rebalancingtheeconomydeti
TRANSCRIPT
1
NI Economic Strategy / HMT Consultation Paper
Graeme HutchinsonDirector of Economic Policy, DETI
20 May 2011
2
Overview
1 Current Economic Performance
2
3
4
Long Term Economic Trends
Corporation Tax
NI Economic Strategy
3
Current EconomicPerformance
1
4
The recession has had a severe impact on the local economy…
Unemployment
• Claimant count increased by 35,600 since February 2008
• Number of unemployment benefit claimants more than doubled (+150%)
Output
• Construction output fallen by almost one quarter (24%) since Q2 2008
• Significant contractions in production (-9%) and services (-7%)
-25%
-20%
-15%
-10%
-5%
0%
Production Construction Services
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2008 2009 2010 2011
5
FDI Jobs
…with significant falls in employment despite strong Invest NI performance in job creation
• Invest NI promoted 7,500 FDI jobs in Northern Ireland during 2008-11 against target of 6,500
• 5,600 jobs (75%) offered salaries above the private sector median
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2008/09 2009/10 2010/11
Employment
• Number of employee jobs fallen by over 40,000 since June 2008
• Equivalent to 5.5% of total jobs in the local economy
670
680
690
700
710
720
730
740
2008 2009 2010
Thousands of Jobs
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Long Term EconomicTrends
2
7
The Northern Ireland economy is dominated by the public sector…
NI Public Sector JobsAlmost one-third of workforce jobs
in public sector*
UK
NI
* Public sector defined as public administration, health and education
NI Public SpendingUnderpins two-thirds of the
economy
+ 5%
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…which has (and will) not lead to convergence with the rest of the UK…
Productivity
Employment Rate
Living Standards
No convergence since mid 1990s
No convergence going forward unless significant change in approach
Source: Oxford Economics
UK Average
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…and has not been able to address a range of structural issues
LabourMarket
• Employment rate is 4.4 percentage points below Great Britain
• Economic inactivity also significantly higher (+5.3pp)
SMEDominated
• Almost 80% of NI employment is in SMEs (under 60% for UK)
• Only 22% of turnover is in large firms compared with 51% in UK
Innovationand R&D
• R&D spend historically around half of UK average but large rise in 2009 to 1.1% of GVA
• Large increase in 2009 mostly driven by just five companies
Brain Drain• One-third of NI students leave to study elsewhere
• Less than half of these (44%) return when degree is complete
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Economic Strategy
3
11
The new economic strategy…
2011 DETI Minister launched initial consultation on economic strategy on 13 January
Meetings with key stakeholders took place during the consultation, including:CBI Trade Unions HE/FE Business Alliance Govt DepartmentsMATRIX Economic Advisory Group Voluntary Sector Agri-Food
Consultation period closed with more than 60 responses received
Report will be published drawing out key points made in consultation responses
NOW
Responses used to inform development of full strategy, which will be put out for consultation later in the year
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…acknowledges that economic growth must be led by the private sector…
Strategic AimWealth and employment creation
Key DriverExport-led economic growth
Rebuilding the EconomyBuilding economic & labour
market stability (short to medium term)
Rebalancing the EconomyIncreasing private sector
productivity (short, medium and longer term)
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…to both rebuild and rebalance the economy…
REBUILDING THE ECONOMY
REBALANCING THE ECONOMY
Improving Employment Opportunities & Employability
Promoting Employment
Stimulating Innovation, R&D and Creativity
Developing Economic Infrastructure
Encouraging Business Growth
Competing in the Global Economy
Improving Employment and the Level, Relevance and Use of Skills
CROSSCUTTINGTHEMES
Equality
Balanced sub-regional
growth
Sustainable development
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…which consultation respondents broadly agreed with
StrategicObjectives
• Agreement that the focus of the strategy should be on export-led growth and delivered through the two challenges identified.
• Stressed that following a similar approach to that pursued in the past is unlikely to lead to radically different outcomes.
