Being the author of forthcoming surveys covering the centenary of partition has reminded me that all too often economic analysis has rarely served the function, using the terminology associated with Keynes, of providing a “technique of thinking” in political debate. Instead economic terminology has often been applied as a varnish to some pretty shoddy intellectual furniture. Equally, there is a danger in discussing policy to not distinguish between the urgent and the important.
So rather than give a highly detailed overview of the state of the public finances or a granular economic analysis regarding Brexit and Covid, important as these issues will undoubtedly remain for the foreseeable future, I will instead focus more on insights from the academic literature.
While the contents of the budget were for the most part well trailed beforehand, the extent of the Corporation Tax (CT) changes – involving a CT increase on company profits above £250,000 to rise from 19% to 25% in April 2023 – was probably the most surprising and significant feature for the executive’s room for manoeuvre. Legal opinion appears to be that EU state aid regulations remain in place. If a NI Executive choose to not follow this CT increase the impact would be felt via a reduction the block grant. The relationship between the way Brexit has evolved and the potentially deflationary and regressive repercussions of CT variation is just an example of a more general observation: rule books – or ‘institutions’ in economics terminology – matter when examining outcomes. The rule book governing the public expenditure implications of the budget – the so called Barnett consequentials – implies for instance that the NI executive will receive £410 million according to the Chancellor (or £3.7 billion since the onset of Covid). The final direction of these resources need to be worked out; the direction of spending will no doubt be influenced by significant challenges facing the public sector (e.g. hospital waiting lists were a problem long before the pandemic).
As the Resolution Foundation have observed, while the CT increase represents bad news for future profits, the £24 billion ‘super deduction’ tax incentive represents good news for businesses investing in plant and machinery soon. The UK has a mixed investment record; the mediocre track record of capital subsidy in Northern Ireland goes back decades. An estimated £118 billion corporate cash pile has been created during the pandemic. The problem is that the temporary nature of the budget’s ‘super deduction’ may do little to remedy the situation: quantitative studies indicate that to reverse underinvestment more fundamental questions concerning managerial quality need to be answered.
What matters is what economists term the ‘institutional geography’ under which the policies are formulated and implemented within devolution. When economists discuss institutional geography we are concerned with a much more fundamental range of issues than just annual budgeting. However, probably more importantly the long-delayed but recently established Fiscal Council offers the prospects of greater value for money. This potentially important initiative for Northern Ireland, which was discussed in New Decade, New Approach, is one aspect of the institutional geography that is the responsibility of the Executive. Yet the delay in creating a Fiscal Council, along with the creation of a commission on tax devolution, has been yet another cost of attempting to deal with the twin urgent challenges of the pandemic and the protocol.
So what kind of economics should inform devolution if we are indeed to ‘build back better’? In contrast to the stereotypes of ruthless utilitarians suffering from physics envy, Princeton’s Alan Blinder notes that economists have demonstrated that policies work best when they combine compassion for the ‘underdog’ with a desire to pursue this focus as efficiently as possible. Economists according to Blinder’s dictum should promote policies that balance hard heads with soft hearts. Some will need policy to help them live a better life (the soft heart). The hard headed part is that a failure to monitor efficiency will damage the ability to pay for other desirable projects. An outlook focused on hard heads and soft hearts implies that we should be probably more concerned with the distributional effects of reversal in the £20 Universal Credit uplift than we should be worried about consumption levels. Once lockdowns end higher income groups will resume spending and there may well be post-covid consumer boom; those on low incomes will not be able to participate.
Another aspect of Blinder’s analysis relevant to thinking about applying economic reasoning is that the political ‘marketplace’ features both ‘supply’ and ‘demand’. Voters are the ‘consumers’ and their preferences shape what legislators will deliver. It follows, that if economic literacy improves, voters will demand better from their legislators. If the consumers clamour for bad policies, it should be no surprise if they get them: sovereign consumers after all need not be particularly prudent. In addition. Blinder argued that in order to produce a more economically literate electorate you would first have to increase the relative appeal of economic writing. This may be easier said than done, however: QUB remains one of the very few Russell Group institutions to have a communication skills module as a core part of a BSc Economics degree.
Blinder’s view of the political marketplace becomes less useful as a guide to economic policy-making in cases where different segments of voters have unequal access. The history of devolution suggests that in such cases policies emerge that perform poorly on both equity and efficiency dimensions. For instance, a failure to mitigate conflicts of interest until the O’Neill premiership distorted decisions. Before 1963 commercial interests, enjoying strong political ties, managed to hinder restructuring efforts. Empirical evidence indicates that resources that could have gone into investment loans instead went into poorly targeted measures. Economic history demonstrates that cronyism did not begin with the RHI scandal.
It was inevitable that a major public health crisis combined with the uncertainties associated with Brexit would ensure that these urgent and important issues would be the dominant political responses to the budget. Yet it is also the case that enduring weaknesses such as poor productivity require sustained attention at both the UK and NI level. Institutional reforms (such as the creation of a Fiscal Councils) and the pursuit of evidence-led policies (for instance, the creation of a commission on tax devolution) can be justified in terms of delivering value for money with compassion. Reframing policy debates in terms of hard heads and soft hearts may provide the easiest way to ensure that better economic thinking becomes ingrained.