Depending on which report you believe, uniting the two Irish economies – North and South – could either lead to a dive in living standards in the Republic, or a big economic boost for the entire island.
As the issue hits the headlines again in the context of Brexit, how do we judge these various arguments – and what are the key factors at play?
This is ultimately a political issue, of course, but economics is a big part of it, too. It is hard to avoid the conclusion that there is a potentially large economic cost to reunification – for the simple reason that the UK taxpayer will stop paying many of the bills – even if some supporters will strongly argue the point. There may be gains too, particularly if the North’s economy can be reinvigorated, but that would take time, investment and planning.
Let’s look at some of the key points. Some data is needed to illustrate the arguments, but not too much!
1. The starting point
The Northern Ireland economy, the economic powerhouse of the island of Ireland at the start of the last century, is now lagging well behind the Republic.
On any measure of economic wealth creation the North trails the Republic – even allowing for the distortions to the Republic’s data from the activities of multinationals here.
Gross value added per head in the North – a measure of what the economy produces – has been estimated to be around 60 per cent of that in the Republic. However, the significant budget transfer from the UK exchequer to the North means that living standards North and South are probably on a par, though both parts of the island have large regional variations.
Looking at average disposable income per person, figures are a few years out of date, but the 2015-16 data showed an average in the Republic of just over €20,000 and in the North – using the exchange rate at the time – of just under €19,000.
There are significant regional variations on both sides of the Border, with Belfast and Dublin best off in the North and the Republic – not surprisingly – and areas such as Donegal and the Border counties on both sides lagging well behind.
A full analysis would require a detailed look at what your money buys you in each jurisdiction, and the wider cost of living. Generally, prices are lower in the North. Also, health insurance would be more prevalent and more expensive in the Republic. Rents and housing prices would be higher south of the Border, too.
Calculations by economists John FitzGerald and Edgar Morgenroth, looking purely at the level of personal spending on consumption, show that on average households in the North actually spent 20 per cent more than their counterparts in the Republic.
This data relates to 2012 and economic growth and the increase in consumption in the Republic have outpaced the North in the meantime, so this gap will have narrowed. But it is still a striking piece of data.
So how does the North produce a lot less economic wealth than the Republic, but still have similar living standards, possibly even allowing households to consume a bit more? The answer is cash from the UK exchequer, which supports incomes and economic activity. One of the key economic questions of the united Ireland debate is how much of this cash would fall to be paid by the Irish exchequer.
2. UK support for the North
The UK supports Northern Ireland via a transfer of cash each year to support government spending. There are various ways of measuring this. The straight transfer of cash via the so-called block grant is more than £11 billion per annum (€12 billion plus at today's exchange rate.)
Separate calculations published by the UK government estimated that the fiscal transfer – when all the pluses and minuses were counted up – came to £9 billion in 2014/15. This is very significant compared with the size of the North’s economy, an estimated 29 per cent of gross value added (a measure of output), according to the UK official figures. Put another way, the deficit per head in the North was around £5,000, compared with £1,750 for the UK as a whole.
Two linked things would determine how this might pan out post-unification. The first is whether all the subsidy would still need to be paid. Work by US congressman Brendan Boyle, which fed into some subsequent economic studies – and by others – has tried to disentangle the spending used to support services in the North from overall UK spending allocated to the North under government accounting but not directly benefiting it. For example the North would be allocated a portion of the cost spending on national defence, UK debt repayment, and so on. Boyle's view was that the direct subsidy – excluding the allocated spending not directly going to the North – is closer to £5 billion-£6 billion per annum
Some studies – such as one by former IMF economist Gunther Thumann and Senator Mark Daly – assume also that the UK continues to pay for public sector pension costs in the North for a period on the basis that these liabilities were accrued under its "watch".
This brings us to the second point, which is whether some arrangement would see the UK continuing to pay some of the costs of the North on a phasing out or tapering basis, a point made by Northern financial commentator and journalist Paul Gosling, who has written in detail on this area.
