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A Review of Economic Policy in Northern Ireland

A Review of Economic Policy in Northern Ireland

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An essay for the 2012 Undergraduate Awards Competition by Claire McKenna. Originally submitted for Business Economics at Queen's University Belfast, with lecturer Jinghai Zheng in the category of Business & Economics
An essay for the 2012 Undergraduate Awards Competition by Claire McKenna. Originally submitted for Business Economics at Queen's University Belfast, with lecturer Jinghai Zheng in the category of Business & Economics

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Published by: Undergraduate Awards on Aug 30, 2012
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10/27/2013

 
 
1
 A Review of Economic Policy in Northern Ireland
Word Count: 2,626 Abstract
Regional policy is vital for an economy, as seemingly isolated problems such as unemployment or incomeinequality, can quickly become country-wide issues; regional disparities are costly for governments as publicspending must be individually allocated for social infrastructure and services. While regional policy focuseson increasing capital, labour and knowledge mobility, the most important policy strategy for Northern Irelandis to create conditions under which these barriers are limited, to encourage domestic start-ups andexpansion, and foreign investment. This paper aims to review current economic policy in Northern Ireland, asset out in the recently published HM Treasury and Northern Ireland Executive reports (2011), and to analyseit using traditional economic theory. The final section provides recommendations for future regional policy.The local economy has a history of slow growth in comparison to other UK regions andthis report finds thatmany of the economic issues in Northern Ireland are on the supply-side such as industry structure, limitedtrade, an underdeveloped supply-chain base, low-skilled labour force, lack of R&I (research and innovation)and entrepreneurship, and inadequate welfare policy. However there are also demand-side issues toconsider including long term unemployment and insufficient demand.Continued economic issues are notsolely due to political instability, and partial devolution of powers is necessary to promote growth within theregion. Local regional policy should aim to reduce income, productivity and employment gaps with the rest of the UK.Northern Ireland has a reputation for excessive public spending and an inadequate private sector;the private sector lacks competition and the innovation and support to be the main driver of the economy.Northern Ireland has low living standards, low skill levels and low productivity when compared to UKaverages and it is vital that education/training, innovation and R&D (research and development), and welfarereform are addressed in order to stimulate regional growth. Northern Ireland needs to move away fromtraditional low value added sectors and towards new higher value sectors. Previous policy has taken a more Keynesian, intervention focused approach with a heavy reliance on thepublic sector and excessive supply-side support for industry and commerce. This model has resulted ininadequate private investment and structural weaknesses. Current spending is not sustainable because itresults in unmanageable fiscal deficit, crowding out and limited encouragement for competition. It isimportant that Northern Ireland transitions from to a more free-market approach that encourages innovationand competition. Deregulation in the labour market, combined with tax incentives to improve productivity andefficiency, will encourage economic growth while limiting government expenditure.This review suggests that a reduced corporate tax rate should be combined with non-tax policy measures toachieve the following goals: public/private sector rebalancing; increased labour participation and lower longterm unemployment; increased productivity and growth in higher value added and export sectors; welfarereform; restructuring of the education system; increased levels of innovation, R&D and entrepreneurialism;an increase in total output growth; and greater domestic and international investment.
 
