Friday 28 October 2016

Northern Ireland may be normalising, but big risks remain

Published 08/05/2016 | 02:30

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Voters in Northern Ireland went to the polls last Thursday. The contest came just months after the ever fragile power-sharing arrangement veered close to collapse over disputes about the money-related matter of welfare reform - rather than over guns or constitutional issues, as has usually been the case in the past.

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With the new assembly likely to face tough budgetary constraints, more brinksmanship is to be expected over the next five years. Although the DUP and Sinn Fein have a lot to lose if the institutions they have effectively carved up between them were to fail, it certainly cannot be ruled out that the power-sharing edifice could collapse over the term of the next assembly.

But despite sectarian division and the ever-present ghosts of the past in Northern politics, the latest election campaign gave some tentative signs of normalisation, in that bread-and-butter issues - taxes and public services - featured strongly and the economy took centre stage in the parties' election manifestos.

All committed themselves to lower corporation tax, help for businesses and the creation of tens of thousands of jobs.

However, and as eminent economist and commentator John Simpson has noted, political debate has tended to lack detail - none of the parties offered a fully costed budget or explained how the slated (and much-vaunted) cut in corporation tax will be funded.

Being aspirational rather than specific is, of course, not unique to the North's political parties - and they can get away with it more easily because the bulk of fiscal and tax powers remain with London.

Stormont's weakness is compounded by the large fiscal transfers it requires from Her Majesty's Treasury. Officially, Northern Ireland's net fiscal deficit in 2013-14 was £9.3bn, or around €12bn, depending on the exchange rate. That is equivalent to an eye-popping 25pc of estimated GDP.

Put another way, if Northern Ireland were an independent state, its yearly deficit would be more than eight times the EU ceiling on such imbalances - making Greece look like a model of fiscal rectitude in comparison.

Although there is a debate about the exact fiscal imbalance, nobody disputes the extent of the transfers from across the water in giving Northerners a much higher standard of living than they would have if they relied only on revenues raised in their own economy.

The next Northern Ireland Executive is almost certain to face tough budgetary decisions. UK chancellor George Osborne is determined to cut the 'block grant' he sends across the Irish Sea, and the lowering of the North's corporation tax rate will result in another loss of revenue. Tighter budgetary constraints are bound to cause tension within the new executive.

Sinn Fein will not want to introduce unpopular measures, lest it allows the hard left to make hay - both south and north. The redistributionist-minded SDLP and even the austere Ulster Unionists may well oppose spending cuts if they decide to opt out of government and go into opposition.

Stormont's budgetary wrangling with Westminster is a symptom of a weak real economy. There is a broad recognition that the Northern Irish economy is underperforming when compared to most other regions on these islands.

As the graph shows, Northern Ireland has the second-lowest GDP per capita in Britain and Ireland, with only the Welsh faring worse. Since 2007, it has been below the EU average.

Nor is this all down to the Troubles.

Underperformance was in evidence well before violence erupted in the late 1960s - in part because Northern Ireland's economy has many of the weaknesses of other ex-industrial and peripheral regions in Britain and the rest of Europe.

That has meant an over-reliance on the state. The Northern Irish public sector is very large, accounting for 28pc of employment, according to Britain's statistics agency (a more normal level in European countries is a third less, at around 20pc).

There are other problems, too. Energy costs, business rates and lagging productivity have all been identified as barriers to growth. It has long been recognised across the political spectrum that Northern Ireland needs a stronger private sector.

Stormont's economic plans are centred on following the Republic's success in attracting foreign investment, with the corporation tax set to fall towards the rate that has long prevailed in the Irish State. Stormont is to gain control of corporation tax in April 2018, and a rate of 12.5pc is expected, though the DUP is aiming for a lower rate.

If the political parties can get their act together, it is possible that further fiscal and tax powers will be on offer over the course of the new assembly term.

But in the much nearer term, Northern Ireland faces a big risk. Next month, voters will be returning to the polls for the UK referendum on its membership of the EU. The political consensus is for staying. Of the five main parties, only the long-time Eurosceptic DUP will campaign to leave. Opinion polls suggest that Ulster will vote to remain in the EU - though a majority of unionists may decide to vote 'leave'.

Certainly, the North has benefited from generous EU funding in the form of agricultural subsidies, regional funds and peace initiatives.

From 2007-13 it totalled £2.5bn, most of which went to farmers. Whether a post-Brexit British government would be prepared to replace this funding in full is far from certain.

The Border is another big consideration. A Brexit would bring in new barriers to cross-border commerce. There is even the possibility that, as an external EU frontier, checkpoints and customs posts would have to be re-erected.

That would be good for no one.

Cross-border trade has in fact been declining as a share of the Republic's total trade. The level of goods traded amounts to €3bn annually and has stagnated since 2008.

The so-called 'peace dividend' that was hoped for after the Good Friday Agreement has yet to materialise. Though this trade is obviously crucial for the border area, there is much potential in increasing cross-border commerce.

North-South trade is much more important to Northern Ireland than to the Republic. While 37pc of Northern Ireland's goods and services exports go to the Republic, exports going north account for a piffling amount of the Republic's total cross-border sales.

Britain outside the EU would almost certainly have a trade-destroying effect - and the damage to the North in particular could be considerable.

And as if the economic complications were not enough to be worrying about, there are much greater dangers.

The Scottish nationalist government has said that it would seek to break away from Britain if Brexit happens. It is not hard to see a crumbling UK causing alarm among the north's unionists. Little Englanders might advocate ditching the peripheral nations, which some see as subsidy junkies.

Irredentists on this island would see an opportunity too. In a society where insecurities are deep and strong and in which paramiliatarism is alive and thriving, it is all too easy to see an abyss opening up.

Sunday Indo Business

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