Category Archives: Economy

Central Political/Economic Forecast

This is our Central Forecast currently for Northern Ireland (and the UK/EU generally) after last week’s referendum. Clearly, there are hugely varying scenarios possible, including political and economic conditions spiralling out of control.

The UK will exit the EU (under Prime Minister Theresa May) in Spring 2019, agreeing an EEA deal minus Financial Services access in return for some additional controls of movement of labour (somewhere between “Norway Model” and “Swiss Model”). Significant variations of this scenario are possible, ranging from remaining within the EU with some additional border controls to a completely disorderly exit with no deal.

The UK (and Northern Ireland) will enter recession in Spring 2017 and the economy will contract during 2017, with recovery not beginning properly until 2019. It is possible the UK (but not Northern Ireland) will avoid technical recession; conversely a disorderly exit could cause an economic shock beyond that of the 2008 “Credit Crunch”.

The UK debt burden will hit 100% of GDP in 2017 and the deficit will remain almost as high in 2020 as it was in 2015. Although we do not expect the debt in itself to be more expensive to service (contrary to some forecasts), a combination of inflation plus the fact the deficit was due to have been closed by the end of the decade means there will be a marked reduction in funds available for public services and welfare provision (we estimate this reduction will be around 3% versus previous, pre-referendum forecasts). There is little variation of this forecast as it is determined by uncertainty around the UK’s future status, rather than the status itself.

UK public spending and welfare provision will be reduced by 8% versus previous pre-referendum forecasts which, combined with higher unemployment (thus welfare bills) will see spending on public services reduced by 14% versus pre-referendum expectations. This will lead to significant strain on Health and Care services in particular. As with the above, there is little variation on this forecast.

UK consumption will reduce 3% in 2017 and will not stabilised until late 2019. This will particularly hit the retail and hospitality sectors, and there will be disinvestment in city centres. The property sector will also be hit, with a knock-on effect on local government services. Again, there is little variation in this forecast.

EU funding will cease to be available for most cases, particularly Rural Development, from 2020. UK will retain access to EU funds for business R&D (except in financial services and agri-food) and for infrastructure. CAP and CFP will be withdrawn from 2019/20 and, outside England, will need to be replaced by devolved Executives.

There will be neither an immediate General Election or a second Scottish independence referendum, but this is an uncertain forecast. There remains the possibility of an early UK General Election to approve a negotiating strategy or exit deal; a Scottish referendum is highly unlikely this decade although we do expect polls consistently to indicate in-principle support for Scottish independence.

UK party political turmoil will continue through the next election, with potential for radical change up to a potential change in electoral system and the Barnett Formula. UKIP is currently likely to form the Opposition after the next General Election. Political debate will shift from internal social issues to immigration and economic development. Despite reductions in public spending, there will be downward pressure on taxation with Corporation Tax potentially being abolished altogether. It is this political uncertainty which feeds into instability in the real economy.

Northern Ireland will attain “Special Access” to the EU, including potentially a Shared Customs arrangement, as its citizens generally qualify for EU citizenship and it shares a land border with the EU. This will mean more EU support is available than elsewhere in the UK, but CAP and CFP will cease as elsewhere in the UK. There will be a surprising degree of political stability but significant strain on public services due to reductions in funding provision versus previous assumptions (these will be marginally less marked than elsewhere in the UK, but still significant). The voluntary/community sector will be particularly hit in Northern Ireland, as many EU or EU-related funding streams simply come to an end without prospect of replacement. There will be the need for significant reform and collaboration.

The UK’s long-term economic outlook is marginally poorer than it was pre-referendum, but with the potential advantage of regional re-balancing due to less dependence on the finance sector and the City of London. The most significant risk to the UK is its loss of reputation for political stability, and loss of faith in its institutions. The longer-term viability of the Union itself, however, remains in question, which could bring further economic shocks. This forecast cannot now be made with any precision, as there are too many variables.