 
1.1 The importance of regional policy
Regional policy is vital for an economy, as seemingly isolated problems such as unemployment or incomeinequality, can quickly become country-wide issues (Armstrong & Taylor 2000). Regional disparities arecostly for governments as public spending must be individually allocated for social infrastructure and services(Armstrong and Taylor 2000).Regional policy focuses on increasing capital, labour and knowledge mobility (Kaldor 1970). The mostimportant policy strategy for Northern Ireland is to create conditions under which these barriers are limited, toencourage domestic start-ups and expansion, and foreign investment (HM Treasury 2011a).When reviewing regional policy,
‘different
goals require different types of policies for their achievement
 (Armstrong and Taylor, 2000 pp.230). It is for this reason thatpartial devolution is necessary; giving moreresponsibility to Northern Ireland and its people to make the best decisions most suited to the local economy.
‘Local policy makers are closer to the economic issues which affect the local economy’ (
EAG 2011a, pp.23).
1.2 Northern Ir 
eland’s
economic structure
Political instability has had negative implications for Northern Ireland, however all market failure cannot beattributed to the peace process. Employment growth began prior to the Good Friday Agreement (Brownlow2010), thus continued economic issues are not solely due to political instability.The local economy has a history of slow growth in comparison to other UK regions (PWC 2011; HM Treasury2011a). Many of the economic issues in Northern Ireland are on the supply-side such as industry structure,limited trade, an underdeveloped supply-chain base, low-skilled labour force, lack of R&I andentrepreneurship, and inadequate welfare policy. However there are also demand-side issues to consider including long term unemployment and insufficient demand.Regional policy should aim to create equality,improve efficiency, prevent congestion and limit inflationary pressure (Kaldor 1970); suggesting local regionalpolicy should aim to reduce income, productivity and employment gaps with the rest of the UK.Northern Ireland has a reputation for excessive public spending and an inadequate private sector (PWC2011). The private sector lacks competition and the innovation and support to be the main driver of theeconomy (EAG 2011a). Northern Ireland has low living standards, low skill levels and low productivity whencompared with UK averages (EAG 2011a), it is vital that education/training, innovation and R&D, and welfarereform are addressed in order to stimulate regional growth. Northern Ireland needs to move away fromtraditional low value added sectors and towards new higher value sectors (NISP et al 2011). Previous policy has taken a more Keynesian, intervention focused approach (Martin 1989a; 1988). Therehas been high reliance on the public sector and excessive supply-side support for industry and commerce,resulting in inadequate private investment and structural weaknesses. This spending is not sustainablebecause it results in unmanageable fiscal deficit, crowding out and limited encouragement for competition(Martin and Minns 1995; Varney 2008).
1.3 Public and private sector imbalances
Future public sector investment will be limited due to recessionary impacts and new EU policy changing thescope for financial assistance (HM Treasury 2011a). This will have a massive effect on Northern Ireland dueto its large reliance on the public sector (Varney 2008; HM Treasury 2011a). Figure 1.1 displays historical
 
 
public sector employment for UK regions; Northern Ireland consistently maintains one of the highestproportions of public sector employment, 31% in 2010.
Figure 1.1: Public sector employment by region, as % of total employment
1995 2000 2010 
North East
28% 28% 32%
Wales
26% 28% 31%
Northern Ireland
33% 30% 31%
Scotland
25% 26% 29%
North West
24% 24% 28%
Yorkshire and the Humber
23% 24% 28%
West Midlands
21% 22% 28%
East Midlands
22% 22% 26%
South East
23% 21% 26%
South West
23% 24% 26%
East
21% 21% 25%
London
20% 19% 22%
UK 23% 23% 27%
Source: Oxford Economics 2011 (BRES and ABI workforce jobs), reproduced by the author for selected regions
Excessive public spending has lead to major fiscal deficit (Varney 2008; NIE 2011); comprising almost 70%of regional GVA, this creates little incentive to grow the private sector (EAG 2011a). Large, established firms,with economies of scale and subsidies hold the majority of the market share, making it difficult for newcompetitors to emerge, and providing little incentive for existing firms to become more efficient (Brownlow2010). Figure 1.2 displays private equity investment for selected UK regions, in 2010 Northern Ireland onlycomprised 2.3% of the UK total. It is clear that encouraging private sector investment should be a policyfocus.
Figure 1.2: Private equity investment by UK region, number of companies, 1998/2010
Region 1998 2010 1998/2010 % of UK deals 1998/2010 # of private equity investments per 100, 000 VAT registered businesses 2010 
London
184 212 3,469 22.6% 54.0
South East
204 125 2,810 18.3% 31.7
North West
111 66 1,483 9.7% 25.8
East Anglia
85 47 1,305 8.5% 18.6
Scotland
121 61 1,182 7.7% 31.6
Wales
33 41 544 3.5% 36.3
NorthernIreland
12 20 356 2.3% 23.7
UK
1,122 823 15,336 100.0% 32.0Source: NISP et al 2011 (BVCA, Investment reports) reproduced by the author for selected regions and indicators

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