Belfast Telegraph

Monday 22 December 2014

What the Executive can do to kick-start our stalled economy

Stormont parties are all against cutting office costs
Stormont parties are all against cutting office costs

The prophets of gloom are in the ascendency. The economic prospects this year are not good. There is no expectation that an external rescue package will be delivered. No large likely benefactor(s) are available.

Understanding the serious impact of the recession is an essential opening to a search for actions to ease its impact if not to put it into reverse and start a recovery.

That assessment must accept that there will be loss of jobs as businesses lay-off employees or in some cases close.

Unemployment is increasing and increasing faster in Northern Ireland than elsewhere in the UK.

Unemployment, however, is lower than in the Republic of Ireland where the financial crisis has hit harder.

Alongside higher unemployment there is the less easily quantified impact of a fall in family incomes either as a result of pay freezes (or reductions) or as a consequence of unwelcome inflation in consumer prices.

Real household incomes in 2012 may be over 5% lower than a year ago.

The recessionary trends combine the loss of jobs in the private sector and the reduced real incomes of all employees with, third, the growing significance of the capping of public sector spending whether for goods and services or social security systems (including housing benefit).

From this starting point, what can be done... and by whom?

The core drivers of economic activity are:

  • current spending by domestic households
  • current spending by government
  • exports of goods and services (spending by others on things from here)
  • capital investment by businesses or households
  • capital investment by government

One negative influence on the economy is the degree to which local consumers purchase goods and services from external sources - imports, current and capital. Of the five drivers of the economy, two are outside significant local action. Domestic households cannot be expected to increase their spending. More likely it will reduce as incomes fall and households tighten budgets to resist extra borrowing.

Current spending by Government is capped by the limits on the Stormont budget. Indeed there is a case for a greater squeeze on current government spending in order to release more funds for capital projects that help rebuild the economy. The Stormont Executive, particularly the Department of Enterprise, Trade and Investment (DETI), has seized the most obvious possible source of boosting the economy - greater external sales of goods and services and exports.

Invest NI has put increased effort into incentivising businesses to find new and bigger markets outside Northern Ireland.

There is good evidence that, within the constraints of permitted assistance, a more positive approach to a wider range of potential clients has emerged from Invest NI. There are examples of some businesses that are already growing. Export competitiveness is increasing, partly as sterling depreciates. The food industries and some engineering businesses are demonstrating that not everywhere is facing a bleak recession.

Whilst Invest NI must tread carefully, a logical extension of its motivation would be to encourage more import substitution. This is more acceptable possibly by local chambers of trade.

Potentially the largest change open to Stormont intervention lies in increasing government capital spending, particularly to speed up the development of infrastructure. This could be managed in different ways.

First, government current spending has still not been subject to a critical review of priorities. No McCarthy-type scrutiny has been applied which might release more current resources to transfer to capital.

Second, the Executive has scope to increase the amounts borrowed to finance extra capital spend.

Whether as an explicit Treasury approval or as a variant on public private partnership (PPP) funding, a temporary two/three year boost would be helpful.

The local economy is in trouble. Because of the structure of the economy, the impact of recession is greater than the UK average.

That makes life difficult. But it does not mean that the Executive and local stakeholders are impotent.

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