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13th May 2022

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Bar chart: Average annual growth in real GDP per capita (%)

Northern Ireland is battling tough odds to reverse decades of economic underperformance, as political uncertainty, fallout from Brexit and civic unrest heap fresh challenges on the region at its centenary. 

Leaders of Northern Ireland’s three biggest political parties said the region created from the partition of Ireland on May 3 1921 could now boost prosperity through initiatives such as taking control of its corporation tax rate, educating children from all its communities together, and making long-term infrastructure investments.

By almost every measure, Northern Ireland is starting from a low base. A research paper published by economists at Trinity College Dublin in 2019 charted decades of inadequate spending on education and infrastructure, a failure to attract inward investment, and a largely one-way flow of talent from the region.

The result has been economic underperformance relative to the UK and the Irish Republic for much of Northern Ireland’s first century, despite massive subsidies from the British government and a surge in state jobs in areas such as defence and security.

This spending was necessitated by the troubles: sectarian violence over more than 30 years that pitted largely Catholic nationalists who wanted a united Ireland against mainly Protestant unionists who aimed to keep the region in the UK. More than 3,500 people lost their lives until the 1998 Good Friday Agreement brought peace to Northern Ireland.

“We had . . . years of violence, a terrorist campaign, which of course was going to have an impact on the infrastructure . . . but despite all of that we are a very resilient bunch,” Arlene Foster, Northern Ireland first minister and leader of the Democratic Unionist party, told the Financial Times, speaking shortly before she announced plans last week to step down.

Although terrorism weighed on Northern Ireland’s economy, its slide was most pronounced in relative terms between 2010 and 2016, when growth in gross domestic product per capita averaged 0.6 per cent each year, compared with 1.3 per cent in the whole of the UK and 3.2 per cent in the Republic, according to data cited in the Trinity paper.

By 2018-19, the region’s spending exceeded its tax revenues by £9.4bn, a gap that equated to 19 per cent of GDP and was made up by the UK government.

Arlene FosterArlene Foster: ‘We had . . .  years of Ireland’s terrorist campaign, which, of course, was going to have an impact on the infrastructure . . . but despite all of that we are a very resilient bunch’ © Liam McBurney/PA

Foster’s departure, largely prompted by her handling of Brexit, comes less than 18 months after devolved government was restored at Stormont, and threatens to intensify political and economic uncertainty generated by the UK’s departure from the EU.

But Steve Aiken, head of the Ulster Unionist party, said Northern Ireland’s legacy of underperformance amplified future opportunities. “There is such an appetite for improvement and to make it work,” he added. 

Northern Ireland’s high levels of public sector employment have cushioned the coronavirus pandemic’s blow to its economy relative to the rest of the UK, and Irish Taoiseach Micheál Martin is enthusiastic about the potential for increased north-south co-operation in several areas including research.

Still, Northern Ireland operates under big constraints. Conor Murphy, finance minister and leading member of Sinn Féin, said he and his counterparts in Scotland and Wales pressed for multiyear spending settlements from the UK government in 2020. “Then, you get abrupt notice that it’s only one year [of spending] . . . so in that circumstance you can’t really operate in a long-term strategic way, ” he added.

Bar chart: Public sector deficit per person, 2018-19 (£, at 2019-20 prices) showing the gap between tax revenues and spending in Northern Ireland is the largest per head in the UK

Brexit is unleashing headwinds. Many businesses are grappling with rising costs and frictions as a result of Northern Ireland’s new trading arrangements with Great Britain under the UK’s withdrawal treaty with the EU. Fierce unionist opposition to the framework spilled on to the region’s streets in eight nights of unrest during April, and images of police deploying water canons against protesters were beamed all over the world.

“I think [Northern Ireland] will probably continue to underperform,” said John FitzGerald, co-author of the Trinity paper and former chief economist at Ireland’s Economic and Social Research Institute, a think-tank.

His and others’ research found that education has been the biggest barrier to Northern Ireland’s prosperity: the result of policies segregating Catholics and Protestants at school along with lower spending, as funding was consumed by defence and housing. 

Aiken said he expected education for both communities to be combined within a decade, which would greatly improve efficiency. Foster wants the same thing but said the timeline could be challenging since there were a “lot of vested interests” in keeping them separate. 

Line chart: Claimant count measure of unemployment (%) showing the unemployment rate in Northern Ireland has mainly exceeded the UK

Either way, reforming education and getting those children into the workforce will be a slow burn. FitzGerald’s more immediate fix is wooing back people who have left Northern Ireland, including students forced out by university caps that can leave just 60 places for every 100 domestic applicants, according to Queen’s University Belfast. Two-thirds of those who depart Northern Ireland for education elsewhere do not return, recent research from Pivotal, a think-tank, found.

FitzGerald thinks there is even less chance of emigrants returning now. “Who would want to go back to a Northern Ireland which is unsettled, which doesn’t know where it’s going?” he asked, saying society was “more divided” amid a polarised debate about whether Northern Ireland’s future lay within the UK. Brexit has fuelled calls for a border poll to bring about a united Ireland.

Others said Northern Ireland had been much more volatile and polarised in the past.

When Newry & Mourne Enterprise Agency set up a business park 50 metres inside the Northern Ireland border, almost all its outlay was covered by an EU grant because it was seen as “bandit country”, said chief executive Conor Patterson. 

Conor Murphy, Northern Ireland finance ministerConor Murphy, Northern Ireland finance minister says ‘you can’t really operate in a long-term strategic way’ © Brian Lawless/PA

But 20 years later, the business park is full. “The place is busy and the businesses there don’t seem to be encumbered by the pandemic or by Brexit,” said Patterson.

Paddy Hughes, who runs equine products business Horse First on the business park, said he had been busier than ever in the past year, although he was dealing with extra costs including leasing more warehouse space because he had to order supplies in bigger batches owing to the post-Brexit trading arrangements.

Corporate leaders north and south of the Irish border said Northern Ireland could win business by embracing its unique position of in effect being in both the UK and EU internal markets for goods.

Stephen Kelly, head of trade body Manufacturing Northern Ireland, said this year he had been contacted by five companies considering investments in Northern Ireland, including one that could create 500 jobs. “I’d spoken to about four companies in the previous eight years,” he added. “Clearly [Northern Ireland is] being noticed.”

But a senior executive at a large multinational that has spent billions in Ireland, and who could see advantages in Northern Ireland’s post-Brexit status, said the relentless negativity of Stormont messaging surrounding the new trading arrangements was one of the reasons the region was uninvestable. 

The British government’s recent decision to increase its corporation tax rate from 21 per cent to 25 per cent by 2023 is another challenge for Northern Ireland, as it competes with the 12.5 per cent on offer in the Republic.

Foster said it was time to “revisit” taking control of Northern Ireland’s corporation tax rate, and suggested a figure of less than 20 per cent. Murphy is less keen, and saw more potential from long-term infrastructure projects that could be paid for with grants from Westminster.

Progress can be hard fought in Northern Ireland, where political leaders could not even reach agreement on commissioning a stone in the shape of the region to commemorate Monday’s centenary. “We are in a mandatory coalition,” said Foster. “And we recognise that . . . there are huge challenges around that.”

2021-05-02 16:00:42

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