Update: 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 2020) reaching the bottom of the trough in April and early May, followed by a recovery that continued at least until August 2020.

The NI Composite Economic Index (NICEI) indicates that Northern Ireland’s total volume of output declined by 13.6% between the first and second quarters of 2020. 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 applied in comparing the NICEI data with UK GDP, as 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 available 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 the renewed restrictions on business activity that came into effect in mid-October 2020, the likelihood is that the overall decline in Northern Ireland’s GDP over the course of the whole of 2020 will be worse than we expected in our Economics Observatory article in June. It could now be worse than a 10% drop: one estimate indicates that Northern Ireland’s GDP declined by 12% in 2020. This compares to the UK-wide decline in GDP in 2020 of 9.9%.

Labour market

At the peak in June 2020, around 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).

The number furloughed has risen again in recent months, from 79,300 at the end of November 2020 to 109,000 at the end of January 2021 and 106,500 at the end of February 2021. Similarly, in early 2021, 62,000 have been supported through the self-employed scheme. The impact of the Covid-19 recession on jobs has been felt much more strongly among younger and lower income workers.

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 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 about £3.5 billion in the 2020/21 financial year. In addition, the spending in Northern Ireland related to the UK-wide employment support schemes and higher welfare payments and loan guarantees amounts to several billion pounds (Bonner et al, 2020).

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

But spending plans have gone beyond England in a number of ways. For example, a £500 compensation payment was given to university students receiving online teaching and a cash voucher was given to each household to be spent in high street shops (the latter pending public health improvements and the lifting of lockdown).

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 (Pivotal, 2020).

Admittedly, it is probably now impossible for Northern Ireland to move to multi-year budgets until the Chancellor widens the UK spending reviews to beyond one year. In March 2021, an independent Fiscal Council and a Fiscal Commission were announced – the former to consider the sustainability of the Executive’s budget and the latter to investigate the scope for tax-varying powers.

The Department for the Economy published a document about rebuilding the economy in June 2020, 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.

An unfortunate long-term implication of such a ‘stabilisation-led approach’ will be that attempts at tackling 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.