Brexit and the Northern Ireland economy

During the Brexit Referendum campaign the core strategy of the Cameron Coalition government was to scare the wits out of people to vote to remain in the EU. The Treasury produced forecasts predicting that leaving the EU would put the UK on the road to economic perdition: exports w'ould nosedive, inward investment would plummet, capital flight w'ould surge, all leading to a rapid decline in economic growth and living standards. The strategy not only failed to work, it spectacularly rebounded on the Remain campaign. People simply did not believe the extent of the economic nadir predicted by the forecasts. As a result, the Leave campaign could convincingly argue that the Government was running a concerted Project Fear campaign and that they should stay with their convictions and vote to exit the EU. It w'as a calamitous strategy error by the Cameron team, and not the finest hour for some in the economics profession either: producing forecasts that stretched economic credibility so far was nothing less than irresponsible. It cost the Remain campaign the Referendum.

Recognizing the foolhardy, one could even go so far as to say reckless, behaviour of the Cameron administration in no way detracts from view'ing Brexit as a massive exercise in self harm by the UK. Brexit above all is a Luddite project, one that will severely damage the existing productive systems which link the UK to the other members of the EU. Damage will result from new barriers to the movement of goods and services and, equally important, from the disruption of integrated control systems. Internationalized supply chains are likely to be disrupted, some of which seriously so, and the UK financial sector is likely to be weakened even if it retains its overall global influence. Multiple certification arrangements that assist the functioning of a w'ide number of business sectors - agricultural, chemicals, civil aviation, and education - will lose functionality. It is important to recognize that a huge amount of serious analysis has been done of the economic consequences of Brexit that does not in any way participate in ‘project fear’. Overwhelmingly, the consensus of these studies is that leaving the EU will have adverse economic consequences for the UK. A stark feature of the Leave side of the argument has been the near absence of any credible economists producing serious w'ork that argues that the UK will be better off after EU departure.

Just as all credible evidence suggests that EU withdrawal will have a negative impact on the UK economy as a whole, so similar assessments predict the same adverse outcome for the Northern Ireland economy. A wide number of studies have been commissioned on the impact of Brexit on different aspects of the Northern Ireland economy. All point in the one direction of the Northern Ireland economy being damaged by Brexit. One study that examined the impact of EU withdrawal on Northern Ireland trade concluded that all forms of Brexit would have adverse consequences. The effects of different varieties of the hard Brexit option were estimated, with each being found to result in a significant reduction in Northern Ireland exports, largely because these would be more expensive for European buyers. Of course, a loss of external trade competiveness invariably spills back and adversely effects the economy further by reducing overall level of aggregate demand. The study found that a hard Brexit would cause a 3.3^4.6 per cent decline in Northern Ireland GDP depending on what 'hard' option was pursued. Anything between 15.000 and 18,500 jobs would be lost, wages would fall by about 3.7 per cent, and each household would be worse off by £2,000-£2,500 each year. A softer Brexit would make the impact less severe, but it would still be negative. Northern Ireland GDP would fall by about 1.1 per cent, causing smaller declines in jobs, wages, and household income (Oxford Economics 2016).

Other studies assess the impact of the Referendum vote on Northern Ireland’s ability to attract FDI. The unequivocal finding of one study was that the uncertainty generated by the ‘No’ vote would lead to fewer FDI-related new jobs in Northern Ireland than if the Referendum had returned a ‘Yes’ vote or if the Referendum had not occurred in the first place. It was estimated that about an additional 1,000 FDI-related new jobs could have been created between 2016 and 2018 were it not for Brexit (Siedschlag and Tong Koecklin 2019a). Another study found that Brexit would also damage the prospects of attracting inward investment to Northern Ireland in the future. Again, the worst case scenario was the hard Brexit option. If only static (one-off) effects are considered, it was estimated that a hard Brexit would lead to the number of FDI projects going to Northern Ireland dropping in the medium to long run by 3 per cent each year and FDI-related new jobs falling annually by 3.6 per cent. A softer form of Brexit, it was concluded, would ameliorate some of the damage: under this scenario, it was estimated that the number of FDI projects and the number the FDI-related new jobs would fall by annually 0.3 per cent and 0.4 per cent, respectively (Siedschlag and Tong Koecklin 2019b).

