New ESRI and NIESR macroeconomic model for Northern Ireland can be used to analyse potential impact of economic shocks and opportunities

The Economic and Social Research Institute (ESRI) and the National Institute of Economic and Social Research (NIESR), supported by Ibec, have produced and published a report on a new macroeconomic model for Northern Ireland and the all-island economy. The report discusses the development of a model for the Northern Ireland economy and how it can be used to produce economic forecasts and to examine the potential impacts of economic policies and shocks.

The modelling framework allows us to examine the effects of economic policies, shocks and opportunities – both emanating from within Northern Ireland, on this island and between these islands and from the outside world – on Northern Ireland, Ireland, the all-island economy, the UK and the international economy. More generally, these exercises contribute to our wider understanding and knowledge of how the Northern Ireland economy functions. This capacity is further strengthened by the model’s compatibility with ESRI and NISER’s models.

Scenario Analysis:

To demonstrate some of the capacities of the new Northern Ireland macroeconomic model, the report considers a range of policy shocks and other external shocks. These include:

• 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. 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. Higher investment has a stronger and permanent impact on the economy compared to higher spending. This highlights the importance of how revenue is spent.
• Another scenario examines a monetary policy shock, specifically an increase in the Bank of England interest rate. 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.

Economic Projections:

• The modelling framework can be also used to generate a baseline projection over the medium term. 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 must be addressed through sustained productivity-enhancing investment to improve long-term economic prospects and living standards. 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.

Adele Bergin, an author of the report and an Associate Research Professor at the ESRI, said:

“The newly developed model can provide key insights into the impacts of potential shocks and policy changes.  It provides a more joined-up framework that enhances the capacity to consider economic shocks and policy choices that impact Northern Ireland, Ireland, the all-island economy, the UK and the international economy.”

Stephen Millard, an author of the report and Interim Director at NIESR, said:

“A key part of NIESR’s mission is to analyse not just the UK economy as a whole, but the Nations and regions that form part of it.  Northern Ireland is in the unique position of being part of the EU single market while remaining within the UK fiscal, welfare, and monetary unions. The model of the Northern Ireland economy outlined in this report allows us to understand the economic issues facing Northern Ireland and examine the effects of different policies on its households and businesses.”

Ibec CEO Danny McCoy said: 

“From a business perspective, it has always been clear that the economies of both Northern Ireland and Ireland can positively and mutually influence each other by fostering improved economic outcomes. However, these potential synergies remain underdeveloped. Now the excellent work conducted by the ESRI and NIESR provides an evidence-based approach that can underpin the development of policies to further enhance the all-island economy. We believe this will serve as an invaluable resource for policymakers in Dublin, Belfast, and London, as well as for public and private sector enterprises operating on both sides of the border. As we launch this initiative in Dublin today, we look forward to extending the launch to Belfast and London in the coming weeks.”