Official Report: Minutes of Evidence

The Chairperson (Dr Aiken): Can we bring up Gareth and Richard on StarLeaf. Gareth and Richard, are you there?

Mr Gareth Hetherington (Ulster University): Yes, Chair. Good afternoon.

The Chairperson (Dr Aiken): Hi Gareth. Have we got Richard?

Mr Richard Johnston (Ulster University): Yes. Good afternoon, guys, how are you?

The Chairperson (Dr Aiken): Excellent. Something works today. Well done. Thank you very much indeed.

Gareth, will you make your opening statement? Thanks.

Mr Hetherington: Thank you, Mr Chairman, for the invitation to provide evidence to your Committee this afternoon. You will have our submission, as we made it available to you. I will make a brief opening statement for no more than a few minutes, and then my colleague Richard Johnston, who is the deputy director of the Economic Policy Centre (EPC), will make a short opening statement. We are then happy to take any questions from you and your Committee. I will focus my initial comments on the economic context in the draft Budget, and then Richard will say a few words about the economic policies that the Executive should consider implementing as part of the rebuilding process.

As I said, my first comment is in respect of the broader economic context. We are in a very challenging economic situation on a scale unprecedented in living memory. The speed at which events have unfolded, and the lack of any comparable reference point, creates significant challenges for Governments around the world in dealing with the health crisis and also in putting in place the appropriate policies to mitigate the unprecedented economic fallout.

Economic forecasts remain highly uncertain, and estimates of the timeline to recover to pre-COVID levels of economic activity vary significantly. For example, as recently as November, the Office for Budget Responsibility (OBR) estimated that it would take until the fourth quarter of 2022, which is the end of next year. However, just last week, the Bank of England produced a very upbeat forecast suggesting that the UK will return to pre-COVID levels as soon as the first quarter of 2022, which is this time next year. That is based on the pace of the vaccine roll-out programme, consumer spending recovering very quickly, and business investment rising on the back of higher sales. Therefore, economic sentiment is changing very quickly and can ebb and flow; it can move from a positive to a negative scenario, depending on the prevailing circumstances.

My second comment is about the change in funding and income in the Budget between this year, 2021, and the Budget year of 2021-22. As I am sure the Committee is aware, the largest source of income comes through the Northern Ireland block grant in the form of resource departmental expenditure limits (DEL), which is for operating our running costs, capital DEL, and financial transactions capital (FTC), which is for loans or equity investments to the private sector. Overall, this settlement is flat, as it increases by just 0·13%.

In addition to core DEL, the Northern Ireland Executive receive funding from a range of other sources. Of particular note, £350 million of New Decade, New Approach (NDNA) funding was made available in 2021 for general pressures as a one-off payment. That is not available in the Budget year. There are also limited details on the UK's Shared Prosperity Fund (SPF), which replaces the EU structural funds, but it is understood that the SPF will not provide a full replacement for EU structural funds, and it will not be devolved. Obviously, that raises questions about the basis on which funding will be allocated. There is also a reduction in Fresh Start funding this year compared to last year.

The one notable increase identified in the Budget is that the Executive will borrow £140 million in 2021-22 through their reinvestment and reform initiative (RRI) for capital spending. There was no borrowing in the current year. Overall, this presents a very challenging funding and income settlement.

My third and final comment relates to the allocation of funding across Departments. The Department of Finance presented the draft Budget for 2021-22 against a baseline position for each Department. That baseline is taken from the previous year's Budget, but, as Finance indicated, it takes some adjustment for factors such as time-bound allocations.

The funding allocation presented in the draft Budget against the baseline suggests an above-inflation increase, on average, of

Departments' resource budgets. That seems to be at odds with the challenging funding settlement that I just spoke about. Separately, in our evidence paper, we set out a comparison between the draft Budget as presented by the Department of Finance against last year's Budget outcome. That shows a much more challenging funding allocation across Departments and is more consistent with the funding settlement.

However, neither analysis provides an exact like-for-like comparison. In future, we suggest that the baseline for the Budget year should be compared against the baseline for the previous year. In addition, one-off items of expenditure each year could be set to allow for a more-informed response.

However, based on the limited analysis that is possible, the Economic Policy Centre is concerned that additional funding does not seem to have been added to support the rebuilding of the economy post COVID, and that will be our focus.

On the capital side, a significant increase has been identified, with the largest in financial terms being allocated to Infrastructure and then Health.

In summary, it is a challenging funding settlement. On the resource DEL side, it is difficult to provide detailed insight into the allocation, but it looks as if there will be very limited funding for economic rebuilding.

We have made a number of other comments in respect of the Budget that we are happy to discuss with the Committee, but I will now hand over to my colleague Richard Johnston.

Mr Johnston: Thank you, Chair and Committee, for the opportunity to speak here today. My name is Richard Johnston. I am the deputy director of the Economic Policy Centre. Our research areas focus on competitiveness, automation, the future of work, behavioural and corporation tax, and those sorts of things.

As Gareth said, the Budget is certainly a challenging funding statement. However, it is worth bearing in mind the context in which it is set. Our identifiable population equivalent (PE) per capita remains above the other UK devolved nations.

The Health budget, which, as Gareth said, is now about 50% of the Budget, is equal to the total income tax, National Insurance, alcohol and tobacco duty take annually in Northern Ireland. The focus on reform that will come from the Budget will probably be one of the greatest challenges and will be exacerbated in future years if that continues.

My research was on competitiveness, and that is how I will frame a lot of the policy discussions. The research indicates that skills, infrastructure and green and digital are some our key challenges over the next number of years. Policies on the opportunities in the green economy are explored in the Budget in more depth.

Working from home is an issue that we need to consider. What does it mean for our policies? What do we do about congestion, parking charges and commuting? How do we begin, for example, to retrofit houses, offices and industrial space to reduce the need for imported heavy oils and other environmentally damaging fuels?

