ni economic outlook - pwc uk · prospects regarding jobs growth… there were 2,140 confirmed...
TRANSCRIPT
NI EconomicOutlook
April 2015
“Times are tight, money is scarce, austerityis continuing.”
www.pwc.co.uk/economics
2
1. Highlights and key messages 3
2. Housing 4
3. Labour market 5
4. Confidence 6
5. Future prospects 7
6. Sector dashboards 9
7. Outlook analysis- Impact of UK Budget 2015 10
PwC Economics Team in NI 12
Contents
3
.
Table 1.1: Growth projections
GDP growth (%) 2013 2014 2015 2016
NI 1.1 1.8 1.7 n.a.
UK 1.7 2.8 2.5 2.3
RoI 0.2 4.3 3.3 3.2
Source: Office for National Statistics (ONS), Central Statistics Office (RoI), PwC
(NI 2013-15, RoI 2014-16 and UK 2015-2016).
NI economicgrowth wasestimated as 1.8%in 2014 andprojected to be1.7% in 2015.
UK economicgrowth was 2.8%in 2014 andprojected to be2.5% in 2015.
Republic ofIreland (RoI)economic growthwas estimated as4.3% in 2014 andprojected to be3.3% in 2015.
Table 1.2: Key Indicators
2013 2014 2015 2016
UK consumer price inflation(annual average)
2.6% 1.5% 0.3% 1.8%
UK interest base rate (Q1) 0.5% 0.5% 0.5% 0.75%
NI claimant count (seasonallyadjusted, February)
64,600 57,600 46,200 41,000
Source: ONS, PwC (inflation 2015-2016, interest rate 2015-2016, claimant
count 2016), Nomis.
1. Highlights and key messages
We anticipate that Northern Ireland
(NI) will deliver gross value added
(GVA) growth of 1.7% in 2015, down
from 1.8% in 2014. That means NI
remains the poorest-performing
region of the 12 UK regions. Overall
UK growth is expected to be broadly
similar to that of last year, with any
gains from cheaper oil offset by the
impact of a higher exchange rate and
difficulties in the Eurozone.
Globally, there are various external
downside risks to sustained recovery,
including the slowdown in growth in
major markets such as the Eurozone
and China and the impact of trade
sanctions on Russia.
NI’s property price growth continues
at a modest level, below the UK
average rate. However one of the
domestic downside risks to growth in
NI is the continued legacy of the mid
2000s property bubble, which has left
a fragile housing market and high
levels of indebtedness.
The NI Executive agreed a 2015-16
Budget at the end of January, which
contains an increased level of
borrowing to meet short-turn
commitments.
On 8 January, the Secretary of State
committed to devolve Corporation
Tax to the NI Executive, conditional
on the Executive implementing the
terms of the Stormont House
Agreement. However, renewed
uncertainty about implementing
welfare reform implies that the rest of
the Stormont House package,
including Corporation Tax devolution
remains uncertain.
NI is achieving impressive jobs
growth but is doing so without any
substantial growth in real wages,
productivity or living standards.
Uncertainties remain in global energy
markets, but inflation is likely to
remain well below the Bank of
England’s 2% target.
4
2. HousingConfidence is gradually
returning to the NI housing
market…
Confidence is gradually returning to the
property market following the collapse in
prices between 2007 and 2009. The
upward trend in property transactions, as
reported by NISRA and the Land and
Property Services (LPS)1, has continued
through the last five years as shown in
Figure 2.1. The number of sales in Q4
2014 was up by 88% compared to Q4
2013.
The latest figure of 5,286 verified sales in
Q4 2014 is encouraging. However, there
was only a modest increase between Q4
2013 and Q4 2014 of 240 sales or 5%. The
sales figures for Q4 2014 remain far below
the peak of over 10,800 quarterly sales
recorded at the height of the property
boom in 2006.
The average NI property price as reported
by NISRA and the Land and Property
Services (LPS) was £125,129, the highest
quarterly price since Q3 2011. This
represents a quarter on quarter rise since
the ten year low of approximately
£110,000 recorded at the beginning of
2013. The Royal Institution of Chartered
Surveyors (RICS) forecast that house
prices will rise faster in NI than the rest of
the UK, with a 4% rise in NI as compared
to a 3% rise elsewhere2. Nevertheless,
ONS has indicated that growth in NI in
the year to January 2015 was below the
UK average.
