Northern Ireland’s missing ingredient – a USP

Posted on November 7, 2013 · Posted in Business Month

The mantra has been that we have to move away from dependence on the public sector, to ‘rebalance our economy’.  Yet announcements of new Foreign Direct Investment in contact centres and support centres in Belfast have led to an inevitable question – have we merely moved from being a fairly high waged public sector services economy to a low waged private sector services economy?

 

Or, as one commentator put it, have we gone on a long journey from the linen factories in order to have the law factories?

 

“I think – not by policy statement, but in reality – we are moving towards being a low paid service economy, alongside a strong public sector,” says economist John Simpson.  “All those statements about going for a high value added economy, it’s just not happening.  We don’t really have a coherent economic policy.”

 

Simpson argues that government departments need to work together and with the private sector, improving both Northern Ireland’s infrastructure and skills base.  “We actually need to have a public sector that operates as a broad front, not just DETI or DEL, and not one that does not co-operate with the private sector.  At the moment, the private sector shouts at the public sector, and the public sector shouts back at the private sector.”

 

This is a good moment, Simpson suggests, for the Executive to take stock of its capacity to grow Northern Ireland’s economy and where the economy should be positioned.  “After the investment conference, we really need to be asking where are we going and admit that we have not really been serious.”

 

It certainly feels as if much of Northern Ireland’s employment growth is in the lower paid service sector.  In the most recent major job announcement, in October, Stream announced that it is in the process of creating 1,000 jobs in its Belfast contact centre.

 

But Richard Ramsey, Ulster Bank chief economist, makes the point that the service economy can also be high value, as with the Herbert Smith and Allen & Overy legal support services in Belfast.  Ramsey believes that Northern Ireland has to make more an effort to market itself imaginatively, based around the low cost of living, good quality of life, an attractive culture – as demonstrated by Londonderry’s status as UK City of Culture – excellent communications network and making a reality of it as being a friendly and tolerant society.

 

The trouble with that, though, is that events like the flag protests make it very difficult to promote Northern Ireland to outside society.  “I sometimes think politicians and the policy-makers don’t see the importance of this,” says Ramsey.  “There is no point in having positive marketing for 360 days a year – and then for five days a year having negative stuff.  We should get people to give an oath of allegiance to the economy.”

 

But as things stand, believes Ramsey, it is difficult to suggest a single USP for Northern Ireland.  “We have a portfolio of different aspects,” he says.  Some of this is in the high value areas that deserve support, including aerospace, pharmaceuticals and ICT.  “Ideally we would want to have more high value added than we have.”  But, he adds, “the cost angle is always going to be there – the low cost, low wages is still going to play a part”.

 

Esmond Birnie, chief economist with accountants PwC, says there is “an element of truth” in the proposition that Northern Ireland is at risk of being a low value service economy.  But, like Ramsey, he stresses that some of the services attracted are examples of the type of high value activity that Northern Ireland should cherish.

 

The ideal, suggests Birnie, is to improve productivity in Northern Ireland.  For this to happen, the quality of management in businesses here needs to rise.  “It’s not just the number of degrees managers have, but it’s also about the subjects and how they use them and whether they are business related.”

 

Future success also depends, believes Birnie, on the aspirations of businesses and employers, looking to exports and recognising the role of innovation and research and development.  “The most recent data from 2011 does show that Northern Ireland R&D jumped up.  But even given that, we are quite far behind other small open economies in Western Europe, for example Finland.”

 

One of the key reasons why Northern Ireland is over reliant on the service sector – both low and high paid – is that we are not sufficiently attractive for profit generating activities when compared to our neighbours in the South.  Even after the next cut in Corporation Tax rates in April 2014, we will still have a main CT rate that is 8.5% higher than in the Republic.  Inevitably, then, Foreign Direct Investment is drawn here as a low cost base for service activities, rather than as a place for profit generating activities.

 

For Mike Smyth, a former University of Ulster economics lecturer and campaigner for reduced Corporation Tax in Northern Ireland, it is the tax challenge that dominates all others.  “We are never going to be able to do that [break out of service sector dominance] without a major change in the policy regime,” he says.  By which he means the tax position, specifically.

 

But Smyth has become convinced that CT will be devolved to Northern Ireland from April 2015 and he expects this to be announced once the Scottish referendum is out of the way next year.  “I am pretty confident that the announcement will be made by this time next year,” he says.  Smyth predicts there will be agreements to devolve tax policy to the Scottish and Welsh devolved administrations on income tax, stamp duty and air passenger duty, which will create the opportunity to devolve CT setting to the Northern Ireland Assembly.

 

Smyth accepts that matching, or beating, the Republic’s tax rate would not of itself overcome the problems of the North’s low employment rate, low wages and low productivity, but he believes it would unlock the other ingredients that are required to create an effective package that would generate jobs and growth.  For example, he says, the demand for well paid jobs would lead to more graduates returning home, with others commuting from across the border.  Moreover, with perhaps a year between an announcement and the lower tax rate being introduced, there would be a period of adjustment and recruitment.

 

An academic study into Ireland’s success in attracting FDI was clear that its low tax rate was the primary factor, backed by a highly skilled workforce that speaks English, good infrastructure, access to transport and an acceptable cost base.  Smyth points out that the South’s equivalent to Invest NI – the Industrial Development Agency – was given the authority to virtually dictate the country’s vocational education policy once there was sufficient demand for workers from foreign investors.  That was driven by the lower CT rate and Smyth believes a similar process would take place here.

 

“Given the choice of all the policy options, I would take the Corporation Tax rate,” says Smyth.  “It gives us the chance to do all the other things that we need to do.”