Skills is one area where we know that there is a significant challenge. We say that we have a world-class education system, but other countries are moving ahead of Northern Ireland. Latvia, Lithuania, Estonia and the Czech Republic are becoming more competitive in educational outcomes. We still spend more on a per capita basis than all other parts of the UK, with the exception of Scotland.

As for infrastructure — I declare an interest as a board member of Warrenpoint Harbour Authority — we need to think about how we invest in efficiencies to offset some of the NI protocol frictions to ensure that egress and ingress to Northern Ireland is as efficient and productive as possible.

Those are the key areas on which we will focus, and, as Gareth said, we are happy to take questions on other areas of the paper that we submitted.

The Chairperson (Dr Aiken): Thanks, Gareth and Richard. Like the Finance Committee, you have been trying to hit a moving target in trying to get some sort of — to use that horrible terminology — granularity on the Budget process and moneys in it.

Ministers keep referring to a standstill Budget, but it appears that the additional funding in New Decade, New Approach required to meet significant one-off costs such as teachers' back pay has largely been replaced by Barnett consequentials, by what has been happening in the rest our country and some of the announcements by the Chancellor. Have the Executive not done relatively well, particularly if the outstanding payments from the UK Government are confirmed, because there is still a substantial amount of unspent money in-year?

Mr Hetherington: That is quite a pejorative question, Mr Chairman. There have been significant challenges in spending all the money that was made available this year. A key reason was that a number of new programmes had to be set up to deal with the very specific COVID challenge. Over the years, many people have commented that Northern Ireland receives significantly more funding for public services than other parts of the UK. Richard referred to it in his opening comments. There may be some reasons why it is more expensive to run public services in Northern Ireland — a more rural, dispersed population, for example. Nevertheless, as we highlighted in our paper, the need for reform in the delivery of public services is fundamental to getting the best outcome for the money available.

The Chairperson (Dr Aiken): OK. we keep hearing how we can get shovel-ready projects going and major capital projects. However, numerous reports tell us about our inability to deliver on capital projects or to spend the money allocated — money that has been shifted from one year to the next. Your university seems to be the world's bottomless pit when it comes to FTC. The overspend on York Street alone could have built the York Street interchange at least one and a half times.

We seem to be remarkably bad at using that money to help the economy. We are talking about the RRI, but of £200 million in our RRI that we could have, I think that we have only seen bids for about £140 million of it. How can we use capital projects to kick-start the economy? Bear in mind of course that much of the construction industry will be conscious of the inherent problems that we have in doing business in Northern Ireland and will be looking to massive projects such as HS2 and seeing them as a better use of their resources.

Mr Hetherington: You raise a number of points, Mr Chairman, one of which is how we manage budgets. One of the points that we make in our submission is the importance of multi-year budgets and the potential for greater end-year flexibility. What that allows the Government or Departments to do is, in general, manage money more effectively. We have not done any research specifically on the challenges with capital budgets or with capital projects, but you are absolutely right that it does appear to be an issue in Northern Ireland in taking forward capital projects and getting them off the ground. Maybe there is a role for an independent fiscal council here, part of the remit of which would be to look at how effective Government are at spending money. Given the importance of capital spending and world-class infrastructure to make our economy more competitive, it is important to achieve the maximum output from our capital spend.

Mr Johnston: I was part of the advisory panel on infrastructure earlier in the year, and a lot of the evidence that we captured from more than 100 stakeholders and interested parties focused on the long-term nature of strategic planning and how it could help to bring into Northern Ireland the experience of infrastructure panels across the world. There is certainly potential to bring in people from outside Northern Ireland.

As economists, we always focus on saying that now is the time for Government to spend on shovel-ready projects and for making sure that Government fill some of the consumer spending gap. We absolutely encourage such spending, both from the public sector and the private sector, especially looking at the ports and airports, some of which are public corporations and have shovel-ready projects in place. For example, there may be no better time to resurface runways at airports. There certainly are infrastructure projects that will create jobs and give a cash injection into the local economy. They can present opportunities for apprenticeships and for young people to get into employment through social clauses, and they can be geographically dispersed so that we have a regionally balanced, sustainable recovery. Such a capital injection would support the whole of Northern Ireland.

Mr Hetherington: I was talking to people in the construction sector as part of another project, and the point that they made was that, particularly in private-sector construction, there is a big demand to get existing projects completed but that there is significant uncertainty about the future pipeline of private-sector projects, particularly for hotels and office accommodation. As Richard said, there is an opportunity now for public-sector investment to fill that gap.

Mr O'Toole: Thank you both for your evidence. There is a slight disconnect, because you have just given us a lot of very persuasive evidence in the economic context and how it links to the Budget, but the truth is that the economic analysis chapter of the Budget document feels completely disembodied from the actual spending allocations. You have linked the potential outcomes to the economic context, but there is none of that in the Budget document. Is that fair?

Mr Hetherington: One of the comments that we make is that, with the way that the Budget document is set out, it just allocates funding to Departments. There is absolutely no detail in that about how that money will be spent. In our evidence paper, we say that it would be very helpful to have funding allocated alongside the Programme for Government (PFG) priorities. That would allow people to see, challenge and advise on the extent to which those priorities are being funded. That is how I would present it. Given how the finances and funding are set out in the Budget document, it is difficult to understand exactly how they will spent and their effectiveness.

Mr O'Toole: I guess that there is very little sense of prioritisation. You have said, or I have inferred from what you said, that there is nothing wrong with it per se, but, to me, the economic chapter at the front of the Budget could be describing the weather in terms of how related it is to the rest of the document. However, you are also saying that, basically, there is no clear link between spending allocations and PFG outcomes, although there are, in some of the chapters, references to the now five-year-old draft PFG from 2016. Do you have any sense of why those outcomes are included? Is it just that Departments have continued to use them as placeholders in the absence of something more up to date?

Mr Hetherington: I think that they are waiting for the PFG to be agreed.

Mr O'Toole: Richard, did you want to come in there?

