Esmond Birnie's, slides from his presentation at the Nevin Economic Research Institute's seminar on devolution post the Scottish referendum on independence. The seminar was held on November 18, 2014.

1. www.pwc.co.uk/ni
Northern Ireland – the
devolution challenge posed by
Scotland et al
Dr Esmond Birnie, Chief Economist in NI
and Scotland
NERI 18 November 2014

2. Summary of my argument
NERI 18 November 2014
PwC
Slide 2
1 An economic recovery in NI – but limited
2 External threats – beyond our control
3 Is devolution in NI working?– uncertain policy response
4 Devolution in the air – everyone’s at it except us
5 Sign-up or sign-off – doing nothing is not an option

3. ECONOMIC UPDATE: Economic recovery in Northern
Ireland continues…
GDP growth (%) 2012 2013 2014 2015
NI* -0.3 1.1 2.2 1.9
United Kingdom 0.2 1.7 3.0 2.5
RoI 0.4 0.2 3.1 2.9
Note: *NI output growth measured by GVA.
Source: Office for National Statistics (ONS), Central Statistics
Office (RoI), PwC (NI, RoI and UK 2013-2014).
Source: ONS Labour Force Survey, 16+.
8
7
6
5
4
3
3
NERI 18 November 2014
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Slide 3
1 Output is growing…
2 Unemployment is falling…
2
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
(%)
Northern Ireland United Kingdom
Business confidence is positive…
16 consecutive months improvement as per the
Purchasing Managers’ Index

4. But we remain towards the bottom of the UK regional
performance league table…
Economic indicator NI Wales Scotland South East
England
NERI 18 November 2014
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Slide 4
Output per head 2012 10th 12th 3rd 2nd
Economic growth 2014 12th 10th 10th 2nd
Employment rate
Feb-Apr 2014
12th 9th 5th 1st
Employment growth
Mar 2007-Mar 2014
10th 6th 11th 2nd
Earnings levels 2013 12th 10th 4th 2nd

5. Two speed economy in terms of sectors…
Employment levels by selected sectors, June 2014 vs. June 2012
NERI 18 November 2014
PwC
Slide 5
Sector June 12 June 14 Change
Public sector 214,310 212,210 -1.0%
Construction 31,370 30,270 -3.5%
Tourism and Leisure 53,880 54,970 2.0%
Food processing 17,020 18,360 7.9%
Financial services 18,960 17,700 -6.6%
Business services 31,140 34,340 10.3%
Retail 112,050 113,780 1.5%
Manufacturing (excluding food) 58,430 59,110 1.2%
Total 692,780 711,920 2.8%

6. THREATS: Even this partial recovery is subject to
significant threats…
NERI 18 November 2014
PwC
Slide 6
What could go wrong?
• International disruption, e.g. Eurozone or China.
• Increased inequality, social and FDI consequences.
• Crunch in UK property market.
Increased exchange rate volatility and a lower
Euro very likely. Also, higher Bank rate,
though probably not until mid 2015-ish.

7. IS DEVOLUTION WORKING: Has NI devolution been
working in any case…
Other policies – Planning, education, welfare, BMAP are deadlocked.
NERI 18 November 2014
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Slide 7
Have the series of high profile events created a real global brand NI?
Exports to BRICs/emerging markets, growing, but overall exports in
Q2 2013 still below Q2 2011.
Mixed messages in tourism particularly from external visitors.
Some policies in lockstep with Whitehall, so no local flexibility.
Keeping taxes and charges low within a £10bn subvention may not be
sustainable.
Ironic if ‘solution’ to welfare reform was to ‘undevolve’ social
security.

8. Stormont’s money problems…
Existing 2011-15 Budget was not in reality
‘balanced’ – Inadequate allowance for
spending pressures.
The 2015-16 Budget still to be
confirmed by Assembly.
NERI 18 November 2014
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Slide 8
Complex because
of
the following six
elements:
Ring-fencing most of DHSSPS
and all of Education adds to
pressures elsewhere.
Growing ‘penalties’ for non-implementation
of welfare reform.
Since the 1970s a situation has
developed whereby spending per head
substantially exceeds the UK average,
whereas taxes paid are lower. (Possible
Barnett Formula replacement.)
There has been no attempt to conduct a
zero based review of public spending.

