Sir David Varney's Review of the Competitiveness of Northern Ireland

Response by the Institute of Chartered Accountants in Ireland to the Call for Evidence of 28 January 2008

Introduction

The Institute of Chartered Accountants in Ireland (ICAI) is the largest and longest established accountancy body in the island of Ireland. It has over 16,000 members, and it is the leading voice of the accountancy profession in Ireland. The Institute was established by Royal Charter in 1888. Its activities and those of its members are governed by its Bye-Laws and by Rules relating to professional and ethical conduct.

Having contributed to Sir David Varney's Review of Tax Policy in Northern Ireland we are pleased to respond to the call for evidence in the context of his Review of the Competitiveness of Northern Ireland. Our comments comprise descriptive details and, perhaps more importantly, pointers and suggestions to measures to enhance competitiveness. These may involve additional or reshaped government policies and actions. Without prejudice, however, our overarching belief, as we have already expressed to Sir David in the context of his Tax Police review, is that the key policy required is a reduction in the rate of Corporation Tax applying in Northern Ireland. However, although in our view the economic case for such a cut is incontestable, it is equally clear that the Government seems to consider the political difficulties of a localised benefit to one particular region within the UK to be insurmountable.

We believe the discrete circumstances and geography of Northern Ireland offer the opportunity for a radical approach to be taken of how its economic growth might be accelerated. We invite the Government to use Northern Ireland to trial more imaginative tax measures as a prelude to their possible roll-out through-out the rest of the UK.

Sir David's call for evidence is broad, so it will be appreciated that our focus has been in addressing areas where we believe the expertise and experience of Chartered Accountants can best contribute to the process. Over the years, ICAI and its Ulster Society (USCA) have carried out research to produce evidence-based reports and surveys which might inform government economic thinking as to how the economy might be boosted. We refer to three of these here: Financing for Growth; the November 2006 Member Survey and the Financial Confidence Survey of November 2007.

We consider all three reports/surveys to be very relevant to this debate and should assist this second stage of Sir David Varney's work.

The first relevant report is a major piece of research called ‘Financing for Growth’. This was commissioned by DETI and undertaken by the Ulster Society of Chartered Accountants in 2000 and launched in 2001. The findings of that report are as relevant today as they were then.

The report found that the challenge for stimulating small business growth was not a shortage of money, or of good ideas, but the matching of appropriate forms of finance with business needs at each stage on the growth curve. The report called for stimulation of entrepreneurship through widening schemes of encouraging investment; tax breaks linked to increasing management capability; developing technology incubators and supporting links between industry and universities.

In a Member Survey of November 2006, members responded that, aside from a cut in the rate of Corporation Tax to stimulate business activity, greater encouragement of FDI was required. They also highlighted improvements to the local business environment through measures such as reduction of business charges; greater encouragement of innovation; more emphasis on skills training; and boosting export performance.

Skills also formed a major part of the USCA's most recent survey in November 2007. The ‘Financial Confidence Survey’ found that there were significant concerns over both the availability and cost of labour in Northern Ireland, with over 70% of respondents citing an inability to recruit staff as an important issue in their development. Pressures continue to mount in terms of competition from Asia and Eastern European countries not only from the perspective of cheap labour but also in terms of the downward pressure they place on international manufacturing prices.

Other issues of importance include increased competition from both local and international rivals; customer pressure for improved products and services; tax and regulatory pressures and the rising costs of energy and raw materials. As regards costs of energy, a recent ERINI ‘Review of Industrial Derating’ report in October 2007 found that in Northern Ireland the overall cost base is rising, pointing specifically to high energy and transport costs. In fact, it said that Northern Ireland has the highest cost of electricity and gas in Europe.

Our Survey of November 2007 asked our members what they felt the key policy priorities should be. After a cut in the corporation tax rate in number one position, the priorities were as follows:

1. Improve skills and education with a better alignment of the education system and commercial environment;
2. Improve infrastructure;
3. Promote and encourage enterprise.

These reports provide evidence of a rich opportunity for relief measures and tax incentives to be offered on a wide range of disadvantages ranging from skills deficiencies and management capability development, to excessive energy costs presently hindering the Northern Ireland economy.