Mr Johnston: If we go back to the framework that competitiveness can give us and look at the drivers of competitiveness — education; research, development and innovation (R&D&I); infrastructure spend etc — that boost productivity and create a larger private sector that will, hopefully, fund better, world-class public services and can also drive better environmental and social outcomes, we see that it gives us a good framework with which to link from the expenditure inputs through environmental factors and activities and into the outcomes for society that we are trying to target. However, that is a slightly different exercise, which is beyond the Budget document.

The other thing that your comments bring to the fore is how we can focus on the areas where we need to engage most. Competitiveness will give us a bit of a road map with regard to where we need to focus most resource and attention in order to catch up with other nations. However, we should also look at an objective, needs-based assessment of spend; at the areas where we are relatively over-provided or relatively under-provided, and how we can move resources around.

If we look at the areas where we do least well — for instance, some of the services in which we get the least good outcomes — are we willing to stop spending on, say, the bottom 10% of programmes and reallocate that funding to other activities? The programme evaluation framework that goes on in government should help in making those decisions. However, you are back to getting good-quality evidence in order to drive forward those better public expenditure decisions to society's benefit in the longer term.

Mr O'Toole: There has also been a lot of analysis that suggests that Northern Ireland is one of the regions where, basically, COVID will have the worst economic impact. It was talking about how long it would take us to get back to where we were pre-spring 2020. I suppose that there has been a long-running debate about how long it took us to get back to where we were pre-autumn 2008. Can you say a little bit about that? In addition to all the other challenges with skills, Brexit, the protocol and everything that we have to deal with there, it looks as though there is the inherent issue that we and our economy will suffer more than other places as a result of COVID.

Mr Hetherington: I will take that initially and Richard can follow on. As I said in my opening comments about the timeline for the economy to return to pre-COVID levels of activity, at the UK level, the OBR and Bank of England, within a few months, changed their timeline from the end of 2022 to the start of 2022. Therefore, it is a very dynamic forecasting environment — let us put it like that. There is a high level of uncertainty.

With regard to how long it would take Northern Ireland to return to fourth-quarter 2019 levels of economic activity, there is greater uncertainty again. However, it will inevitably take longer — 12 to 18 months, possibly longer. You are absolutely right that there is significant debate about whether the Northern Ireland economy, from a GVA perspective, has ever got back to its 2008 level of economic activity, depending on which measure you look at. One of the things that our economy has been poor at is recovering from economic setback at the same pace as a lot of other developed nations or regions.

Mr O'Toole: I will give someone else a chance in a second, Chair. It is difficult. Every economist in the world is struggling to forecast accurately and is doing their best to analyse potential factors.

In your paper, you talk about our having a low business churn rate. For obvious reasons, one of the impacts of COVID is going to be a possible chill effect on business starts. We know that, if you have a once-in-a-century, black swan event that is shutting down lots of small businesses for an undefined period, it will inherently make it a lot less attractive for people to say, "I am going to start up a small shop", or whatever. Are we particularly exposed to that? It would seem that we are, given that we already have a relatively lower level of entrepreneurship here. We have a relatively high number of microbusinesses and sole traders etc, but a lot of those are more established. We seem, however, to have a lower level of entrepreneurship microbusiness starts. Is there concern there that that will be damaged in a structural way?

Mr Johnston: Yes. It is worth noting that the self-employed have been more impacted on than the employed, particularly because the employed have been supported quite well through the coronavirus job retention scheme (CJRS). At this point, the labour force survey (LFS) data indicates that the number of self-employed people moving into unemployment and inactivity is relatively higher than the number on the employed side.

It is a concern. We have always had a lower level of business starts and a very low level of churn, so we do not have what is called "creative destruction", which is Joseph Schumpeter's theory, where the least competitive exit the market and that then increases the average overall. That is effectively what I was talking about when I said that the policy framework will probably remove the bottom 5% or 10%.

I characterise what we have as being disruption squared, between COVID and Brexit. The overhanging problems that we had prior to COVID and Brexit are certainly becoming an issue. We have lower levels of productivity, higher levels of inactivity and problems with innovation. Moreover, we have relatively high healthcare and childcare costs compared with those right across our competitor nations. There is therefore quite a bit to be done to stimulate an entrepreneurial culture, and that is a challenge that Invest NI and the councils have been focused on since 2001 or 2002.

The Chairperson (Dr Aiken): Before I ask Jim Allister to come in, I have a quick question. You said that one of the issues is that none of the Budget is linked to any of the PFG activity. We are in a situation, however, in which we have the draft Budget before us, while the PFG, which we are supposed to be working to, is not even due to be reported on until April, as evidence to inform it is still being asked for. Is there therefore not a significant disconnect between the budgetary process and the PFG? Does that not indicate that there is something more fundamentally skewed about how we are trying to do budgeting and governance in Northern Ireland?

Mr Hetherington: The approach that has been taken is the same approach that has been taken year-on-year for several years. There is now an opportunity, with an Assembly and a Finance Committee in place that can provide the appropriate challenge, perhaps to change how some of the decisions are made and some of the information is presented. There is a desire for the voting public to see, from a democratic and electoral point of view, how funding is allocated to the priorities that they and their political leaders care about most.

The Chairperson (Dr Aiken): OK. Thank you very much.

Mr Allister: Good afternoon. Is the Irish sea border helping or hindering our economy?

Mr Hetherington: We are clearly in the early days of the operation of the Northern Ireland protocol. It is quite clear that there are some significant issues with its operation that are detrimental to the local economy. We have to hope for significant effort on the UK side and the EU side to reach an agreement on the operation of the protocol that limits friction and limits checks to those that are absolutely necessary so that they do not harm the economic, social and cultural fabric of Northern Ireland's links North/South and east-west.

Mr Allister: Have you read the Manufacturing NI report?

Mr Hetherington: I have not seen it.

Mr Allister: When you do, you will see just how devastating it could be for the manufacturing sector, which, of course, relies so much on the provision of goods and raw materials coming in from GB. One would not have to be an economist, would one, to know that if you fetter the trade with your biggest market and supplier, you are doing inevitable damage to the economic growth of the region of Northern Ireland? Does that not simply follow as logic?