NI remains the second most
affordable UK region…
NI remains one of the most affordable
regional property markets in the UK, with
the Halifax house price to earnings ratio
for NI in the last quarter of 2014 well
below the UK average, and coming second
only to Scotland in terms of
affordability.
The Halifax Housing and Mortgage
Affordability figure, property price to
earnings ratio, was 3.92 in Q4 2014.
In other words, the average property
price at the end of 2014 in NI is just
under four times the average local
salary.
Figure 2.1: Number of housing sales per quarter, NI, 2010-2014
-
1,000
2,000
3,000
4,000
5,000
6,000
2010 2011 2012 2013 2014
Having peaked at 8.59 just before the
crash, this most recent figure
demonstrates a return to affordability
in the NI housing market. With
earnings beginning to pick up, we
estimate that this figure is likely to
remain relatively stable in the coming
quarters.
Figure 2.2: House price affordability (average house price/average earnings ratio), 2000-2014
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Northern Ireland UK
Source: LPS/NISRA Northern Ireland Residential Property Price Index
Source: Lloyds Banking Group - Halifax Regional House Price Index
1 The attraction of the LPS data is that it is based on a record of all transactions in Northern Ireland rather than a sample survey
as undertaken by ONS. ONS regional data are not directly comparable in that they include an adjustment to standardise house
type mix across regions.2 http://www.rics.org/uk/news/news-insight/press-releases/scotland-and-northern-ireland-outperform-uk-housing-market-/
5
3. Labour market
of 5.7%. By the LFS measure, NI saw a
fall of 0.3 percentage points on the
previous quarter and a fall of 1.5
percentage points over the past year.
However, the NI economic inactivity
rate remains the highest amongst the
UK regions at 27.8%, significantly
above the UK average of 22.2%. It
should also be noted that, while
Mixed performance and
prospects regarding jobs
growth…
There were 2,140 confirmed redundancies
in the 12 month period to February 2015,
a 1% increase (2,171 persons) compared to
the preceding 12 month period.
NI’s financial and business services sector
saw a notable job boost in recent months,
with Kainos announcing 403 jobs. This is
in addition to the 807 jobs announced by
PwC, 486 by EY, 600 by Citi and 338 by
Deloitte in the previous twelve months.
This suggests that the NI business services
sector continues to enjoy strong growth
prospects.
There has been mixed news in the
manufacturing sector with the
3 Full-time median earnings, Annual Survey of Hours and Earnings, November 2014.
Figure 3.1: Claimant count unemployment rates (%), February2008- February 2015
Unemployment is falling…
Seasonally adjusted claimant count
unemployment, has continued its
downward trend.
The claimant count measure is generally
accepted as a more accurate measure of
the unemployment level in NI and in the
12 month period to February 2015, there
was a decline of 11,400 to 46,200; which
reduced to 5.2% the percentage of NI
people claiming unemployment benefits
Nevertheless, this remains more than
twice the 2.4% UK average, with February
2015 marking the twentieth consecutive
month where NI’s claimant count was the
highest of the 12 UK regions. Over the last
year the number of claimants in NI fell by
19.8%, significantly less than the UK’s
32.5% decline.
Using the Labour Force Survey (LFS)
measure, the seasonally adjusted
unemployment rate for NI was 6% for the
period November 2014 to January 2015.
This is slightly higher than the UK average
claimant count unemployment fell by
11,400 in the past year, the number of
economically inactive people in NI
increased by 14,000 to 575,000.
announcement in February of 130
contract jobs to go at Bombardier in
Belfast. However, in March
Bombardier confirmed that it will
build 20 new aircraft for a Malaysian
airline, with the wings being produced
in Belfast, which should create new
job opportunities. Meat processor
Dunbia is to add 209 jobs over three
years.
The launch of the NI Civil Service
voluntary exit scheme attracted a
reported 3,200 enquiries in the first
week; however the scheme is
dependent on agreement on welfare
reform. The rest of the Stormont
House Agreement, alongside the
deeper austerity measures announced
in the Chancellor’s Budget Statement
on 18 March, is expected to have a
sizeable impact on public sector jobs
and it will be interesting to monitor
the impact of the cuts over the course
of 2015.