Without prejudice however, our overarching belief, as we have already expressed to Sir David in the context of his Tax Policy Review, is that the key policy required is a reduction in the rate of Corporation Tax applying in Northern Ireland.

Question 1

We are looking for evidence on the most important factors for businesses considering moving to or from Northern Ireland. In particular we would welcome evidence on:

• the advantages Northern Ireland offers and the types of investment that are particularly suited to Northern Ireland's economy;
• the relative weaknesses of the Northern Ireland economy that act as potential barriers to investment decisions;
• the significance of access to the rest of the UK or the Republic of Ireland;
• the role of government policy in determining investment, including the role of political stability; and
• what further steps could be taken to improve the conditions for investment in Northern Ireland, including changing the focus of government investment.

Business Migration and FDI

We take this question as relating to means by which Northern Ireland can secure its position as a destination for foreign direct investment. We do not concur with the emphasis in Sir David's review of Taxation Policy in Northern Ireland that supply factors alone can stimulate the economy.

There is considerable literature on the drivers for FDI, but we find that one of the most compelling summaries is that advanced by economist Matthew J. Slaughter.

• When considering FDI from the US to Europe.. . one might presume this FDI to be predominantly horizontal in nature motivated mainly by market access. Regression analysis showed that multinationals seem to tailor their operations based on factors such as host country size, per capita income and policies such as EU membership and corporate tax rates.¹

We find this compelling because it mirrors our experience of FDI determinants in Ireland. It is also compelling as it amplifies the earlier conclusion, from an analysis of econometric studies, by Sir David that “the prime motivation for FDI is easy market access with low costs, as well as skills, infrastructure and telecommunications”²

There are two main reasons why a business might seek to establish a foreign presence with direct investment. The first is that it wishes to broaden its market access outside of its domestic market. The second reason is that it wishes to reduce its cost base, either by accessing a cheaper labour market or a ready supply of raw materials, perhaps natural resources. These account for the business decision to commit to foreign investment.

IDA Ireland, Ireland's industrial development authority, has devised a graphical illustration of how it sees FDI investments are made. As the IDA has some considerable experience and track record in developing FDI, and because there are significant similarities between the Irish and Northern Irish business environments, we feel it appropriate to cite it here³ Its logic informs many of the observations throughout this paper.

Recent observations⁴ by Mr Peter Sutherland, the former EU Commissioner on Competition Policy and founding Director General of the World Trade Organisation, are worth noting in this context.

• “I think that by far the two most important issues in terms of [Ireland's] relative growth... have been the reduction in corporation tax and inward investment. FDI has been the crucial element in causing significant growth in [Ireland's] economy. I have no doubt that foreign direct investment would not have happened without the lower corporation tax rate. It was the vital cause of inward investment and is a better way to attract companies than subsidies. This is because low corporate tax is useful only if you are profitable, but a subsidy can make a bad investment look good.”

Northern Ireland's Advantages

IDA Ireland's sister organisation, Invest NI, has identified ten compelling reasons for multinationals to locate in Northern Ireland⁵. Among these are:

• Talent, pointing to Northern Ireland's highly educated and skilled English-speaking workforce
• Competitive Operating Costs, suggesting that Northern Ireland's operating costs are highly competitive and significantly lower than the rest of the UK and Europe
• European Accessibility-Northern Ireland provides a competitive near-shore proposition to Europe, with the advantage of operating in the same time zone, regulatory environment and similar culture to the UK.
• A strongly pro-business climate, evidenced, inter alia by the work with which Sir David has been commissioned.

Invest NI also points out that many major multinationals have already invested in Northern Ireland-key investors include multi-national companies such as Seagate Technology, Fujitsu, Bombardier Aerospace, Microsoft, Caterpillar, Polaris Software Lab, Liberty Mutual, HCL BPO, BT and Halifax. The extent to which this is an influence cannot be overstated. Once a region brands itself successfully, the build up of business confidence accelerates.

What types of investment are particularly suited to Northern Ireland's economy?

We concur with the advantages listed by Invest N.I. They also serve to provide pointers towards a response to one of the evidence requests-what types of investment are particularly suited to Northern Ireland's economy. We suggest that the answer may lie in the Information and Financial Services sectors and any manufacturing sector such as life sciences or aeronautical engineering where advanced technology is essential to the manufacturing process and a high level of skill is required from the employees.