Mr Hetherington: I agree that it is having a negative economic impact —.

Mr Allister: Can you quantify that?

Mr Hetherington: I do not have the exact numbers to hand, but if we compare North/South with east-west trade, imports from and exports to the Republic of Ireland are in the region of £5 billion to £6 billion a year. The similar trading figure for east-west is about £16 billion to £17 billion, so there is very significant east-west trade, and we need to minimise friction there.

Mr Allister: The very provisions of the protocol require friction, do they not?

Mr Hetherington: I am for frictionless trade. I am not defending that friction.

Mr Allister: If you are for frictionless trade, you cannot be for the protocol. It is as simple as that. The protocol is a friction machine.

A Member: Or for Brexit.

Mr Allister: The protocol is about imposing friction on trade from GB to Northern Ireland, so I am wondering why an economist is being so hesitant about the inevitable conclusion that there is therefore significant economic damage being done to the economy of Northern Ireland. You do not have to be politically correct here, Gareth.

Mr Hetherington: Mr Chairman, it was not my intention to be politically correct, and I am not suggesting that any of the friction or the Northern Ireland protocol as it is currently operating is good for the Northern Ireland economy. It is not.

I recognise that, given where we are at, there is a need for some mechanism that facilitates Brexit. What I would call for is that the Northern Ireland protocol be implemented in a way that minimises those frictions as much as possible. I agree with the point that how it is being operated at the moment is having a detrimental economic impact, and

continue.

Mr Allister: I suggest to you that what you have been saying is just a contradiction. You cannot implement the protocol in anything but a friction-causing way. If you remove the frictions, you remove the protocol, and vice versa.

The Chairperson (Dr Aiken): I think, Jim, that you have made your point.

Mr Allister: OK. I have one other question. Richard, you gave us some figures about what our spend on health equated to in tax take. Can you repeat those for me?

Mr Johnston: Health is around 50% of our budget in Northern Ireland. That would equate to our income tax, National Insurance, alcohol and tobacco duty tax take.

Mr Allister: From Northern Ireland?

Mr Johnston: Yes. Those are figures published by HMRC.

Mr Allister: What we therefore spend on everything else, which is the other half of our expenditure from the block grant —.

Mr Johnston: Sorry, Jim. Departmental expenditure is about £12 billion a year, but, in Northern Ireland this year overall, we spent in and around £28 billion. That includes the annually managed expenditure (AME) that comes in to fund pensions, benefits and all that sort of stuff that is dispersed by the Department for Communities. There are also the moneys that came in through the CJRS, the self-employment income support scheme (SEISS), the coronavirus business interruption loan scheme (CBILS), the bounce back loan scheme (BBLS) and the other UK-wide supports.

Looking at the broad figures, we estimate that we have gone from around £24 billion the year before to around £28 billion this year. It is a significant increase. The element that we have control over in the departmental budgets for resource DEL and capital DEL is about £12 billion, and the rest is funded through the Barnett formula. The fiscal deficit, according to the Office for National Statistics (ONS) methodology of calculation, could increase from around £10 billion to easily £13 billion or £14 billion in Northern Ireland this year. I realise that there are different methodologies and different elements that may or may not be included in those calculations. That is just a back-of-the-envelope version of the ONS methodology.

Mr Allister: In straightforward terms, with our annual expenditure of £28 billion, including AME, how much is the shortfall?

Mr Johnston: Potentially, this year, because of the increased COVID spending and the reduction in activity leading to a reduction in tax, it could be in the region of £13 billion to £14 billion, going up from £10 billion in previous years.

Mr Allister: Does it fill you with any confidence that we have a Finance Minister who has told us that it is somewhere under £3 billion?

Mr Johnston: That is the point that I have made. There is an Office for National Statistics definition of the fiscal deficit, and there are then other definitions that exclude things such as national defence programmes. There are different ways in which to calculate the deficit, and there are different views on that. We have to take all perspectives into account when we are discussing the public finance regime.

Ms Dolan: Thanks, Gareth and Richard. We know that the employment prospects of young people have been the most impacted on by COVID, and that is really concerning. In your paper, you mention how the new unemployed:

Without an adequate Budget, is there a way in which to avoid that happening, or could the Department for the Economy be preparing for that now in order to provide for those young people?

Mr Hetherington: There are a number of elements to the skills programme, one of which is ensuring that as few young people as possible leave school with low or no qualifications. That is the first part. The second part is about making sure that young people are directed to the career paths and tertiary education routes that are appropriate for them based on their skill sets and their abilities and based on meeting the needs of the economy. The final component is upskilling or reskilling people who are either in the labour market at the moment or who have just left the labour market. For the latter, that would give them the appropriate skills to move back into the labour market. That should happen in any given year. The concern is that, in COVID's second year, the number of people who are likely to fall into that reskilling bracket will increase, so it is difficult to see how you can do that without there being additional funding to support it.

Mr Johnston: I will add to that. Government is one of the largest employers in Northern Ireland, so, for me, there are two aspects to this. One is that government should be leading by example and employing a number of those young people on apprenticeship schemes, getting them into gainful employment and supporting their skills development into a career that will potentially pivot them into some other occupation when the economy picks up at some stage. You would like to see, for example, one, two or three of the Departments taking forward that type of scheme. Government could certainly lead by example in that regard.

The other thing is conditionalising assistance. If we are to assist a firm that has been reasonably successful, we will ask that firm, for example, to bring in 15 people on an apprenticeship or through a social clause. If that firm is to get assistance from government, it will have to support young people, engage in behaviour that will improve the environment or engage in some other social or environmental good that supports other policy objectives in government. If we look across the economy, we see that there are sectors that have been devastated by COVID, such as the arts, entertainment and hotels. Equally, however, there are other sectors that have done reasonably well, such as ICT, logistics and pharma. We could perhaps look to those types of companies to support those other policy objectives through our method of engagement, I suppose.

Ms Dolan: Thank you. That is really interesting. That concludes my questions, Chair.

