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ComDFP Varney II submission

Assembly Committee
Department of Finance and Personnel

An agenda for discussion with Sir David Varney

  1. Sir David Varney reported, first, on tax policy in (or for) Northern Ireland and, second, on the assessed level of competitiveness of Northern Ireland including a range of suggestions on how this competitiveness might be improved.
  2. There is a strong inference in these reports that Northern Ireland can be sufficiently competitive to secure faster economic development with a particular (but not exclusive) emphasis on attracting externally owned foreign direct investment (FDI)provided that there is in place a well structured range of policies to enhance the competitiveness of businesses, directly or indirectly.
  3. The analytical basis for the Varney reports, particularly the second, appears to start from the proposition that, whilst Northern Ireland has a range of appropriate economic policies, there is significant and conspicuous scope to improve the impact of those policies within the remit and resources available to the Executive. Using the careful language of a Treasury mandarin, the second report is, at least implicitly, critical of parts of the delivery mechanisms in Northern Ireland.
  4. The objective of this paper is to provoke some amplification of the proposals. The report is a welcome positive contribution to the debate on policy actions. However one cautionary thought may be appropriate. If Varney has made specific comment on a policy area, the response ‘but we are doing that’ is inadequate. The usually well informed suggestions are about getting better or speedier answers.
  5. Sir David might, therefore, be asked to outline his overall assessment of the current competitiveness of the local regional economy prioritising those issues which might merit more urgent action.
    1. Does he endorse the general thrust of economic policy as outlined in the Programme for Government, the Budget allocations, and the investment strategy?
    2. In this overall context, what are the strengths and weaknesses that have been identified? In particular, through what policies or instruments would he envisage notable improvements?
    3. Should the second report be read, explicitly or implicitly, as a series of constructive criticisms of current policies and their application so that it shows how Northern Ireland might create stronger responses?
    4. If current policies and practices remain unaltered, what are the prospects for a faster growing economy? Alternatively, would an urgent and constructive implementation of the proposals (or most of them) in the second report make for a dramatic improvement?
  6. Concomitant with the critical review, there might be a more explicit statement about the adequacy of the resources available to the Executive. Although no specific figures are quoted, the usual Treasury viewpoint is that Northern Ireland is, even allowing for past social and civil disruption, probably the best funded regional administration in the UK. Confirmation might be sought on his reaction to a suggestion on the merits of providing extra resources, additional funding, or measures to offset the cumulative effect of any investment backlog in services.
  7. To improve competitiveness the Report appears to rely on greater selectivity with current resources rather than additional spending. Is this conclusion intended?
  8. The theme of the second report is that, since the Executive has laid down the strategy, the need now is to move from analysis to action. This transformation, it suggests, will require strong leadership and a willingness to take tough decisions and ensure that implementation is rapid. This is both positive and critical. As a discipline to monitor progress and avoid passive inertia, the implementation plans for economic development should be formalised and, as action related proposals, should include clear timelines and explicit deliverables. This would make the Public Service Agreements (PSA) more directly operational.
  9. In particular, the Executive has identified policy areas where change needs to occur and this review proposes more. A key element is that the public sector needs to be reshaped to support a balanced economy. Also, since there are too many unskilled people, resources need to be mobilised to provide for the more specific skills most needed by the economy.
  10. The Report offers a large number of suggestions and recommendations. Each merits closer scrutiny. However, in a short discussion, the priority is to examine the issues where there can be the greatest impact. High on this agenda would be the review of employment and skills questions, consideration of measures to increase business investment, and sharpening the role and operations of the public sector.

    11. Employment

  11. High on the list of recommendations, Varney refers to the much higher rate of economic inactivity in Northern Ireland, equal to about an extra 6% of the active labour force. The contrasting evidence relative to other regions is striking. The single feature creating most of this difference is the number of people not working because they are drawing incapacity benefit.
  12. The message is that the Back to Work programme, operated by DEL, should be made stronger. Is this an indirect suggestion that DEL needs to be more rigorous?
  13. In a reminder of a recurring question, Varney suggests that the Executive should assemble more evidence on the impact of the (so-called) benefits trap. Implicit to his theme, he hints that since private sector earnings are on average lower than in other UK regions, the interaction of lower earnings, the minimum wage and benefit levels may be distorting the incentive to become employed. This raises a question of what Varney would propose to reduce the impact of the benefits trap.

