RebalancingTheEconomyDETI

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  • Represent three pillars of Public Policy
  • Represent three pillars of Public Policy
  • Represent three pillars of Public Policy
  • RebalancingTheEconomyDETI

    1. 1. NI Economic Strategy / HMT Consultation Paper Graeme Hutchinson Director of Economic Policy, DETI 20 May 2011
    2. 2. Overview 1 Current Economic Performance 2 3 4 Long Term Economic Trends Corporation Tax NI Economic Strategy
    3. 3. <ul><li>Current Economic </li></ul><ul><li>Performance </li></ul>1
    4. 4. The recession has had a severe impact on the local economy… Unemployment <ul><li>Claimant count increased by 35,600 since February 2008 </li></ul><ul><li>Number of unemployment benefit claimants more than doubled (+150%) </li></ul>Output <ul><li>Construction output fallen by almost one quarter (24%) since Q2 2008 </li></ul><ul><li>Significant contractions in production (-9%) and services (-7%) </li></ul>
    5. 5. FDI Jobs … with significant falls in employment despite strong Invest NI performance in job creation <ul><li>Invest NI promoted 7,500 FDI jobs in Northern Ireland during 2008-11 against target of 6,500 </li></ul><ul><li>5,600 jobs (75%) offered salaries above the private sector median </li></ul>Employment <ul><li>Number of employee jobs fallen by over 40,000 since June 2008 </li></ul><ul><li>Equivalent to 5.5% of total jobs in the local economy </li></ul>
    6. 6. <ul><li>Long Term Economic </li></ul><ul><li>Trends </li></ul>2
    7. 7. The Northern Ireland economy is dominated by the public sector… NI Public Sector Jobs Almost one-third of workforce jobs in public sector* UK NI * Public sector defined as public administration, health and education NI Public Spending Underpins two-thirds of the economy + 5%
    8. 8. … 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
    9. 9. … and has not been able to address a range of structural issues Labour Market <ul><li>Employment rate is 4.4 percentage points below Great Britain </li></ul><ul><li>Economic inactivity also significantly higher (+5.3pp) </li></ul>SME Dominated <ul><li>Almost 80% of NI employment is in SMEs (under 60% for UK) </li></ul><ul><li>Only 22% of turnover is in large firms compared with 51% in UK </li></ul>Innovation and R&D <ul><li>R&D spend historically around half of UK average but large rise in 2009 to 1.1% of GVA </li></ul><ul><li>Large increase in 2009 mostly driven by just five companies </li></ul>Brain Drain <ul><li>One-third of NI students leave to study elsewhere </li></ul><ul><li>Less than half of these (44%) return when degree is complete </li></ul>
    10. 10. <ul><li>Economic Strategy </li></ul>3
    11. 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 Departments MATRIX 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
    12. 12. … acknowledges that economic growth must be led by the private sector… Strategic Aim Wealth and employment creation Key Driver Export-led economic growth Rebuilding the Economy Building economic & labour market stability (short to medium term) Rebalancing the Economy Increasing private sector productivity (short, medium and longer term)
    13. 13. … 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 CROSS CUTTING THEMES Equality Balanced sub-regional growth Sustainable development
    14. 14. … which consultation respondents broadly agreed with Strategic Objectives <ul><li>Agreement that the focus of the strategy should be on export-led growth and delivered through the two challenges identified. </li></ul><ul><li>Stressed that following a similar approach to that pursued in the past is unlikely to lead to radically different outcomes . </li></ul>Key Issues Raised <ul><li>Conclusion on whether to take powers to vary Corporation Tax </li></ul><ul><li>Initiatives to improve the availability of finance </li></ul><ul><li>Address issues around business regulation </li></ul><ul><li>Prioritise actions for innovation and skills </li></ul><ul><li>Consider focusing resources on particular niche sectors </li></ul><ul><li>Important role for community / voluntary sector </li></ul><ul><li>Further work on issues such as public sector reform </li></ul>
    15. 15. <ul><li>HM Treasury Paper </li></ul>4
    16. 16. A cut in Corporation Tax will redirect money from the public sector to the private sector… 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 85 80 70 65 30 Behavioural response 2.6 2.6 2.5 2.3 1.0 per cent of NI block 270 265 265 235 110 Direct cut to block grant 345 Year 4 300 Year 2 335 Year 3 355 140 Total redistribution Year 1 Year 5 £m
    17. 17. … and potentially provide wide ranging benefits for the local economy… Investment <ul><li>New foreign companies will invest in Northern Ireland </li></ul><ul><li>Existing FDI firms will be encouraged to expand further </li></ul><ul><li>FDI companies drive improvements in R&D expenditure </li></ul>Jobs <ul><li>New and expanding firms will create significantly more jobs </li></ul><ul><li>This will increase spending in the economy and create even more indirect jobs in ‘support’ sectors </li></ul>Local Firms <ul><li>Supply chain benefits for local companies </li></ul><ul><li>Opportunities to build trading relationships with large multi-nationals </li></ul>
    18. 18. … and most importantly for local people Jobs <ul><li>More high-value and better paying jobs for local people </li></ul><ul><li>Greater ‘trickle down’ opportunities for low skilled and inactive </li></ul><ul><li>Help to replace jobs lost in recession </li></ul><ul><li>Joblessness and low wages are main causes of poverty </li></ul>Living Standards <ul><li>Address poverty levels across society </li></ul><ul><li>Reduce dependence on state benefits </li></ul><ul><li>Improved prosperity key to addressing economic disadvantage </li></ul>Migration <ul><li>High value jobs will address ‘brain drain’ of local students </li></ul><ul><li>Encourage young people to stay in Northern Ireland </li></ul>
    19. 19. 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. 20. … 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 Standards Rapid increase from 60% of UK to 110% in 2006-07 Productivity Went from 15% below to 15% above UK in 2003-05 Phased reduction in main rate to 12.5% Source: World Bank Databank
    21. 21. 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 TIME SCALE - Draft estimates currently being considered by EAG - EAG paper to be published in May / June 2011
    22. 22. EAG has commissioned independent research to help estimate the benefits… <ul><li>- Commissioned by DETI to progress IREP recommendation </li></ul><ul><li>Forecasting FDI jobs with lower rate of Corporation Tax </li></ul>- Baseline economic forecasts for EAG - Assessing economic impact of lower tax on GVA and jobs SCOPE TIME SCALE - Draft estimates currently being considered by EAG - EAG paper to be published in May / June 2011 <ul><li>- Currently working on draft estimates </li></ul><ul><li>Figures will be provided to DETI in May / June 2011 </li></ul>
    23. 23. … which shows that a lower rate of CT could significantly increase living standards… UK Ave Central High Baseline Low Source: Oxford Economics Trendline fDi Intelligence Draft estimates are in between low and central OE scenarios Draft estimates indicate a step change in NI economy from lower CT
    24. 24. … and raise the employment rate UK Ave Central High Baseline Low Source: Oxford Economics
    25. 25. Summary of Benefits Employment <ul><li>Many more jobs created in local economy </li></ul><ul><li>Greater high value job opportunities </li></ul>Living Standards <ul><li>Significant convergence with UK average </li></ul><ul><li>Address poverty across society (joblessness and low wages) </li></ul>Economic Growth <ul><li>Faster economic growth </li></ul><ul><li>A larger (private sector) economy </li></ul>Productivity <ul><li>Increases in productivity levels </li></ul>Exports <ul><li>More export-intensive economy </li></ul><ul><li>Important for overarching aim in Economic Strategy </li></ul>FDI <ul><li>Large increase of FDI into NI </li></ul>

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