Belfast Telegraph

Northern Ireland stands at an important economic crossroads

By Esmond Birnie, chief economist PwC NI

At the risk of sounding a bit like Prime Minister Terence O'Neill in a speech he made in 1968, our economy really will stand at the crossroads in the next few months. The decisions we make now will strongly influence not just the next five years but probably the next decade or even longer. And this is not simply because of the EU Referendum - other internal and external developments are also of very great significance.

Where we've come from

The recovery in the NI economy really began around mid-2013. We are therefore coming towards the end of the third year of that recovery. Employment has grown and unemployment has fallen, output continues to grow. In 2014-15 and 2015-16 the performance of Invest NI, especially in terms of inward investment, was very strong.

An incomplete economic recovery

But, and here we come to the crossroads, it is also significant just how limited that recovery has actually been. Once we allow for the depth of the recession during 2007-9 here in Northern Ireland there is a very large part of the mountain still to be climbed simply to get back to where we once were. There has been something of a gulf between the performance of the UK economy and the Northern Ireland regional economy. And then there is the reality that the global economic recovery is not that solid. The world economy seems to be dependent on close to zero interest rates (in some cases, even negative ones). China has been the key driver of growth but that motor is now slowing down. The fundamental weaknesses of the eurozone have not really been resolved.

Poor productivity

In fact, policy makers and businesses here have to address a host of fundamental or strategic weaknesses which persist notwithstanding the economic recovery. Northern Ireland, for example, has one of the lowest levels of GVA per worker or productivity across the entire developed world. And Northern Ireland's export markets are still relatively undiversified with the share of exports going to the BRIC and largest emerging markets being much less than the UK average.

Trading challenges

This point has some relevance to the Brexit debate. Northern Ireland is for sure much more dependent, in proportional terms, on exports to the rest of the EU (in 2014 59% of all goods and services exports, with 37% going to the Republic of Ireland alone). Brexit could - depending on what terms of market access are negotiated - threaten short run disruption but in the longer term could Northern Ireland be jolted to look to more distant markets?

The available estimates suggest that the European Single Market has added about 2% to UK GDP which is certainly valuable.

Crucial decisions

In the light of all of this, there are challenges which need to be met and opportunities which need to be grabbed. In particular, after the Assembly election on May 5 there will be a new Executive alongside a new (nine instead of 12) departmental structure.

The next Programme for Government should include a smaller number of targets but these targets should be more meaningful in the sense that they will emphasise output and delivery (rather than simply measuring inputs to the policy process). It would be very good if we could have targets relating to productivity and the employment rate.

Last week saw the UK Budget for 2016. In a very tight fiscal corner the Chancellor managed to produce a combination of cuts in current spending and higher infrastructure spend alongside a range of tax increases. It is far from inevitable that he will hit his target of a Budget surplus in 2019-20. Much will depend on whether the growth in business tax receipts matches the Treasury's projections.

For our own Executive, it is probably crucial that a multi-year Budget is put in place. We already have an agreed Budget for the next financial year, 2016-17. The question is whether a Budget can be agreed to cover the rest of the next Assembly's mandate.

A multi-year Budget would encourage more certainty and stability. It could also play a very valuable role as evidence to the Treasury that the Northern Ireland finances could indeed survive the strain of corporation tax devolution. Agreeing a medium-term Budget will be challenging given that allowance has to be made for the traditional spending pressures (notably health) to which is added the impact on the block grant of devolving corporation tax.

In short, a busy couple of months lie ahead.

Belfast Telegraph