9. Austerity will now intensify…
NERI 18 November 2014
PwC
Slide 9
Departmental spending
cuts and GB welfare cuts
throughout next
Parliament – regardless of
2015 General Election –
has consequences for NI.
Current funding difficulties
in health were very
predictable – A number of
reports in 2011 suggested:
• Rate of cost increase in
health exceeds the NI
average.
• NI per capita health
needs greater than the
UK average.
Additional penalty for non-implementation
of welfare
reform, £87m in 2014 and
£114m expected in 2015.
By implication, in the
absence of fundamental
reform, demand for
healthcare will always
outstrip resources.
Already in 2014-15 current
spending in some Dept.
reduced by about 4% with
a further 1.5-3.5% to come.
Departmental bodies have
been warned to prepare for
cuts of up to 15% in 2015-
16.
2015-16 budget 3%+ real
cuts.
In that absence of political
agreement, medium-term
picture is therefore quite
bleak.
The measure of agreement
in the 2015-16 “Halloween
Budget” may not last. Still
no agreement re. welfare.
Increasing borrowing to
cover short-run shortfalls.

10. The £100m “loan”: Public finance meets Mr
Micawber…
• Executive didn’t get the £150m it asked for.
• Was made clear further requests to the National Reserve may be refused.
• Has to be repaid in 2015-16.
• Conditional to some degree on Treasury oversight, e.g. in terms of a credible
Budget for 2015-16 being struck (and passing through the Assembly in the early
Spring).
• The Executive now proposing a further £100m of borrowing- using RRI- to
cover cost of voluntary redundancies.
NERI 18 November 2014
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Slide 10

11. DEVOLUTION IN THE AIR: Pre devolution vote – the
Scotland Act 2012
Powers to be devolved (and may be more):
• Land & Buildings Transaction Tax
• Scottish Landfill Tax
• Scottish Government Borrowing Powers for capital schemes
• Scottish Rate of Income Tax
• The power to create or devolve other taxes (with agreement of UK Govt)
NERI 18 November 2014
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Slide 11

12. Post Scotland’s vote – Decentralisation decade…
1 The 18 September 2014 vote does not imply business as usual.
Scottish Government already has the 2012 Scotland Act and likely to have further powers, such as Income Tax
and Air Passenger Duty. See forthcoming Smith report. 2
3 Implications for Cardiff’s Assembly, City Deals to big English urban centres and London.
2
4 ‘Wales Act’ goes to consultation – Pressure for ‘whatever Scotland gets?’
NERI 18 November 2014
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Slide 12
5 Possible challenges –What happens to the Barnett Formula and resolving the ‘West Lothian Question’.
Not just an ‘English question’ but a ‘London question’ – Hitherto, London has generated the net fiscal transfers
going into the other UK regions (including NI) – How long and how far can that continue? 6

13. Home Rule all round? Everybody’s doing it
Smith Commission – parties’
proposals published on 14
September
“English votes for English
regions” – solving the West
Lothian Question
NERI 18 November 2014
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Slide 13
Next stage of
devo proposals
to be announced
by 25 January &
will be key in
2015 General
Election
Hague review – to consider
further devolution for
Wales, N Ireland & English
regions
Wales Bill –consultation
now out with deadline of 12
December 2014
New City States – Govt re-announce
£12bn to English
cities like Manchester,
Liverpool & Leeds
NI still hoping for Corporation
Tax - but if we get it, can we
afford to use it? Possible end of
Barnett Formula.

14. A worrying likelihood that NI will lag behind…
NERI 18 November 2014
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Slide 14
As decentralisation becomes the norm
elsewhere in the UK, five possible responses
on part of Stormont:
1. ‘Don’t talk about it – Will only encourage the Treasury
to cut the block grant’. But, Treasury hardly needs
encouraging.
2. ‘Let’s not ask for extra powers – We can hardly manage
the ones we have’. A counsel of despair, or permanent
‘irresponsibility?’
3. ‘Corporation Tax powers would be enough – They are
the game changer’. But, will the Executive be able to agree the
consequent funding cuts and are such powers
a game changer by themselves?
4. ‘A devolution holiday’ would let Direct Rule
make the hard choices’ Switching off system temporarily but
is re-writing of the software required?
5. ‘Let’s have an independent review of scope for extra
fiscal powers like Wakes & Scotland’. Would we want to
know the outcome?

15. SIGN UP OR SIGN OFF? Northern Ireland cannot
afford to ignore what happens elsewhere…
NERI 18 November 2014
PwC
Slide 15
1 Economic Update – where are we now?
2 External Threats – beyond our control
3 Is devolution Working?– uncertain policy response
4 Devolution in the air – everyone’s at it except us
5 Sign-up or sign-off – doing nothing is not an option

16. NERI 18 November 2014
PwC
Thank you, looking forward to
discussion…
Dr Esmond Birnie, Chief Economist in
NI and Scotland
PwC | Chief Economist
Direct: +44 (0)28 9041 5808
Mobile: +44 (0)7850 907892
Email: esmond.birnie@uk.pwc.com
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