Modelling Northern Ireland within the context of the all-island economy
January 15, 2025
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- Northern Ireland occupies a unique position following Brexit and the Windsor Framework. It is part of the UK fiscal, welfare and monetary unions – where the main policy levers are mostly exercised at a UK national level – along with its national economic policies for devolved administrations and regions. Simultaneously, it remains within the EU Single Market for goods with Dual EU/UK regulatory regimes, participates in the Common Travel Area (CTA) between the United Kingdom and Ireland and is supported by a commitment to continue specified areas of North-South cooperation. The economic effects of this will continue to evolve over time.
- Whatever the background situation, it is clear that the economies of both Northern Ireland and Ireland can have a mutually beneficial impact on each other through improved economic outcomes on both sides of the border and enhanced interaction.
- This report discusses the development of a model for the Northern Ireland economy. The model can be used to produce economic forecasts and to examine the effects of economic policies and shocks. The framework captures the various linkages between the Northern Ireland economy and that of Ireland and so aids our wider understanding of how the Northern Ireland economy functions within the context of the wider all-island economy. The modelling framework also captures linkages to Great Britain and the international economy. By developing such a model and ensuring that the unique features of the Northern Ireland economy – that it is part of the United Kingdom while also being part of the EU Single Market – are built into the model, we can better understand the evolution of the Northern Ireland economy and what it means for the all-island economy.
- The model can be used to generate a baseline projection over the medium term for Northern Ireland and the all-island economy. GDP growth in Northern Ireland is expected to average around 1.2 per cent per annum over the medium term, similar to its longer-term historical trend, although it is expected to be somewhat higher in the short term. The challenge of relatively low productivity in Northern Ireland needs to be addressed through sustained productivity enhancing investment to improve long-term economic prospects and living standards. While expected growth in Northern Ireland is relatively modest compared to Ireland, it is slightly stronger than the wider UK, in part driven by stronger export growth bolstered by demand from Ireland and its relatively more favourable (than the UK) trading relationship with the European Union. With growth in Ireland expected to moderate in the coming years from previous extraordinarily high rates, our projections are for growth in the all-island economy to average around 2.2 per cent per annum over the medium term. With the period of high inflation rates over, real wage growth is expected to support increases in real personal disposable income in the all-island economy over the medium term.
- The modelling framework allows us to examine the effects of economic policies and shocks – both emanating from within Northern Ireland and from the outside world – on Northern Ireland, Ireland, the all-island economy, the UK and the international economy. The report considers a range of policy shocks and other external shocks. For example, the report develops a hypothetical scenario that is consistent with more devolution in Northern Ireland where income tax rates are increased and where the Northern Ireland Executive receives the revenue which it can then use for additional government spending and/or investment. This can also be seen as a proxy for the Northern Ireland Executive raising taxes on Northern Irish households in ways that it can do currently. In both scenarios, the overall impact on the level of Northern Irish output is positive but the impact is stronger and permanent in the case of higher government investment. The simulation results suggest that increased government spending leads to an increase (or ‘crowding-in’) of private sector investment which can enhance productivity. The stronger and permanent impact on overall output in the case of higher investment compared to higher spending highlights the importance of how the revenue is spent. In a similar vein, we examine scenarios where there is an increase in the block grant to Northern Ireland, which stimulates demand, employment and output with stronger impacts when the additional resources are used for government investment rather than government consumption spending.
- The report also considers a monetary policy shock, specifically an increase in the Bank of England interest rate and the simulation results suggest that the Northern Ireland economy is less sensitive to interest rate changes than the wider UK. The report also considers spillover effects from stronger growth in the Irish economy on the Northern Ireland economy and the impact on the all-island economy, focusing on positive shocks to Irish consumption and exports. The simulations reveal positive impacts in both cases on the Northern Ireland economy. Additionally, the report analyses the sensitivity of Northern Ireland's economy to global oil and gas price shocks. The simulations show a short-term spike in inflation that moderates over time, with output and investment recovering in the medium term after initially falling below the baseline.