Posted on Sunday 16 October 2011 by Ulster Business

Executive challenged on economic policy

The EAG has delivered its recommendations, but are the Executive listening?

John Simpson analyses the advice recently delivered to the Executive on economic policy and asks where next for the economy if those recommendations are not acted upon.

Executive Ministers are explicit: the economy is the priority! These assertions deserve to be challenged. The balance of decision making by the Executive is more generally on social priorities such as concessionary travel, free prescriptions or avoiding water charges, than on policies orientated to the economy, such as skills, infrastructure, fiscal arrangements and efficient government services.

The Executive Sub-committee on the Economy, chaired by Arlene Foster, on 12 September, met the members of the specially appointed Economic Advisory Group which is chaired by Kate Barker.

The Economic Advisory Group (EAG) presented an updated assessment of policy priorities which they commend to Ministers. The agenda and evidence from the EAG gives some comfort to the Executive on aspects of economic policy but their conclusions are also critical. The language is measured but the thrust is that the Executive’s actions could be stronger.

The EAG offers a brief but pointed analysis demonstrating, first, that Northern Ireland is having a very serious recession, worse than most UK regions and, second, that there is an urgent need to strengthen Northern Ireland’s economic competitiveness.

Improving competitiveness is, of course, a wide-ranging agenda. The test of the relevance of the EAG is how successfully they have pinned down the operational levers that may give this result. Why, for example, is competitiveness a serious question (which it undoubtedly is) when average earnings are lower than some other UK regions? The answer lies in the skills mix, the input of value added, and the effective cost per comparable unit.

To the credit of the EAG, there is an explicit emphasis on building the private sector and doing that by improving the export competitiveness of manufacturers and service providers. Although the EAG sums this up as a need to increase exports, for clarity, they should define exports as increasing external sales to other regions and countries. Sales to Northern England are no less important than sales to countries in northern Europe. When the EAG refers to exports, the wider meaning is presumed.

The core of the EAG advice hinges on how competitiveness can be improved and the delivery mechanisms to gain these advantages. In both respects, the EAG is helpfully refreshing if, in some parts, lacking adequate detail or somewhat incomplete.

SWOT analysis

The analysis of the EAG hinges on a comprehensive review of the current state of the economy in relation to five general headings: economic structure, innovation and R&D, enterprise, investment and skills. Each subject is assessed in terms of the usual SWOT (Strengths, Weaknesses, Opportunities and Threats) categories.

Whilst any SWOT analysis necessarily relies on subjective judgements, the suggestions quoted seem to slightly overstate the ‘strengths’ and understate the ‘weaknesses’.

The first statement on the strength of the local economy suggests that there is a ‘strong SME base, which has been getting stronger’. That claim could be contested: is it getting stronger? However, more specifically, the EAG might wish to consider the absence of any headline suggestion that there are weaknesses in the general economic infrastructure that might be a priority (although these issues occur in later references).

Also, there is no headline reference to general or selective measures on the cost of doing business in Northern Ireland. In particular, the EAG is silent on energy costs, which is an area where targeted policy might make a difference.

Nevertheless, the EAG does focus on the (in)efficiency of service provision (which includes planning services), infrastructure commitments (as formerly envisaged by the Strategic Investment Programme) and enhanced skill attainments for the active labour force.

Policy levers

The EAG assumes that the Treasury will approve the devolution of corporation tax to Northern Ireland and that this is an important new lever. The EAG goes on to emphasise that changes in corporation tax will not be dramatically effective in the short-term. Whilst the policy is negotiated and implemented, there will be at least a two or three year delay and other complementary policies must be developed.

With the corporation tax assumption, economic convergence with the UK will be induced by creating a more private sector orientated economy. The prospect for a stronger economy is welcome but, on its own, the hope of the tax change is an insufficient influence. The EAG adds: “It must be accompanied by the effective and timely deployment of an Economic Strategy that also prioritises investment in R&D/Innovation, skills, business growth and economic infrastructure, alongside other additional measures to stimulate employment creation.”

Criticism

The EAG has brought together a series of critical comments on the recent actions of the Executive.

On the budget: “we would have expected (in the budget allocations) greater priority to have been attributed to the economy departments (DETI, DEL, DENI and DRD)”. These departments had current spending budgets reduced by 2.85%; other departments averaged an increase of 0.43%. The Executive “could not realistically hope to stem the continued rise in unemployment if the funding to the main economic departments was targeted for reductions.”

On supplementing the budget: “it will be essential that the Executive realises additional resources, where possible, to lessen the impact of fiscal restraint (as part of the budget measures)”.They add that efforts to find further revenue streams should be explored. They do not add, although this writer would, that the Scottish example merits study.

On efficiencies: “DHSSPS, as the largest spending department, should arrange a formal efficiency savings plan.” Also, “the Review of Public Administration should be driven through to streamline governance and promote efficiency.”

On implementing the Executive’s economic strategy: The EAG members supported the overall vision of the strategy for 2020. However, “Having the right vision and direction … is only the first step. The critical issue will be … a clear and effective implementation plan. Of critical importance… will be identifying who carries responsibility for delivery and implementation.”

On proposed actions: “…a reallocation of resources is necessary”. Economic departments will need to prioritise spending towards supporting export sectors capable of achieving the expected results. And in a challenging suggestion, EAG questioned “whether Invest NI has the necessary skill set to ensure alignment with the new focus on high-tech R&D as the conduit for funds”.

Where next?

The EAG has signposted some of its agenda for the next years. This includes:

  • Assisting the DETI Minister to secure the best possible deal in a revision of EU Regional Aid guidelines
     
  • A work programme on enhancing the ease of doing business in NI. Including planning reforms and priorities for economic infrastructure
     
  • Detailed support for measures to enhance innovation and R&D, including modelling the impact of enhanced R&D tax credits alongside mentoring schemes
     
  • Ideas on how the skills gap with the rest of the UK might be reduced

 

Is the Executive listening? The mantra of the economy as a priority is wearing thin. The EAG offers a refreshing restart.

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