Mr McGuigan: Thanks to both gentlemen for their presentation. I want to come back in on some of the points made by Jim Allister. He asked you about the damage being done but did not ask you about the damage being done to the economy from Brexit, when it is clear to anybody with any common sense that the protocol follows on from Brexit. He also cherry-picked certain results from yesterday's survey from Manufacturing NI, even though Manufacturing NI itself has said that, despite some of the difficulties, manufacturers here in the North want the protocol to work. It is the job of sensible politicians to work on that basis and to come up with sensible ideas to resolve some of the difficult issues rather than to grandstand at Committee's here and elsewhere.

First, in your paper, you said a number of times that the Budget from the British Exchequer does not allow for the creation of initiatives to instigate economic growth in the short, medium or long term. One of the points that you laboured in your paper is the lack of a multi-year Budget. Can you go into a bit more detail on your opinion on the impact that not having a multi-year budget will have on the Executive's ability to plan long-term economic recovery?

Secondly, in its submission, the Federation of Small Businesses (FSB) praised the Minister for his efforts to support business to try to recover from COVID by granting rate relief for certain sectors and putting a freeze on the regional rate. Are those policies a sensible approach if we want to restart our economy once COVID eases off?

Mr Hetherington: Thank you for those two questions. We are certainly suggesting that multi-year Budgets allow large organisations to plan and make strategic decisions beyond the next 12 months, and we recommend them.

You asked about the Treasury decision, I understand that it was the Treasury's intention to run multi-year Budgets, but, given the significant uncertainty around COVID, running a Budget beyond the next 12-month period was deemed to be too uncertain. That approach is not unreasonable. We should be trying to move to having a multi-year Budget as quickly as possible. For as long as we are operating a one-year Budget, however, Departments and the Treasury should be facilitating as much end-year flexibility as possible in order to ensure that there is not a dash to spend money as we approach the end of the year in areas that will not deliver maximum value for money rather than hand it back. I understand that temptation. Yes, let us therefore go for multi-year Budgets, and I think that that is Treasury's intended direction. For the period that we do not have multi-year Budgets, however, we should have greater end-year flexibility to facilitate moving money from one year to the next.

You asked about non-domestic rate relief. The Committee will be aware that, earlier in the year, I did some work for the Department of Finance on rate relief. In some of the follow-up work that I have been doing, rate relief has been seen as being critical for and fundamental to allowing large numbers of firms to stay in business. Without it, they would have had to close their doors, and unemployment would have increased accordingly. What I will say is that I see rate relief primarily aiding the survival of businesses rather than forming the plank of a build back better strategy and an economic recovery strategy. It is one of the life support measures rather than one of the longer-term strategic policies for the economy moving forward.

Mr Johnston: Now is the time to consider much more targeted support. For example, as Gareth said, we were looking at a set of polices for survival and viability. As we look, hopefully, to the vaccine working and our beginning to claw our way out of the recession and back towards recovery, it is time for more targeted support for the sectors that are in significant difficulty. That might mean lobbying for an extension of the CJRS for certain sectors, such as the arts, entertainment, hospitality and restaurants, and the rest of the economy going back to something that is more or less normal.

Certain sectors of the economy have done incredibly well out of digital supports. That raises the question of how we fund our public services. Do we begin to look at the fourth industrial revolution, consider our rating system and look at a digital sales tax, as has been discussed, to fund and support those sectors that have been critically damaged over the past number of months? As we move out of the current situation, we will move towards demand stimulation and market access rather than life support, as we see it, for the business pace.

Mr Catney: Thanks very much, Gareth and Richard, for your presentation. At various stages during the past financial year, Departments have struggled to get rid of all of their capital money. How important is it to have spade-ready projects out there to stimulate the economy? Are you thinking about that? Projects could be brought forward now that would have a quick spin-off rather than that long-term spin-off. We will have to think of the long term eventually, however. For the whole new green economy, rather than hand it back, can any of that money sitting there be used? Is there an opportunity for any of that money to be spent before the financial year is out?

Mr Hetherington: Richard, do you want to deal with most of that question from your experience on the infrastructure panel? I will deal with the last part, Chair. For projects of a capital nature, it is now very late in the day to be identifying projects and getting the money spent before the end of the financial year. That is my sense, as it is six or seven weeks hence. That is not to say that there are not significant capital projects, particularly those to do with green and clean energy, that we could move to. I will allow Richard to deal with the substance of your question.

Mr Johnston: Thank you. It is a great question, because, inevitably, we tend to have these discussions in around February and March of most financial years about the underspend, the potential handing back of money and those sorts of things. It would be a great idea for Departments to have a range of capital projects with business cases approved, for which the cost can be updated to reflect current prices, procurement done and the project then taken forward reasonably quickly. That is probably something that we should do early next year to get ready for a budget spend later in 2022, however.

There are massive opportunities here for Northern Ireland to be a leader in the green economy. Northern Ireland has been really successful in renewable electricity generation. It is the only indicator in which we lead all of Europe. We are ahead of every other nation. That is a fantastic result. A lot of the reason for that goes back to policies that were put in place in the noughties and the early teens. If we get this right, there is the opportunity to generate an awful lot of activity. We could reduce our amount of imported fuels. We import a lot of heavy oils for the transport industry and for heating.

Those are two areas in which we could move significantly towards ground-source and air-source heat pumps, solar energy and all those sorts of things. We need to begin to think about how we improve the conversation on generation and storage technologies, and how we can retrofit them into existing buildings. Perhaps the planning system could say that every house and office that is built from 2022 onwards is zero-carbon. We could use the rating system to say, "In five years' time, and we're giving you a clear signal, unless your building is carbon neutral or carbon compliant, we're going to increase the rates, and you've got enough time now to begin that journey to get to the point where you will pay lower rates". Give those clear signals to businesses. Give them time to adjust to the factors that need to be adjusted.