The Eurozone will generally avoid recession but will be subject to a marked slowdown in the short term. There are also significant political risks, with notable elections in 2017 in the Netherlands, France and Germany and the increased focus on issues forced by populists across the continent. Recession, and the election into government of populists opposed to EU membership, remains a risk in almost every EU country currentlyalthough there is no prospect of any committing to an in/out referendum.

Sterling will stabilise at just under $1.30 and €1.20, but will be subject to occasional significant volatility. It remains possible that Sterling will stabilise significantly lower than that, particularly against the US dollar.

Analysis update – NI budget

The Finance Minister is currently presenting a revised NI Executive Budget to the NI Assembly, after consulting on the Draft Budget and the availability of some additional funds through Barnett Consequentials and non-use during the current financial year. This follows on from and is complementary to our analysis of the Draft Budget.

Figures apply only to Current Resource spending except where specified.

Extra Allocation

The Executive is promoting an “extra allocation” of £150 million for Resource spending – around 1.5% extra.

The “extra” money comes from:

  • an allocation by the UK Treasury through Barnett consequentials (most obviously from the £1.7b increase in NHS spending for 2015/16) – £79m;
  • money not used to mitigate welfare reform – £43.1m; and
  • reduced requirements identified in monitoring rounds – £30.5m (although other pressures see this effectively reduced to £28.1m).

This is below £150m, and the latter strictly applies to 2014/15 not 2015/16, but there are also some helpful sundries including £10.7m from the revaluation of public sector pension schemes, £5.9m reduction in interest repayments, and £1.3 in increased rates revenue (although there are is also an overcommitment of £4.4m to address in the current financial year, and some other minor negatives).

This, plus the ability to use Capital funds to pay back loans and welfare deductions to the UK Treasury, is sufficient to mean that total Current Resource Spending will be only £60m lower in 2015/16 than 2014/15 (assuming that the NI Executive is allowed to keep an unallocated £13.9m to run over).

There is also an allocation of £18.7m which had not previously been agreed for European projects, and some re-adjustment on the capital side which does not affect current resource spending directly.

The term “extra” is used in the sense that no Department will lose out versus its position in the Draft Budget. The extra money will be allocation additionally to that.

Executive Change Fund

The Minister’s Statement also includes the allocation of £30 million held in the “Executive Change Fund”, held aside as money to be bid for for “innovative reform” by Departments.


Health receives no “extra” money. It receives £4 million (c. 13%) of the “Executive Change Fund” allocation – much lower than its share of the overall Draft Current Resource Budget of 47%.

Some concern is hinted at concerning the “performance” of the Department of Health, Social Services and Public Safety in managing its budget.


Education does well, receiving almost half the “extra” allocation (£63m), an increase of 3.4%. It also receives £1.4m from the “Executive Change Fund”, much less significant.


Policing receives an extra £20m, which means the overall spend on Justice rises 2%.


Enterprise had already done well from the Draft Budget, and an extra £3m goes directly to Invest NI.

Employment and Learning, which is likely to merge with Enterprise at the end of the financial year, receives the biggest share uplift at 5% (£33.2m), although this is against a very unfavourable initial allocation.

Other Departments

Other Departments receive extra allocations of up to £5 million. Another £5 million is set aside for a “Social Investment Fund”.

New Northern Ireland Current Resource Departmental Expenditure allocations in revised Budget for 2015/16

New Northern Ireland Current Resource Departmental Expenditure allocations in revised Budget for 2015/16


No revenue raising applies. The average household in Northern Ireland will pay £812 in “household taxes” and zero extra for water (versus £1322 in Scotland, £1433 in England and £1613 in Wales where water delivery is charged extra).

Corporation Tax (NI) Bill – Overview

The draft Corporation Tax (Northern Ireland) Bill was published last week, with the Secretary of State pledging her best endeavours to have it on the statute book by May’s election (in other words, by the end of March). This is an extremely challenging timescale, but any new government would be bound by the spirit of the Stormont House Agreement to proceed with it anyway. So, what is it?