A key element in attracting knowledge based industry is the protection offered by the legal and social infrastructure towards the protection of patents, know-how and other forms of Intellectual Property. This is a distinguishing characteristic between more developed economies and underdeveloped or developing economies. Business is reluctant to locate in environments where its assets and raw materials cannot be secured. Enjoying as it does the robust structures and traditions of the UK legal system, NI offers a level of comfort in this critical area.

Employment Challenges

A weakness in the Northern Ireland economy in attracting this type of business ironically is a matter often promoted as a strength. This is the high level of employment in Northern Ireland.

Employment is at a record high – unemployment is at 3.7%. This high level of employment we suggest has been driven mainly by public sector spending growth at approximately 5% per annum, which represents approximately 61% of Northern Ireland GDP. The Northern Ireland public sector employs one in three of all workers and 60% of all females in employment. This level of subvention cannot last for ever and a shift of employment profile is needed away from the public sector towards the private sector.

There is not necessarily a direct correlation in the short term between employment numbers and Foreign Direct Investment. In 2002, Ireland attracted 10bn in FDI, and those companies involved created 30,000 jobs. A comparable FDI figure in 2004 resulted in the creation of 10,000 jobs. Nevertheless, total FDI employment increased by a third in the ten years from 1997–2006.

There would however seem to be a direct correlation between employment quality and FDI – FDI job salaries run on average at 25% over the annual industrial wage.⁶

A significant challenge for Northern Ireland, which is perhaps unique in the Western world, is not only to foster indigenous enterprise and FDI, but in tandem, foster migration from public sector employment to private sector employment.

In short, not only is it necessary to create jobs in Northern Ireland, but to create jobs which are more attractive than those already available within an economy which functionally has already achieved full employment rates.

We believe this can only happen if:

• Pro rata, it is cheaper for employers to pay well than pay badly, and/or
• It is more tax efficient for employees to work in the private sector than in the public sector.

Possible solutions to this difficult problem might involve:

• A tapering scale of Employer's National Insurance Contributions, whereby the effective rate of NIC decreases as wage levels increase.
• A reduced rate of Employee NIC for private sector employment.
• A separate Private Sector Employee tax allowance.

Access to the Rest of the UK and Ireland

Ireland's experience of economic activity, growth and prosperity over the last 15 years in particular strongly suggests that the geographical location of Northern Ireland should be no impediment to its economic growth.

The potential for greatest impact on Northern Ireland's prosperity with regard to its geographical location lies in its relation with Ireland and its coexistence with the more prosperous Ireland as part of an all island economy.

Ireland is held up, rightly, as a paradigm model of a destination for inward investment. This emphasis however overlooks one particularly salient fact – Ireland is a net exporter of Foreign Direct Investment.

FDI outflows via Ireland in 2004 were the largest total ever recorded at 12.7 billion. Outflows were over two and half times higher than in 2003. For the first time Ireland was a net exporter of FDI, as outflows exceeded inflows by €3.6bn. Ireland is at present the fourth largest investor in the UK economy.

On this evidence we suggest that Ireland can be a very important source of investment for Northern Ireland.

What steps can realise this potential? All the key boxes are already ticked, except for the divergence of rates of Corporation Tax. We have noted geographical proximity, our common language and customs, our compatible legal and commercial systems and the lower cost base in Northern Ireland. We should not overlook the Goodwill factor. Currently there is much international goodwill towards Northern Ireland, particularly in the United States, the European Union and Ireland.

Question 2

We are looking for evidence on the opportunities and challenges for Northern Ireland businesses starting up and/or attempting to grow or sustain their growth. In particular we would welcome evidence on:

• whether access to finance presents particular difficulties for Northern Ireland businesses compared to the rest of the UK or the Republic of Ireland, and in particular access to venture capital;
• the uptake and effectiveness of financial support and incentives from government to support business growth;
• the role of non-financial support in supporting start ups and business growth;
• other barriers to either starting or growing a business in Northern Ireland compared to the rest of the UK or the Republic of Ireland; and-what further steps could be taken to support enterprise and growth of Northern Ireland businesses, including whether there is scope for further streamlining and/or rationalisation of delivery mechanisms.

