Economic Relations between Northern Ireland and Britain

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Economic Relations between Northern Ireland and Britain

Before partition in 1922 the Irish economy had been fully integrated into the U.K. fiscal and monetary system since the Act of Union in 1801. After partition, under the Government of Ireland Act of 1920, Northern Ireland was governed by a local parliament at Stormont. However, policy continued effectively to be fully integrated within U.K. structures. The main change was that economic and financial legislation enacted at Westminster usually needed to be transmitted to Northern Ireland through enabling acts of its local parliament. A wide range of trade, fiscal, and monetary policies were "excepted" or "reserved" and were framed by Westminster. In all matters concerning public expenditure there was close supervision and control by the U.K. treasury (Birrell and Murie 1980).

Given the industrial strength of the Northern Ireland economy in the immediate aftermath of the First World War, it had never been envisaged that the newly devolved region would become dependent on outside subvention. Indeed, there had been an expectation that Northern Ireland would make a net financial contribution toward the cost of imperial services (Wilson 1989). That this did not occur was due mainly to the collapse of the Northern Ireland industrial sector during the 1920s and 1930s. The quality of public services in the North was initially inferior to that in Britain, and the gap was difficult to close because the North was required to be generally self-sufficient at a time when its main industrial bases—shipbuilding and linen—suffered serious decline. It was not until 1946 that there was a commitment to parity of services and taxation between Great Britain and Northern Ireland.

The major pressure on public expenditure in Northern Ireland came from the growth of the U.K. welfare state. In a context where tax rates, social-insurance contributions, and social-welfare benefits were equalized within the United Kingdom, expenditure in excess of local tax revenue in Northern Ireland was driven by greater local needs. However, it was not until the mid-1960s that public expenditure per head in Northern Ireland equalled that in England, and only in the early 1980s (after the abolition of the Stormont parliament) did it exceed the level in Scotland and Wales (Wilson 1989).

The decline of Northern manufacturing from a historically high level mirrored the more general U.K. process of deindustrialization, but was exacerbated by the outbreak of civil unrest in the late 1960s and the abolition of Stormont in 1972. The imposition of direct rule led to efforts to improve social and economic conditions in the North, and the expansion of the public sector offset the decline of private-sector activity. By the mid-1990s the external subvention had reached nearly one-third of GDP (Bradley 1998).

Today there are structural weaknesses in the economy of Northern Ireland, and these problems are moving toward center stage in the aftermath of the restoration of devolved government under the Belfast Agreement of 1998 (Heath et al. 1999). There is a continued dependence on traditional sectors such as textiles, clothing, and shipbuilding, which are particularly vulnerable to low-cost competition. Insufficient education exacerbates low productivity and high structural unemployment. A dependence on public assistance has emerged as a consequence of an inability to attract foreign direct investment in sufficient quantity to offset the decline in traditional domestic industry. The problems are aggravated by the disruption of civil unrest, together with collateral problems of labor-market segmentation and discrimination.

Difficulties experienced by policymakers as they tackle these problems can be traced to the very limited degree of policy autonomy within Northern Ireland, which effectively prevents appropriate region-specific policy variations from national U.K. norms. Within the new devolved administration in Belfast, social and economic policies are still set mainly according to U.K. standards, but a discretionary pattern of public expenditure can be set within the overall block grant received from London, and this has been used in the design of generous subsidy-based industrial incentives. Nevertheless, the fact remains that policy norms in the North are designed with the wider United Kingdom in mind. While the subvention assistance can be used to design and operate beneficial policies to address Northern Ireland's structural problems, some of these problems may originate in the first place from the application of U.K.-wide policies to Northern Ireland (Dunford and Hudson 1996; NIEC 1996; Bradley 1998).

The United Kingdom is a highly centralized state and has devolved only limited powers of economic governance to its regions. The recent devolution for Northern Ireland has relaxed the degree of centralization only to a modest extent. Economic success depends increasingly on the ability to mobilize regional resources and policymaking powers to improve competitive performance. Without such devolved powers Northern Ireland is at a severe disadvantage relative to regions that have extensive devolved or federal policymaking structures and are prepared to use them creatively.