My third point is around infrastructure as well. If we are going to have a hydrogen-fuelled public transport network and hydrogen-fuelled cars and electric vehicles, we need to invest heavily in charging and refuelling points across Northern Ireland. There are massive opportunities here for green investment. It will require money to be removed from certain areas and put towards green energy, but again, you will be back to creating jobs and the ability to bring in young kids from a vocational background, perhaps from even the inactive and unemployed, train them and develop their skills base. If there are young people who have left school, university or college and have never been in work, those are the kids who would benefit most from the apprentice schemes and getting into the green energy technologies early in their careers. There could easily be a 10- or 15-year window of employment here if you have the right green-energy skills. It is something that other economies have embraced relatively quickly, and Northern Ireland needs to move reasonably sharply on that as well, not to get a first-mover advantage but to be reasonably well up the pecking order. So, that is a good question.

Mr Catney: That is encouraging but we have to have the thought to unleash that. Doing the Budget every year, as we do in Northern Ireland, is working against itself. If we could have three-, four- or five-year Budgets, that would play into that system and the planning. Do you believe that the first thing we could do is look at yearly Budgets and try to make sure that we move to three- or four-year Budgets? That is the key to unlocking all of that. Keep in mind as well that the Budgets in England and Scotland this year run to 2026.

Mr Johnston: If we could align the Programme for Government from the next election cycle — once the elections were complete and the Ministers in place — and the Budgets across the next Executive timeline, that would be a fantastic improvement that would give security and length of sight to officials who are working with the budgets across the piece.

The infrastructure panel looked at planning right out to 2050. We need to plan our infrastructure, because once we build it, it will be in place until 2050 and beyond. We need to engage young people in those conversations because they are the people who will probably be paying for and using that infrastructure for the largest proportion of their lives. We are going to use if for maybe 20 or 30 more years, not necessarily for 40, 50 or 60 years, so that is where we need to take that conversation.

I agree absolutely that we very much need to look at the longer-term, and even cement those capital budgets. If it is a 15-year project, cast that into your Budget pretty sharply, and you can then move forward from there. It would be a big improvement if we could move to three- or to five-year Budget cycles that aligned with Programme for Government priorities.

Mr Catney: Thank you.

Mr McHugh: Thank you for your report. I read it with great interest. You alluded in the report to what one could only interpret as the silo nature of the departmental structure in the allocation of the Budget. The structure possibly does not lend itself to addressing elements of the Programme for Government such as employment. Is a more inter-departmental approach needed to successfully address the Programme for Government?

Mr Hetherington: Yes. Cross-departmental working is required to deliver an effective Programme for Government. A pooling or sharing of funding will also be required to deliver effective cross-departmental working. It is normal human behaviour that if you have a budget to manage, you manage your budget and allow someone else to manage theirs. Sharing funding is a challenge and not easy to do. I do not want members to think that there is an easy win that is just not happening. However, it is critical for a lot of the challenges that we face as we come out of this economic recession and deal with the major national and global challenges such as climate change. The challenges require whole-of-government responses, and that requires flexibility in the movement of funding around the different delivery agents and Departments. There will need to be a greater level of flexibility in the allocation of funding between Departments to help deliver that.

Mr McHugh: The shared prosperity fund is not likely to replace all of the benefits that we previously received from the European Union. How is that likely to impact on the overall development of the economy in the North of Ireland?

Mr Hetherington: That is a very difficult question to answer, and maybe Richard will comment. Until more detail comes out on the SPF, it is very difficult to provide a comment. All the indications are that the amount of funding overall from SPF will be less than was made available to the UK through EU structural funds. The UK could change how it spends and allocates other money across Departments that historically had EU funding. Remember, the UK contributed approximately £10 billion per year more to the European Union than it received, and it is about what the UK Government choose to do with that additional funding. Are they going to use that funding to reduce the deficit, or are they going to spend it on public services? If they spend that on public services, the money will be allocated through the Barnett formula to the block grant. It is a complex question; it is a good question. However, we could have a situation where there is less money coming in under the SPF badge than came in under the EU structural funds badge, but more money may come through the NI block grant than would otherwise have been the case, and that is an unknown at the moment.

Mr McHugh: Are you saying that we are at the mercy of the UK Government? Given the way that they have treated the North of Ireland on the Brexit issue and the protocol, I am not confident that we will be a priority in their Programme for Government or that our objectives will match their objectives. However, that is just my view.

You have already mentioned that the North receives more per head of the population than any other part of the UK, and, yet, our productivity lags behind that of every other region in the UK, and far behind that of the Republic. Given the projections that one has now for national growth, and the Republic's is probably one of the highest, if not the highest, in the European Union, is it likely that the gap will widen for the likes of us in the North of Ireland?

Mr Johnston: I will take that one. To finish off on your first question, Maolíosa, if you look at, say, Invest NI's budget, you see that the EU money could easily have been 10% to 15%. Invest NI would have to confirm those figures. Obviously, that could be seen as a reduction in income and ability to support firms right across Northern Ireland. If the SPF does not replace that directly, the question is how that assistance will get to firms in Northern Ireland. For me, there is a significant lobbying piece to be done with the UK Government to say, "Right, you have stated that levelling up is one of the Government's clear policy objectives. How does the SPF help to level up across the UK? What do we get with regard to, say, a digital catapult and some of the advanced manufacturing centres, and how will they support some of the UK Research and Innovation (UKRI) and Innovate UK activity that takes place in Northern Ireland that will then plug the gap in the EU money that Invest NI was previously able to disperse?".

Going on to the second point about more spending per head, we have lower productivity in general. That is partly due to the mix of sectors that we have. For example, we have a larger proportion in agriculture, which, generally, has lower productivity, and we have a lower proportion in professional services, which has higher productivity. Even within sectors, agriculture here is less productive than agriculture in the UK. Therefore, what we need to look at is digitisation and automation and how we begin to bring some of those technologies to bear right across all the sectors in Northern Ireland. Obviously, Invest NI is looking at that quite intensely. Manufacturing NI is working with Invest NI on that.

