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We can't afford to fall behind in the devolution revolution

Economy Watch by Esmond Birnie, chief economist at PwC

Published 09/08/2016

Northern Ireland must not fall behind other regions in the UK
Northern Ireland must not fall behind other regions in the UK

The devolution revolution - are the English regions leaving us behind? Former Chancellor George Osborne called it the Northern Powerhouse, but to government watchers in England it's just one element in a nationwide devolution revolution.

Either way, the dash to embrace "Devo," with its combined authorities, elected mayors and new fiscal powers is becoming the new normal in English local government. Driven by a combination of fiscal austerity, economies of scale and a fear of being left as the only council not to have asked for devolved powers, 69% of chief executives and council leaders believe they will be part of a combined authority by 2020.

"So what," could be the response in Northern Ireland, where we've had our own version of devolution between 1921 and 1972 and then again since 1999 and especially since 2007.

Actually, GB's devolution revolution matters quite a bit.

That's partly because of the scale of the UK regions, which - beyond London and South East England - represent about two-thirds of overall UK economic output. That makes them major markets for Northern Ireland businesses, with a potentially considerable impact on the growth rate of the Northern Ireland economy.

While the agenda is impacting right across England, the Northern Powerhouse is the poster boy for devolution. Comprising the three large regions in the North of England - the North East, North West and Yorkshire and the Humber - in 2014 it accounted for almost one-fifth of total UK economic output or gross value added (GVA) - around £300bn.

And while London delivers around £360bn of output with a much smaller resident population (or workforce), that means the level of productivity is lower in the Northern Powerhouse. Having said that, its output is still nine times that of Northern Ireland and about one and a half times that of the three Devolved Nations combined.

A second reason why the Northern Powerhouse is of interest is that aspects of economic performance are similar to Northern Ireland. The graphic illustrates trends in the level of living standards in various UK regions:

In terms of GVA per head, there are reasonably big performance variations between the three Northern regions. Performance in the North East is very similar to that Northern Ireland and, in comparative terms, Yorkshire and the Humber slipped by just over 4% points, comparing 2014 with 1997. Interestingly, GVA per head in Scotland remains considerably higher than in each of the three Northern regions in England.

A third reason why Northern Ireland should be interested in the Northern Powerhouse is because it provides an example of how a broad range of powers, including fiscal powers, are being used to drive change at the regional level. However, despite all the fuss around the devolution revolution, the Greater Manchester Combined Authority - aka the Northern Powerhouse, still has fewer powers than the Stormont Executive.

Yes, it is about to have a directly elected Mayor, control of some health and social care budgets, variation of and retention of Business Rates, regional planning and parts of criminal justice. But Northern Ireland has, at least similar powers, or potentially even more. Which poses the question, "if the Greater Manchester Combined Authority is transforming the relationship between Westminster and the English regions, is the Northern Ireland Assembly making the best use of the powers it already has?" The GB experience may also beg the question whether the Assembly has been too complacent on the question of super-parity - the opportunities which have been foregone to raise local taxes and charges to levels comparable to those in GB regions with similar levels of GDP per capita. The new Assembly is about to agree a Budget which will probably cover the period 2017-20. The experience of the 2011-16 Assembly was that unfunded spending pressures, especially from Health, can push a multi-year Budget towards deficit. It looks as though the new Executive starts with at least one very major spending commitment - £1bn extra spending on Health.

To this pressure will be added the impact on the Northern Ireland block grant of the cost of devolving Corporation Tax in 2018, the cost of the welfare reform transitional arrangements and some element of additional funding of public sector pensions.

In short, Northern Ireland could look to England, Scotland or Wales for examples of revenue raising, while the Northern Powerhouse also highlights just how important it is to have strong leadership, including political leadership, which can articulate a compelling long term vision for the region.

The new Executive could do worse that create a Programme for Government that will contribute to such a vision.

Next week, we hear from Andrew Webb of Webb Consulting

Belfast Telegraph

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