Esmond Birnie: How the Windsor Framework is impacting the Northern Ireland economy
In the mid 1960s, NI prime minister Terence O’Neill stated an aspiration that the output per person reach the UK average by the year 2000. That did not happen, nor is there much sign of movement towards that goal in 2023. In the period start 2021 to mid 2023, coinciding with the operation of the NI Protocol, the growth of the NI economy has been less than that of the UK economy overall: 8.2% compared to 11.6%.
Our key strategic problem is low competitiveness which derives from relatively low productivity (output per worker). The most recent data (2021) implies that the US, France and Germany have levels of output per hour worked about 40-50% higher than that in NI.
This competitiveness/low productivity problem is a very longstanding one. It pre-dates Covid, Brexit and the Troubles.
You might have thought previous devolved governments would have made raising competitiveness a key priority. They did not. This is one reason why I doubt that restoration of devolution per se will work an economic upsurge. I am struck by how often poor quality decision making happened during 1999-2022 when devolution was in operation. UK prime minister Rishi Sunak recently complained that the political system opted for decisions which were “easy rather than right”. He was thinking about Westminster and Whitehall. The same applies, perhaps even more so, to Stormont. This is not just about the Renewable Heat Incentive but a host of short-termist and populist decisions.
The Windsor Framework (WF) claims to provide access to the rest of the UK and also the EU (we are still part of the single market and customs area). Euphoric commentary is based on this “dual market access”: the world’s most exciting economic zone or being a European Hong Kong. In fact, if you are a business selling to GB but your product is based on materials/components brought in from GB the WF implies some increase in costs. Decreased ability to remain competitive in that GB market could render unfettered access rather moot.
Three fundamental points:
The NI-GB flows of goods (the protocol and WF are about goods not services) are much bigger than the NI-RoI flows. In 2021 (most up-to-date data) NI purchases from GB were four-and-a-half times bigger than the NI purchases from RoI. And NI exports to GB were double those to RoI: £12.3bn compared to £2.8bn, and £7.8bn compared to £3.9bn.
The UK government and EU have decided to place an economic border through the larger, rather than the smaller, economic flow.
There is a lot of continuity between the protocol and WF. Both imply considerable burdens of form-filling, checks and other bureaucracy.
Even though aspects of the WF have only been in force since 1 October we have had a statement by a cabinet office minister claiming that all is well. I have four responses to that:
First, the UK government has adopted a rolling approach to WF implementation, much of it will only apply in a year’s time;
Second, the eligibility to apply to use the green lane is actually quite restricted. Only products with a final sale/end use have eligibility in theory. So manufacturing firms bringing in materials from GB are excluded at the outset (the UK government has softened this by granting an exemption for firms with a turnover of less than £2m annually, but I estimate that about 75% of output in that sector will be in larger firms above that threshold);
Third, eligibility to apply for the green lane is only the start of a process. There will still be considerable bureaucratic hurdles before green lane status applies to any individual business. The green lane could perhaps be more properly called the “brown lane” (mixing green and red paint!);
Fourth, some businesses will decide it is simply not worthwhile trying to operate through the green lane. Some GB suppliers will cease to supply the NI market. Some manufacturing firms which are multi-regional may decide that the peculiar arrangements in NI imply that their NI branch(es) are no longer cost competitive compared to the rest the firm in GB.
It is an ill wind that fails to bring someone a benefit. The UK government may be grateful that the “cost of living crisis” disguises and distracts from any impact from protocol/WF to prices in NI.
Another important way to look at the impact of the protocol/WF is in terms of trade diversion. NI firms which previously bought from GB now find it more cost competitive to buy from RoI given bureaucratic burdens and frictions. The latest NISRA trade data shows that in 2021 (the first year of the protocol’s operation) the value of goods imported into NI from GB increased by 13.9%, a considerable growth but indicative of the post-Covid recovery. However, the growth in purchases of goods from RoI was much greater, almost twice as high: 26.3%. Comparing these two growth rates is highly suggestive of trade diversion.
So, what to do? Here’s a modest proposal. NI firms, for example in manufacturing, which are importing goods from GB for further processing but do not export into RoI/rest of EU could make a declaration (legally binding in terms of UK law) that none of their goods will cross the Irish border. If inspections within the RoI by the authorities there show that some such NI goods have strayed into the single market, the RoI could inform the UK authorities and the latter could then prosecute the business under UK law.
Dr Esmond Birnie is senior economist at Ulster University Business School