Role of Local Enterprise Agencies

Northern Ireland has many thousands of locally owned businesses operating alongside a much smaller number of, usually larger, externally owned businesses. The Inter Departmental Business Register, maintained by Government, held records of 71,185 names in 2007.⁷

If one person businesses, self-employed people (and small farms) and voluntary organisations are excluded, the number of commercial businesses is thought to be less than 20,000. The largest (by employment) 100 businesses in Northern Ireland are estimated to employ nearly 30% of all private sector employees.

There is an extensive network of over 30 Agencies with a direct interest in encouraging the establishment and development of some 5,000 businesses. As might be expected, most of these Agencies operate in modest environments with limited resources and focus mainly on micro-units.

These Agencies draw financial support from their property management, some limited financial support for projects from local Councils and revenue from the delivery of economic programmes on behalf of Invest NI. They employ a small number of their own staff. A gap exists at present between the setting up of small one-person businesses and those businesses falling under the Invest NI umbrella. Particular effort should be directed to those businesses with more than 10 staff in the manufacturing and tradeable services sectors but which are below Invest NI's employee numbers threshold for assistance. There is a need for a transition programme of financial incentives which would encourage start-ups to move along the business growth continuum to a size which would bring them to the attention of Invest NI.

Invest NI

The key official participant in the encouragement of business start up and growth is Invest NI which is wholly funded by Government through the Department of Enterprise, Trade and Investment. The annual budget for financial assistance to business related objectives is about £130m. Which includes both inward investment (FDI) and internal developments.

In its first five operational years, 2002–2007, Invest NI committed slightly more than half of its total financial assistance, £339m, to locally owned projects. The projected capital investment of these locally owned businesses, at £1,274m, was nearly as large as that committed by externally owned (FDI) projects although the average size of each project was smaller.⁸

Support for locally owned projects is analysed by Invest NI in three ways: support for new business formation, for business expansion and for specific innovative activities.

The support for locally owned projects included assistance in 983 offers to support the formation of 413 businesses with investment plans for £150m. Invest NI, therefore, offered selective assistance equivalent to just over 21% of the cost.

Assistance for expansion of locally owned businesses was based on planned investment of £745m. Invest NI offered selective assistance of £131m, equivalent to an average of just under 18% of the cost.

The encouragement of innovative actions by local businesses converts into a more diffuse series of actions ranging from R&D assistance, technology and process development projects, specialised efforts related to trade development and focused training and skills programmes. Planned spending by businesses amounted to £378m of which Invest NI offered to contribute £176m, or 46% of the total.

Invest NI operates with constrained delegated authority in discretionary awards of financial assistance to businesses. The guidelines are heavily constrained by the rules on maximum levels of State Aid within the competition rules of the EU. Invest NI is also motivated to use funding to maximise the impact on the local economy and minimise unwarranted displacement or deadweight effects.

More recently, Invest NI has set new criteria in assessing proposed projects which seeks to identify indicators of the potential value-added. This has been converted into an ambition to secure projects where average earnings on offer will exceed the median level of average earnings in existing businesses. This ambition is consistent with the Irish experience of FDI earnings outlined in our comments under Question 1.

The principal forms of selective financial assistance are capital grants and off-sets to training, research or approved marketing costs.

We would advocate increased funding for Invest NI linked to enhanced targeting of businesses with growth potential.

A prime area for tax incentives might be measures to assist collaborative working between companies to exploit ideas with business potential but requiring the resources of more than one company to execute. There should be an emphasis on support for training as well as grants in export markets.

Other tax relief such as additional relief for training could be offered.

Recognising profit generation within the Northern Ireland Economy

In the period when Invest NI was being established there was discussion of a possible switch from financial assistance dominated by (capital) grants to the creation of a local source of equity capital for businesses development.

Three locally based venture capital organisations aimed at Northern Ireland opportunities now exist. However, the up-take of these facilities has been modest. Informal assessments point to more of a deficiency in demand for VC funding rather than an inadequate supply. There is no known general criticism from local businesses that access to VC presents particular difficulties.

