Belfast Telegraph

Tuesday 25 November 2014

Rebalancing the economy needs a steady approach

Belfast city centre's VIctoria Square
Belfast city centre's VIctoria Square

The argument that the Northern Ireland economy needs to be rebalanced is too simplistic. The economy is unbalanced because the public sector is too large relative to the size of the private sector.

That argument calls for an understanding of the dependence of the public sector on transfers of funding from UK taxpayers with a large benefit to Northern Ireland through the redistributive effect of the Barnett formula.

If the economy was rebalanced, meaning if the private sector in Northern Ireland was larger, the extra inflow of funds from the UK Exchequer would be smaller. More importantly, if the private sector was larger, the extra economic activity would generate jobs, higher incomes and reduce the gap in overall living standards with other UK regions.

There are two overlapping strands to a debate on rebalancing the economy. First, how might the private sector be incentivised to grow? Second, since the public and private sectors are interdependent, what are the implications for the public sector?

The argument has been made that the rebalancing debate is effectively only about the private sector. The public sector might simply be maintained as it is, or left alone.

That dual economy assessment is deceptive for a number of reasons.

The public sector is a large customer of the private sector and both sectors recruit in a single labour market where there is considerable mobility. Some of the services for the public, currently provided within the public sector, might be competitively outsourced.

Because of the strength of recent advocacy, the debate about the role and scale of corporation tax changes must be developed.

The structure of all official policies affecting private sector businesses needs to be reviewed, obstacles removed and incentives reconsidered.

Compared to Scotland, the number of public service employees in Northern Ireland (and excluding the numbers employed on policing and justice) is nearly 30,000 higher than might have been expected.

Whether this is an adverse comment on public sector efficiency or a consequence of maintaining services 'in-house' rather than outsourcing, needs to be examined and conclusions drawn.

If the private sector is too small, one of the ways in which its competitiveness might be improved would be to allow it to compete on rigorously tested criteria to grow the domestic market place.

The deceptive analysis of how to rebalance the economy, which simply argues that the private sector is too small and that the focus for policy making should be on improving profitability in order to capture larger export markets, is inadequate.

The new minister with the main responsibility for economic policy has an immediate challenge to tackle. A consultation on a review of economic strategy has been underway. Now, conclusions must be drawn and proposals made to the Executive.

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