Opinion & Analysis

What shall become of Northern Ireland? Part 2: The economic challenges of Britain’s weakest region, by S. McLaughlin

“Caught between a hub and a large place” 

Part two of a three-part report (missed the first part of the report? You can find it here)

The Victorian period saw the glory days of the Northern Irish Economy. The booming 19th century linen trade and shipbuilding industries positioned Belfast as a one of the great powerhouses of the British Empire. The 1950s saw a decline in its heavy industrial bases. Thereafter, decades of intense civil conflict stifled economic activity, only ending formally in 1998.

Since then, the province’s economy has consistently lagged behind to become the UK’s most economically fragile region. In many ways Northern Ireland is like going back in time to sluggish pre-Thatcherite Britain. This column aims to answer how it has come to this and the looming threats to the province’s economy.

The sorry state?

The short answer is that Northern Ireland is unable to forge its own economic competitiveness. Therefore, the region is the most obvious beneficiary of the UK’s famous Barnett formula, whereby regions of lower economic output receive higher levels of public spending. Public spending per person in Northern Ireland is the highest of any UK region (the only region where this figure exceeds £11,000 per person). Because tax revenues are also so low, Northern Ireland has a colossal budget deficit estimated to be 33% of GVA, at around £10 billion. (The value of the region’s economy is roughly £30bn).

Frequently, the Stormont administration comes under fire from Westminster for this profligacy that the UK could not afford to roll out across all its regions. As stated by PWC economist Esmond Birie,

“If a friend or family is always on hand to bail you out, will you ever learn to make responsible decisions?”

The civil service is notoriously bloated and sleepy. (Many civil servants have joked to me in private about the lack of work that they do). Around two in every five are employed directly by public sector bodies (against one in five in the UK as a whole).

The Brussels formula?

The region is also highly dependent on funds from the European Union – 8% of the region’s GDP, according to a report by the Centre for European Reform (CER). Notably, this is through CAP [Common Agricultural Policy] payments of EUR 3.5bn between 2014 and 2020. Bluntly, the report stated that “unless this funding is continued [replaced by Westminster spending], a recession in Northern Ireland is inevitable.”

It was part of an understanding of the Good Friday Agreement (GFA) that there would be generous EU funding spent in the province. Cultural heritage centres and cross community projects, such as Derry/Londonderry’s peace bridge, were backed by the EU’s social cohesion fund. Funding was directed towards the skills and development of young people affected by the troubles through the EU’s Peace IV and Interreg initiatives.

In total, the latest pot of EU money directed at such causes is worth £425 million and is due to end in 2020.

Northern Ireland voted to remain in the European Union. However, it was mostly Unionist parties that backed leave, namely, the DUP. The DUP should therefore explain how these funds will be replaced.

Coming cuts?

As described above, London and Brussels largely keep the province afloat, and together provide 38% of the region’s funds. Why is this so?

The problem is structural. Geographically detached from the British mainland, it is isolated from the UK’s economic mainstays. Politically detached from the Republic, it cannot partake in its lucrative low corporation tax arrangement. I have before called this situation, “caught between a hub and a large place.”

European funds were promised to a conflict-hit region under the GFA. UK government funding is received with the understanding that the province has few other options.

In all, around 38% of the funds supporting the region’s economy could be under threat. My fears are that firstly, these Brussels funds would dry up, because the UK is leaving the EU and those funds may not be replaced by Westminster (Post-Brexit, accessing these peace programme funds will be easier than structural and investment funds).

Secondly, these London funds may dry up. This could happen because of a possible post-Brexit, cash-starved, small-state, “bargain-basement” experiment, or the general long term decline of the British economy, or both.

The above-mentioned scenario is pessimistic. Yet it must not be overlooked. In the previous partof the report, two sources disagreed on the prospect of reignited violence. However, they both agreed that Catholic support for a United Ireland may become more solidified if there is a breakdown in the province’s heavy-spending, generous welfare state model.

Yet London administrations have seldom been able to force, post-2010-English-style austerity on Stormont. For the sake of not upsetting order in the province, London may continue this generous funding – however squeezed the treasury may become. Fiscal challenges have only very recently made their way onto the political agenda of the province’s parties (and seem to have fallen back off again, being overtaken by the terms of the assembly’s resumption).

West of the Bann

European Union funds have also tried to solve Northern Ireland’s “West of the Bann” problem, both directly and indirectly. This is a well-known situation in Northern Ireland whereby areas situated West of the river Bann such as Omagh and Fermanagh are generally less prosperous than those to its eastern side such as Belfast, Antrim, and the corridor to Newry.

Just one example of indirect EU assistance to such areas is through energy policy. In comparison to other UK regions, West of the Bann has particularly poor energy generation and transmission infrastructure. Northern Ireland is expected to enter supply deficits by 2021.

parliamentary report from 2016 details how Dale Farm, a leading dairy company in the province,

“had intended to make a £30 million investment in a new plant in Cookstown, but was informed by NIE Networks [Northern Ireland Electricity] that there was insufficient capacity in the local area and so was asked to pay for its own 27-mile line … at a cost of £7 million. The substantial additional cost … made the investment … which would have created 100 additional jobs in the area—commercially unviable.”

A workable solution to these problems has been the all-Ireland Single Electricity Market (SEM) which increasingly integrates generation and transmission links between Northern Ireland and the Republic. Part of this is solution is the large scale, 400kv, 138km, interconnector. It was proposed in 2009 to link the Monaghan, Cavan and Meath areas with those of Tyrone and Armagh, at a cost of £200 million. Discontinued membership of the European Union puts in doubt whether or not this crucial piece of infrastructure will be built. A decision is due in late 2017.

Given the low-wage, well educated workforce, the area could be attractive to certain industries. Yet the region’s infrastructure, particularly in the west (and not only in the energy sector), cannot support any economic activity that there is, let alone increased growth or any heavy industry.

Such schemes are typical of the proposed European Smart Grid. The proposed project would enhance energy security by sharing storage and transmission continent-wide, from Scottish wind to Sicilian solar. Britain cuts its ties from the continent just at a time when one of the most exciting aspects of European integration is taking off.

In all, then, this column has attempted to show how Brussels and London support the province’s very fabric, in its politics, economy and society.

Although the next part of the report will detail the economic prospects for Northern Ireland, involved administrations must not shy away from dealing with these very real dangers facing the province. It was Britain that volunteered for these. It is also easy to belittle these problems, as feeling their pain lies in the distance.

This article was written by Sean McLaughlin

Sean McLaughlin is a Financial Analyst for Latin America at Inframation – An Acuris Company