"Bailout for Wrightbus and H&W could be part of DUP negotiations with Johnson"

Press/Media: Expert Comment

Description

Cited at length in Belfast Telegraph article re. how response to cash flow problems at 2 NI firms- Wrightbus and Harland and Wolff- might figure within the negotations around Phase 2 of the Conservative-DUP Confidence and Supply Agreement

Subject

Citations were taken from this Press Release:

Release: Immediate Wed. 24 July 2019

 

Confidence and Supply- Phase 2 But How well did the 2017-19 Agreement work?

Dr Esmond Birnie, Senior Economist

“A new Prime Minister implies we are now moving into the negotiations for Phase 2 of the Conservative-DUP Agreement.

In evaluating the 2017-19 Agreement the positive aspect is that most of the money has been spent notwithstanding the absence of a devolved government. That said, some of that money was spent in ways which differed from how the original Agreement said it would be spent.

Turning to what might be in the next Phase, more cash will always be useful to a still cash-strapped NI public sector. It is extremely unlikely that HM Treasury will offer anything large enough to plug some massive holes in the NI Budget. Interesting questions around tax policy and emergency aid to some NI businesses (Wrightbus and H&W) also emerge.

Further Confidence and Supply monies are useful, especially if they are invested in future growth capacity (as opposed to frittered away in crisis management of current cash crises) but they are no substitute for a transformation agenda in the NI public sector or an NI industrial strategy- both of which, ideally, directed by devolved Ministers or, as second best, by active Direct Rule Ministers.

 

Part 1 Evaluating the previous two years of the Agreement

  • Notwithstanding the lack of devolution there has been relative success in spending the money- about £750m out of just over £900m over the two years (and most of the rest of the money, relating to ultra fast broadband, should be committed early next year). For details of spending, see Table in Part 3 below.

  • Extra money was useful at a time when most NI Departments (nearly everything outside of Health) were facing real term budget cuts. That said, even c. £900m over two years looks small when compared to the underlying gaps in the NI Budget- a shortfall in capital spending of close to £4.5bn can be indicated (i.e. £1.2bn to deal with the backlog in roads maintenance, £1bn to clear waiting lists, £2bn+ for improving NIW water supply and treatment,  £0.2bn+ for healthcare transformation), and about £500m annually in terms of current Departmental spend (e.g. £250m for schools, c. £50m in terms of shortfall in university funding compared to England, annual spending shortfalls in terms of Housing Executive, Translink and social care, and c. £100m if the welfare reform mitigation package is extented).

  • In practice, and this was always likely to happen, there was some deviation from the planned type of spending. There was a shift away from longer term investments towards short term relief of budgets- understandable but probably not a good thing. Money allocated for health transformation was devoted to reducing immediate pressures. Money allocated for “infrastructure” in fact went into the common budget pot.

Part 2 What might be in the next Phase of the Agreement?

  • It is obvious that more money for NI Departments would be useful.

  • That said, as noted above, the likely scale of assistance through Phase 2 will probably be small compared to some of the looming unfunded Budget demands.

  • Consideration of further tax devolution to NI has always been there in the margins of the Confidence and Supply and, indeed, the previous multi-Party agreements at Stormont (Stormont House and Fresh Start). In principle, increased tax devolution can have two types of benefits: “political”- make regional government at Stormont more “responsible” as it is forced to matching spending decisions with consideration of revenue raising, and “economic”- tax rates could be cut to make the NI business location more competitive. In practice, tax devolution is difficult to administer and any tax cuts at the regional level may imply less revenue raised, hence adding to the problems of Budget balance already referred to [Note 1].

  • Specifically in terms of tax devolution, the DUP could ask for the 12.5% NI Corporation Tax rate to be implemented without the two existing preconditions applying- i.e. that it could happen even if there was no Stormont Executive in place and there would be no deduction from the NI block grant. Both of those preconditions have to apply as long as the UK is part of the EU or linked to EU rules [Note 2] and even post Brexit HM Treasury would have to be persuaded.

  • A possibly more modest fiscal proposal would be to devolve all of Air Passenger Duty [Note 3] and/or a VAT rate for tourism [Note 4]. Unless the Treasury is feeling generous, these measures would imply hits to the NI block grant (albeit, smaller ones than for Corporation Tax). The case for such measures is an improvement in NI’s cost competitiveness especially compared to the Republic of Ireland- the jury is still out as to whether there would indeed be a large and positive economic response [Note 5].

  • The current cash crisis at two of NI’s most respected manufacturing businesses (Wrightbus- employing c. 1,400, and H&W employing c. 130) may also figure in the talks. The fact that both firms produce high quality products in markets which have good long term prospects would be a case for some short-term cash aid. The argument against would be that historically when government provided operating subsidies to NI businesses this rarely led to improvements in the performance of those firms.

 

 

 

 

Part 3. Summary of the spending under the 2017-19 Agreement

Spending category

Amount planned for 2018-19, £m

Amount planned for 2019-20, £m

Extent to which money has been spent

Infrastructure

200

200

Spent but used as general funding support for NI Departmental spend. The York Street Inter-change was named in the Agreement, but only very limited pre-procurement work has been possible.

Broadband

75

75

Just £3m in 2019-20 on pre-procurement preparation. Moving to tender from private sector suppliers, even in the absence of a Minister, in early 2020.

Deprivation

20

20

Spent. £20m allocated for each of the following 3 years.

Education and health pressures

50

50

Spent (£20m in 2018-19 and £80m in 2019-20).

Health transformation

100

100

Spent-though some used to deal with immediate pressures.

Mental health

10

10

Spent. £10m allocated for each of the following 3 years.

.“

Ends

Note to Editors

  1. Unless, that is, one takes an admittedly very optimistic view- as in the so-called Laffer curve or the thinking of the 14th Arab scholar Ibn Khaldun which has been referenced by Boris Johnson- that any tax cut would provoke such a large increase in economic activity that consequentially total tax yields would increase by enough to compensate for the initial reduction in revenue collected. In practice, any such compensating effects are unlikely to be 100%.

  2. And, very likely, also apply under any form of softer Brexit where membership of the Single Market continues implying still being subject to EU Law and the oversight of the European Court of Justice- EU “case law”, particularly the “Azores Judgement”, establishes that a regional area within the EU can have a lower rate of business taxation than the rest of the member State of which it is part provided that there is a regional government in place provided that regional government “takes the hit” in terms of any reduction in tax revenue collected.

  3. The rate for long haul flights (i.e. trans-Atlantic) has already been devolved.

  4. Though, arguably, a regional-sectoral special rate of VAT would contravene EU rules. So, is this measure dependent on Brexit?

  5. Important considerations are how far any tax cut would be passed on by businesses (hotels or airlines) in the form of prices and how far would demand be responsive (i.e. how price elastic would demand really be)?

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For further information please contact:

Dr Esmond Birnie, Senior Economist, 07703 184459

 

Period25 Jul 2019

Media contributions

1

Media contributions

  • Title"Bailout for Wrightbus and H&W could be part of DUP negotiations with Johnson"
    Degree of recognitionRegional
    Media name/outletBelfast Telegraph
    Media typePrint
    CountryUnited Kingdom
    Date25/07/19
    DescriptionCited in Belfast Telegraph article
    PersonsEsmond Birnie