New governments are at the helm of both Northern Ireland and the Republic’s economies. What should the new kids on the political block be tackling when it comes to boosting business? Our two economists ask that very question
Richard Ramsey, Chief economist, Ulster Bank
Parallels with the 1980s have continued to abound since I made comparisons between present events and that decade in last month’s column. Portugal, for instance, has since succumbed to the inevitable bail-out and will require assistance from the IMF as it did in 1983. Man City has made it to its first FA Cup final since 1981.
One of the best-known films of the 1980s was Back to the Future, in which Marty McFly accidentally gets transported back 30 years in Doc Brown’s time machine, and the challenge for Marty and the Doc is to get back to where they started. Here, there are some interesting parallels with the Northern Ireland economy.
Marty (McGuiness) and the Doc (Paisley) became First and deputy First Minister in 2007 and their first Programme for Government was chosen as the vehicle to take Northern Ireland into the future. But through no fault of theirs, the economy, in many respects, now finds itself back in time.
Since 2007, we’ve had our first recession since the 1980s. Private sector output is back to 2003 levels. The Business Services and Finance sector has witnessed a 40% peak to trough fall in output. There has been a 60% peak to trough fall in house-building; back to 1994 levels. The labour market has also gone back in time, with around 45,000 to 50,000 jobs having been lost in two and a half years. Meanwhile, the dole queue is back at levels that pre-date the signing of the Good Friday Agreement (GFA).
The challenge for the incoming Northern Ireland Executive is therefore to choose a vehicle to get the economy ‘back to the future’ – ie back to where it was in 2007. But, quite simply, this will be a long, hard slog and will not be completed in the next assembly term.
Restoring the lost output and jobs from the downturn will take the best part of a decade. However, actions taken in the next four years will be very important.
In this respect, the last four years and the next should be like night and day with regard to fiscal austerity. Economies elsewhere are openly embracing unpopular but unavoidable policies. We, too, are entering the unpopular policy era, although a quick glance at the various parties’ manifestos might make it seem otherwise. Unpopular policies remain conspicuous by their absence. In this respect, if there was an ‘Economists’ Party’ standing in this Assembly Election, its manifesto would certainly look somewhat different from the others. What key issues might it look at?
During the period between the signing of the GFA and the start of the downturn, around 26,000 public sector jobs were created. This is equivalent to a town the size of Newry in just 10 years. It needs to be ascertained exactly where all of these jobs were created. Were they frontline or back office? How many were really needed and can be afforded? Pay flexibility should also be looked at, not least because the scale of public sector job losses could be limited as a result.
This political hot potato, which is of huge significance in terms of public expenditure and rebalancing the economy, will come to a head between the executive and the unions during the next term.
It doesn’t take a rocket scientist like Doc Brown to realise that radical cost reductions and revenue generation are required.
However, in the main, the headline pledges in the manifestos are based on securing and extending existing public expenditure commitments or delivering efficiency savings that were announced previously but not delivered. How will this be reconciled?
We have become overly familiar with the phrase ‘the economy is the number one priority’. However, are we sure what it means in real terms? In effect, it has become all things to all people — open to interpretation, pleasing everyone and threatening no one.
This is highlighted with the frequently cited view that the public sector is not too large, it is the private sector that is too small. This might be a bit like saying that there is no obesity problem; it’s just that some of us are big boned and everyone else is too skinny. During the forthcoming term, this mindset has to change. A spade has to be called a spade.
We will soon begin to see what having the economy as the number-one priority looks like. More importantly, what sort of ‘economy’ will the incoming Executive have in mind? Will it be the sort of economy where privatisation and profits are seen as dirty words and unequal pay for unequal productivity is scorned?
Or will the priority be an economy where the private sector is prioritised and the public sector streamlined?
Thankfully, while the economy has gone back in time, politically, huge strides forward have been taken since the 1980s, which is important from all perspectives, including the economy’s.
As a result, Northern Ireland is almost unrecognisable as a place in which to live, work and visit.
However, the key is to translate this progressive political approach into the economic policy sphere.