Despite the improving employment
situation, the latest earnings results
from November 2014 suggest that, in
the year to April 2014, average
earnings in NI were still declining in
cash terms (down by 2.2%) and at an
even greater rate than the rest of the
UK (nominal growth of 0.6%)3.
Therefore, these data indicate a
worrying trend. NI’s overall
employment is increasing, but is not
being matched by either growth in
average wages or increasing
productivity.
2
3
4
5
6
7
8
(%)
Northern Ireland United Kingdom
Source: ONS Claimant Count (Seasonally Adjusted)
6
Source: Danske Bank Consumer Confidence Index
Figure 4.2: NI Consumer Confidence Index, September 2008to March 2015
90
100
110
120
130
Index (Sep 2008=100)
4. Confidence
For businesses a poor start to
2015…
Figure 4.1 shows output change by region
as measured by Ulster Bank’s Purchasing
Managers’ Index (PMI). The PMI is a
survey of firms which tracks activities
such as employment, production and
exports.
A PMI score of 50 represents an
unchanged level of business activity from
the previous month, so 48.9 in February
implies that output is decreasing.
The latest 12 month average for NI is
55.5 so NI business activity is
currently 6.6 index points below that
average.
A key explanation may be sterling’s
strength relative to the euro, as it
reaches heights not seen since 2007.
Nevertheless, manufacturing and
construction firms recorded growth in
activity and new orders; however this
was more than offset by the declines
in retail and the service sectors.
Looking towards the mid-year, there
are some grounds for optimism as
February saw some increase in
employment. This may indicate that
firms are expecting new orders in the
near future.
45
50
55
60
65
12 months average 3 months averageIndex (50=no changeg from previous month)
Consumer confidence dips
slightly…
In Q4 2014, the Danske Bank Consumer
Confidence Index dropped by three
points, to 131. However, as Q3 2014 had
been a six year high (134), this modest
drop should be seen in context. The Index
is still eight points higher than in Q4 2013.
The majority of NI households believe
that their financial position has remained
the same as one year ago (56%), with 17%
believing that their financial position has
improved.
People in the 16-22 age category answered
more positively than their older
counterparts in terms of both the financial
position relative to the last 12 months and
expectations for the future. Such
optimism is interesting in light of
relatively high levels of youth
unemployment.
The ‘expectations for spending’ element of
the Index was the only component to rise
from the previous quarter. There was a
marginal increase in the number of
households intending to spend more
on big-ticket items.
NI consumer confidence is marginally
down overall, but the index has only
been higher on two occasions in the
last six years (March and September
2014), suggesting that consumer
confidence overall, remains high. The
questions for 2015 will be whether
employment levels continue to rise,
whether real wages will start to rise
and whether low inflation and low
interest rates continue? These would
act to boost consumer confidence.
Figure 4.1: PMI Output Index by region, 12 & 3 month average to February 2015
Source: Ulster Bank PMI
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5. Future prospects
Global economy and
productivity prospects
PwC is currently projecting global
GDP growth of 3.5% in 2015 and 3.9%
in 2016, with average annual growth of
3.5% in the period 2017-214 .
The US is forecast to have healthy
growth of 3.2% in 2015 and 3.1% in
2016, while growth in the Eurozone
will remain subdued at 1.2% in 2015
and 1.75% in 2016. China is forecast to
see some deceleration in growth to
7.1% in 2015.
Since the middle of 2014, global
growth has been assisted by a slump in
oil prices, but at some point energy
prices are likely to start climbing
again. NI has only limited exposure to
trade with Russia; nevertheless 2013-
14 exports to Russia were worth
£110.4m5 , greater than the value of
trade to any other BRIC6 or emerging
economy.
The jury is still out on whether we are
witnessing a ‘new normal’ of rather
more mediocre growth or even some
sort of secular stagnation, especially in
the Western economies including
Japan. If the latter, this could be a
result of a combination of high levels
of debt, weakening productivity
growth and the impact of an ageing
population7 .