If locally owned businesses are to contribute more to a stronger regional economy, generating improved living standards, the primary requirement is that these businesses must function sufficiently profitably to attract the resources needed. Too little is known about the relative profitability of the strongest units. The evidence from surveys is that pre-tax profits have been increasing steadily in the last 4–5 years and a small but significant group of successful enterprises can be identified.

One conclusion that offers a pointer to policy recommendations is that there are now fewer loss-making businesses (among the larger firms) in Northern Ireland than would have been in evidence a decade ago.

Since profit margins have improved in recent years, even if only marginally, to encourage further expansion and growth, an improved tax regime (lower corporate tax rates) is commended.

Improving Productivity

Business competitiveness can be improved if some of the underlying costs can be reduced or offset. This has, in the past, converted into suggested offsets to extra regional costs (related to transport, insurance and energy) or offsets to regional imposts that indirectly affect regional costs (such as regional or domestic rates).

Two major factors deter this approach. First, offsetting operating costs that are essentially market determined is quickly challenged as an operating aid that would be potentially illegal under competition rules. Second, offsetting such costs is a poorly targeted method of generating advantage where it is most needed: the deadweight effect is large.

Two strands might be developed to improve competitiveness in acceptable ways.

First, up-skilling, re-skilling or vocational training of employees, or potential employees, might enhance the productivity of a business. Second, access on a favourable basis to new technology, research and development, and innovation support could be arranged without becoming an item in the profit and loss accounts.

Schemes, on attractive terms, should be available for placements, vocational courses or induction training for selected key staff in defined businesses. Similarly, assistance with innovation and development should be available at minimal cost. (The proposed Invest NI innovation voucher scheme is commended although the upper limit might be raised.)

The Need for Business Rationalisation

In the last ten years there has been considerable movement and changes in the competitiveness of locally based (including FDI units) businesses. Of the listed Top 100 businesses in 1998, 42 have either changed ownership or have dropped out (closed/contracted) and been replaced.

Of the 42 changes, 15 were businesses that were taken over. Of the 15:

• 6 continued in NI with new owners⁹
• 2 were radically reshaped and expanded¹⁰
• 1 emigrated to another country¹¹
• 6 became part of a bigger local business¹²

Of the others, 11 downsized to fall out of the Top 100 and 16 closed. The closures were heavily concentrated in the textiles and clothing sector.

In 2007, the Top 100 companies contained:

• 58 continuing businesses from pre-1998
• 8 survivors of take over after 1998
• 34 new businesses or businesses that grew into the Top 100

There is therefore evidence of a degree of dynamism that dispels any notion of sclerosis. There is also evidence that most businesses are putting in stronger performances. However, in the absence of a more formal measure, subjectively it seems that the degree of progress to knowledge based, higher value-added processes and employment has been (at best) modest.

Invest NI should explicitly be asked to play an active (non-financial) role in facilitating business rationalisation where this would strengthen the competitive ability of local businesses.

Question 3

We are looking for evidence on the role of the public sector in the Northern Ireland economy.

We make some suggestions here:

• The Government should thoroughly explore the opportunity throughout the public service to outsource services to the private sector. Such a move should, under the discipline of the marketplace, improve efficiency, bring cost savings and help companies develop a wider customer base leading to their enhanced viability.
• More services should be privatised such as the Water Service and the Port of Belfast. If these assets were to be transferred into the private sector in Northern Ireland, it is vital that any funds raised from privatisation should be ring fenced for local infrastructure investment.
• The planning regime should give a priority to reaching an early decision on applications from business and economic projects.

Question 4

We are looking for evidence on how the level of public and private innovation might support Northern Ireland growth. In particular we would welcome evidence on:

• whether Northern Ireland companies face particular barriers in accessing financial or non-financial support for R&D or other innovation, compared to other UK or ROI businesses;
• the effectiveness of links between businesses and academic institutions, particularly concerning the commercialisation of research;
• the significance of workforce skills in driving innovation; and
• what further steps could be taken to improve the levels of innovation and strengthen the science base in the Northern Ireland economy.

The economy of the 21st Century is the “Knowledge Economy”. Information is pivotal to the success of this economy; and research and development activity (R & D) is crucial to the harvesting of this information.