The Republic of Ireland’s economy grew rapidly from the early 1990s to the early 2000s, moving from GDP/capita 20% below the EU average to 40% above in just over a decade. Campaigners, particularly businesses, argued that one of the key components of that success was its rate of Corporation Tax (i.e. the tax incorporated businesses pay on their profits), which were placed at much lower than the EU mainstream and were thus seen as an easy way of promoting inward investment from North America. It was suggested by them, in Northern Ireland and elsewhere, that a similar policy should be tried. This analysis is, however, contested – for example, the Republic of Ireland also made use of tax loopholes so that some large investors were able to avoid paying any Corporation Tax at all. There are also questions over the long-term sustainability of the policy and whether “GDP/capita” is a sensible measurement of economic progress in any case.

The proposal is generally referred to in Northern Ireland discussion simply as “Corporation Tax”, understood to mean the reduction of Corporation Tax in Northern Ireland to match the rate across the border.

In fact, the proposal is specifically to transfer the power to set the rate of Corporation Tax to the Northern Ireland Assembly, and then only for companies with a presence in Northern Ireland on profits attributable to trade in Northern Ireland outside the broad finance and oil industries. It is noted also that the power to move the rate downwards would require the Northern Ireland Executive itself to find, from Departmental Budgets, money to pay back to the Treasury to make up the difference. (It is commonly stated that this comes about because of “EU rules”, and indeed it does; but in fact it also comes about under the existing UK financial policy known as “Parity”, which is currently topical due to Welfare Reform).

The assumption is that the Assembly would immediately use this power to reduce the rate to the current rate across the border, i.e. from 20% (the UK rate from April 2015) to 12.5% (the Irish rate). However, that is not contained in the Bill. The Assembly could in theory (as has been mooted already by the Enterprise Minister) reduce it further, perhaps to 10% or even nil; on the other hand, there is an increasing body of opinion which supports transfer of the powers but does not support using them immediately, given the Executive’s ongoing Budget difficulties.

1. Rate Application

After passage of the Bill, there would be a “Northern Ireland Rate” (of Corporation Tax) and a “Main [i.e. UK] Rate”.

The “Northern Ireland Rate” would apply to trading profits of SMEs whose costs and employee time are largely (75%) in Northern Ireland and to the profits of a large company attributable to a presence in Northern Ireland, and also excludes certain industries.

This is designed to stop large companies simply shifting their nominal HQs to Northern Ireland from elsewhere in the UK.

2. Rate Setting

The “Northern Ireland Rate” would simply be set by resolution of the Assembly at any time before the start of the financial year. If one is not set, the existing rate continues to apply.

In practice, this would appear to make the setting of a lower rate for 2017/18 unlikely but conceivable.

3. Application

The Bill distinguishes between “Northern Ireland profits” (i.e. profits due to activity based in Northern Ireland) and “mainstream profits”. The former is taxed at the “Northern Ireland Rate”, and the latter at the “Main Rate”.

Losses are relieved as far as possible against the relevant rate.

The objective here is that the “Northern Ireland Rate” would be paid on profits due to trade attributable to activity in Northern Ireland. This is designed to encourage local employment and, again, to stop companies simply shifting nominal HQ from elsewhere in the UK (or anywhere else, for that matter).

4. Definition

To qualify to pay the “Northern Ireland Rate”, a company must be a “Northern Ireland Company”. To do this, it must meet the aforementioned conditions concerning trading and presence in Northern Ireland and must be in a “qualifying trade” (although a “Northern Ireland Company” may pay the “Northern Ireland Rate” on profits from “back-office functions” even of a non-qualifying trade).

A “Northern Ireland Company” may be a “Northern Ireland SME” or a “Northern Ireland Large Company” (or a large company with a “Regional Establishment”, see 5 below).

This is primarily designed to encourage local entrepreneurship across the board, but to stop any threats to London or Edinburgh as the UK’s prime financial centres (finance is a non-qualifying trade).

5. Regional Establishment

Large companies may qualify to pay the “Northern Ireland Rate” (if the above conditions are met) on profits from a Northern Ireland trading arm. To do this, they will formally have to set up a “Northern Ireland Regional Establishment” – essentially a devolved part of the company meeting the trading and presence requirements.