The Office for Budget Responibility’s
(OBR) central forecast for UK growth
is that the economy will grow in excess
of 2% annually until the end of the
decade, with public sector net debt
falling to 71.6% of GDP by 2019-20 8.
That assumes a sharp rise in
productivity growth above the current
0.5% rate to over 2% p.a. However if
productivity growth remains at its
current level, GDP growth will fall to
below 1% from 2016-17 and wages will
still be below their 2017 level by 2019-
20 – all with serious implications for
NI. In fact, the latest figures indicate
that levels of GVA per head in
Northern Ireland have continued to
decline relative to the UK average
reaching 76.7% in 2013; the lowest
comparative level for any year since
19979 .
Whilst the outcome of September’s
Referendum on Scottish independence
has removed one source of potential
uncertainty, some turbulence in terms
of both policy making and the financial
and currency markets should be
expected in the run up to the 2015
General Election and perhaps also in
its aftermath.
Local economy
PwC is forecasting GVA growth of 1.7%
in 2015, a slight slowdown on 1.8% in
2014. Recent growth across the UK has
been heavily dependent on consumer
spending and such growth in
consumption is not sustainable insofar
as it has been dependent on a
reduction in savings10 . During 2014-
15, NI enjoyed solid recovery in
employment promoted through new
foreign direct investment projects. It
should be noted that some of these
represented investments announced
ahead of the EU limits on state aid
which came into force on 1 July 2014.
Whereas during 2008-14 the civil
service headcount dropped by 16% in
Great Britain, the NI Civil Service
headcount remained static. Public
sector employment declined by only
1% during the two years to the end of
2014, but that trend will probably now
accelerate especially given the
proposed four year (£700m) voluntary
redundancy scheme. The Executive’s
recently agreed Budget 2015-16
indicates a cash reduction in current
spending of about £50m in 2015-16 or
0.5%, with the OBR’s forecasts for
reductions in Whitehall departmental
current spending implying a further
reduction of about 16% in real terms in
the three years to 2018-1911, though
with a jump back in the final year of
the next parliament.
This level of further austerity, on top
of reductions already in the system,
will be financially and politically
challenging for the Executive and we
find it difficult to determine how such
austerity can be absorbed without
radical change to the shape, structure
and operation of the region’s public
sector. The Budget 2015 has
confirmed that austerity will continue
and that the challenge posed by
welfare reform in the rest of the UK
will not go away. Devolution continues
to gather pace in Wales and Scotland.
Greater Manchester, is similarly
4 Measured using purchasing power parities. PwC March 2015, Global Economy Watch.5 NI dairy producers have a small exposure to the Russian retaliatory restrictions on food imports from the West.6 i.e. Brazil, Russia, India and China.7 M. Wolf 18 November 2014, “The curse of weak global demand”, Financial Times.8 Office for Budget Responsibility (OBR) March 2015, Economic and Fiscal Outlook.9 ONS 10 December 2014, “Regional Gross Value Added, December 2014”, Statistical Bulletin.10 The extent to which there could be scope for further reductions in savings is considered in PwC November 2014, UK EconomicOutlook.11 OBR March 2015, Economic and Fiscal Outlook.
12 On 3 March 2015, the DETI and DFP Ministers indicated they were sceptical as to whether a complete devolution andabolition of Air Passenger Duty could be justified in cost benefit terms. The detail of a similar exercise relating to CorporationTax reduction has yet to be put into the public domain.
8
acquiring control of the health budget
within its metropolitan area. By way of
comparison, in NI focus has been
almost entirely on seeking devolution
of Corporation Tax, which, whilst a
useful tool in the region’s arsenal, was
acknowledged during the debate on
the Corporation Tax Bill as unlikely to
be an economic ‘silver bullet’12 .
Exports have the potential to be a
major driver for growth.
Unfortunately, so far there has been
little evidence of sustained export-led
recovery, with 2013-14 manufacturing
sales outside NI rising by 5.4% on the
year to £14.3bn, a small increase in
real terms13 . In March 2015, DETI
published a new experimental data
series which attempts to measure the
total value of exports both
manufacturing and service sector from
the NI economy. Hitherto, we have
been able to measure the exports
produced by the manufacturing sector,
but the value of the DETI research is
that it broadens the coverage to also
include service sector activities and
many people will be struck by the scale
of service sector exports at over £3bn
(in 2012).
