08 January 2006

Comment: Alan Ruddock: Addicted to state subvention, north will suffer when it's gone

Times Online

The Sunday Times
January 08, 2006

The contrasting fortunes north and south of the border have been put in stark relief over the past few weeks. In the republic, the government’s finances are in even better shape than expected, while the Industrial Development Agency (IDA) reports that last year was its best since 2000. Job creation is remarkably high (almost 100,000 new jobs were created in 2005); tax receipts are buoyant on the back of the continued booms in construction and consumer spending; and while there are medium-term concerns about the sustainability of the rate of economic growth, the immediate future looks secure.

In Northern Ireland, by contrast, the picture is grimmer. Peter Hain, the secretary of state, recently described its economy as “unsustainable” and suggested, to predictable outrage, that its future lies in being part of an “island of Ireland” economy.

It was a neat soundbite, one that was guaranteed to appeal to nationalists and to appal unionists, who predictably spotted yet another political plot to do them down. Hain’s comments were, however, much more disingenuous than that. He knows that Gordon Brown, the chancellor, will not countenance fiscal or monetary independence for Northern Ireland. Under no circumstances will he allow Northern Ireland to set a corporate tax rate to compete with the republic, or even to align its Vat rates to Irish standards. And suggestions that he might allow Northern Ireland to join the euro are fanciful in the extreme. Any concession made to one part of Britain would be demanded by all the others: Scotland already looks enviously at the republic’s low corporate tax rate and romantically at the euro.

Northern Ireland is stuck with what it holds, so for Hain to talk of participation in an island of Ireland economy is nonsense, and he knows it. There is no island economy, and cannot be while two separate tax, legal and currency regimes exist. There is undoubtedly opportunity for greater trade between north and south, but businessmen both sides of the border know that, and pursue opportunities where they see them.

Since Hain’s prescription holds no water, his diagnosis is particularly troubling. If Northern Ireland’s economy is unsustainable, and if there is no easy fix by blending with an island economy, then what is to happen?

Undoubtedly, the economy is in trouble. It is alarmingly dependent on the British state, which is responsible for 63% of economic activity and directly employs a third of all workers. Its manufacturing industry, which was heavily reliant on the textile, clothing and ship-building industries, has shed 100,000 jobs in the past 35 years.

It has had some limited success in attracting foreign investment — about 100 American companies provide employment for some 23,000 people — but its achievements pale beside the success of the IDA, which has encouraged 1,000 foreign companies to provide employment in the republic for 130,000 people.

Northern Ireland’s economic statistics, which show reasonable growth and low unemployment, mask a host of problems. State spending, which is now under severe threat from Brown’s belt-tightening regime, is the main driver of the economy. Unemployment figures do not show the true level of economic inactivity in the north, where the number of people claiming incapacity benefit is 74% above the UK average. Neither do they chart the scale of the province’s brain drain. Because the number of university places is capped, more than a third of school- leavers attend university in the UK, and half of them never return.

The British subvention runs at a net £5 billion (€7.4 billion) a year, yet, for all the money, the quality of services falls below UK standards. Northern Ireland’s health service receives 9% more per head of population than the UK average, but its waiting lists are longer and productivity is lower.

Its education system is renowned for its success in delivering university students, yet 24% of the working population has no qualifications whatsoever.

The biggest problem, though, is the scale of the state’s involvement in the local economy, which runs at about double the equivalent rate for the republic. It is a pressing problem because Brown’s stewardship of the British economy — marked by a profligate tax and spend policy — has run its course.

British growth is slowing, its tax revenues contracting and its options are limited. Brown has to rein back spending where nobody either notices or cares, and from a Westminster standpoint, Northern Ireland qualifies on both counts. Spending will be cut, jobs will be lost, and whatever savings accrue in time from lower security bills will be snaffled by the Treasury, and not returned to the province.

Unless the local business community takes up the economic slack with alacrity, the deflationary pressures on the economy will be severe. And therein lies another problem: years of state dependency have robbed Northern Ireland of entrepreneurialism. It lags far behind the republic and the UK, with proportionately half the number of young entrepreneurs. Businesses have to compete with the state for employees, yet struggle to match the wages and job security that the state can offer, not to mention the pensions. That feeds through into the choices made by students and the courses offered by universities: why chase a high-tech degree if your guaranteed future lies as a bureaucrat?

Into this sclerotic, state-dominated, economy Hain hopes to attract a new wave of foreign investors, who will be asked to choose Northern Ireland over cheaper accession countries, far cheaper Asian countries and the republic’s low-tax regime. In its favour it can offer grants, but so can the rest of the UK regions, and it can offer a relatively well-educated, English-speaking workforce, as can the republic.

It can highlight a few success stories, such as Seagate, an American firm that employs more than 2,000 people in two plants and which has created world-beating standards of quality and productivity in a highly demanding industry. Yet the republic can point to highly developed clusters of high-tech companies, including the world’s best-known brands such as Intel, Microsoft, Google and Dell. The reality is that the inward investment boom has passed by Northern Ireland.

The world is now a far more competitive place than it was in 1998, when the Good Friday agreement was signed. Back then, buoyed by international goodwill and a genuine feelgood factor, Northern Ireland could have extracted concessions from the British and the European Union that might have proved the catalyst for a mini-boom. But the opportunity was lost. Since then the province’s politicians have engaged in mind-numbingly rancorous politics. Its communities have become more, rather than less, polarised, and the economy has been left to wither.

Sinn Fein struggles with the concept of democracy, plays fast and loose with decommissioning, indulges in espionage and deceit, and forgets that its posturing eats away at the economic prospects of its people. Unionism sees plots and conspiracies at every turn, struggles to embrace cross-border initiatives and devotes none of its energies to tackling what is threatening to become a genuine crisis.

And all the while the republic ticks along, creating jobs and enjoying a prosperity that was once beyond its dreams. In 1970, Northern Ireland enjoyed a standard of living and an economic output that exceeded the republic’s by almost a third. Now it lags behind, and the gap grows daily.

Where the fault lies no longer matters: Northern Ireland’s economy is unsustainable because the British exchequer no longer has the interest or the resources to maintain it in the style, however faded, to which it has become accustomed. The province’s politicians, who draw a salary for doing diddlysquat, need to wake up to their crisis, resolve their contrived differences, and get on with the serious business of providing leadership and direction.

Northern Ireland has to wean itself away from state dependency, and that requires a combination of entrepreneurialism and political realism. Republicans must realise that those in the republic who yearn for unity would prefer a successful Northern Ireland that does not require huge state subvention. Unionism must accept that cross-border co-operation on every possible economic level is essential to its prosperity. Without realism the impasse will remain and the province’s economy will founder.

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