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Economy watch: Hokey Cokey continues over EU membership

By Richard Ramsey

Published 19/05/2015

Richard Ramsey, Ulster Bank chief economist
Richard Ramsey, Ulster Bank chief economist

They say a week is a long time in politics. Almost two weeks have passed since the shock election result delivered the first majority Conservative government since 1992.

While we now have certainty over the shape of the new Government, and many of its policies, we face even more uncertainty in other areas.

The next two years could be a very long and defining period in politics from an EU, UK and Northern Ireland perspective.

The failure to elect a Labour-led government means their planned increase in the corporation tax rate (to 21%), the introduction of a mansion tax on homes worth £2m+ and the reintroduction of a 50p income tax rate will not happen. In addition, the 'bedroom tax' will not be abolished.

Meanwhile, George Osborne will get his first opportunity to deliver a 'Blue Budget' - and the first Conservative Budget - since November 26, 1996. This will take place on July 8 and will be a vehicle for delivering the Conservatives' manifesto pledges.

On the tax side, barring U-turns, this means there will be no rise on rates of VAT, national insurance contributions and income tax. A coalition government would likely have seen these generous pledges watered down. In light of these tax freezes, one can expect a smattering of stealth taxes to be introduced sooner rather than later.

There is a strong incentive for the government to frontload the fiscal pain in the first two years of this Parliament, so as to ease-off in time for the 2020 General Election. The recent election effectively acted as a speed camera on the pace of austerity. Now that this has passed, the Chancellor is expected to put his foot down on the 'austerity accelerator'.

On the spending side, the cuts in departmental spending over the next two years are expected to be more severe than any of the cuts delivered in any year over the last five.

We will get more clarity on the UK spending cuts in this autumn's Spending Review (SR). This will set public spending totals for the next three to four years.

In turn, SR 2015 will determine Northern Ireland's spending allocations.

Welfare spending is also set to be cut by an additional £12bn, as flagged before the General Election. This will include a two-year freeze on working age benefits from April 2016, and a lowering of the annual benefits cap from £26,000 to £23,000. Further details will emerge in the coming weeks.

Given the state of the UK public finances, it would be desirable to have no major political distractions to deflect the government from addressing this priority. Unfortunately, this will not happen.

The return of a Tory government with an outright majority and enhanced mandate means an 'In-Out' EU referendum will be delivered by 2017. However, from a business and political perspective, the sooner the period of uncertainty ends, the better.

Last year, UK politics was dominated by debating the pros and cons of the Scottish referendum on independence, or 'Scexit'. The next two years will focus on the merits or costs of the UK remaining in the EU or leaving it (Brexit).

Given the success of the Scottish National Party (SNP) in the latest General Election, the Scexit issue has not gone away. We can expect Westminster to provide Scotland with additional fiscal powers. This will trigger a fiscal powers arms race within the UK's cities and regions. England is now joining in on the devolution party. Westminster has already sought to devolve greater fiscal powers to areas of England, including the development of the so-called 'Northern Powerhouse'.

In addition, 2017 remains a key date for Northern Ireland, too, as corporation tax setting powers will be devolved by then. However, this is dependent upon delivering on a number of interlocking agreements which formed the Stormont House Agreement. Delivering welfare reforms that have been adopted in the rest of Great Britain, including by the anti-austerity Scottish National Party (SNP) in Scotland, are central to this.

Reform of the EU is seen as essential. However, welfare reform is controversial in Northern Ireland, with the Stormont Executive failing to agree a way forward. This has led to the build-up of a financial black hole of around £500m, which could necessitate Northern Ireland to announce its first Emergency Budget at next month's Monitoring Round.

It could be said that the next two years are set to be characterised by the lyrics of a well-known 1940s dance hall song. When it comes to the UK's relationship with the EU, the left want in, the right want out, and some on the right of the middle want to shake it all about (ie, introduce reform).

And there's plenty of in/out deliberation to be done at a UK domestic and Northern Ireland political level too, with the question of Scexit and even Stexit - where some have speculated that the welfare reform impasse could lead to the reintroduction of direct rule.

So we're set for Hokey Cokey politics. Uncertainty is what it's all about.

The view from Dublin

By Dan O'Brien

There is acute sensitivity in Ireland to how we behave towards powerful foreigners.

“Tugging the forelock” is an expression that is often used in this regard. That charge is made when there is a  perception that an Irish person (or government) is insufficiently assertive towards a foreigner (or a foreign government), or — worse still — appears to be behaving subserviently.

In recent years, in the context of the crisis in Europe, the charge has been made frequently in relations to burning bank bondholders, the EU-IMF bailout and other related matters. Those making the charge have often advocated aggressive unilateral responses.

More often than not, tough-talking advocates of such action grossly overestimate the power a small country like Ireland wieldsin the world.

Overplaying one’s hand can easily result in things turning out worse than a more restrained approach. And they fail to see that recognising one’s own weakness is a sign that one understands the hard realities of power relationships.

Much of the sensitivity to any appearance of subservience, and a desire to talk tough to powerful foreigners, almost certainly has its origins in the historical relationship between this island and its neighbour.

Thankfully, Anglo-Irish relations are better than they have ever been since we exited the UK almost a century ago.

But since the British people decided 12 days ago to elect a government which could preside over an exit from the European Union (left), Ireland has been placed in an invidious position.

Anyone who thinks seriously about Irish interests can only conclude that a British departure from the EU would be very bad for this island. It would, among other things, take a toll on our prosperity by eroding east-west economic links, it would destabilise the North by accentuating the border and it would further increase Germany’s already excessive influence within the EU.

The only upside to a British departure is that Ireland will become more attractive for businesses seeking guaranteed and unfettered access to the EU single market, still the biggest market in the world. That is because there is very considerable uncertainty over the kind of economic relationship Britain would have with the EU as a non-member. Many members already ask why they should give one country all the benefits of membership (ie full access to the single market) without the costs of playing by the rules.

Belfast Telegraph

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