Northern Ireland’s £9.4bn subvention and the cost of Irish unity

The level of subvention Northern Ireland receives from the UK exchequer has become, like so many things in the North, politicised. It is regularly – and spuriously – conflated with the economic cost of a united Ireland, which is an entirely different concept.

In reality, the transfers that go from London to Belfast each year – they amounted to £9.4 billion (€10.8 billion) in 2019 – merely reflect the North's annual budget deficit, the difference between what it raises in taxes and what it spends.

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).

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London, the southeast and the east of England had fiscal surpluses of £38.7 billion, £21.7 billion and £4 billion respectively and were therefore net contributors to the UK exchequer.

A question regularly posed is how much of the North’s deficit – presuming it continues – would fall on the shoulders of any new all-island administration in the event of a united Ireland.

A new study by Dublin City University (DCU) academic John Doyle concludes that as little as £2-£3 billion (€2.3-€3.5 billion) of the £9.4 billion would carry over into an all-Ireland entity.

Spending

His paper, which will be published in June in the academic journal Irish Studies in International Affairs as part of The Analysing and Researching Ireland North and South (Arins) project, unpacks the various components involved.

It notes that the North’s annual subvention is dictated by three financial flows: taxes raised in Northern Ireland; expenditure spent in Northern Ireland; and also – crucially – expenditure spent on Northern Ireland or the North’s share of UK-wide spending.

The single largest element of the subvention in 2019 was £3.4 billion in pension payments paid by the British state to pensioners in Northern Ireland.

While the UK could theoretically walk away from this obligation in the context of a united Ireland, there is no reason to assume it would as the pensions are based on contributions made to the UK exchequer.

The UK currently pays pensions to a number of people in the Republic who have previously worked in the UK. It also signed up to pay its share of liabilities for the pensions of EU civil servants as part of the recent Brexit negotiations.

So while a new all-island administration would be liable for pensions going forward, it wouldn’t necessarily be liable for existing ones, Doyle’s study contends.

National debt

Another sizeable component of the subvention relates to the North’s share of the UK’s national debt and the annual repayments arising from it. This was put at £2.4 billion in 2019. But this is largely an accounting exercise as the North hasn’t contributed to the UK’s debt liability for decades.

The UK treasury could, in theory, seek a contribution as part of an agreed settlement – based on a presumed liability for the North – but there’s no precedent for this and it is legally the UK’s debt.

The Republic was allowed to exit the UK to form the Irish Free State in the 1920s debt free.

Equally if the UK sought a contribution, a new Irish administration could, in theory, argue that it is entitled to a share of UK assets as a quid pro quo.

Another element of the subvention relates to defence spending, which was £1.1 billion in 2019. Most of this isn't actual spending on defence in Northern Ireland but the North's share of UK's defence budget, much of which relates to its Trident nuclear programme and the cost of the Afghanistan war. It is calculated on a pro-rata basis.

Doyle’s study assumes a new all-Ireland administration would not spend anything near this amount on the basis that the Republic’s defence spend is just €1.1 billion.

When these payments – and the additional corporation tax that would accrue from businesses in Northern Ireland – are factored in, the North’s annual subvention falls by about £7 billion, the study concludes.

“The cost of the subvention objectively – in terms of what is relevant to the debate about Irish unity – is no more than £2-£3 billion,” Doyle says.

Economic cost

That, of course, doesn’t mean that the economic cost of a united Ireland is £2-£3 billion. The economic cost, or benefit, of a united Ireland is predicated on an entirely different set of variables and performance criteria and would be impossible to determine without knowing the sort of political entity that might preside.

In many ways, the North's subvention is a red herring in the debate about Irish unity. All economies are centralised around richer, more industrialised parts and the UK is no different. Dublin is wealthier than Connemara or Leitrim, but we don't view the Republic's economy through the prism of Dublin's surplus versus Connemara's or Leitrim's deficit.

What the North’s subvention level and the ONS figures show is that Northern Ireland as a region of the UK has not prospered economically. It is consistently the poorest region of the UK.

More worryingly, it has fallen further behind the rest of the UK since the 1998 peace accord, which many believed would bring an economic dividend to the region.