Key Issues Raised
• Conclusion on whether to take powers to vary Corporation Tax
• Initiatives to improve the availability of finance
• Address issues around business regulation
• Prioritise actions for innovation and skills
• Consider focusing resources on particular niche sectors
• Important role for community / voluntary sector
• Further work on issues such as public sector reform
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HM Treasury Paper
4
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A cut in Corporation Tax will redirect money from the public sector to the private sector…
£m Year 1 Year 2 Year 3 Year 4 Year 5
Direct cut to block grant 110 235 265 265 270
per cent of NI block 1.0 2.3 2.5 2.6 2.6
Behavioural response 30 65 70 80 85
Total redistribution 140 300 335 345 355
Cut in Corporation Tax provides a stimulus to move away from a public sector orientated approach
Could lead to much larger benefits throughout the local economy than direct public spending
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…and potentially provide wide ranging benefits for the local economy…
Investment
• New foreign companies will invest in Northern Ireland
• Existing FDI firms will be encouraged to expand further
• FDI companies drive improvements in R&D expenditure
Jobs• New and expanding firms will create significantly more jobs
• This will increase spending in the economy and create even more indirect jobs in ‘support’ sectors
LocalFirms
• Supply chain benefits for local companies
• Opportunities to build trading relationships with large multi-nationals
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…and most importantly for local people
Jobs
• More high-value and better paying jobs for local people
• Greater ‘trickle down’ opportunities for low skilled and inactive
• Help to replace jobs lost in recession
• Joblessness and low wages are main causes of poverty
LivingStandards
• Address poverty levels across society
• Reduce dependence on state benefits
• Improved prosperity key to addressing economic disadvantage
Migration• High value jobs will address ‘brain drain’ of local students
• Encourage young people to stay in Northern Ireland
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0 1 2 3 4 5 6
USA
Germany
Canada
UK
Poland
Czech Rep
Ireland
Singapore
FDI Performance (index adj for size)
Low Corporation Tax is very important for attracting FDI in a small open economy…
Source: Inward Investment Monitor 2010
10-17%
39%
30%
29%
28%
19%
19%
12.5%
ROI and 12.5% CT Rate“Let me be absolutely clear on this
issue: our 12.5% rate of corporation tax is here to stay. It is central to our
industrial policy and is an integral part of our international brand. The
Government’s message is therefore unequivocal and I can assure the House that there will be no deviation from that
position.”
20
50
60
70
80
90
100
110
120
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
UK=100
…and has been a key driver in the economic success of the Irish economy up to recession
Productivity
Living Standards
10% rate for manufacturing
10% rate for financial services (IFSC)
Living StandardsRapid increase from 60% of UK to 110%
in 2006-07
ProductivityWent from 15% below to
15% above UK in 2003-05
Phased reduction in main rate to 12.5%
Source: World Bank Databank
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EAG has commissioned independent research to help estimate the benefits…
- Baseline economic forecasts for EAG
- Assessing economic impact of lower tax on GVA and jobs
SCOPE
TIMESCALE
- Draft estimates currently being considered by EAG
- EAG paper to be published in May / June 2011
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EAG has commissioned independent research to help estimate the benefits…
- Commissioned by DETI to progress IREP recommendation
- Forecasting FDI jobs with lower rate of Corporation Tax
- Baseline economic forecasts for EAG
- Assessing economic impact of lower tax on GVA and jobs
SCOPE
TIMESCALE
- Draft estimates currently being considered by EAG
- EAG paper to be published in May / June 2011
- Currently working on draft estimates
- Figures will be provided to DETI in May / June 2011
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UK Ave
…which shows that a lower rate of CT could significantly increase living standards…
Central
High
Baseline
Low
Source: Oxford Economics
75
80
85
90
95
100
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
UK=100
Trendline
fDi IntelligenceDraft estimates are in between low
and central OE scenarios
Draft estimates indicate a step change in NI economy from lower CT
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86
88
90
92
94
96
98
100
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
UK=100
…and raise the employment rate
UK Ave
Central
High
Baseline
Low
Source: Oxford Economics
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Summary of Benefits
Employment• Many more jobs created in local economy
• Greater high value job opportunities
Living Standards
• Significant convergence with UK average
• Address poverty across society (joblessness and low wages)
Economic Growth
• Faster economic growth
• A larger (private sector) economy
Productivity • Increases in productivity levels
Exports• More export-intensive economy
• Important for overarching aim in Economic Strategy
FDI • Large increase of FDI into NI