John Campbell

Columnist

John Campbell

BBC NI’s Economic & Business Editor

How Can A Government Make An Economy Grow?

This is the key question for the new Prime Minister and Chancellor, having set themselves the target of boosting the UK’s long-run rate of growth to 2.5% a year. That compares to average annual growth of less than 1% in the period since the financial crisis in 2008. Unfortunately for them there is no simple, failsafe answer to this question.

The Chancellor’s first stab at it in his mini-budget was to reduce personal taxation and reverse a planned increase in corporation tax; have another go at creating special economic zones and promise planning reforms in England.

The personal taxation move stumbled at the first political hurdle while the evidence on corporation tax is decidedly mixed. The rate of corporation tax in the UK fell sharply from 28% in 2010 to 19% by 2017 without appearing to do very much to help overall growth.

Special economic zones drift in and out of fashion: in the 1980s the UK created enterprise zones, including zones in Belfast and Derry. These mostly saw activity shifting from one part of a city to another. Enterprise zones were back again in 2011, under Chancellor George Osborne. This time Northern Ireland got one in Coleraine. It has not been a conspicuous success.

Freeports were the big idea of the last Chancellor, while this Chancellor will have his Investment Zones. Planning reform should help with delivering investment but the political appetite among Conservative MPs is uncertain. A previous reform plan under Boris Johnson went nowhere.

So, if these policies are unlikely to move the dial very much then what will? Fundamentally what this government (and all others) are aiming for is a cocktail of policies that will deliver an increase in productivity: policies which will increase the output per worker or output per job across the economy.

When the government is talking about boosting growth it is really talking about boosting productivity. For the past couple of years the Manchesterbased Productivity Institute has done useful, detailed work aimed at producing evidence on what works.

Queen’s University academics David Jordan and John Turner are part of that research network and last year published a review of the existing evidence for Northern Ireland. Remember that Northern Ireland is consistently one of the least productive regions of the UK and also compares badly to the Republic of Ireland.

The structure of the local economy, a poor investment performance and geographical peripherality have all been suggested as important factors.

The review says there is no single explanation but that “the evidence presented for the role of human capital in Northern Ireland’s productivity problem is strong”. In other words, education and skills. The review adds that: “NI’s workforce appears weak in both basic skills and its share of higher skills.

“That management also lags behind best practice may exacerbate the deficiencies of the workforce.” The latter point may say something about the structure of our economy: in smaller family-owned firms people can become managers almost by accident and there isn’t the systemised management training that can be found in larger businesses.

Another factor which bears on productivity is business investment. Relatively low investment has been a long-standing problem in the UK.

A recent paper for the Institute for Government by former government advisor Giles Wilkes also attempts to figure out what is likely to improve performance. He cautions against “lavish, tax-focused” measures, instead urging the government to look at broader business conditions, such as skills and infrastructure. He says policy makers need good insight into why particular investments do not proceed, and the reason might sometimes lie in one of the other essential ‘factors of production’ such as labour force or infrastructure.

If the skilled workforce is not available or energy costs make a manufacturing plant unviable a tax incentive is not going to fix it. He also thinks it’s important in some cases to align a high-level policy goal and a type of investment.

Examples are the Office for Low Emission Vehicles which aligns net zero with automotive R&D or the Aerospace Technology Institute as a source of funding certainty for technologies that are necessarily very long term in cost and impact. But perhaps his key message is that failure by government to stick to a clear direction and fulfil policy promises is very damaging to businesses whose plans are dependent on government actions.

His example is how industrial strategy has been taken up and dropped twice in the past 15 years in what he describes as “a terrible level of volatility when many companies plan investments that endure for decades”.

You might also think about our own “terrible level of volatility”. How does stop-start government impact investment in Northern Ireland?