Posted on Monday 17 December 2012 by Ulster Business

John Simpson

The regeneration of Belfast city centre under the Belfast Streets Ahead project recently won recognition in the RICS awards but retailers in Belfast continue to be hit by subdued consumer spending

Northern Ireland is experiencing a worse recession than most other regions of the UK. Only in comparisons with north-east England or the whole Irish economy is there any relative reassurance in comparative terms.

Of even greater concern is a growing awareness that economic recovery will be slow and handicapped because of local features that are making the impact of the recession larger.

In some respects, the depth of the recession in Northern Ireland has been worsened because of decisions and actions generated in Northern Ireland. Similarly, any recovery will depend not just on external decisions and actions but also on a series of changes in Executive policies.

The impact of the current recession in Northern Ireland differs in degree to other regions for two key reasons. First, the recession in domestic property has had a greater impact because Northern Ireland had a much larger house price inflation in the years 2005-8, when average prices nearly doubled, and this has been followed by a much bigger reverse adjustment to bring prices back to levels comparable elsewhere.

Second, in a co-incidence that has had unwelcome consequences, the newly devolved Northern Ireland administration enjoyed a period of higher public sector spending, current and particularly capital, in much of the last decade. This larger public sector spending unhappily peaked just as the UK Government introduced the Comprehensive Spending Review with major reductions for the years after 2010-11. Over the years to 2014-15 public sector capital spending is falling by 37%.

Combined, these two changes would have been enough to hit the economy hard even without the further impact of the monetary and fiscal crises affecting the UK budget and much of the demand (and trading opportunities) in western European economies.

The continuing recession from 2009 is unlike previous economic cycles. The recovery process will be slower and more difficult to manage. Its management will call for much more comprehensive policy adjustments than would come from the normal macro-economic management of the UK economy through the UK Treasury. This will also need to impact on the behaviour of the devolved Governments in Scotland, Wales and Northern Ireland.

The recovery in Northern Ireland will be more difficult to generate because domestic demand has been more seriously handicapped by the housing crisis than has yet been appreciated. It will also be more difficult to manage because there is an unpopular adjustment needed to make public sector finances more sustainable. The ambition to enhance public services must be reconciled with a long-term need to reduce the budget imbalance with unsustainably high exchequer borrowing, which is a battle still not convincingly won either for the UK Government or its devolved administrations.

Economic recovery, if or when it is generated, might come from four sources:

• increasing levels of exports of goods and services (to GB or external markets).
• increases in current demand from domestic consumers.
• increased spending on investment by businesses, government or individuals.
• increased current spending by government.

Whilst it would be reassuring if exports were buoyant and increasing, it would be an unexpected success story if local competitiveness was strong enough to rely heavily on this outcome. Admittedly, an ambition to gain more exports through competitive improvements must be a central effort, but that alone will only be part of the process.

Also the other possible sources of recovery must be heavily qualified.

Will domestic consumers, local households, be a source of increasing demand?
Real household incomes have fallen in the last three years both as a result of pay freezes or pay pauses and as price inflation has more than matched income changes. At best, domestic demand, if based on current incomes, will remain restrained.

Much more significant, for the immediate future, is the overhang of negative equity in the housing market. As a result of the particular nature of the private sector housing crisis in Northern Ireland, the negative equity overhang is proportionately much larger than in any other UK region. 80,000 domestic properties were purchased in the three years 2006-2008. Even if, on average, those properties would today sell for £40,000 less, this represents an overall paper 'loss' of £3.2bn, or the equivalent of over 10% of total annual personal income.

This negative equity has implications for the housing market and also for domestic spending. Understandably, even if a household continues to receive an anticipated income, there is a powerful reason why current spending would be constrained. Then, add to these features, the consequences of job losses or apprehension about employment prospects.

Domestic consumer spending is not likely to be a significant source of recovery in the next year.

Is there likely to be increased investment spending by businesses, government or individuals?

Capital spending by Government, on the Executive's published plans, will stay near to £1.2bn for the next two years and this is well below the record spending levels three years ago of over £1.6bn. A critical issue for the Executive is whether, and how, it could change local priorities to lift the future capital budget.

Future investment spending by businesses and individuals (for enterprise development or new housing) is likely to be restrained until the UK and EU economies begin to recover. Local actions to attract more external investment, such as Foreign Direct Investment, or give more confidence to house building, are partially within the remit of the Executive. The policy debate must be about the practical scope for supplementary local supportive actions.

Theoretically the fourth possible source of recovery might include increased current spending by government. Since there is a continuing need to reduce the UK government borrowing deficit, there is more likely to be pressure to decrease current spending by government, which will apply to Northern Ireland through the Barnett parity principles.

The Executive has not yet adjusted its spending priorities to find ways of reducing current spending to release funds for capital projects. The reluctance to raise extra revenue (possibly through water charges and/or prescription charges) or slim down current spending across the spectrum of public services is becoming a self-imposed restraint. A comparison of changes in public sector employment, in the UK and Northern Ireland, points to a more significant readjustment in GB than locally.

Recovery from the current recession, which is less in evidence in Northern Ireland than other parts of the UK, will be slow and calls for more than straightforward macro-economic management. The Chancellor, on 5 December, has stated his case for the UK as a whole.

This year, more than in any earlier recession, the devolved administration has a responsibility to inject effective supportive recovery policies. Simply to wait for authority to change corporation tax rates will be inadequate. A 'Waiting for Godot' policy will leave Northern Ireland waiting too long.

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