Subscriber OnlyEconomy

North’s ailing economy explains the high cost of unification

Regardless of the terms of disengagement by UK in any unification, there is no magic economic pill to bring NI up to standards down South

The cost of a united Ireland is – unsurprisingly – as contested as the politics. In a study last week, economists John FitzGerald and Edgar Morgenroth ruffled nationalist feathers by putting the bill for reunification at a hefty €20 billion a year for 20 years.

The figure is nearly double Northern Ireland’s annual fiscal deficit (or subvention), the gap between what it spends and what it collects in taxes. The latter typically runs at a rate of £10 billion (€11.6 billion) per annum.

It is the starting point for most discussions about the cost of reunification but Dublin City University (DCU) academic John Doyle, who disputes FitzGerald and Morgenroth’s findings, believes the subvention number is merely a UK accounting exercise.

We don’t, for instance, assess Donegal or Leitrim’s relative economic performance on the back of the annual transfers they get from the Irish exchequer. Regional transfers are part and parcel of any developed economy, a point that is acknowledged in FitzGerald and Morgenroth’s study.

According to the UK’s Office for National Statistics (ONS), Northern Ireland was one of nine UK regions to have a fiscal deficit in 2019. The northwest, which includes Cumbria and the Greater Manchester area, had the biggest (£20.2 billion) followed by the West Midlands (£15 billion), Wales (£13.5 billion) and Scotland (£13.5 billion).

Only three regions were net contributors to the UK exchequer in 2019: London, the southeast and the east of England.

Doyle, in any case, insists that not all of the North’s subvention or fiscal deficit would necessarily travel with it into a new unified administration. In a 2021 study, he suggests the bill could be as low as £2-£4 billion on the assumptions that the UK would still underwrite pensions in Northern Ireland, on the grounds that the North could walk away from its prorata share of UK debt and because its defence budget would be considerably smaller.

Who can say what would happen in reality. Might London continue to pay the North’s pensions and/or waive its national debt burden in an act of goodwill? FitzGerald and Morgenroth note that Scotland, if it had voted for independence in 2014, would have exited with an agreed share of UK debt.

In the event of Irish unification, it would be difficult to postpone such a standardisation of rates across a united Ireland for long

—  John FitzGerald and Edgar Morgenroth study

“This reflects the fact that it is normal when a country breaks up in a negotiated manner that assets and liabilities are shared among the two new jurisdictions,” their study says.

The other reason they see the reunification bill being so large (effectively double the level of subvention) stems from the “rerating” of welfare payments and public sector pay rates in Northern Ireland to align them with those in the South.

“In the event of Irish unification, it would be difficult to postpone such a standardisation of rates across a united Ireland for long,” they say. However, Germany after reunification took three decades to equalise its welfare and public sector wage rates.

There are big disparities between the two welfare systems on this island. The standard unemployment payment in the Republic is €232 versus £85 (€99) in the North while the Republic’s contributory pension is €277 versus £204 (€238) in the North. Shouldering this “rerating” burden would require a “dramatic increase in taxation and/or a major reduction in expenditure”, FitzGerald and Morgenroth conclude.

The debate will rumble on. Academic focus on the cost of Irish reunification appears to have been rekindled by Brexit and the North’s in-out position.

The studies seem to presume, however, that reunification would take the form of a single unified administration effectively absorbing the North, something that would seem too big a jump even for unionists not averse to an all-island economy. In reality, a united Ireland is more likely to involve – initially anyway – some sort of federalised structure with the North and South still largely managing their own affairs.

What FitzGerald and Morgenroth’s study reveals, above all else, is the poor state of the North’s economy and how little it has prospered since the Belfast Agreement of 1998, which was meant to signal a new start. The level of foreign direct investment (FDI) in the North is largely unchanged since the agreement. The North’s public sector is oversized while its underperforming private sector delivers wages that are (even without the multinational component) significantly lower than those enjoyed in the Republic.

A report last year noted that Northern Ireland’s GDP per capita, a measure of productivity, which was 20 per cent lower than the UK’s overall rate at the time of the 1998 agreement is now 21 per cent lower, meaning it has little to show by way of a peace dividend.

The UK economy is more centralised around its capital than most and Northern Ireland, Wales and other regions are victims of that, hence former UK prime minister Boris Johnson’s “levelling up” agenda.

Nationalists hang their hat on the North’s economy performing better under the Republic’s low corporate tax rate; its unfettered access to the EU’s single market and its more stable regulatory regime (the UK’s post-Brexit regulatory position versus Brussels remains unclear).

This is plausible given the North’s economic performance to date but the costs of integration and the politics surrounding it make it an unlikely prospect any time soon.

Read More