1

NI Economic Strategy / HMT Consultation Paper

Graeme HutchinsonDirector of Economic Policy, DETI

20 May 2011

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Overview

1 Current Economic Performance

2

3

4

Long Term Economic Trends

Corporation Tax

NI Economic Strategy

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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

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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

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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

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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.”

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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