At the same time, if the figure for total
Northern Ireland economy exports of
£9.1bn in 2012 is accurate, it is
important to put that into some sort of
perspective. £9.1bn was equivalent to
30% of Northern Ireland's GVA or
total output in 2012. According to
figures published by the Scottish
Government in 2013, the export to
GDP ratio for the entire UK economy
was 33%, so Northern Ireland is
behind the UK average though not by
much. However, using the same
source, some of the small economies in
Europe have much higher export/GDP
ratios; Denmark 54%, Finland 41%
and Sweden 50% and the Republic of
Ireland would be even higher.
Such figures move us towards getting
much better benchmark figures about
Northern Ireland's competitiveness and
export performance.
At the same time, the euro has devalued
and further devaluations are likely as the
European Central Bank moves to combat
deflation through full-blooded
Quantitative Easing. The OECD has
indicated that overall UK growth is
somewhat sensitive to any appreciation in
sterling relative to the euro and that
relationship is likely to be stronger in the
case of the NI economy.
Inflation
We forecast that UK inflation will remain
below the Bank of England’s 2% target,
averaging 0.3% in 2015 and 1.8% in 2016.
However, price shocks in an open
economy like the UK are largely imported,
so the supply and demand of global
commodities like food and fuel are likely
to be the prime drivers of inflation.
Interest rates
The Bank of England stated policy line is
that it will raise interest rates when the
data indicate that the time is right.
Certainly, the consolidation of the UK
recovery makes this possibility
increasingly likely though probably not
until 2016.
Given relatively low inflation, we expect
the MPC to keep interest rates on hold in
the short term but then to increase them
gradually from later this year or early
2016, returning to around 3.5-4% by
2020. Businesses and households should
start preparing for this upward trend now.
A recent survey, conducted for the Bank of
England14 suggests that a 2 percentage
point increase in interest rates could
push 480,000 households into
mortgage arrears. The proportional
impact in NI could be greater.
Overall
The overall outlook for NI is
particularly downbeat. Recent growth
has been largely fuelled by household
consumption, a situation that cannot
continue at the current rate as savings
become eroded and, in the absence of
significant recovery in investment,
export and/or public expenditure, a
decline in the rate of growth is
inevitable.
While overall employment is
increasing, this employment growth is
not being matched by either growth in
average wages or increasing
productivity.
The disproportionally small private
sector cannot compensate for the
sharp decline in both public spending
and anticipated public sector
employment reduction.
The 23 December 2014 Stormont
House Agreement produced a complex
and inter-related timetable of
milestones for the Executive in terms
of putting its Budget on a sustainable
basis, introducing welfare reform and
wider modernization and reform of the
public sector. Given varying
interpretations between the political
parties as to exactly what was agreed
in terms of measures to mitigate
welfare reform15, the implementation
of that Agreement is now in doubt.
This casts doubt not only as to whether
Corporation Tax powers will be
devolved in 2017 but even as to the
continued operation of the devolved
government.
13 Manufacturing Sales and Exports 3 December 2014. Alternative and more up-to-date data from Her Majesty’s Revenue and
Customs based on VAT payments present an even gloomier picture of recent NI export performance.14 Bank of England Quarterly Bulletin 2014, The Financial Position of British Households: Evidence from the 2013 NMG
Consulting Survey.15 Particularly in terms of whether the guarantee to leave no one person worse off applied only to existing claimants or whether
it included future ones as well. If the latter, then the impact on the NI Budget would be considerable.
9
Employment, for key sectors*
Sector Dec 12 Dec 14 Change Key Issues
Public sector 214,605 212,794 -0.8%
NI Budget and the 2% real cut in departmental budgets for2015-16 implies redundancies in the public sector. During2009-14 public sector employment in the UK declined by15.3%, compared to a decline of 5.8% in NI.
The previous Budget 2011-15 missed an opportunity toreform and modernise, will it be different this time?
Healthcare andresidential care
90,710 92,490 2.0% Even with “protected” treatment, without fundamental
reform likely growth of public funds will fall short of growthin demand.