Without R&D, economies throughout the world will struggle, and we have already pointed (in our response to Question 1) to the importance of Information based business in Northern Ireland. This has been widely recognised by governments, including the governments both North and South which have introduced various R&D tax incentives. These tax incentives encourage organisations to carry out R&D, thereby contributing to the success of economic activity. The focus of our response to this Question is the structure and effectiveness of R & D tax based initiatives.

Forms of R & D tax incentives

R & D tax incentives can take one of two different forms:

• Deduction of the R & D expenditure, which reduces the income subject to tax; or
• Credit, which reduces the amount of tax due.

The relief may be incremental, i.e. in order to avail of the relief, there must be an increase in R & D expenditure in comparison with a “base year”.

The form of tax incentive implemented generally suits the country environment, and, when dealing with an EU Member State, must also take account of the various Treaties of the European Union.

Qualifying R&D activities are defined in the legislation. It can vary from country to country. It is usually different to the accounting definition of R & D and also the scientific meaning of such activity.

R&D incentives in Northern Ireland¹³

R & D tax incentives are in the form of a tax credit which only companies can claim. There are two schemes depending on whether the R&D is carried out by

• a small or medium company (SME), or
• any company other than a SME (a large company).

The R&D tax credit works by allowing companies to deduct up to 150% of qualifying expenditure on R&D activities when calculating their profit for tax purposes. Companies which are SMEs can, in certain circumstances, surrender this tax relief to claim payable tax credits in cash from the HM Revenue & Customs.

R&D is defined by reference to DTI Guidelines. Broadly, these guidelines provide that a project which seeks to, for example,

1. extend overall knowledge or capability in a field of science or technology; or
2. create a process, material, device, product or service which incorporates or represents an increase in overall knowledge or capability in a field of science or technology; or
3. make an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes; or
4. use science or technology to duplicate the effect of an existing process, material, device, product or service in a new or appreciably improved way (e.g. a product which has exactly the same performance characteristics as existing models, but is built in a fundamentally different manner)

will be R&D for tax purposes if the project seeks to achieve an advance in overall knowledge or capability in a field of science or technology, not a company's own state of knowledge or capability alone.

Companies can claim R&D Tax Credits for their revenue expenditure on

• employing staff directly and actively engaged in carrying out R&D,
• paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D,
• consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D), and
• power, water, fuel and computer software used directly in carrying out R&D.

There are special rules regarding expenditure on sub-contracted R&D which differ between the SME and large company schemes. And there are rules which mean that in some cases projects which benefit from a subsidy or grant may have the amount of qualifying expenditure reduced.

The R&D tax credit works by allowing companies to deduct 175% (under the SME scheme) or 130% (under the large company scheme) of qualifying expenditure on R&D activities when calculating their profit for tax purposes.

SMEs may be able to claim payable tax credits in cash from HM Revenue & Customs if they have losses in the accounting period. The payable tax credit could amount to £24 for every £100 of actual R&D expenditure, but the enhanced relief must be surrendered in order to receive this payment.

Northern Ireland's Experience of R&D Incentives

R&D tax incentives in Northern Ireland are under the UK R & D rules. While the HMRC website outlines the success of the R& D credit (with over 22,000 claims made by 2006 and £1.8bn claimed, Northern Ireland has not shared in that success.

Sir David Varney has already made it clear that Northern Ireland is lagging behind the UK in terms of R&D activity. According to his Review of Tax Policy, the Northern Ireland share of UK R&D spending is below what might be expected given its share of national income; and the business expenditure on R & D as a proportion of gross value added was about 40 per cent of the UK average in 2004.

At the beginning of this section, R & D was highlighted as the crucial link in the creation of a Knowledge Economy. If Northern Ireland is performing below par in this important area, then this area must grow.

On 1 November 2006, HMRC announced the setting up of seven specialist R&D tax credit units to handle all R&D tax credit claims from companies dealt with outside the Large Business Service. These specialist units have been proactive in advising companies on the availability of the R&D credit. It is noted that the specialist unit dealing with Northern Ireland is in Cardiff. In order to encourage more R & D in Northern Ireland, a specialist unit should be set up there.