Equally, with regard to the public sector, we have probably been spending more per capita for slightly less good outcomes. What comes though in the competitiveness research is that we have been spending a lot on public services, but our outcomes are just not as good as we would like them to be in literacy, numeracy and all those sorts of things. We are actually a very happy nation. This is quite a good place to live. We have good environmental credentials, and all that, so it is certainly not all bad. However, there are areas, especially in education and healthcare, where we need to begin to look much closer at our outputs for the spending that we make and work out how we can best spend those pounds. It goes back to the reform point that, I think, Steve made earlier in the conversation.

Mr McHugh: I will just come back to the point about the gap. Is it likely to widen with regard to productivity and the opportunities that seem to exist in the Republic of Ireland, our next-door neighbour? In every respect, we lag far behind.

Mr Johnston: The answer is that, unless we begin to change what we do, we should not expect the results to be any different. That, for us, certainly, in the policy centre, in the discussions that we are having, is absolutely key; that we step up and begin to make those policy changes that make a real difference and close those gaps in future.

Mr Frew: I just have a comment to make about the economy and renewable energy. Whilst it is correct to say that we top the league for wind generation and renewable energy, we have paid for it; 70,000 businesses have paid for it. Most of the heavy industrial users are paying for the most expensive electricity in Europe. We also top the league table, usually competing with Italy, for the highest charge for industrial energy. It is not all good news. We have a system operator that does not function properly, a wholesale market that is stumbling, and a system that, even in its infancy, is starting to creak and crack with regard to amber alerts and costs. Therefore, it is not all good news on the economic front with regard to renewable technologies. I worry about putting some sort of financial pressure, penalty-wise, on businesses to adapt property when they already pay substantial network costs on their energy bills. I think that that would be a non-starter. It is one thing to pay for an incentive scheme to generate more electricity, but it is another to penalise businesses when they have already paid through the nose. I certainly worry about that. Have you any comments on that?

Mr Johnston: I am happy to take that. I made the comments, so it is fair for me to answer. Electricity is not very competitive in Northern Ireland. Large and medium industrial users pay some of the higher electricity charges across Europe. We have to balance that across all the costs that businesses face in Northern Ireland. In general, we are quite competitive in rates, rents and water charges. We also have relatively low labour costs. There is a cocktail of reasons why firms trade here, and electricity is certainly one of those elements.

One suggestion of how we could incentivise companies is to say, "If you do not begin to change, you will potentially pay higher rates". There are other potential options. You could subsidise them — at, say, 30% for large companies and 50% for smaller companies — to take forward renewable energy and storage options. There are certainly ways in which we can incentivise them to do better. As an economist, I also think that we should disincentivise some bad behaviour and look at the policy framework around that. That may not be the single policy framework that would be used in terms of long-term aspirations for rate changes. However, we need to consider both the incentive and disincentive sides of the coin to ensure that the public and private sector begin to work together to deliver better outcomes for the environment.

I agree that electricity is one element that large industrial users certainly struggle with. Look at the decisions by the likes of Michelin. Electricity cost was one of the key challenges that Michelin faced in Northern Ireland. It was supported to install a wind turbine but, when it benchmarked against plants across the rest of the world, Michelin was still uncompetitive given the costs here and, ultimately, moved. Those are not success stories. We are acutely aware of the impact that it has when companies leave Northern Ireland.

Mr Frew: Yes. You have hit the nail on the head. That is a company that I know a lot about, having lived two miles away from it at that time. What you say is quite right, but most big industrial users and big energy users have adapted to try to get their bills down not through incentive but through necessity. Some of them have gone into the demand side of things to try to reduce costs. That has even affected shift work in many ways. Companies are adapting and changing due to necessity, not necessarily because it is the right thing to do environmentally or because of a penalty that they could incur. It is through necessity that they have adapted and put in the wind turbines and solar panels. That, in itself, has an impact on the economy. If you take large companies off grid, all the people who remain on grid pay for that, especially the large industrial users that remain on grid. They then pay a bigger share of the bucket, because that bucket does not seem to reduce. There are real balancing issues here with regard to incentivising companies to go greener with regard to energy.

Mr Johnston: Absolutely. DFE is working hard on that in the energy strategy, which I think will be taken forward at the end of this calendar year. I agree with those points. It is a balancing act. However, with policies in the labour market, for example, we need to balance the benefits traps with the incentives to get people into work, the removal of benefits as people earn more, and all of that sort of stuff. The very same applies in the energy sector. We need to be cognisant of how all the different policies interact with each other to create all the incentives and disincentives that we talked about.

Mr Frew: OK. Thank you, Richard.

I have a question on the Reinvestment and Reform Initiative (RRI) borrowing. I think that everyone —

The Chairperson (Dr Aiken): Deputy Chair, may I interject with a quick question on the energy issues?

Mr Frew: Yes.

The Chairperson (Dr Aiken): One of the questions that is asked about the increased energy costs in Northern Ireland is this: is Northern Ireland too small to run its own separate regulation process and the rest of it; would we be much better being part of the rest of our nation's energy structures, particularly contracts for difference (CFDs)? A very significant question is now being asked about market incentive, particularly for things like offshore wind and larger-scale renewable projects that cannot be done on the scale on which we operate at the moment. Is the university doing any modelling on the ability or size of the Northern Ireland market vis-à-vis the benefits of being part of a much larger market or the CFDs and new markets that are going through in the rest of our nation? Is any work being done along those lines?

Mr Frew: If I may add to that, is any work being done on interconnection even? Obviously, interconnection, in general, is a good thing. There is always the economic balance of how much we pay for it. Is the university looking at any sort of further interconnection with GB and Europe?

Mr Hetherington: I am not aware of any work being done on that in the university, but I am happy to follow that up and get back to the Committee with an answer. If any work or any research is being done, whoever is conducting that will be more than happy to engage with your Committee.

The Chairperson (Dr Aiken): OK. Thanks very much indeed.