    14. Skills

  14. Possibly the most trenchant comments point to a more active skills agenda.
  15. The discussion on the need for more unqualified people to be encouraged to obtain at least to Level 2 skills; for more adults and young people to enrol for ‘essential skills’; for an increased number of apprenticeships; an increase in the provision and enrolment on vocational courses; and more selective targeting of university courses, amounts to a wide ranging agenda.
  16. The report points to the need for enhanced programmes across a range of topics. However, the report lacks quantitative support for evidence of past, current and proposed levels of activity. To obtain a better baseline to assess these issues, Varney might be asked if it would help if had information in the form of Key Performance Indicators (or if he would commend there publication) on:

    17. a. Number starting apprenticeships each year, since 2000, plans/targets until 2011

    b. Number for each main sector/industry

    c. Number starting vocational courses each year 2000-2011

    d. Number for each large occupational group

    e. Number enrolling for essential skills each year 2000-2011

    f. University enrolments in NI for (separately) each of the STEM areas, 2000-11

  17. Even in anticipation of performance indicators, Varney has a range of suggestions of improvements. For basic skills, this includes:

    18. Implementation of the Bain review of schools

    Early implementation of the revised strategy for 14-19 year old people

    Increased delivery of basic skills, functional literacy and numeracy and

    level 2 qualifications

    Improved delivery of basic skills and workforce training in the upcoming

    review of Success through Skills and FE reform

    All eligible public sector workers to be offered training up to level 2 and a

    similar pledge for the private sector.

    For intermediate and higher level skills, the recommendations include:

    An increase in the supply and take-up of youth and adult apprenticeships

    A review of the FE system to consider the effectiveness of delivery of

    intermediate skills

    Improved careers information and advice

    Support or bursaries to increase the supply and take-up of the skills

    opportunities for those occupations most in demand

    New partnership models for support of FDI

  18. In relation to higher education and training Varney comments that the funding structure for universities and FE colleges does not always support the strategic direction of economic development policy. This is not a surprising conclusion since the funding is largely non-directed. How would he suggest that the planning and funding should be altered?
  19. In any time-limited discussion, some confirmation might be sought of the rationale for this large range of proposals. Is this list a serious criticism of current actions? Are there any obvious priorities for early action?
  20. Varney makes two particular comparisons between the English and Northern Ireland training arrangements. First, the absence of the Train to Gain and the Skills Accounts initiatives in Northern Ireland, although he does see the prospect of a review in the near future. Second, he notes that there is a lower emphasis on training by, or though, employers in Northern Ireland. A comment on these differences and their significance might be useful prior to asking DEL to make changes.

    21. Investment

  21. The Varney report is of particular importance for its assessment of the ability of Northern Ireland to attract business investment. His comments are wide ranging and, although generally supportive, point to some current deficiencies. He argues that ‘the full set of proposals .. within this report, on skills, enterprise and investment in infrastructure, will be essential in improving levels of domestic business investment and FDI.’
  22. The review of the planning system is welcomed but the rider is added that the timescale should be quickened and other lessons should be learned from the Barker review of Planning in England.
  23. In a short summary paragraph there are recommendations whose origins and purpose are not entirely clear and may be a form of criticism. The proposals are that the work of invest NI should be focussed through a review [to include] the role of Ministers in support for trade promotion, the governance of Invest NI, improved working links with IDA and UKTI, embedding links with other Government departments, universities and non departmental public bodies. A more detailed explanation would be helpful.
  24. Some explanation is offered in later paragraphs where the report says that some submissions questioned the capacity of Invest NI to attract the high levels of FDI that are needed. It then goes on to say that ‘there is merit in the Executive reviewing further how best to strengthen Invest NI to support NI’s FDI vision.’ In organisational terms the plea is for streamlining decision making, or giving more autonomy to certain bodies, and a system which is more immediately supportive of those who want to invest, for example in committing to training workers in a specific skill needed.

