Graham Gudgin: The protocol isn’t helping Northern Ireland, as some economists say

The political battles over Brexit and the Northern Ireland Protocol continue to be bitterly fought, and as in war, truth is the first casualty.

By Graham Gudgin
Thursday, 23rd June 2022, 9:43 am
Updated Friday, 24th June 2022, 2:48 am
Dr Graham Gudgin is honorary research associate at the Centre for Business Research, Judge Business School, Cambridge University and senior economic advisor at Policy Exchange think tank, London
Dr Graham Gudgin is honorary research associate at the Centre for Business Research, Judge Business School, Cambridge University and senior economic advisor at Policy Exchange think tank, London

Opponents of Brexit in Britain continually attempt to claim that Brexit has damaged the UK economy since the referendum in 2016 and since Great Britain left the EU’s single market and customs union at the beginning of 2021. At the same time they claim that the protocol is helping Northern Ireland and must be retained.

All sorts of sleights of hand are employed to make the remainer case.

The Sunday Times’ economics columnist, David Smith, for instance claimed that UK exports of goods trade had fallen by a fifth since before the pandemic and the subsequent recovery, largely due to Brexit.

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David McWilliams repeats his well-worn theme of NI as a benighted economy

To get this figure he picked his dates carefully, and included oil (which is running out). He also failed to mention that it was exports to non-EU countries which had fallen most while exports to the EU have dropped much less.

Much of this is clearly due to continuing difficulties associated with the pandemic, and only zealots find it easy disentangle the impacts of Covid and Brexit.

Others have tried to use unlikely combinations of countries including Greece and Iceland to form a benchmark for economic growth and trade, to conclude that the UK is performing badly since Brexit.

However, a straightforward comparison of the UK with the G7 major economies shows no lagging at all.

As for Northern Ireland and the protocol, there is a daily barrage of hostile opinion, almost all of it arguing that NI has done well out of the protocol and gets the best of both worlds.

The main source for the claim of a superior performance came from London’s prestigious National Institute for Economic and Social Research (NIESR) in its Spring 2022 UK Economic Outlook. However, no evidence was presented to back up this oft-repeated claim. NIESR’S own charts clearly show output NI underperforming since the start of the protocol in January 2021, employment is the worst of any region.

The better performance of NI was in 2020 during the pandemic and not in 2021 following the introduction of the protocol.

Only two regions have seen their output grow more slowly than NI since the protocol was introduced.

A comparison of NI with Scotland, illustrates what happened. Prior to the onset of Covid in Spring 2020 the economies of NI and Scotland had been growing at similar rates. During the worst of the pandemic in 2020 Scotland’s output fell much further than NI’s, and its recovery was later and weaker. As a result NI pulled ahead of Scotland by a huge 8%. However, Scotland did make up some of the lost ground in 2021 when it grew faster than NI. Most of these ups and downs is likely to be due to the pandemic and its aftermath.

It is well-nigh impossible to discern any distinct impact of the protocol as some soothsayers pretend.

None of this appears to concern Southern commentators who confidently assert that NI has gained from the protocol.

Right on cue the economist David McWilliams has joined the fray writing in the Irish Times on June 18. He points out that NI is the only UK region apart from London to have a higher level of income today than before the pandemic. This is true but largely because Northern Ireland’s economy took the shallowest hit from the pandemic before the protocol came into operation.

Economic growth in NI has been relatively sluggish since the pandemic. Whether it might have been even slower without the protocol is impossible to say. Certainly, the ‘best of both worlds’ argument is shallow and partial. As the Fraser of Allender modelling exercise argued, the protocol introduces important new costs for importing goods into NI from GB. The authors estimate an additional average cost of 8-9% for goods imported in NI. This increases costs for consumers in NI but also for businesses including those which export from NI.

The consequential loss of competitiveness is calculated to reduce exports despite a lack of outward-bound customs checks. The authors estimate the long-term net impact as a loss of 2.5% of GDP in NI.

McWilliams’ failure to recognise these additional costs does not inspire confidence. Nor does the rest of his article which repeats his well-worn theme of NI as a benighted economy.

He appears not to have seen the growing body of research showing that living standards are higher in Northern Ireland than in the Republic where high taxes and high prices erode any apparent advantage of higher southern wages. Both Professor John Fitzgerald of ESRI and Patrick Honohan, formerly governor of the Irish Central Bank, show that Irish national accounts hugely over-estimate Irish living standards, lulling people like McWilliams in to a false sense of southern prosperity.

The truth that southern living standards are as low as the poorest UK regions helps to explain the rise of Sinn Fein in the South.

The conclusion is that being a region of the UK supports living standards better than the South’s economic strategy of being a tax haven. McWilliams likes to argue that NI is a failed industrial economy but does not know that NI has as many jobs in manufacturing, relative to its population as the South.

Moreover, NI has proportionately as much high-tech manufacturing as the South, due to its aircraft and guided missile production as well as its successful pharmaceutical industry.

A little humility would be much appreciated from the South alongside more understanding not only of the Northern Ireland economy but also of their own.

One of the most perplexing issues in Irish economics is how a policy of low corporation tax which attracted investment from most of the world’s high-tech companies failed to raise average living standards to anywhere close to those of the UK.

We might also add the conundrum of why southern economists like McWilliams appear not to know this.

Dr Graham Gudgin is honorary research associate at the Centre for Business Research, Judge Business School, Cambridge University and senior economic advisor at Policy Exchange think tank, London. He was director of the NI Economic Research Centre 1985-98 and special advisor to David Trimble 1998-2002