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Esmond Birnie

Hard choices to be faced after NI election

Esmond Birnie


Ballot boxes will be opened after voting takes place in the Assembly elections on Thursday

Ballot boxes will be opened after voting takes place in the Assembly elections on Thursday

Ballot boxes will be opened after voting takes place in the Assembly elections on Thursday

It is commonplace to say that elections in Northern Ireland prioritise constitutional issues over so-called bread and butter ones.

Before each election someone will say this time is different. Usually that turns out not to be the case. That said, post- election policy makers will have to wrestle with three areas of economic concern: inflation, tax devolution and competitiveness.

The political parties all acknowledge the seriousness of the cost of living crisis. There are right to do so but to the extent that inflation is caused by problems in world markets for food and energy there are limits to what can be done at the UK level, let alone the regional-devolved level.

Alongside sympathetic messaging about sharing the people’s pain, the party manifestos have suggested giving cash subsidies to households (sometimes non-means-tested). This is very much following the pattern set by the London government. In an imperfect world, such a policy response has something to commend it, certainly in terms of getting a quick response, but there are at least two drawbacks.

First, to the extent that the current energy crisis has a underlying cause, over-dependence on expensive overseas energy sources, wouldn’t it be better to invest some money to increase energy resilience in the future? Second, the now non-operational Stormont Executive has received £300m of Barnett money from GB but it is important to remember some of the subsidy assistance in England represents a loan to households.

By implication, some of the money which Stormont has now will have to be repaid a few years in the future. So, a decision to spend now may lead to a policy dilemma in the future as the Executive has to return some of the £300m: do we tax Northern Ireland households or cut back some other area of spending? So, there is a sense in which our politicians have prioritised the short term over the longer term.

In terms of tax devolution, looking at the glass half full the party manifestos do demonstrate some progress: they now frequently attempt to quantify the cost of some of their policy proposals. However, that progress is only partial. We rarely if ever see is an attempt to say how extra spending will be funded: by higher taxes or by cutting back spending elsewhere. The absence of domestic water charges is one sacred cow which should have been slaughtered a long time ago.

Given the recent inquiry by the Fiscal Commission it would have been appropriate if this election campaign could have included some debate about whether to devolve income tax powers and what might be done with such powers.

Perhaps that is a debate we will have after Stormont is re-established. In principle, the benefits of tax varying powers include: greater accountability (some matching up of decisions about whether to spend with decisions about how to fund such spending) and ability to incentivise desirable economic activity.

It is important to recognise that implementation of the protocol probably does constrain Stormont’s ability to use effectively policy instruments such tax variation, freeports or free trade agreements.

Sometimes people claim that the greatest challenge facing the Northern Ireland economy is the legacy disadvantage created by the Troubles, or the harm done by our peripheral location or damage created by Brexit and/or the NI Protocol or the aftermath of Covid.

In fact, the greatest challenge is our lack of competitiveness which is evidenced by comparatively low levels of productivity. This problem long pre-dates Covid, Brexit or, even, the Troubles.

If productivity is measured by output per hour worked France, Germany and the USA, produce about 40-50% more than Northern Ireland. That implies about 4.5 days of work here is necessary to produce what in other Western economies takes only three days.

Given low productivity levels of wages and salaries are relatively low. Hence, the recent increases in fuel and energy prices really do bite. And because productivity is low levels of business profitability are low which means businesses have little cushion to protect against cost increases caused by Brexit or the protocol.

Over much of the last two decades NI has had one of the best records within the UK of job creation through inward investment. However, we have not been creating well paid (productive) jobs to the same extent as GB or many other Western economies.

Many factors could help explain NI’s productivity gap: low skills, lack of innovation, our peripheral location. Perhaps a major one is the capacity and capabilities of management. All this is suggestive of the sorts of areas Northern Ireland policy makers ought to prioritise whether in the form of a new (simplified) Programme for Government, a multi-year Budget or otherwise.

When it comes to cost of living, tax varying and competitiveness, a new Stormont Assembly/Executive will inevitably face hard choices. The experience of devolution so far has tended to be one of hard choices deferred: the can kicked down the road.

That road cannot continue indefinitely. A former Prime Minister of France, Pierre Mendes-France, expressed it well: “To govern is to choose”. After May 5, hard choices must be faced”.

end piece: Dr Esmond Birnie, senior economist at Ulster University Business School. The views expressed do not reflect a corporate view of the NI Fiscal Council