This is designed to enable investors to pay the “Northern Ireland Rate”, but only on Northern Ireland activity.

6. Profits and Losses

Where a company is in a non-qualifying trade (notably finance) but has some back-office functions, it may declare its profits (and losses) separately – paying the “Main Rate” on front-line (non-qualifying) activity, and the “Northern Ireland Rate” on back-office activity.

This is complex, but seems designed to boost Northern Ireland’s growing back-office finance industry.

7. Other Provisions

Other provisions include the allowance of relief against establishing a “Northern Ireland Regional Establishment”; the payment of royalties at the “Main Rate”; makes the “Northern Ireland Regional Establishment” effectively a separate but not independent enterprise; and distinguishes “back-office activities”.

8. Assets

Essentially, assets used for the purpose of making a profit payable at the “Northern Ireland Rate” are set against the Northern Ireland Rate.

This is extraordinarily complex, depending on the type of company, its trade, the location of its activities, the date of establishment of the asset, the purpose of the asset, and so on. Accountants and lawyers will have a field day!

9. Credits

R&D credits are assessed against the “Main Rate” (generally and where possible). The adjustments required to achieve this are, again, extraordinarily complex.

The idea is to ensure no one loses out (or is dissuaded) from R&D activity.

10. Land

Profits and losses on land are treated similarly to assets and credits above.

11. Film

Film tax credits remain in place and the system is designed to ensure they are unaffected by film companies paying the “Northern Ireland Rate” or “Main Rate” as appropriate.

As this is a key industry for Northern Ireland currently, the objective is clear.

12. Television Production

Television Production is treated as film above.

13. Video Games

Video Games are treated as Film and Television Production above.

14. Theatrical Production

Theatrical Production is treated as Film, Television Production and Video Games above.

15. Intellectual Property

Intellectual Property deductions from Corporation Tax payments are separated into “Mainstream Deductions” and “Northern Ireland Deductions”.

16. Partnerships

Partnerships will be dealt with similarly to companies (although a new term, “Northern Ireland Firm”, is used for them).

17. Non-qualifying trades

Non-qualifying or “excluded” trades include lending, investment, investment management, re-insurance, long-term insurance, and oil and gas exploration. The Treasury has the right to amend this list, and to define “back-office activities”.

This is designed to protect key sectors elsewhere in the UK. The specific omission of oil and gas exploration (and any activities around the UK’s Continental Shelf) may also be preparation for the day a similar Bill is demanded for Scotland.

18. Note

The Stormont House Agreement sets the year from transfer of powers at 2017, but does not say exactly when that year (this is relevant, because the Northern Ireland Assembly has to pass a resolution to change the rate before the beginning of the financial year).

The Bill does not clarify this, and indeed does not even reference 2017. It merely gives the power to the Treasury to declare when the transfer of powers applies.

19. Politics

The Bill is highly complex, filled with highly technical language and even complicated mathematical formulas! This does demonstrate that a lot of work has gone into it and it is a serious attempt at offering Northern Ireland a central tool to “re-balancing its economy” away from dependence on the public sector (i.e., crudely, subvention from Great Britain).

The Bill does its best to ward off any threats from the rest of the UK, removing from the equation in particular key Scottish industries (finance and oil). Nevertheless, it is inconceivable that the Scottish Government would not demand the same powers if Northern Ireland were ever to use them and be seen to benefit; and it is equally inconceivable in the current climate that they would not get them (indeed, as noted at 17 above, the Bill seems already written for that inevitability).

An increasingly widespread view is that the powers should be transferred but not necessarily used (and certainly not immediately). This carries a degree of risk, as the UK Government sees the Bill as a generous devolution uniquely to Northern Ireland of a highly useful economic tool. There is a risk, therefore, that the UK Government’s response to any future “begging bowl” would be simply to recommend to the use of that economic tool. This risk may not be significant, as the UK Government effectively rejected the “begging bowl” at Stormont House last month in any case.

