Belfast Telegraph

Why the Irish and UK budgets have got more in common than it seems

Economy Watch

By Neil Gibson, chief economist for EY Ireland

The UK and Irish Budgets are now both in the books and it is helpful to compare the approaches taken in two neighbouring economies with what would appear to be very different economic conditions. The headline forecasts presented in both Budgets suggest economies at two completely different speeds.

Ireland is growing at 4.3% and the UK at 1.5%, according to the official projections.

Our own EY ITEM club and Economic Eye forecasts would concur with the UK outlook but be more bullish on Ireland. If the forecasts are proved correct, this will place the two economies at either end of the European growth charts. Given this context, the tone of the two Budgets is perhaps surprising.

The Irish Budget was more cautious in tone, mentioning Brexit no less than 16 times and risks/challenges 17 times.

In contrast, the UK went for just two Brexit mentions (at the beginning) and a major focus on the world "future", with no less than 33 mentions. "Future" was less frequently used in the Irish speech, with 10 mentions and interestingly "skills/talent" only made two appearances and "digital" did not feature at all.

Political realities dictate much of the tone of Budget speeches. Scarred from the losses at the ballot box and dealing with unease, both within the party and with the public, the UK Chancellor struck an upbeat tone and tried to focus firmly on the future.

The language of austerity - living within means or eradicating debt - was confined to the margins.

In contrast, the Irish Budget needed to quell expectations that here would be money to spend on every item on the wish list. Mindful of its own political pressures and the frequent disconnect between headline growth and the public's feeling of prosperity, there was a much greater emphasis placed on dealing with looming pressures.

Exploring tone and wording is helpful but ultimately superficial; it is in the policy detail that the comparison is revealed to be somewhat less divergent.

Are the economies really so different?

The headline growth rates reflect a genuine divergence in economic performance at this time but they do, perhaps, overstate its extent.

Support for the divergence narrative can be found in falling real wages in the UK compared to rising real wages in Ireland (though nominal pay rises are similar).

Government tax receipts are also growing more rapidly in Ireland than in the UK, but looking at the labour market shows more similarities and this is often the economic signal with which the public is more closely in tune.

Both economies are enjoying rapid job growth - nearly 2.5% in the most recent year in Ireland and 1.3% in the UK. Over the longer term, since 2012, the growth rates are 11.6% and 7.7% respectively.

Unemployment, though falling rapidly in Ireland, stood at 6.1% in August according to Eurostat, higher than the UK rate of 4.2%. Similarly, the economic inactivity rate is much higher in Ireland at 29.6% compared to 22.5% in the UK (Eurostat Q2 2017).

Housing and infrastructure both featured heavily in the two Budgets and, in many ways, threaded amongst the detail were many areas of similarity with fairness and equality a common narrative.

A need to get money back into public services was also a feature of the Budgets, though perhaps the issues of elderly and social care did not get the prominence that might have been expected. So the divergence in policy choice was not nearly as wide as the tone of the two speeches might indicate.

No local budget to compare

Sadly, the NI Budget cannot be added to this article for comparison as no one is there to set it.

That is a slightly unfair comment as a region does not set a national budget and it is only the prioritisation of public spending that would be comparable. Nevertheless, the welcome extra £660m in the NI spending budget should facilitate some additional capital investment, though how far it stretches will depend somewhat on the path of inflation.

At the risk of sounding like a broken record, it is the strategic decisions that are lacking due to the absence of an Executive. Major funding decisions, prioritisation of capital build programmes and, crucially, a decision on the devolution of corporation tax cannot move forward.

With economic growth rates at their current levels, the tax base has no chance whatsoever of keeping pace with the costs of delivering public services. Genuine reform will be needed and very difficult choices over education and health funding will be required.

These are the areas of real damage resulting from the lack of a local Executive. It is simply not good enough to plead the case for additional money in any area of public service - it is time to talk about from where that money might come.

Good news on negotiations

It is always welcome for any region to get specific mentions in the Budget and the mention of Belfast City deal negotiations and a tourism VAT/air passenger duty (APD) review were pleasing.

Prioritising which projects would make the list under a city deal and deciding if reductions in VAT/APD would rank above other public policy priorities will be a challenging, but worthwhile, exercise in the months ahead. City deals are structured to share the risk/reward and this is likely to become common place in policy devolution - corporation tax devolution would be similar. In other words, if we want a tax reduction then we invest our own money and, in return, we retain the benefits.

Seems a sensible approach but the negotiation on what those benefits are and the precise nature of the funding mechanism will be lively to say the least.

When NI is making is own choices as to how to spend its own money, then perhaps future NI budgets will be just as debate-worthy as their Irish and UK equivalents have proved in recent weeks.

Belfast Telegraph

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