Moderator: Cross posted from Normal Mouth's blog.
Normal Mouth (Rhondda, blogger): A fortnight ago Sir David Varney published the second instalment of his review into Northern Ireland's competitiveness. The first drew comment from a Welsh perspective only from Adam Price and me - suprising given that the review's remit was to investigate whether a lower rate of corporation tax would boost a part of the UK economy that has historically lagged behind others.
The reason may have been that Varney served up what most did not want to consume, namely that the case for varying the rate of corporation tax at a sub-state level was unproven. In that vein, it should be no surprise that his latest offering has also been ignored in Wales, for Varney's analysis and recommendations are equally unpalatable to those who favour greater devolution without concomitant fiscal responsibility. He suggests that the public sector in Northern Ireland is far too large, that comparatively high levels of public sector pay crowd out private sector investment, and that the province spends more on public services than it raises in taxes to the tune of £7 billion per annum.
Why should these conclusions trouble devolutionists in Wales? There is, after all, no comparable assessment of the Welsh balance sheet. The last such attempt to do so was in the mid-1990s, and some of its methodology was strongly challenged at the time.* We cannot say with any confidence whether government expenditure in Wales exceeds revenue raised, and without that (as Varney notes) judgements about the size of the public sector are difficult to reach.
Nevertheless, it is possible to look at other characteristics of the Northern Ireland economy less controversially aligned to the Welsh experience and which suggest that the Varney analysis is indeed repercussive for Wales. Varney points to a low and static relative per capita GVA (81% of UK GVA in Northern Ireland compared to 77% in Wales). He cites high and stubborn rates of economic inactivity (Northern Ireland's rate is highest among the UK's nations and regions at 26.9%, Wales's is second highest at 24.8%). He suggests that "Northern Ireland tends to be over-represented compared to the UK average in low productivity sectors, such as agriculture, while it is somewhat under-represented in high productivity sectors such as financial intermediation and business services." The WAG has been making such observations of the Welsh economy since 1999. Finally, he posits that at 67% of GVA compared to 45% in the UK as a whole, the public
sector in NI is too big. In Wales the comparable figure is 58%.
What remedies does Varney therefore suggest? He is clear, inter alia, that levels of pay for public sector workers in Northern Ireland are too high relative to the private sector, a situation he claims makes private sector recruitment and expansion more difficult. The repercussiveness for Wales is strong, given that the differential is almost as high as it is in NI (public sector pay is on average 23.2% higher than private sector pay in NI compared to 20% in Wales). Varney's recommendation to the Northern Ireland Executive is euphemistic: it should "look at how it could use the public sector pay process to reduce the public-private sector pay differential over time, so that public sector pay reflects better the local labour market".
The suggestion that public sector workers in NI - and by extension Wales - are being paid too much for the good of the economy is by no means the only disquieting recommendation. On benefit levels Varney suggests that "low rates of private sector wages compared with nationally set [i.e UK-wide] benefits may indicate a potential benefits trap which could lead more people to choose to be unemployed or incentivised to claim Incapacity Benefit when they might be able to take on some work.". Even though the formal recommendation is merely for the NI Executive to gain
a clearer picture of this alleged benefits trap, the implication is clear; there ought to be lower levels of benefits where pay levels are lower.
These are not easy things to contemplate, particularly for those parts of the UK with concentrations of endemic poverty. But they have a certain dark logic to them in keeping with the wider devolution project. Power was ostensibly devolved to Scotland, Northern Ireland and Wales to enable more deft, fine-tuned policy responses; "Welsh solutions to Welsh problems" in the time-honoured phrase. Hitherto this has been expressed almost exclusively as a devolution top-up, the idea that Wales gets everything England does plus some goodies on top like free prescriptions, or the latitude to abjure PFI. Varney's is the other edge of the devolution sword, the idea that more locally focussed responses might entail cutting benefits and/or public sector pay to maintain private-public or employed-unemployed differentials and/or reduce tax bills. Those who support devolution (and indeed those who support independence, given that the same logic applies) may have no appetite for implementing these kinds of ideas, but surely we can expect them to provide a cogent response?
*
Although some of those objections, such as the late Dr Phil Williams's suggestion that the UK's debt should not be apportioned on a per capita basis because there was "no moral case for imposing the historic costs of England's imperial postures...on the Welsh economy" were hardly substantive.