There is also an increasingly apparent tendency for Nationalist parties in Northern Ireland to be swayed by broadly “left-wing” views, which oppose this tax reduction at the expense of a loss to funds for public services.

20. Economics

The actual economics of using the powers in the Bill to reduce the “Northern Ireland Rate” to 12.5% are highly contested.

The case for is that it would make Northern Ireland a uniquely appealing location to invest – within the UK but with lower corporation tax and property costs; within the Irish Corporation Tax zone but with lower housing costs, lower VAT and more favourable income tax bands (reducing employee costs). As a headline alone, reduced Corporation Tax would be a significant advantage to those promoting Northern Ireland.

The case against is that those benefits may be outweighed by the loss to the funding of public services and the uncertainty around what the actual cost to Northern Ireland Departments would be. Already, the sense is that Northern Ireland’s government structures are simply not up to the challenge of managing spending reductions; to add further strain by using the powers transferred would have unpredictable (and surely disadvantageous) results.

It is a finely balanced case, also prone to external shocks (such as the potential eventual devolution of Corporation Tax to Scotland, and what it would mean if the Scottish Government used it either to go to 17%, as the SNP has advocated, or even to 12.5% to match Ireland). The outcome of the debate, as with the outcome of actually using the powers transferred, is unpredictable!

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Analysis of NI Executive Draft Budget under consideration

Earlier this month, the Northern Ireland Executive ran out of money. Over-spending left it with a shortfall of £100 million (around 1% of the overall budget). To cover this, the UK Treasury allocated it a loan, on condition that the Executive agree its 2015/16 budget by the end of the month.

It is noteworthy, first of all, that the Executive does have some revenue-raising powers. It could:

  • raise the Regional Rate paid by households and/or businesses (a 19% rise, as implemented on one occasion under Direct Rule, would raise almost exactly the £100m shortfall) and/or remove the Regional Rate Cap (whereby rates are not assessed on property value above £400,000);
  • introduce separate Water Charges paid by households (depending on exemptions, this would eventually raise £150m-£250m annually, although it would likely be phased in so would raise less than half immediately); and/or
  • introduce other charges, such as for Prescriptions (raising £7m-£31m depending on the charge itself and exemptions) or motorway tolls (as in the Republic of Ireland, potentially raising £30m annually although there would be set-up costs).

The largest party, the DUP, is against all of these except Prescription Charges (the Finance Minister noted that, in any case, the full advantage to the public purse would not be felt immediately). The second largest party, Sinn Fein, is against Prescription Charges (and seemingly everything else except removing the Regional Rate cap). The outcome, therefore, is that revenue-raising options will be ignored.

That means that any shortfall in the 2015/16 budget – estimated at around £762 million plus repayment of the £100 million loan – has to be met purely through spending reductions. In practice, although Health and Education remain priorities, absolute protection of their budgets becomes impossible when looking at an effective 8-9% reduction across the board, not least as these are the biggest two Departments.

The Draft which will be put to the Executive is as follows:


Draft Outcome (£ million)







































Regional Dev.




Social Dev.
















Some smaller parties have difficulties with this, particularly in the area of Education. There may be some minor changes there, but it is hard to see any significant difference emerging from the above, assuming any deal is done at all.

It is worth noting also that the above budgets refer only to expenditure falling under what is known as Departmental Expenditure Limits – in other words spending on public services. It does not include areas such as benefits and pensions, which fall under Annually Managed Expenditure (as strictly speaking they can be estimated but not precisely budgeted for).

What will Theresa Villiers bring to Hillsborough Castle?

Theresa Villiers

New Secretary of State for Northern Ireland, Theresa Villiers

Theresa Villiers has been appointed Secretary of State for Northern Ireland, replacing Owen Paterson. Mr Paterson was widely liked in Northern Ireland, and many will be sad to see him go to DEFRA.

Ms Villiers is a surprise appointment, moving over from Transport, but her keen interest in Cypriot affairs may have been a consideration. She has long campaigned for a single sovereignty and citizenship on the island, divided between Greeks and Turks since a Turkish military intervention in 1974.

