Belfast Telegraph

Thursday 21 August 2014

Recovery relies on policy review

New construction projects need to be agreed

Prospects for Northern Ireland in 2013 are slightly better as a result of the decisions by the Chancellor in his Autumn's statement last week.

Hopes in mid-2012 that the worst of the recession was over can now be seen to have been premature.

In 2013 there is a probability that Northern Ireland will face a continuing and deeper recession than other regions in Great Britain but it will be less severe as a result of the Chancellor's decisions.

The Chancellor has taken account of the suggestions by critics that greater priority should be given to measures to grow the economy. There is a complicated series of changes all constrained by policies to reduce the public sector deficit.

The most worrying feature of the recent changes in the Northern Ireland economy is the contrasting performance compared to the overall UK economy. The Northern Ireland public sector has avoided, so far, the job losses of a reducing public sector current budget. The Chancellor has now put more pressure on current public spending by a 1% cut in resource spending, costing Northern Ireland £40m in 2014-15.

Stormont has taken more of the recent spending cuts from to the public sector investment budget. Before the Chancellor's statement, some pressure to reverse that trend was evident in the announcement of the £200m package three weeks ago.

A more worrying contrast in the last year has been the increasing job numbers in the private sector in Great Britain at the same time as the private sector in Northern Ireland has contracted. Whilst the evidence is tenuous, there are questions about why the Northern Ireland private sector is not reflecting the Great Britain trend.

Since the level of real household spending is still falling (as prices increase faster than earnings), a recovery in NI will depend on being sufficiently competitive to sell goods and services in external markets or building additional employment on a larger capital investment programme.

There is now a stronger expectation that the capital investment programme can deliver some expansion.

The Chancellor's announcement of an extra £132m for capital in 2013-14 and 2014-15, when added to the slightly smaller adjustment planned by the Executive, could mean that the public sector capital programme may be (at least) £100m higher in each year.

In addition, the added impact of Government guarantees and a new option to introduce PFI projects should mean that the worst of the slump affecting the local construction industry can be ended.

New construction contracts could have the potential to create 2,000 extra jobs in 2013-14 and the following year.

The only proviso is a question about the forward planning of the public sector. Are there sufficient high priority projects which are 'shovel ready' and not subject to planning delays? Sammy Wilson and the Strategic Investment Board have a shared responsibility to make sure that contracts can now be agreed to be effective early in 2013.

The impetus of an increased public sector capital programme is a welcome development.

Alongside the new emphasis on extra capital spending, the downside of the Chancellor's arithmetic shows negative implications for household real income levels (as price rises continue to exceed increases in earnings) as well as the continuing strategy of rebalancing social security spending so that the difference between earnings on low pay and entitlement from social security is widened.

Households on lower income levels, or social security, are expected to be about £200 worse off in a full year.

The permitted 1% increase in benefits for adults on social security will compare with earnings increases expected to average 2.2% in 2013. This differential policy will be controversial. Nevertheless Government policy is that social security levels (and budgets) must be further reduced, partly to increase the incentives for people to take lower paid jobs.

For Northern Ireland to recover from the recession, the many strands of official economic policy now need to be reviewed and strengthened.

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