What has been the impact of Covid-19 on Northern Ireland’s economy?

Given the resurgence of the virus and a bigger fall in Northern Ireland’s GDP than expected, policy is focused on restoring public health and maintaining some stability of jobs and incomes. But delays in tackling underlying economic weaknesses will have long-term costs.

Unfortunately, very timely and reliable data on the overall state of Northern Ireland’s economy are limited. The likelihood is that it is broadly tracking UK-wide trends: a severe output decline during the first lockdown (23 March to late June), reaching the bottom of the trough in April and early May, followed by a recovery that continued at least until August.

The NI Composite Economic Index (NICEI) indicates that Northern Ireland’s total volume of output declined by 13.6% comparing the second quarter of 2020 with the first quarter. This seems catastrophic and certainly there are few if any precedents for such a marked decline. At the same time, it was apparently a less severe decline than the one that characterised UK GDP in the second quarter: a fall of 19.8%.

But care should be taken in comparing the NICEI data with UK GDP. They are not estimated on the same basis. The NICEI uses the level of employment in the public sector as a proxy for changes in public sector output. Although this approach is an understandable response to a gap in the available output data, it is far from ideal if we want to examine the relationship between inputs and outputs. The UK GDP data, unlike the Northern Irish data, do try to allow for the extent to which output in schools and the non-Covid-19 parts of the NHS was lower during the first lockdown.

Given that the renewed restrictions on business activity that came into effect in mid-October for at least four weeks, the likelihood is that the overall decline in Northern Ireland’s GDP over the course of the whole year will be worse than we expected in our Economics Observatory article in June: it could now be worse than a 10% decline.

Labour market

At the peak in June, probably about 223,000 people in Northern Ireland were supported through the Coronavirus Job Retention Scheme (CJRS) and a further 71,000 people through the income support for the self-employed (Magennis et al, 2020). By the end of August, the number on the CJRS had declined to 70,500. What we do not know is how many of those furloughed (or formerly furloughed) will become unemployed when the CJRS ends on 31 October.

The various replacement job schemes introduced by the Chancellor provide a lower subsidy rate, although the announcement on 22 October has narrowed the gap. The number of unemployed claimants has already increased to above 60,000 (more than doubled compared with March 2020). There is speculation that the figure could reach about 100,000 by the end of the year, although that is now looking less likely given the intensified subsidy schemes.

Money and the devolved government

Northern Ireland’s regional government – the Executive – has very limited tax-varying powers and it is largely dependent on a block grant from London to fund public services. The Executive has joined with its counterparts in Scotland and Wales in making repeated requests for more funding.

Northern Ireland has received a ‘Barnett consequential’ (that is, a population share of Covid-19-related spending increases in England) of £2,400 million. Additionally, the spending in Northern Ireland related to the UK-wide employment support schemes amounts to £1.1 billion and business loan guarantees to a further £1 billion (Bonner et al, 2020).

The Northern Irish authorities have sometimes lagged behind in spending all of the money that has been allocated – perhaps because they have been waiting to see how the virus would develop and what the Chancellor was about to do at the national level.

Policy development

Understandably but perhaps unfortunately in terms of policy, the urgent may have sometimes crowded out the important. The Executive is behind some of its targets as set by the January 2020 New Decade New Approach Agreement (NDNA), a new programme for government aligned to a multi-year budget and the creation of an independent fiscal council (Pivotal, 2020). Admittedly, it is probably now impossible for Northern Ireland to move to multi-year budgets given that the Chancellor has limited his spending review to one year only.

The Department for the Economy did publish a document about rebuilding the economy in June, which stressed that priority was being given to short-term responses. Understandably, restoring public health and maintaining some degree of stability in terms of employment and incomes have been the immediate focus of public policy.

But an unfortunate long-term implication of such a ‘stabilisation-led approach’ will be that attempts to tackle the long-term competitiveness weaknesses within the Northern Irish economy have once again been delayed. To the extent that the NDNA represented a potential switch towards a more ‘efficiency-led’ approach, its delay will have long-term economic costs.