Written evidence from HM Government
1. BACKGROUND TO
THE FORTHCOMING
GOVERNMENT CONSULTATION
DOCUMENT ON
REBALANCING THE
NORTHERN IRELAND
ECONOMY
The Government is committed to rebalancing the UK
economy as a whole and specifically in Northern Ireland. The Coalition
Government committed to publishing a paper on rebalancing the
NI economy in the June 2010 Budget, "The Government will
publish a consultation paper, in autumn 2010, on rebalancing the
Northern Ireland economy. This will include examining proposals
for economic enterprise zones, possible mechanisms for changing
the corporation tax rate and other economic reform options. The
Government will consult the Northern Ireland Executive fully as
the paper is prepared". This followed on from a commitment
in the Coalition's Programme for Government to "produce
a government paper examining potential mechanisms for changing
the corporation tax rate in Northern Ireland".
The paper is due to be published by the Treasury
in the late autumn after consultation with both the Northern Ireland
Office and Northern Ireland Executive.
2. CURRENT STATE
OF THE
NI ECONOMY AND
THE NEED
TO REBALANCE
The Northern Ireland economy relies heavily on the
public sector, which represents over 70 per cent of the economy.
The increase in the size of the public sector began in the late
1960s, coinciding with the beginning of the Troubles. Over time
successive UK Governments have significantly increased spending
in Northern Ireland in order to strengthen security and assist
the local economy, which saw a reduction in investor confidence
and a slowdown in growth during this period. The Northern Ireland
economy has traditionally been dominated by manufacturing industry
and agriculture but there has been a shift over the last 30 years
to a more service based economy including the public sector. There
is, therefore, a clear need to take action that would help to
boost the private sector.
Strengths
There is strong potential for growth in the Northern
Ireland economy. The economy has benefited from the progress made
under the Northern Ireland peace process. Northern Ireland has
a number of strengths:
- a relatively young population and a good quality
education system;
- competitive labour costs , below the UK average;
- scope for drawing on the large economically inactive
sector;
- a successful track record in attracting inward
investment through Invest NI, building on increased investor confidence
in recent years;
- 100% broadband coverage;
- good transport links and infrastructure;
- a relatively low crime rate; and
- strong tourism potential and an attractive natural
environment.
Challenges
In spite of these strengths there remain substantial
challenges. Public expenditure per head in Northern Ireland is
the highest in the UK. A large public sector may tend to crowd
out the private sector, for example through distorting the labour
market and high levels of public sector asset holding. The
average salary in the public sector is also higher than in the
private sector.
Currently total public expenditure on services per
head[16]
in Northern Ireland is 21% above the UK level, whereas GVA per
head remains significantly lower than that of most of the other
parts of the UK with GVA per capita in NI at £16k, slightly
higher than Wales (£15k) but significantly lower than England
(£21k) and Scotland (£20k). This can be attributed to
low levels of productivity coupled with high rates of economic
inactivity.
Northern Ireland tends to be over represented compared
to the UK average in low productivity sectors such as agriculture
while it is under-represented in high productivity sectors such
as financial intermediation and business services. Private sector
productivity is held back by a lack of basic skills, relatively
low levels of enterprise and low levels of research and development
plus a lack of large high turnover businesses. Northern Ireland
also suffers from a high rate of economic inactivity including
in the number of long term sick and disabled.
3. THE MAIN
ELEMENTS OF
THE GOVERNMENT'S
STRATEGY TO
REBALANCE THE
UK ECONOMY
The Government's strategy for rebalancing the UK
economy was set out in the Budget and 2010 Spending Review. These
set out the importance of reducing the deficit while promoting
enterprise and maintaining a commitment to fairness.
The Government's objective is to deliver strong,
sustainable and balanced long term growth of income and employment.
Delivering this will require the UK to increase productivity,
its share of exports and incentivise greater levels of private
investment, including making the UK more attractive to foreign
investment. Key areas include:
- A phased reduction in the main rate of corporation
tax from 28% now to 24% by 2014-15 and setting out clear objectives
for improving access to finance, particularly for smaller businesses
to support private sector business expansion.
- Focused Government that supports investment for
the long term by concentrating spending on areas where it is needed
and reforming public services to drive better value from spending.
The Efficiency and Reform Group has the task of driving out waste
and inefficiency in UK government departments.
- Providing the certainty and incentives for private
investment by providing macroeconomic stability and policy certainty
while ensuring the right incentives are put in place for this
investment.
- Stimulating private infrastructure investment
through reviewing new funding and financing approaches and reforming
economic regulatory systems to ensure that more private capital
is encouraged and can be used as efficiently as possible.
The Government is also committed to promoting balanced
growth across the regions. The Government published a Sub-national
Growth White Paper on 28 October which set out the approach to
building a new, fairer and more prosperous economy. Although this
paper mainly applies to England, the principles are relevant to
Northern Ireland and certain policy proposals may also be transferable
if they find favour with the Northern Ireland Executive. The three
key themes are:
- Shifting power to local communities and businesses
- those who understand their economies best should lead their
development and enable all places to fulfil their potential.
- Increasing confidence to invest - create the
right conditions for growth through Government allowing market
forces to determine where growth takes place and provide incentives,
which ensure that local communities benefit from development.
- Focused intervention - tackling barriers to growth
that the market will not address itself, supporting investment
that will have a long term impact on growth and supporting areas
with long term growth challenges manage their transition to what
is appropriate for the local area. Government policies should
work with the market, not seek to create growth artificially.
4. TAX OPTIONS
IN NORTHERN
IRELAND
The Government has committed to explore options for
developing Northern Ireland as an enterprise zone. The concept
of enterprise zones as they were introduced in the 1980s would
need to evolve to take into account devolution to the Northern
Ireland Executive. This has increased the ability of Northern
Ireland to set its own policies with regard to business investment,
particularly in relation to its planning regime and business rates,
which were two key features of previous Enterprise Zones. With
the Northern Ireland Executive and the UK Government working in
cooperation there may be scope for devolved and reserved policies
to be harnessed to promote Northern Ireland as an area of enterprise
and centre of excellence for innovation in the UK.
The consultation paper will also consider potential
mechanisms for giving the Northern Ireland Executive the power
at least to vary the corporation tax (CT) rate for trading profits
in Northern Ireland. This would enable it to be brought more into
line with the rate of CT for trading profits in the Republic of
Ireland, which is currently 12.5% and could have a significant
impact on inward investment, although costs would also need to
be considered.
The aim of this stage of consultation is to gain
a full understanding of the costs and benefits that a separate
rate would involve, for Northern Ireland and for the rest of the
UK.
Both the economic
and fiscal effects of a separate, lower CT
rate in Northern Ireland will be examined as well as the legal
and implementation issues.
5. OTHER OPTIONS
TO STRENGTHEN
THE PRIVATE
SECTOR IN
NORTHERN IRELAND
There are a range of non tax devolved and reserved
options to strengthen the private sector in NI including welfare
reform, public sector reform and supply side micro economic policies
to promote skills, innovation, competition, enterprise and investment.
In devolved areas it is entirely for the NIE to determine its
own policies and priorities. Work that has been completed such
as the Varney Review of Competitiveness in Northern Ireland and
the NIE's Independent Review of Economic Policy provide a wide
range of options for consideration. The consultation paper and
consultation process will also help to inform the updating of
the NIE's own economic strategy due to be published in the spring.
22 November 2010
16 Public Expenditure Statistical Analyses 2010 Back
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