group is asked to develop an over-arching Economic Strategy. One of the particular tasks is to advise on strategies and policies to implement the conclusions of the Independent Review of Economic Policy as announced last January. This sequence of one review leading to another for advice on implementation is a cause for concern. For the last 50 years, Northern Ireland administrations have tried to improve economic performance and lift living standards. Reports, expert groups, and strategies on the local economy are heavy on library shelves and now, more likely, in the memories of electronic files. Each Minister, or Permanent Secretary, who inherits responsibility for local economic policy tends to ask for a re-examination of the situation. Perhaps there is now enough evidence from the cycle of reports, recommendations, conclusions and moving to another report, to look for fundamental lessons. Two recent reports, first, the 1999 document usually known as 'Strategy 2010', chaired by Sir Gerry Loughran, and, second, the Independent Review of 2009, chaired by Vice-Chancellor Richard Barnett, point to the repetitiveness of the conclusions. First, the analysis and generic conclusions are very similar: second, after a ten year gap effective UK catch-up is minimal. That converts into a bigger question: is the failure to implement effective change a reflection on an inadequate competence to deliver policy changes or is it because the local economy is incapable of the necessary changes? Differences between incompetence and lack of capability are both uncomfortable prospects but the implications do differ. Perhaps this distinction is a critical challenge for the new expert group working under Kate Barker. Sound familiar? In March 1999 the Government published the 'Strategy 2010' report by the economic development strategy review group. Some of the document's key recommendations (below) bear more than a passing resemblance to goals set out in more recent reports such as the 2009 Independent Review of Economic Strategy - perhaps illustrating that the pace of change has not been quick.
  • Too much of our manufacturing is in sectors which have poor growth prospects or are vulnerable to low cost competition. The balance needs to shift towards high growth, high value-added sectors.
  • The private sector of the economy is too small compared to the public sector: this balance needs to be redressed.
  • Educational standards in the lower ability ranges are low by international comparators and our technical education is not providing the levels of skill that industry needs.
  • Our firms spend too little on R&D and are less likely to innovate than their competitors.
  • The Corporate Tax regime in Northern Ireland (as in the rest of the UK) reduces our attractiveness to inward investors compared to the Republic of Ireland.
  • We must equip ourselves for the knowledge-based economy of the future, with a better education, higher skills and a commitment to R&D and innovation.
  • [We should] rebalance our incentives to existing industry to: put less emphasis on investment grants; encourage the use of private equity finance; provide enhanced tax incentives to encourage profitability.
  • [We should] create a single industrial development body to cover the services currently delivered by IDB, LEDU, IRTU and the company development side of T&EA.
  • A proposed Economic Development Forum should have responsibility for monitoring and adjusting strategy.

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