The eco­nomic cost of lack of devo­lu­tion isn’t clear

Belfast Telegraph - Business Telegraph - - Economy Watch - by Paul Macflynn, econ­o­mist at the Nevin Eco­nomic Re­search In­sti­tute @Ner­i_re­search Next week: Neil Gib­son of the Ul­ster Univer­sity eco­nomic pol­icy cen­tre

As the dead­line of June 29 passed without the es­tab­lish­ment of a new Stor­mont Ex­ec­u­tive, it looks as though North­ern Ire­land may be in for a long pe­riod with no de­volved govern­ment. Quite how long this in­ter­reg­num will last is in the realm of po­lit­i­cal spec­u­la­tion, but it does have im­por­tant im­pli­ca­tions for our econ­omy.

Much has been made of the fact that, as a con­se­quence of the fail­ure to form an Ex­ec­u­tive back in March, the civil ser­vice has been ‘run­ning the coun­try’.

That the walls have not come tum­bling down around us, has led many to ques­tion the real ben­e­fits of devo­lu­tion and whether we would re­ally miss the Ex­ec­u­tive if it never came back.

How­ever, much of this com­men­tary is pre­ma­ture, as the eco­nomic im­pli­ca­tions of this in­ter­lude are yet to be felt.

Much of the dam­age may be in train, but we are un­likely to ex­pe­ri­ence its ef­fects for the time be­ing. The eco­nomic im­pli­ca­tions are wide and var­ied but can be bro­ken down into two phases, medium and long-term im­pacts.

The medium-term im­pacts stem from the de­ci­sions around pub­lic spend­ing in North­ern Ire­land. Un­der ex­ist­ing leg­is­la­tion, civil ser­vants can only re­lease fund­ing of up to 95% of last year’s bud­get al­lo­ca­tions.

If the sit­u­a­tion con­tin­ues to the end of the fi­nan­cial year, it could re­sult in a large short­fall of some £500m in pub­lic spend­ing.

In re­al­ity, this sce­nario is ex­tremely un­likely to play out as the Govern­ment would step in long be­fore that point and ei­ther in­tro­duce a bud­get or ap­point di­rect rule min­is­ters. Run­ning out of money is not the is­sue here.

At present civil ser­vants have the power to con­tinue pub­lic spend­ing as it cur­rently stands, but they have lim­ited or no ca­pac­ity to make pol­icy changes.

This has been a key con­cern for the com­mu­nity and vol­un­tary sec­tor in terms of its fund­ing, but the same sce­nario also ap­plies in cap­i­tal spend­ing.

Large in­fra­struc­ture projects are planned years in ad­vance of con­struc­tion and re­quire min­is­te­rial di­rec­tion. The ab­sence of that di­rec­tion, even for a few months can push these projects into de­lays that can last even longer.

The knock-on ef­fects for lo­cal con­struc­tion firms and sup­pli­ers can be even more dis­rup­tive.

Many firms will make in­vest­ment de­ci­sions based on the promised in­fra­struc­ture projects and there­fore any de­lay in pub­lic in­vest­ment can be mul­ti­plied in the pri­vate sec­tor.

The level of dis­rup­tion caused is di­rectly linked to the length of this cur­rent im­passe.

The ab­sence of an Ex­ec­u­tive in the first part of this year also meant the ab­sence of a June mon­i­tor­ing round, and the Sec­re­tary of State is now mak­ing ar­range­ments with the Trea­sury in or­der to dis­burse up to £120m of un­spent funds.

How he will choose to al­lo­cate that money is com­pletely a mat­ter for him­self. There will be no demo­cratic ac­count­abil­ity for it nor will there be any de­bates in the Assem­bly about the wis­dom of any such al­lo­ca­tions.

When the amount in ques­tion is only £120m, it may not seem a big deal, but as we look at the tra­jec­tory of the block grant over the next four years, these de­ci­sions be­come much more sub­stan­tial.

The block grant is set to re­main static at just over £11bn up to 2021. How­ever, as in­fla­tion is cur­rently run­ning at just un­der 3%, North­ern Ire­land’s block grant will ac­tu­ally be cut and it could be up to 7% lower in real terms by 2019 — on top of the al­ready in­creas­ing pres­sures on the health and ed­u­ca­tion sec­tors.

How this spend­ing pro­file is to be man­aged will re­quire some sig­nif­i­cant and en­dur­ing de­ci­sions. What ar­eas of spend­ing are pri­ori­tised? Can we re­ally af­ford a cut in cor­po­ra­tion tax?

While the in­tro­duc­tion of di­rect rule min­is­ters could bring some cer­tainty to the de­ci­sion-mak­ing process, we are likely to be short changed in the end.

Di­rect rule min­is­ters owe a greater al­le­giance to the Trea­sury than they do to vot­ers in North­ern Ire­land. What­ever the short­com­ings of the po­lit­i­cal class, devo­lu­tion al­lows for a de­bate about what kind of econ­omy and so­ci­ety North­ern Ire­land wants to be.

This brings us to the long-term im­pact of the cur­rent im­passe.

Devo­lu­tion is meant to have an eco­nomic ben­e­fit be­yond the peace-build­ing role that it is so of­ten iden­ti­fied with. Bring­ing de­ci­sions closer to the peo­ple that they af­fect and in­still­ing greater own­er­ship of those de­ci­sions is a way of build­ing up so­cial cap­i­tal.

A de­volved govern­ment can cre­ate im­por­tant net­works with so­cial part­ners and busi­nesses al­low­ing for its in­ter­ven­tion in the econ­omy to be ef­fec­tive, ef­fi­cient and innovative. For all its faults to date, the Ex­ec­u­tive showed the ca­pac­ity to do this job well and ev­ery day that it re­mains in limbo, it is un­do­ing that progress.

Di­rect rule min­is­ters owe a greater al­le­giance to the trea­sury than they do to vot­ers in NI

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