If the incoming Executive could jump in a time machine and go 40 years forward to see the consequences of its actions, or inactions, I’m certain it wouldn’t hold back from making the tough choices that our economy absolutely needs.
Geraldine Concagh, Senior economist, AIB Global Treasury
On February 25, the electorate in the Republic of Ireland (RoI) voted in a new government, made up of coalition partners Fine Gael and Labour. Their main policy agenda is set out in the Government for National Recovery 2011-2016 programme.
It is an ambitious list, as the new Government sets about dealing with the huge economic and social challenges that face the RoI as it emerges from its worst recession.
Top of the list is getting the public finances in order. These have been severely dented by the fall in exchequer revenue as a result of the economic downturn and the need to provide significant support to the banking sector though various recapitalisation programmes.
In 2006, the general government balance/GDP ratio recorded a surplus of 2.9%. By 2009, this had turned into a deficit of 14.6% of GDP — a clear illustration of the scale of the deterioration.
The previous administration had already begun the job, with fiscal tightening of 6% of GDP in 2009 and 2.5% of GDP in 2010 helping to stabilise the underlying budget deficit at just below 12% last year.
Further fiscal tightening of €6bn or 3.7% of GDP this year should bring the deficit down to some 9.5% of GDP.
However, there is still much to be done and the government is committed under the terms of the programme agreed with the EU/IMF to reducing this deficit to below 3% of GDP by 2015.
The economy’s ability to return to a sustainable growth path is the key in terms of meeting this medium-term target. In this regard, recent data has been positive, with the economy returning to growth on a GNP basis in the final three-quarters of last year.
Meanwhile, on a GDP basis, after three years of contraction from 2008 to 2010, growth of 0.5% is anticipated this year and 2.0% next year.
Over the medium term, many commentators, including the Economic and Social Research Institute (ESRI), believe that, if underpinned by a robust export sector and a return to growth in the domestic economy, the RoI has the capacity to grow by around 4%, which will be supportive of Ireland’s ability to reduce its debt burden.
The Government must seek to underpin this by supporting existing areas of growth, in particular the export sector, while at the same time encouraging new sources of economic growth, including areas such as further development of the ‘smart economy’, R&D, cloud computing and alternative energies.
The Republic already has in place a highly diversified and flexible economy upon which to develop these new growth areas.
The RoI economy remains a very attractive location for foreign direct investment, and thus policy decisions must continue to support this.
The Government remains committed to the existing low corporate tax regime, as well as encouraging further improvement in competitiveness, thus building on the considerable progress that has already been made from large price and wage falls.
Furthermore, despite the fact that capital spending has been cut in nominal terms due to the pressures on the public finances, it is important that improvements to public infrastructure remain at an active stage of development, thus enhancing the productive capacity of the economy.
Another key challenge is the protection and creation of jobs. From 2000 to 2007, Ireland was virtually at full employment, with a jobless rate of around 4.5%.
By the end of last year, unemployment had risen to 13.6%, with employment falling by a cumulative 14% from 2008 to 2010.
Within this, there has also been a sharp rise in the structural unemployment level, as the labour market has been hit by the collapse in the construction sector.
This is something that the Government must tackle with work placement and jobretraining programmes. Doing this under the umbrella of tight fiscal restraint will not be an easy task, but the Government shortly plans to announce the details of a jobs initiative programme.
The Government is also seeking to restore confidence to the RoI’s banking sector through a comprehensive recapitalisation and restructuring programme.
One of the key objectives of this is to restore credit flows to allow the indigenous banking system to support growth and job creation.
As a result of the outcome of the recent Prudential Capital Assessment Review (PCAR) exercise, banks in the Republic will now be capitalised to very high levels, which should help restore confidence from both a domestic and international perspective.
As well as improving the backdrop for business confidence, consumer confidence must also be restored.
The latest consumer-confidence survey from KBC/ESRI shows its sentiment index improving considerably in March.
While any improvement is seen as tentative and fragile, and the index remains well below its historic average, the recent upturn suggests that the new Government is on the right path.
There is still some way to go though.