Construction29,680 29,050 -2.1% Little or no recovery in the local market. Larger firms
increasingly working in GB.
Tourism andleisure
53,730 53,810 0.1% Challenges remain such as better integrating the work of
Tourism NI (ex-NITB) and Tourism Ireland and improvingair connectivity. Given EU rules, an NI-specific VAT rate forthe sector is probably not feasible.
Businessservices**
33,470 34,710 3.7% New jobs, particularly through FDI.
Financialservices***
18,850 17,910 -5.0% Contraction continues in bank branch network.
Retail115,650 120,150 3.9% Employment has grown but reliant on consumer spending
growth continuing. Also, impact of switch to on-line.
Manufacturing****54,020 58,980 9.2%
Whatever happens to Corporation Tax, existing incentivesshould be more fully exploited.
Growth in R&D spending continues but at a slower rate thanthe UK average.
Food processing17,360 18,810 8.4%
Improved branding could promote growth further. The depreciation of the euro could have a large negative
effect (particularly, in fewer exports to the RoI).
Pharmaceuticalproducts
2,070 2,320 12.1% Strongly performing sector but scope for more in terms ofpersonalised medicine and clinical trials.
Energy andwaste*****
5,670 5,160 -9.0% Growth coming from waste. Driven by EU directives. Landfilltaxation could be an important issue.
Creative******7,900 8,620 9.1%
Tax incentives play an important role.
Total 700,150 723,670 3.4%
6. Sector dashboards
Note: *: Employees only (i.e. excludes self-employed), ** SIC codes 69-70 and 81-82, ***SIC codes 64-66 ****Excludes food processing &pharma, *****SIC codes 35 and 38-39, ******SIC codes 59-60, 71 and 90
Source: Quarterly Employment Survey.
10
7. Outlook analysis - Impact ofUK Budget 2015
The context is considerable
uncertainty about the NI
fiscal position…
The delivery of Budget 2015 came as
the NI economy continued to
demonstrate recovery albeit with
indications that the recovery may be
slowing. This Budget also coincided
with renewed concern as to the
strength of the supply side of the NI
economy ; the latest statistics imply
that the living standards gap between
NI and the UK average widened
substantially during the seven years to
201316.
George Osborne delivered his Budget
in the midst of considerable
uncertainty about the Stormont
Executive’s own devolved Budget. It is
unclear whether, or how soon, the
Stormont House Agreement of 23
December 2014 is going to be
implemented. This in turn casts doubt
on the Executive’s ability to gain extra
fiscal resources from HM Treasury,
notably in terms of a £700m loan over
four years to fund voluntary
redundancies in the public sector, and
doubt as to whether the Executive’s
Budget for 2015-16 is now viable in the
absence of Westminster support. The
political impasse over welfare reform
will further impact Corporation Tax
devolution which could facilitate a
lower rate being set by April 2017.
Some limited and short term
relief…
The overall assessment is that Budget
2015 is helpful to NI. In particular it
allows the Executive a little bit more
room for fiscal manoeuvre through a
positive Barnett consequential of
£11m. At the same time and by itself,
this Budget does not make a decisive
difference to either the underlying
supply side questions or to a
resolution of the uncertainty as to
whether Stormont House will now be
implemented.
With projected tax revenue up, the
Chancellor used this to fund a range of
tax cuts and spending increases.
Continued UK economic growth, now
forecast by the Office for Budget
Responsibility (OBR) to be 2.5% in
2015 and 2.3% in 2016, which is partly
the result of lower global oil prices,
produced this favourable situation.
But, in the longer term,
austerity continues
regardless of the May
Election…
Taking a longer term view, it was
significant that the Chancellor
confirmed continued and substantial
austerity through to 2018-19, though
with real terms public spending
growth in 2019-20. According to the
OBR current spending by Whitehall
Departments in 2018-19 could be 16%
lower than in 2014-15 in real terms.
Reading this across to NI implies a
series of tough NI Executive Budgets
in coming years. Admittedly, the
Chancellor’s projections assume either
a Conservative win in May 2015 or at
least a Conservative-dominated
government. At the same time, the
indications from Labour are that they
would slow the pace of austerity but
that it would continue.
