The Northern Ireland Economy: Problems and Prospects

This paper examines the performance of the Northern Ireland economy in recent decades and shows that it has suffered from very low productivity growth. This has meant that the regional economy has grown very slowly and this performance compares badly with that of other regional economies, such as Scotland and East Germany. The key factor behind the poor productivity performance in Northern Ireland has been the low investment in physical and human capital. The failure to reform the education system to reduce the number of early school leavers and increase the numbers of graduates is the single most important factor in the low growth. Large transfers from central government have ensured that the standard of living in Northern Ireland is close to the UK average and above that of Ireland. However, the dependence of Northern Ireland on these transfers leaves it very vulnerable to shocks. Brexit will, undoubtedly, have serious negative consequences for the Northern Ireland economy. Possibly more serious for Northern Ireland are the changes taking place in the politics of the UK which could see a reduction in transfers in the future. The best economic outcome for Northern Ireland is one where future UK governments commit to providing continuing large transfers to Northern Ireland for at least a further decade in return for a change in regional economic policy aimed at promoting economic growth. Public expenditure needs to be reallocated from sustaining consumption, especially public services, to investing in education and infrastructure. While painful initially, it would move the Northern Ireland economy onto a sustainable growth path. Another option, Irish unity, if it involved ending transfers to Northern Ireland, would produce a dramatic fall in the standard of living there. Alternatively, unification, where Ireland took over responsibility for the transfers to Northern Ireland, would necessitate a major cut in the standard of living in Ireland of 5% to 10% in order to allow Northern Ireland to maintain a standard of living between 10% and 20% above the Irish standard of living. Whatever form Irish unity took there would be a heavy economic cost for both Northern Ireland and Ireland.