Public cuts will bring private pain
With further government spending cuts on the cards businesses in Northern Ireland reliant on public sector contracts will face a tough time making up any lost ground
A cut in corporation tax for Northern Ireland of perhaps 10% may be on the cards should the Conservatives win the General Election.
But the sting in the tale is that this would be matched by spending cuts that would be in addition to the severe reductions government departments already face.
Shadow secretary of state for Northern Ireland, Owen Paterson, explains: “The Conservative Party has been saying for some time that a radical, long-term strategy is required to end Northern Ireland’s dependence on the public sector and to boost private sector investment. Northern Ireland faces some economic challenges that are unique within the United Kingdom.
“That’s why Conservatives and Unionists are currently looking at ways in which we could turn Northern Ireland into an enterprise zone should we win the election. Obviously given the terrible state of the public finances, any changes must be affordable. But we will look closely at [recently published] proposals [from the Northern Ireland Economic Reform Group] which will help to inform our strategy for reforming corporation tax.”
While the strategy would presumably attract greater inward investment, the UK Government’s annual subvention to Northern Ireland would be cut, probably by around £200m a year.
This is on top of what the Department of Finance and Personnel calls ‘pressures’ of £367m on departments’ revenue budgets for 2010/11 alone, which arise in part from the impact of an equal pay settlement and departments improving financial controls, so reducing underspends that usually provide financial flexibility.
But over £200m arises from the decision not to implement water charges, the revenue from which had been factored into government budgets.
As well as this, UK public expenditure will fall and that will feed into reduced support for Northern Ireland.
Richard Ramsey (above, left), chief economist of Ulster Bank, explains: “The UK will see public expenditure cuts of about 10% in total from 2011/12 for three years. That is a real term cut of about 3% per annum. That would translate in Northern Ireland to a 10% cut in about half of Northern Ireland expenditure — because only half of expenditure here is under Northern Ireland control.
“That would mean £500m to £750m in cuts over and above the current cuts the Executive is dealing with at the moment. There will be a significant squeeze going forward up to 2020.”
Ramsey argues this requires radical action. “You need strategies that provide tailored solutions for regional problems,” he suggests. “The merits of having regional public sector pay and regional social security benefits need to be openly debated. Regional public sector pay would be an extremely powerful economic development tool for the Executive and is also attractive from a public expenditure viewpoint, particularly if Northern Ireland could retain the savings to be invested elsewhere.
“Northern Ireland must also look at new sources of revenue. If you introduced a public sector pension levy in Northern Ireland, as you have seen in the Irish Republic, could Northern Ireland keep that and invest that in an infrastructure fund? Social security benefits are set at a national level, whereas pay rates in Northern Ireland are one of the lowest of any UK region.
“The gap between the two is narrower in Northern Ireland than any other UK region: as a result the disincentive to work is greater here than elsewhere.
“If we introduced regional social security payments, would we be able to keep the savings to pay for schemes to get the long-term unemployed and economically inactive back to work?”
The construction sector is in line for a second severe blow, following the collapse of private sector house building.
“A lot of Strategic Investment Board plans going forward to 2020 were predicated on asset sales, which now have to go back to the drawing board,” says Ramsey. “The original ISNI [Investment Strategy for Northern Ireland] plans can’t be delivered in my view.”
Until now, some construction activity has been maintained through the building of roads, the Fermanagh Hospital, schools and social housing. When this slows down, then chartered surveyors and the business services sector will suffer, as well as the construction industry itself, he predicts.
PricewaterhouseCoopers (PwC) believes the severity of the impact on most public services depends in part on whether the Executive ring-fences health spending.
If it does, says PwC chief economist in Northern Ireland, Esmond Birnie, “the other departments — roads, schools, universities, social housing, environment and culture — face brutal spending cutbacks of between 10% and 20%”.
The impact on businesses of public sector retrenchment is already being felt. Capita has warned that 65 jobs in Belfast are at risk relating to its contract to recruit staff for the Northern Ireland civil service. With a temporary freeze on some staff recruitment, there is less need for recruitment support.
Jackie Henry, an associate partner in Deloitte Belfast, suggests that the experience of Capita is a sign of what may be felt across the wider private sector.
“This was one of the first [Northern Ireland public sector] outsourcing contracts,” she points out. “That is really just the tip of the iceberg. We have not seen what all the rebalancing of the books will do. The main impact for the private sector to date has been a slowness in public sector decision-making, rather than actual cuts.” Henry points out that there are commercial opportunities from the crisis.
As public bodies struggle to make ends meet, the attractions of contracting-out shared services to private companies will grow if this cuts costs.
“There are positives for the private sector in this,” she says.
PwC’s Birnie agrees.
“When a spending ice age descends, the entire public sector needs to be subjected to ‘zero based accounting’,” he says. “Instead of trying to justify individual cuts in service delivery, you take every item of public spending and ask, ‘Should government be doing this at all?’, and, even if it should, ‘Can it be done and delivered in a better way’,” he says.
But, warns Henry, the Executive has little time to make up its mind about how to balance the books.
“Those decisions will have to be made,” she says. “They can’t be avoided.”