Sustaining Northern standard of living is a costly exercise

In December, the Northern Ireland Statistical Office (NISRA) published new data for the North which provide a better picture of the structure of its economy, facilitating comparisons with similar data for the UK as a whole and for Ireland.

In terms of standard of living, international comparisons are normally made using GDP per head of population (GNP in the case of Ireland) adjusted for differences in price level. On this basis Ireland and the UK were at very similar levels in 2012, while Northern Ireland had a GDP per head that was about 80 per cent of that of Ireland or the UK.

However, a much better measure of the day-to-day standard of living of the population is the level of total consumption per head, adding together what is consumed by households and the state’s provision of education, health and security. This alternative measure of living standards shows a very different picture.

In 2012, on the basis of total consumption per head, Northern Ireland and Scotland had a very similar standard of living to the UK as a whole. On this basis the standard of living in the Republic was only 85 per cent of that enjoyed by people living in the UK and its regions.

Better public services

Digging a bit deeper into the data, it becomes clear that this difference in living standards does not arise from differences in household consumption – Ireland and Northern Ireland are at similar levels.

It is in the sphere of public services, such as health and education, that there is a striking difference between Northern Ireland and the Republic. In Northern Ireland expenditure on public services is much more generous than in the UK as a whole. Compared to the Republic, spending on public services in the North per head is more than 50 per cent more generous, notwithstanding that social welfare benefits are typically lower per head.

While some of this is accounted for by substantially higher expenditure on security, and having parallel state and denominational educational systems, it still reflects a much more generous provision of public goods than in Ireland, but also than in the rest of the UK. The National Health Service is one of the most visible differences compared to the South.

This elevated standard of living in Northern Ireland is funded by a very large transfer from government in London. In 2013-14 this transfer amounted to more than a quarter of Northern Ireland’s GDP.

In a study last year by a Canadian firm, KLC consulting, the possible long-term economic effects of Irish unification were modelled.

However, somewhat bizarrely, a central assumption of the study was that “unification would require that this deficit be financed and assumed by the Republic of Ireland”. Such a blithe assumption takes no account of the sheer magnitude of the funding gap in Northern Ireland – in 2013-14 it amounted to the equivalent of about 8 per cent of GNP in the Republic.

For Ireland to fund such a deficit through raising taxes would require a repeat of the austerity of the past seven years, reducing Irish GNP by at least 6 per cent and household consumption in the Republic by almost 15 per cent.

These sacrifices would be required to maintain the standard of living in Northern Ireland, which is already higher than in the Republic. Such an imposition on the population of the Republic would not be possible politically or economically.

The alternative scenario, where Northern Ireland would balance its own budget, would require dramatically greater cuts in the standard of living in Northern Ireland, something that would cause massive pain for the people who chose to stay there.

Standard of living

The history of the Northern economy, since the Good Friday agreement, is that there has been little progress in transforming it into a self-sufficient economy, which could sustain the standard of living currently supported through transfers from London.

To grow, normal economies need to invest 20 per cent or more of GDP. However, in the North the large transfer is being used to maintain current consumption; investment languishes at about 10 per cent of GDP.

Unless there is a major reallocation of resources in Northern Ireland towards building a vibrant self-sustaining economy, it will remain vulnerable to policy changes in London.

Brexit could be the trigger which might force a reassessment of such transfers, within what might end up being a smaller United Kingdom. Let us hope that neither Brexit, nor such a change of policy, happens any time soon. Whatever the outcome, Irish unity is off the cards for the foreseeable future.