Mr Frew: On the other issue of RIR borrowing, I think that, to a person, everybody on the Committee has stated that we should be borrowing at this time. When we were all urging Departments to seek out projects to qualify for this borrowing, it struck me that I remember having a conversation a number of years ago with somebody high up in the Infrastructure Department who was lamenting that a big block of his yearly budget goes on interest on previous projects that had borrowed through public-private partnership (PPP) at the time. If we are going to have this collegiate approach as an Executive, is it right and fair that a Department, which may gain advantage from borrowing, should be left to fund the interest solely? Should there be a more collegiate approach?

Mr Johnston: It is correct that private finance initiative (PFI) and PPP payments will silt up a Department's capital budget. That is certainly the practical outworking. You would need to consider whether or not that project is a Northern Ireland-wide good, or is it a specific infrastructure project or education project? Should the Executive have a central interest payment element? The pros and cons of that one are wide open for debate. An airport project that would benefit all of Northern Ireland could be something that you would have an NI Executive interest payment on. If it is purely a road, school or hospital, there is probably a better argument for that being paid for at the departmental level.

Mr Frew: If we build a new corridor and that attracts new business, gets the commuter to a certain destination in quicker time and brings all the infrastructure benefits that we know about, whether it be in respect of rail, road, hospitals or schools, surely that has a benefit for all. Even in its purest sense, when you get to February of any year, and you have this money left at the centre, surely it would be easier and better to, if nothing else, pay off interest, if that is possible, rather than having a Department doing it singularly? Do you understand what I am getting at? Does it add more flexibility? This could be pie in the sky — I just do not know, and I am sure that you will inform me if I am wrong — but imagine we have £200 million left at the tail end of a financial year. If we were to push that into interest payments rather than hand it back to Treasury, that would still be a massive benefit to the people of Northern Ireland. It would be value for money and money well spent because it would be reducing interest. Can that be done?

Mr Johnston: It is a well-made point. I would need to check with Department of Finance officials whether that would be allowed by the rules that Treasury and DOF operate under. I understand the idea of paying off the capital but, in that context, it is about the art of the possible.

Mr Hetherington: The member raises an interesting point. You compare the way in which a national Government would operate their finances with that of a regional, devolved Administration. A national Government will borrow money through gilts and allocate that funding, and then the Treasury of that national Government will pay off the interest separately. Therefore, that Government's Department for Infrastructure, for example, does not owe the interest on the debt that was used to finance the road-building project; it is the Treasury itself that pays that. As Richard said, in a devolved Administration, the rules on finance and borrowing are different. It is a good and interesting idea that merits further investigation, but I think that officials in the Department of Finance are best placed to answer your question.

Mr Frew: OK. Thank you very much.

The Chairperson (Dr Aiken): A short one please, Matthew.

Mr O'Toole: I will keep it short.

Would you say that, with Northern Ireland's position at the minute, notwithstanding some of the issues in getting used to goods moving from east to west, there are potential competitive advantages for our economy, relative to both GB and the South of Ireland? We are in the unique position of having unfettered goods access into both Great Britain and the EU single market. I am not asking anybody to get involved in political controversy, but from an economic perspective, does that represent a competitive advantage?

Mr Allister: Good try.

The Chairperson (Dr Aiken): We are an equal opportunity Committee. Let him continue.

Mr Hetherington: There is "potential"; that is the word. We are currently operating in the unknown. There is an argument that we are in the UK union economically and in whatever free trade agreements that the UK can negotiate, so we have access to the UK single market, and we also have access to the European single market. I will not rehearse previous comments, but, for that to work effectively, trade east-west and west-east has to be as frictionless as possible. I have heard a number of businesses indicate that there may be potential benefits from being located in Northern Ireland, compared with GB and the Republic of Ireland. It is about how we take advantage of those. At the minute, that is an unknown. I have not done any work on it, but those are the sorts of opportunities that we need to start thinking about.

Mr Johnston: There are certainly opportunities. If you look back at a lot of the Brexit research, you see that you could shave 5% or 6% off the UK and NI economy. Overall, there is probably a perspective that it is negative, given the potential relationships. There are always going to be winners and losers in any economic policy conversation. If you look at FDI, you see that there are companies that considered investing in GB that have now thought that Northern Ireland looks like a much better option, because you have a foot in both markets. Those companies, which were looking at other areas of GB, have begun to shift their sights, geographically. The other element is, perhaps, firms in the South potentially setting up a base in Northern Ireland to export to GB.

The third thing is regulation. The UK is pretty good at regulation; it is well respected globally, and that is very good for finance, pharmaceuticals, legal services and all those sorts of things that we export around the world. Firms can now benefit from being part of both regimes. Effectively, if a firm can pick the more stringent of the two regulatory regimes, it can trade in both markets. That is a comparative advantage that the firm will not have in other jurisdictions.

The last thing that I will talk about is frictions. From a policy perspective, we could reduce some of the frictions. For example, in the vehicle management system, if you drive a lorry off a ship, you can be stopped for three different reasons: HMRC, the council or DAERA can all perform a check. If we had a single check that was able to satisfy all those requirements, we could reduce the physical frictions that are in place in Northern Ireland. We could do that with one or two policy tweaks and getting those organisations to work more closely together.

The Chairperson (Dr Aiken): I will not make the obvious comment that, if we did not have any checks, it would be completely frictionless.

Mr O'Toole: I will not make the obvious point that, if we did not have Brexit, we would not have checks. We are where we are.

The Chairperson (Dr Aiken): Behave.

Mr O'Toole: We have to start the story at the right place, Chair.

The Chairperson (Dr Aiken): I have two final things before you go. Sorry for this being an extended session, but we can safely say that it was valuable. Gareth, at the beginning of the meeting, we had correspondence to say that the independent fiscal council will be set up by the end of this financial year. As someone who probably will be a key member of that, if it is going to be a truly independent fiscal council, have you had the telephone call from the Minister yet?

Mr Hetherington: It came as news to me when you said that it was going to be in place by the end of this fiscal year.

The Chairperson (Dr Aiken): It is probably safe to say that Richard Ramsey feels the same.

Mr O'Toole: Have you checked your inbox?

The Chairperson (Dr Aiken): Gareth and Richard, thank you very much indeed.