However, the above considerations are not enough to bring Northern Ireland into the 21st Century where it can compete in a Knowledge Economy. It is clear that a Northern Ireland specific R&D tax relief must be implemented. In order to encourage more R & D in Northern Ireland, an increase in the tax credit available, coupled with a relaxation on the rules governing what constitutes R&D expenditure would go a long way.

As outlined in our initial submission in the context of Northern Ireland Tax Policy, this should not contravene EU Treaty arrangements. In this way, R&D will result in an increase in high-wage jobs and increased innovation in Northern Ireland.

The introduction of an R& D tax incentive will not put a country at the cutting edge, but rather should allow it to compete better on the world stage.

Question 5

We are looking for evidence on how the skills of the Northern Ireland workforce might be improved to support the economy. In particular we would welcome evidence on:

• the qualifications of school leavers and graduates and their suitability to match the demands of employers;
• the level and quality of employer-led training;
• the attractiveness of Northern Ireland as a place of study, and opportunities to increase its attractiveness;
• the causes of out-migration by graduates and opportunities for retaining Northern Ireland graduates and attracting high skilled labour from outside Northern Ireland;
• what further steps could be taken to improve the skills levels of the Northern Ireland workforce; and
• what the impact of demographic changes might be and how to maximise any potential advantages for Northern Ireland.

Skills Shortages

Policies to secure a major shift in the scale of skills preparation and its early and effective implementation are a key early structural contribution that can be made to improve competitiveness. There is a continuing and serious debate about the degree to which change in the Northern Ireland economy is being constrained by skills shortages.¹⁴

Whilst there are some indications that the problems are officially recognised, there is an urgent need to ensure more effective and more adequate responses. The areas of concern and the range of possible interventions call into question the administration of several aspects of educational and training policies and linked institutional arrangements.

Not only are there questions of substance and process, there are questions about conveying perceptions of activity. Policies and publications such as ‘Training for success’, ‘success through skills’ and ‘FE means business’ should flow through into demonstrable actions.¹⁵

The objective might be expressed in two ways: first to ensure that Northern Ireland has an adequate supply of people with skills that are needed to help develop the economy at a more advanced level and, second, (and equally important) to ensure that opportunities are made available so that everyone, particularly younger people, has opportunity(ies) for educational and vocational training that will equip them as well as possible for a working life.

The present arrangements fall short on both of these ambitions.

The administrators of the current skills programmes need to acknowledge the continuing inadequacies rather than resting on self-congratulation or reassurance based on ambitions rather than achievements.

Assessing Undergraduate Provision

To create the curriculum that meets the needs of the middle and second part of the 21st century, academic advances need to be tailored to commercial specialisms, and vice versa. Each major School (or Faculty) in the universities should build a mechanism to ensure that the course content, the nature of the learning experience and its commercial relevance is enhanced by structured input from commercial and industrial leaders.

The relevance of undergraduate provision in the universities and its relevance to the needs of the economy and the associated personal qualifications should be reviewed drawing on international expertise and the in-house expertise of the local universities.

Improving participation in Further Education

The skills deficiencies in Northern Ireland lie partly (but only partly) in the Universities with a focus on relevant undergraduate provision and support for post-graduate applied research. The proposal by the NI Executive that there should be a 25% increase in the number of higher level students in STEM subjects by 2015 is welcome (if also somewhat tardy) and merits additional supportive finance.

More significant skills questions need to be addressed across other parts of the spectrum of education and training.

There is recognition that too many school leavers are inadequately qualified in basic literacy, numeracy and in ICT skills. As a result of many earlier years when a proportion of school leavers were inadequately equipped, there is an unwelcome proportion of the adult population who lack these essential skills. This has been acknowledged by the NI Executive and the proposal to ensure that 90,000 adult learners achieve the basic qualifications by 2015 is welcome.

