- £1bn – “a welcome boost,” but not the silver bullet for an underperforming economy.
- Forecast NI growth of 0.9% in 2018 - well behind overall UK and regions.
- 87% of NI farm incomes comes from CAP… post-Brexit reform,” is inevitable.”
Northern Ireland can expect economic growth of 1% in 2017, falling to around 0.9% in 2018, according to the latest Northern Ireland Economic Outlook (NIEO) from PwC.
PwC also says that while the ‘confidence and supply’ arrangement between the DUP and Conservatives, brings a welcome £1bn of new money to the region, it will not fundamentally alter the structural challenges that face any new Executive.
The absence (at the time of publication) of any certainty around the restoration of the Stormont institutions, means that the strategies and policies essential to regenerate the economy over the medium-to-long term, remain elusive, with agri-food particularly at risk.
PwC partner, Dr David Armstrong, says that the additional money will alleviate some immediate problems, but issues like productivity, reform of agri-food and scaling-up the private sector remain unresolved:
“The financial deal brings £200m a year for two years for infrastructure, with the £150m York Street Interchange project specifically mentioned as a priority. The balance of the fund could help complete vital schemes like the A5 or A6 and that would be a welcome boost to infrastructure and connectivity.
“Additional cash for health, education and to stimulate social investment will also make for real short-term improvements. With one in seven people in Northern Ireland waiting for an outpatient appointment, the gap between demand for services and funded capacity means health service transformation is vital and urgent.
“And affording flexibility to the previously-agreed £500 million for shared education and housing projects will also offer the potential to some creative ways of stimulating investment in social housing.
“The investment package will alleviate some urgent current pressures, but it is not the silver bullet that will regenerate an underperforming economy. Employment has now recovered to more than the pre financial crisis peak, but virtually all other recovery measures remain below their 2007 level. Rising inflation means real wage growth is now negative, household savings levels are at their lowest since the early 1960s, so medium-term growth prospects are not encouraging.
“The good news is that the local economy will keep on growing, although a combination of decelerating consumer expenditure, lacklustre business investment and Brexit jitters, suggest that growth will slow. We now expect the Northern Ireland economy to grow by around 0.9% in 2018 - well behind the forecast UK growth of 1.4% and the lowest amongst the UK regions.”
The NIEO’s recovery index measures how much ground the local economy has made up as compared to the region’s peak economic performance, which occurred before banking crisis and housing slump that began in mid-2007.
The recovery index suggests that, while employment has not passed the pre-crisis peak, real wages are still only 94% of their 2005 levels and real household disposable incomes are only 89% of their 2005 levels – that’s equivelant to an annual income cut of around £1,810. Job creation is not being accompanied by a proportionate increase in wealth-creation, so further economic recovery will rely on an increase in productivity and knock-on increases in real wages and household incomes. The NIEO concludes that continuing to measure Northern Ireland’s economic recovery solely by employment levels, would be misleading.
The NIEO takes an in-depth look at the Northern Ireland agri-food sector, its importance to the economy and its prospects post-Brexit.
Currently agri-food employs around 5.5% of the NI workforce, more than double the overall UK agri-food’s 2.4% share of total UK employment. Locally, that breaks down to around 75,000 local jobs, comprising around 50,000 farmers and farm-workers and 25,000 jobs in the food and drink processing sector. In total, that amounts to an industry GVA of £1.1bn - around 3.2% of NI total GVA as compared to only 2.3% across the UK.
NI farmers currently receive EU support in the form of payments from the Common Agricultural Policy (CAP) where NI received £2.5bn by way of CAP Single Farm Payments between 2005 and 2014. Around 87% of NI farm incomes are made up of CAP payments, a significantly higher proportion than the UK average where 53% of annual farm incomes come from CAP support.
Assuming no change to the status-quo, CAP payments to NI farmers will total around €2.5bn between 2014-2020. However, given the current reliance of NI farming on direct subsidies, the industry will need a package of support from the NI and UK governments to enable it to transition successfully to the post-Brexit world, where three possible options are immediately apparent:
- “no subsidy” - accept the loss of the EU funding and offer no replacement. The sector will then be fully exposed to free market conditions;
- “replicate EU funding” - the UK and NI governments replicate the EU funding through existing or new mechanisms, ensuring continuity and financial security for farmers but with an almost total continued reliance on direct payment subsidies; and
- “reform with re-tailored subsidies” - reform of the agri-food sector and its funding structures (similar to New Zealand, Canada and Australia) with subsidies tailored more towards the specific needs of the sector but with more exposure to free market conditions.
David Armstrong says that, post-Brexit, the apparent options are between maintaining - and someone paying for - the status quo, or reform:
“The global trend is towards reducing subsidies to farmers, removing trade barriers and encouraging efficiency, productivity and an export focus. Within the EU, CAP payments have been decreasing as a share of the EU’s budget and now CAP accounts for 39% of its budget, down from 70% in the 1980s.
“The percentage of the EU budget going to CAP is expected to decrease further after 2020, suggesting that, as subsidies decline and borders open, reform is inevitable, regardless of Brexit. The challenge for the industry and politicians is to identify the options, create a reform strategy and manage the process with the minimum impact on the producer and processor sectors.
“Yet another compelling reason for an Executive and Assembly that can put a laser focus on the economy, on reform and on creating an internationally-focused, wealth-creating region.”
A copy of the report can be downloaded below.