Would the UK be prepared to do this on the basis of the long-term savings that would accrue? And would any financial support be available from the EU – another point made by Gosling – particularly to increase the level of investment in the North’s economy, a notable weakness which would need to be addressed if private sector growth were to improve.
Part of the move to a united Ireland would probably involve a big cut in public sector jobs in the North – indeed savings here are counted in by some studies. The public sector accounts for around half of the North’s economy, compared with around one-third in the Republic. Again funding such a reduction would carry an initial cost and would be disruptive.
Whatever way the numbers are added up, the scale of the subsidy from the UK exchequer is very significant. The study by Morgenroth and Fitzgerald take a much less optimistic view than Thumann and Daly. They believe that the cost of all this would be very significant for the Republic. The necessary subvention to the North from the Republic would be equal to the fiscal cost of the economic crisis and could lead to a reduction in living standards in the Republic of up to 15 per cent, according to their research.
Given the huge subsidy from the UK to the North, it is hard to avoid the conclusion that there would, indeed, be a significant cost to the Republic’s exchequer. How this would play into any debate on a united Ireland would be interesting.
3 . The economic plus side
So what about the plus side – the potential synergies and advantages from a united economy? Is it reasonable to conclude that even if there were significant fiscal costs, a longer-term economic boost could, at least in time, help to offset these?
A study called Modelling Irish Unification by a Canadian company KLC Consulting estimates significant gains. The North's adoption of the euro would give it a competitive boost, it said, while its adoption of the Republic's tax system – including low corporation tax – and falling trade barriers would boost foreign direct investment and growth. Cross-Border trade would also rise.
All of this would lead to a period of catch-up growth in the North, it said. The report does recognise the cost coming from the cut in UK support, but feels a smaller public sector in the North could allow a more dynamic private sector to emerge. The research estimates that unifying the two economies could lead to gains of between €15 billion and €36 billion over eight years. Under its model, the bulk of these gains would accrue to the North’s economy.
There have been various studies of the benefits of increased cross-Border cooperation, including one by the Joint Oireachtas Committee on Jobs, Enterprise and Innovation in 2016. Sinn Féin has also argued consistently for the economic gains from cooperation and a united Ireland.
However, the scale of benefits in the Modelling Irish Unification report have not been echoed in any other study and appear to take a highly optimistic view of the economic calculus post-unification, the likely speed of "catch-up"of the North's economy, and the prospect of such gains outweighing reduced, or removed, support from the UK exchequer.
Also, the report was completed before the move to Brexit. Post-Brexit, new trade barriers between the North and Britain would presumably follow unification and would need to be factored in as a cost. The North’s economy may also be in for a significant short-term hit, if there is a hard, no-deal version of Brexit.
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The economic calculus of a united Ireland thus comes down to two things. How would the financial gap from the withdrawal of the UK subsidy be filled post-unification? And what economic benefits would unification bring to offset this cost?
Both points are debatable, as we have seen. However, whatever measure of the exact subsidy is assumed, the level of UK support for the North is clearly a massive factor and would lead to significant additional costs post-unification. Estimating this more precisely – and agreeing who would pay for what – would be the starting point of any real unification discussion.
Economic gains would, crucially, require a major restructuring of the North’s economy, massive infrastructural investment, and a very clear strategic plan. Given that this would require cuts in the public sector it would not be painless. There is an argument that the North could engage in the kind of economic catch-up seen in the Republic, with rapid growth for a period, but assuming it would happen easily or quickly seems unwise. Some benefits could come from all-island cooperation and scale in areas such as education and research, but again this would need to be planned and funded and would be relatively limited in scale.
Of course, primarily this is a political question. But the economics of it are important too. The bottom line is that the North’s economy is currently financially reliant on the UK exchequer.
The first question to answer is who would pay the bills in future. There is no ducking this. And the second is whether a realistic plan could be put in place to reinvigorate the North’s economy and increase activity and thus taxes in the years ahead. Assuming that everything will be okay is not an option. Interestingly, these now seem like a relevant debate in the light of Brexit, rather than just a hypothetical exercise.
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