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Bloody Sunday, election, Irish, Ireland, British, Ulster, Unionist, Sinn Féin, SDLP, Ahern, Blair, Irish America

Crunch marks the end of the free lunches

(by Liam Clarke, Sunday Times)

The news that the Irish economy has formally entered a recession and is likely to stay there for at least a year is a reminder that the very factors that make Northern Ireland an economic black hole are likely to save it from the worst of the economic downturn.

All the things that set the north apart from the south -and that people talked about changing while the Celtic tiger roared- now reveal their silver lining as the Irish and world economies falter. Economic dependency on Britain, once seen as limiting growth and potential, now seems like a safety net.

The fact that the public sector makes up 70% of the economy in the north and 34% in the south is startling. There is a greater dependence on public spending than in some parts of the Soviet Union before the collapse of the Berlin Wall. As for £60 a week in direct transfers to every citizen from the UK, it may be damp down the entrepreneurial spirit, but it is there when you want it.

Of course, the same could be said of many other regions. Only last month, a report by the British Tory-leaning think tank "Policy Exchange" made this point about much of the North of England. It talked bullishly of closing down places like Liverpool, no longer needed as a port now that the slave and cotton trade are not the money-spinners they were and of encouraging the population to move to the greater London area where the best jobs are. The green belt could be relaxed to build new houses and a new Silicon Valley might spring up in an expanded Cambridge if planning restrictions were relaxed, it was said.

The same sort of case could be made about regions of Ireland. If Mayo were a country and had to pay its own bills with locally raised taxation, it would probably go bust. An Irish Policy Exchange might close it down and ask pointedly what Clare is actually for these days.

Now that Aer Lingus has closed its Heathrow link with Shannon, why not tell people to get to hell out of Connaught and just keep the west of Ireland for tourists? If everyone lived somewhere more convenient like Drogheda, they could have access to both Dublin and Belfast Airport.

And as for Londonderry, don't start me. All those complaints about poor transport links, never mind the debate about what to call the place, would simply disappear if all them Darry wans moved to Lisburn.

The point is that nothing like this is likely to happen to any of these regions. Brian Cowen cannot afford abandon Mayo or Longford and Derry is safe as long as Martin McGuinness and Gregory Campbell are around. It makes as much political sense as Dean Swift's "Modest Proposal" that the poor should sell off their children as food for the rich.

In Britain, David Cameron disowned the hapless Policy Exchange, describing their modest proposals as crazy. Governments don't count the cost of the regions which elect them. Northern Ireland, on the other hand, is a place apart. There are no votes there, and anyway, it is not quite as integral to the British or Irish national psyches as Merseyside or Mayo. De Valera believed that "Ireland is still Ireland without the north", and in Britain, opinion polls generally show a majority in favour of Irish unity.

British people do count the cost of Northern Ireland. They use the Barnett Formula, and it is not impossible that as times get worse it will be eroded. Devolution and the huge administration of 108 quarrelsome MLAs, not to mention a bloated civil service which provides tens of thousands of jobs as well as fuelling the retail sector with its spending powers, brings the point home to the tax payers.

In these circumstances, local politicians need to be careful what they ask for. There has been a long running campaign by local businessmen and trades unions to reduce corporation tax to the 12.5% charged in the republic to enable the province to compete for foreign direct investment. The British government has done its sums on that one. It would cost £300 million a year and lose the Treasury around £2.2 billion over ten years according to a report by Sir David Varney last December. He recommended abandoning the idea and concentrating spending on other areas.

The Tories have been taking these figures more seriously than the Policy Exchange's offerings. Party sources say they would consider cutting corporation tax as long as Northern Ireland paid for the revenue shortfall out of its annual subvention. Then, after a few years, the Treasury might start seeing a profit. Local politicians need to do their sums instead of just holding their hands out.

Will changing Corporation Tax increase revenues by attracting in investment as it did in the republic or would it leave the north competing unsuccessfully with ex-communist states, some of whom charge 0% to incoming investors? And, if it works, who will benefit from the increased revenue – Stormont or Whitehall?

Northern Ireland is only 2% of the UK population ,so Britain can afford to subsidise it unless things get really bad. There is, however, a risk that cuts will eventually be made. Certainly the figures are debated in a way that wouldn't be thought proper if it was Mayo or Liverpool that was being discussed.

All this was brought home to me at a recent gathering of economists, bankers and other pundits who came together to discuss the economic prospects of Northern Ireland. Generally speaking, those from south of the border were keen enough on an all island economy and co-operation with the north on development and infrastructural projects, but there was a distinct wariness of any suggestion of political unity. One banker recalled the example of Germany, where the long cherished dream of national unity turned into an economic nightmare for West Germans when their weaker neighbour was "just tipped in on top of them."

Northern Ireland currently has a third of its GDP handed to it on a plate by the British taxpayer. The Northern economy is kept afloat, and living standards kept as high or higher than those in the Republic by annual financial aid from Britain larger than the entire EU structural funds used to transform its competitive position between 1994 and 1999.

With this cushion in place, there little sense of economic crisis, just complaints about rising prices. Politicians give the impression of having bigger fish to fry. In the midst of an economic blizzard, the Northern Ireland Executive sends delegations to the US looking for investment, but hasn't met since June because of a wrangle over the timing of the devolution of policing powers.

This sort of self indulgence can't go on. The British subvention is unlikely to increase in real terms in the current climate and the slack won't be taken up by anyone else if it is reduced. The bill would have crippled the republic even at the height of its recent boom.

The south looks north with a friendly interest seeking economic synergies and investment opportunities, but it is not a free lunch and neither is Irish America. Much was made of a recent Emerald Fund Initiative which may put £160 million of New York City Pension Fund cash into the north but the reality is that this is a private equity outfit looking for a 20% return.

The British subvention shouldn't be treated as a free lunch either. Now there is peace, it provides a golden opportunity to weather the recession in reasonably good order and build up competitiveness for when things improve again. Politicians should show the same urgency as the republic did when it used EU structural funds to pave the way for recovery.

The world doesn't owe Stormont a living.

September 29, 2008

This article first appeared in the Sunday Times on September 28, 2008.



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