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Private sector must help itself and end culture of dependence

The private sector is too small. As David Cameron tried to explain, that makes the public sector, relatively, seem too large.

The public sector is larger than in Great Britain, partly because employment in policing and justice is proportionately much higher, partly because water services are within the public sector rather than the private, and partly because of more people working in social security administration.

Even allowing for these major differences, to increase the size of the private sector to match the average elsewhere in England would mean that about 40,000 more jobs would be needed, taking the ratio of private sector jobs from the current 71% to over 76%.

If Northern Ireland was a more profitable place to do business, would the private sector lag so far behind prosperous regions? Is there any doubt that, if the bottom line of what Northern Ireland sells compared favourably with Birmingham or Southampton, the unfavourable differences would disappear?

Profitability and prospects for profitability do not seem to be strong enough.

The best profits, measured as a ratio of turnover, included Belfast Harbour, Allstate NI, Phoenix Natural Gas, Belfast International Airport, Terex GB, Dunnes Stores, and Premier Power. On other criteria Viridian, Almac Group and Norbrook Laboratories might also be added.

The accepted wisdom is that private sector businesses in Northern Ireland do not generally have significant advantages compared to other places. That comparison plays a part in the argument by those economists and politicians who are pushing for a lower rate of corporation tax in Northern Ireland.

Efforts to compare the cost of doing business in Northern Ireland have been made. Invest NI, understandably, markets Northern Ireland as a good place to do business. Some businesses are critical of extra costs for energy, transport and insurance.

Offsetting extra costs, the difference in employee costs gives local businesses an advantage. Skill for skill, if skilled employees are available, local earnings offer a competitive advantage. On average, private sector pay also lags behind comparable earnings elsewhere, as well as being lower than in the public sector.

If materials and service costs, interest and depreciation are equivalent to (say) 50% of costs, labour costs some 45% and pre-tax profits get the remaining 5%, then Northern Ireland operations with 7% higher operating costs (excluding wages) and an advantage of 12% on earnings would be over 20% more profitable than a fictional comparator elsewhere.

This calculation points to the uncertainty lying behind the debate about profitability and productivity in the private sector. This earnings advantage may be eroded by lower productivity.

If this is a possibility, then there are important conclusions for management and efficiency improvements.

Some of the productivity differences may be questions of adequate skills, adequate scale of operations and managerial leadership. All of these are pertinent to assessing the private sector.

A reliance on changes in corporation tax as the single route to private sector expansion would be a deceptive illusion. Of course, lower taxation would be helpful but only if it is alongside improved productivity, new efficiencies in public and private organisations, and a self-help momentum replacing the dependency culture.

Entrepreneurs in the private sector must play their bigger part in investing in profitable expansion.


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