For the up-coming generation, the immediate weaknesses of their education and training lie in:

• Too many school leavers lacking the basic educational skills [3Rs]
• Too few achieving their potential in skills at levels 2, 3 and 4
• Too few undertaking relevant vocational training courses [in FE Colleges]
• Too few younger workers gaining the benefits of formal modern apprenticeships

As an early priority, a more detailed programme is needed to ensure that the FE Colleges increase their contribution to improving the availability of appropriate skills. At present there is no overall business performance plan for the impact of the FE Colleges. The formal statements of the NI Executive are couched in terms of increasing the proportion of college provision at different levels. It is important that there is not only a shift in the proportions enrolling at higher Levels but that the absolute numbers engaged in the FE system should increase.

Where the public service agreements for enhancing the provision of numbers of skilled people refer to a higher proportion of places in FE Colleges being at higher levels, this should be extended to add that the total numbers enrolled should be increased and, where necessary, extra resources and incentives to encourage enrolment are developed.

Apprenticeships

Because modern apprenticeships are usually linked to current employers’ needs and also because of the changing structure of the local economy, the number of apprenticeships is thought to be low relative to other regions or relative to the emerging ‘new’ economy. If Northern Ireland were to aim to have apprenticeships for 20% of 16–17 year olds, as is suggested for England, then a mechanism to double the provision would be needed.

Special measures are needed to increase the number of apprenticeships which may involve tailored incentives to employers, training organisations and potential employees.

Question 6

We are looking for evidence on how to reduce levels of economic inactivity and unemployment in Northern Ireland. In particular we would welcome evidence on:

• particular causes of incapacity in Northern Ireland, and steps which could be taken to reduce incapacity;
• particular barriers to economic activity;
• whether there is scope for further labour market and welfare reforms;
• the effectiveness of existing schemes in supporting those who are seeking entry to the labour market;
• the scope for further developing local employment partnerships providing private sector job opportunities for the unemployed; and - what further steps could be taken to increase levels of participation.

Economic inactivity is higher in Northern Ireland than in any other region and 6 percentage points above the UK average. The concern that emanates from this comparison is that this difference means that any measure of GVA per person will lack the contribution of 6% of the potential labour force and real income levels, per person, will lag by about 6%.

As a form of presentation, there is logic in calculating income levels per employed person, rather than per adult person.

Two particular features influence the Northern Ireland figures. First, in a more rural society with a higher proportion of families in small farm units, there is likely to be a lower formal participation rate. Second, after several generations experiencing high unemployment, linked to relatively high levels of claimants of incapacity benefit, alongside earnings levels which make the benefits trap more serious, inactivity is more ingrained.

The application of social security parity of benefits across the UK, alongside lower earnings for unskilled people, means that this problem may be enduring.

For the immediate Varney review, since unemployment is now a much reduced problem, and under-employment (in the sense of inadequately skilled) is significant, the inactivity question is less of a priority, though it still requires to be addressed. We therefore believe that the stimulus of economic activity is very important. We are of the view that the best way of achieving this stimulus is through a reduction in the rate of corporation tax applying in Northern Ireland.

Question 7, Question 8

We feel that the observations we have to make under these question headings have already been addressed in the foregoing responses, and accordingly do not propose to duplicate comment.

1. Host Country Determinants of U.S. FDI into Europe. Matthew J. Slaughter, published in Foreign Direct Investment in the Real and Financial Sector of Industrial Countries: A Summary. Heinz Herrmann and Robert E. Lipsey

2. Varney Review of NI Tax Policy, at paragraph 2.45.

3. As reproduced in Expenditure Review of IDA Ireland's Property Programme, published 2004 by the Department of Enterprise, Trade and Employment.

4. In The Irish Times INNOVATION Magazine, February 2008

5. Invest NI Factsheet, published August 2007

6. Forfas Review of Trade and Investment

7. Invest NI Performance Information Report 2007, page 60

8. op.cit page 28

9. Viridian, Northern Bank, Guinness, Belfast Telegraph, Boxmore, Powerscreen

10. Stewarts became a base for Tesco, Wellworth a base for Safeway/ASDA

11. Galen plc

12. Sandown Nursing, CrestaCare, Baneberry, Dukes transport, Cawoods, Connors Chemists

13. Her Majesty's Revenue and Customs website

14. See the Northern Ireland Skills Monitoring Survey 2005, published November 2007. This survey tends to understate the scale and impact of shortages

15. Documentation on these subjects is available on www.delni.gov.uk