She grew up in North London and is a barrister by profession.

Welfare Reform

Mr Paterson had sought for some time to promote Welfare Reform directly in Northern Ireland, as a past PPS to Iain Duncan Smith. Villiers is less likely to take such a direct interest in the subject, which is in any case theoretically devolved.


Ms Villiers is a past Shadow Chief Secretary to the Treasury, so may bring some significant economic interests to the post.

It remains likely, however, that a change of incumbent merely means a swifter dropping of the notion of a separate Corporation Tax for Northern Ireland alone. Mr Paterson had personal capital built into the idea, for Ms Villiers this does not apply.


Ms Villiers moves over from Transport which, while mainly focused solely on England, includes UK aviation. It is possible that she will use the role to highlight NI’s aviation issues, particularly the airports’ quest for new destinations.


By coincidence, her constituency is the same as that held by Reginald Maudling, a past Home Secretary with responsibility for Northern Ireland.

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Why Corporation Tax will not be reduced in NI

Debates on the subject of Corporation Tax in NI are highly frustrating, largely because they focus on opinion of what should happen, as opposed to analysis of what, practically, is likely to.

The likelihood is that Corporation Tax will not be reduced in NI – whatever the political and economic benefits. This is because it is not politicially feasible.

There are three prime political reasons that it will not happen.

Firstly, there is no public demand for a corporation tax reduction, not least because the campaign for it was deeply flawed. Campaigns, such as Grow NI and others, have failed to move the debate beyond the business sector. Since the whole issue is how small the business sector is, that by definition leaves the vast bulk of the population disinterested. It is the classic case of how not to run a campaign – it has focused on stating something seen as self-evident only to those who see it as self-evident, and thus leaving the majority of the population at best on the sidelines and at worst outright opposed. The “Yes to AV” was a classic example of this; Grow NI and others are a second classic example. None of those who made the case really understood who they had to make it to (well beyond business), what aspects of it they had to prioritise (jobs, not profit), and so on (failing to adapt to economic changes in the Republic of Ireland, or to political changes in Scotland). Thus the Lucid Talk poll showed the population opposed to reducing public spending in return for corporation tax reduction by almost 2:1.

Secondly, and linked to the above, the NI Executive was always lukewarm on the idea. Although nominally in favour, the public sector voter was always worth more than the private sector one (since the public sector voter outnumbers the private sector voter economically by 3:1, and probably even more among the actual voting population). Ministers had to play a good game (particularly in private) about reducing corporation tax because they did not wish to seem unwilling to grow the economy when it came to bloc grant negotiations, but they were never really serious about it – hence Sammy Wilson’s carefully placed public statements and of course Sinn Fein’s nods to the Left. Throw in the glow disappearing from the Republic of Ireland’s economy (upon whose strength most of the argument was based), and top-level political backing slowly ebbed away.

Thirdly, the UK Government could not deliver it – particularly once it was given the excuse of a population against and an Executive lukewarm. There were legal obstacles, but these could have been overcome. However, the political obstacles were nigh impossible, not least once the SNP came to power in Edinburgh. The nail in the coffin was Alex Salmond’s call for a 20% rate in an “independent Scotland”; confirming his desire to enter the argument. From that moment (in truth, from the moment of the SNP majority), the game was up – at least insofar as devolution of corporation tax powers to NI alone was concerned.

So now we are watching a delicate dance of political disengagement, which consists of the UK Government gradually moving up the price (remember when it was a quarter of a billion; note it’s now half a billion) and the NI Executive gradually moving down the scale of stated willingness to pay it. The UK Government will gently blame Stormont for being lukewarm on the whole idea; Stormont will gently blame the UK Government for setting the price “too high”. Actually, neither could have delivered – the UK Government would have had to devolve the same powers to Scotland and Wales; Stormont could not have got away, politically, with paying the price whatever it was (frankly even half a billion is a small proportion, around 3%, of the NI Executive’s budget, so a few hundred million up or down was never really financially decisive, just politically).

For campaigners of whatever background, this all points to no reduction, and plans should be based on that reality.

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