ECONOMICS:PROVIDING A fiscal stimulus to avert a pronounced and prolonged recession has become a priority with policymakers around the world. The US paved the way earlier this year by providing tax rebates amounting to 1 per cent of national income. This week, it was the turn of the UK and the European Union.

In the UK, the economic outlook for next year is pretty bleak. Record low interest rates and a competitive exchange rate are not enough to prevent a pronounced and potentially prolonged recession.

To limit the downturn, Alistair Darling's pre-budget report unveiled a fiscal boost over the next two years. That will then get reversed after the next general election - 2010 at the latest.

Clearly, the health of the UK economy will largely determine the fortunes of the Northern Ireland economy.

The pre-budget report announced measures worth some £20 billion or 1 per cent of GDP.

The centrepiece was a temporary 13-month reduction in VAT from 17.5 per cent to 15 per cent, designed to stimulate consumer demand. The VAT reduction is equivalent, for the average household, of £275 a year of extra spending.

However, with unemployment on the rise and consumer confidence continuing to fall, it will be difficult to get consumers back into the high street.

Clearly, this is not a problem for some of the North's Border towns such as Newry, which are experiencing a retail boom given the current euro/sterling exchange rate. The VAT reduction will provide an even greater incentive for shoppers in the South to head North.

The other main giveaways were a £60 Christmas present for pensioners, increasing and bringing forward child benefit payments and increasing the personal tax allowance.

In light of these moves, the Government has attempted to claw back some revenue by raising duties on alcohol, tobacco and petrol. Following a fall in pump prices of over 20 pence per litre from their summer peaks, a 2 pence per litre fuel duty increase will go ahead on December 1st, 2008.

However, the real pain, in terms of tax increases, kicks in from 2011 with the top rate of income tax to be raised from 40 per cent to 45 per cent for those individuals with incomes over £150,000.

National insurance contributions for employees and employers are also set to rise in 2011. These measures will erode the labour cost competitiveness of Northern Irish and British firms.

Another key feature of the pre-budget report is the bringing forward of £3 billion in capital spending from future years into this year and 2009/10. This will have a positive impact on the UK construction sector and will also provide new opportunities for Northern Ireland firms.

The North's construction sector is reliant on public sector investment more than ever, given the current housing downturn. Following the pre-budget report, Northern Ireland will be able to bring forward £86 million of future capital spend on top of its existing planned investment.

The difficulty to date has been getting projects up and running, so the challenge for Northern Ireland's Executive is to consider bringing forward and fast-tracking aspects of its investment strategy. In particular, the Executive could accelerate its investment in social housing, which is one area in which it could make a noticeable difference.

Housing completions are set to fall next year below levels not seen even in the 1970s. Clearly, there is a social and an economic imperative to address this issue now.

Northern Ireland businesses will benefit from the measures that were announced to support businesses. These include delaying the proposed increase in the small companies' corporation tax rate until April 2010. Local firms, experiencing financial difficulty, will also welcome the option of deferring payment of their taxes.

Overall, the measures announced in the pre-budget report to boost the UK economy are broadly welcome, but it remains to be seen how successful they will be. The fact that the US, EU and UK are now all providing fiscal packages simultaneously will help to maximise the impact.

However, all economies, to a greater or less degree, will be paying for this in terms of higher taxes and lower public expenditure for years to come.

Richard Ramsey is Northern Ireland economist with Ulster Bank