    25. Innovation

  25. There is a number of general conclusions on the need to stimulate higher levels of innovation and particular reference to the need to encourage higher levels of R&D work. Whilst there is acknowledgement of the low take-up of tax credits for R&D the report has no easy mechanism to propose that would lift the level of spending and tax benefit. The R&D voucher scheme is commended with comments on its efficient administration, including a wider sourcing of assistance.
  26. These are important topics but, without devaluing their significance, the report is non-controversial. Extra funding for a Higher Education Innovation Fund is another budget question for DEL.
  27. In a proposal that also relates to skills development, there is an acknowledgement that the recent reforms of FE ‘are not yet explicitly aligned in terms of skills provision or priority areas to the Regional Innovation Strategy.’

    28. Enterprise

  28. This section summarises the ambition which is to increase both the number of business start-ups and the number of large firms through the growth of existing firms.
  29. Without taking away from the importance of the theme, there are few new contentious policy points in this section of the report.

    30. Public sector reform

  30. The theme of the recommendations for change in the public sector is that, in many different ways, the functioning of the public sector affects the operation of the private sector either through direct relationships (e.g the labour market), or indirect effects (e.g the quality of public services and infrastructure), allocation of resources away from priority areas (e.g higher spending on social issues relative to economic policies).
  31. The recommendations are, therefore, diverse. In summary, there are risks that the large public sector will ‘crowd out’ private sector activity, especially in competition for skilled labour. This is evidenced in comparatively higher wages, greater job security and excellent pensions. Also, the public sector has high levels of asset holdings. If these asset holdings are more than needed then they should not be treated as ‘family silver’ but rather as capital tied up inefficiently.
  32. In the search for efficiency, the report says that the Executive should continue thevalue for money programme and reform of central government agencies including a review of the number of Executive Departments. This objective can be seen as already adopted although Varney might be asked about any aspects of its implementation that might be improved.
  33. One of the high profile suggestions is that the Executive should examine how to usepublic sector pay process to reduce the public-private sector pay differential over time, so that public sector pay better reflects the local labour market. This controversial suggestion might be tested by asking whether the ‘local labour market’ should over-ride the other principle of ‘pay parity with GB’.
  34. The search for capital realisations to allow a higher level of capital expenditure is already part of budgetary policy. Varney supplements this by suggesting furtherasset disposals where there is no clear case for retention in order to deliver more efficient services as well as releasing extra funds for investment. Has he any evidence to supplement the existing report now with Ministers and prepared by a team led by Ed Vernon?
  35. Potentially amongst the more debatable ideas, the report identifies changes where services could bemore productive if transferred to the private sector. Examples quoted include public car parks, the DVLA, ownership of public sector housing stock (from the Housing Executive), and Belfast port. The argument for these suggestions is efficiency based, not for capital realisations. The general principles as well as the practicalities of each might be enhanced by further explanations.
  36. Northern Ireland has had less direct experience of service delivery through PPP, design, build and finance/operate models of public provision. Varney asks that this type of option be considered, where appropriate. The case is that differenttypes of delivery model, including the potential for greater contestability, and further reform of procurement policy so that SMEs can benefit, might also offer value for money. This should extend to consideration of its relevance to the Investment Strategy. Discussion might focus on possible examples including outsourcing ideas.

    37. The Irish dimension

  37. Recurring through the second Varney report are references to the Irish experience and the possible gains from co-operation, shared learning and agreed common actions. Nevertheless, Varney might be expand further on:
  1. In particular, some further detail on the possible role of a Competition Analysis Board, akin to the Irish NCC (National Competitiveness Commission) reporting mechanisms, might be helpful. This suggestion has not yet been developed in public discussion.

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19.05.08