Similarly, a Labour approach to
welfare reform may well continue with
many of the cuts and a tougher
sanction regime whilst rejecting some
of the recent specific Conservative
proposals such as a lower household
cap on benefits (£23,000 instead of
£26,000) and a cap on Child Benefit to
two children per family. This would
moderate slightly the “cost” to the NI
Executive of either non-
implementation of welfare reform or
implementation allied to measures to
protect existing benefit levels.
Given the OBR forecasts, it would not
necessarily be a sound strategy or
prudent negotiating position for the NI
Executive to assume that the General
Election, even if it produces a hung
Parliament, will leverage substantial
extra money for NI. Moreover, it is
also worth considering how NI might
be impacted if a Labour-minority
government was to be reliant on
support from the Scottish Nationalist
Party (SNP). We could be looking at
substantial tax competition if current
or previous SNP policy commitments
such as a lower rate of Corporation
Tax or Air Passenger Duty were
16 ONS 10 December 2014, “Regional Gross Value Added, December 2014”, Statistical Bulletin.17 Interestingly, the Executive have signalled that they are not inclined to further reduce APD in NI. University of Ulster
Northern Ireland Centre for Economic Policy December 2014, Air Connectivity in Northern Ireland: The Economic
Impact of Changes to Air Fares and Short-Haul Air Passenger Duty.
11
18 PwC October 2014, Good Growth Cities.
enacted17. Incidentally, the raft of
measures in Osborne’s Budget relating
to Manchester and the wider
“Northern Powerhouse”, such as
transportation and medical research,
are a further warning that NI could get
left behind in an increasingly
decentralised UK.
The Chancellor placed much emphasis
on existing and proposed “City Deal”
fiscal arrangements with GB cities
such as Inverness, Aberdeen, Glasgow,
Leeds, Cardiff and Cambridge.
Further powers are to be given to the
London Mayor.
Similarly recent PwC research18
highlights the role which Belfast has as
a driver for the entire NI economy.
Whilst the “super councils” from 1
April help, more needs to be done to
recognise the economy at the level of
the Belfast metropolitan area. It is not
a zero-sum game; growth in Belfast
can be good for the rest of NI. There
may be a need for a “compact”
between the City Council and the
Executive.
Budget measures which are
particularly relevant to NI…
Returning to specific and immediate
measures in Budget 2015 which are
particularly relevant to the NI
economy, these include:
The increase in the Income Tax
Allowance to £11,000 in two
years’ time. Since 2010, 103,000
people have been taken out of the
Income Tax system.
The freezing of fuel duties;
880,000 drivers should benefit
from this.
The small real terms increase in
the Minimum Wage to £6.70 will
have a disproportionate effect in
NI given the prevalence of low
pay.
Conclusion…
In direct terms the impact on NI of the
Budget will probably be small though
positive; notably the Barnett
consequential of £11m. Of greater
long term significance may be the
indirect impact on devolution in NI of
the example set by enhanced
devolution/decentralisation to cities
elsewhere in the UK.
The Chancellor indicated that austerity
will continue through to 2018-19 so
the Executive should prepare now for
three or four tough NI Budgets ahead.
The General Election and even a hung
Parliament is unlikely to shift the
fundamental fiscal arithmetic very
much or the broad pattern and
direction of welfare reform.
Unfortunately, reform and
modernisation in NI’s public sector is
made very difficult given the
uncertainty which continues to apply
to the implementation of the Stormont
House Agreement alongside the
associated borrowing powers and
other financial support.
12
Dr. David Armstrong
Partner
+44 (0) 28 9041 5716
+44 (0) 7713 680266
Dr. Esmond Birnie
Chief Economist in NI andScotland
+44 (0) 28 9041 5808
+44 (0) 7850 907892
Media information
John Compton
Director of Corporate Affairs
+44 (0) 7799 346925Andrew Doherty
Senior Economist
+44 (0) 28 9041 5751
+44 (0) 7811 384688
Alan Shannon
Economist
+44 (0) 28 9041 5224
Sam Donaldson
Economist
+44 (0)28 9034 6680
James Loughridge
Economist
+44 (0)28 9034 6552
Conor Duggan
Economist
+44 (0) 28 9034 6579
PwC Economics team in NI