The message could not have been plainer: Brexit would make Northern Ireland a less attractive location for FDI; the region would receive fewer FDI projects and create fewer FDI-related jobs. The only issue that could be squabbled over is the degree of the adverse impact. In an interesting precursor to future events, the study also found that Northern Ireland would become a more attractive location for inward investment were it to remain in the EU Customs Union and single market while rest of the UK left. In this scenario, it was estimated that the number of the FDI projects in Northern Ireland would increase by about 1-1.4 per cent.

The impact of Brexit on the Northern Ireland labour market was also assessed. A feature of the labour market in the region over the last two decades has been the growing use of migrant labour in many parts of the economy. In 2018, out of a total employment level of 835,000, about 10 per cent, approximately 80,000 workers, were born outside the UK. The largest share of migrant labour was from the EU (apart from Ireland), making up 5 per cent of the employment total, some 44,000 workers. Of the remainder, 3 per cent were from outside the EU, 26,000 workers, and 2 per cent were from Ireland, 13,000 workers. The sectors with the highest share of EU workers are manufacturing and distribution, hotels, and restaurants. About 66 per cent of the workers from the EU (27,000 people) worked in these sectors: roughly 55 per cent of EU workers were employed in lower skilled occupations such as processing and elementary occupations while a further 16 per cent were in skilled trade occupations. Since the Referendum result it seems that EU workers view Northern Ireland as a less attractive location for employment. The number of EU workers in Northern Ireland dropped by 17 per cent during 2016-2017 and 24 per cent during 2017-2018 (NISRA 2020).

Unlike other parts of the UK, the fall-off in labour from the EU has not been compensated by an increase in migrant labour from the rest of the world, which only increased by 8 per cent during 2016-2018. Thus, the significant recent decline in EU workers in Northern Ireland is spelling nothing but bad news for those business sectors that have become reliant on migrant workers. Businesses involved in the production of food and beverage products, residential care, and hotel and catering are likely to be among the hardest hit. The UK Government did little to ease the risk to these businesses by announcing the introduction of a points-based immigration system that would bar entry to the UK for unskilled workers, and require skilled workers to have a job offer from an approved employer sponsor which meets a minimum general salary threshold of £25,600. In February 2020, the Government revised downwards some of its original proposals, including as yet unspecified lower salary thresholds. Whether these revisions will ease the recruiting difficulties faced by an increasingly large number of Northern Ireland businesses remains to be seen. But there is no disguising the fact that these labour market tensions are real and widespread, with some assessments warning that they could even trigger capital flight, with businesses moving from Northern Ireland for more favourable labour market conditions elsewhere (Oxford Economics 2020). Sight must not be lost of the fact that the origins of this problem lie with Brexit.

Thus the catalogue of evidence finding that Brexit will be harmful for the Northern Ireland economy is extensive and decisive. It is bewildering and hard to comprehend that the DUP stood so defiantly in support of EU withdrawal in the face of such extensive and one-sided evidence. Apart from a number of fringe unionist parties and groups, no other political party, business group, or civil society association adopted such an approach. They viewed Brexit as delivering Northern Ireland the double shock of a destabilized peace process and a weakened economy. But these groups were also determined that Brexit would not go unchallenged, especially as the majority of people had voted to stay in the EU. As a result, a demand that very quickly gained momentum was that Northern Ireland be given some form of special status to indemnify the region from the political and economic uncertainties created by Brexit. At the start, it was unclear what it would mean in practice to confer special status on Northern Ireland. But soon this lack of clarity gave way to the demand that any Brexit deal must ensure that the border between the north and south of Ireland remained open. The demand for no return to a hard border in Ireland had seismic political consequences: it shattered UK Government plans for an orderly, smooth EU withdrawal and it obliged a Protocol to be signed that could radically alter the future political and economic shape of Northern Ireland.