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Accept that mending the economy is going to hurt

By Neil Gibson

Published 20/10/2015

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In my role as economic advisor to EY in Ireland, I was in Dublin last week speaking at a Budget 2016 event and providing economic commentary. There was a palpable sense of an economy that has turned a corner and is looking at better times ahead.

According to Oxford Economics, Ireland is set to grow at 5.8% in 2015 and 4.3% in 2016, retaining its position at the top of the eurozone growth league table. This growth will likely be close to three times the comparable figure in Northern Ireland.

So what lessons should Northern Ireland learn from the Irish experience? Does this turn of events contradict the need to look at anti-austerity policies more carefully (as I argued in my last column)?

The Irish turnaround is welcome, but no one should be under any illusions about just how painful conditions have been for many people over the past eight years, and continue to be for many.

Unemployment topped 15% and would have hit 20% without significant outmigration, many people are still in negative equity, every citizen saw substantial cuts to their income and public service budgets were also heavily cut.

The damage of this course of action at a personal and societal level should never be discounted - the scars will last a lifetime for many. The most significant tax cut in the Irish Budget 2016 was to Universal Social Charge, a tax only administered to bring spending and income closer into line.

It is worth reflecting that Northern Ireland never endured such a tax rise (or cuts in spending budgets of the scale of the South). Northern Ireland can therefore count itself lucky to have avoided the sharp pain experienced in the south, but it is not immediately apparent in the local economic discourse that there is any sense of good fortune. In fact, the narrative seems to suggest we are a special case suffering more acutely than elsewhere. Sticking to the pure economic facts, this is not an easy position to defend.

The debate over welfare is highly emotive, but it strikes me as odd that during the debate hardly anyone has looked at the rising numbers on, for example, Disability Living Allowance, and consequently the rising welfare costs during a period when the economy has actually been growing (a notable exception being my fellow commentator Richard Ramsey in this series). The principal debate needs to be around a long-term sustainable welfare state with sufficient resource to care for the most vulnerable in society.

Northern Ireland has to be considering tax rises locally to meet the growing need, but in tandem with a strategy to help and support those who may possible be able to transition out of the benefit system with the right support. We have to understand the increases, the reasons for them and have a strategy to meet future costs. We either show leadership to plough a different furrow now or we accept the national changes - choosing neither seems hard to defend.

Given the backdrop of more talks, resignations and a policy impasse, it was refreshing to see the CBI commit to paper some ideas of what might make a difference in its Punching Above Our Weight: 12 steps to create a more prosperous Northern Ireland paper. It is always easy to criticise the ideas of others, much harder to put positive suggestions forward, and in this regard the paper should be warmly welcomed. I support much of what is in the report, though as an economist it is important to point out the costing of some actions (including the corporation tax reduction) is not covered.

Helpfully, the document suggests an increase in fees as a possible way to meet the higher education funding problem. My personal view is that this would be welcome. To paraphrase the movie Argo, it is the best bad idea.

It would be wonderful not to need to raise fees, but educating fewer people with substandard equipment and potentially a reduction in the quality of staff - and encouraging a greater outflow of students to Great Britain - seems a much, much worse outcome than asking people to invest in their own future by means of a loan only repayable upon their expected success. The first point in the CBI document is a push for setting of a rate and date for the reduction of corporation tax, but the thorny issue of who pays is not addressed.

Would business give up some of their subsidies in return for a lower rate? It is not surprising that the 12-step report does not detail costing options or volunteer businesses to take cuts.

We should expect most suggestions to side-step funding issues or look to others to take the pain, but ultimately we are all going to have to make some adjustments to realign the economy.

Northern Ireland is currently having a 'big conversation' about education, but really the same debate needs to happen about the wider economy, collating all of the suggestions and determining an outcome that will probably not please everyone, but at least it will be a choice.

If those choices cost more of our own money, then perhaps in time we, like Ireland, will come out the other side and be able to roll back some of the taxes as we begin to enjoy the benefits of a more prosperous economy.

Belfast Telegraph

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