Cost of Irish reunification overblown and benefit underplayed

The ARINS/Irish Times surveys published last December suggested that perceptions of the economics of reunification will affect some voters in future referendums. Currently Northern Protestants are pessimistic, Northern nationalists optimistic, while a majority of Southerners believe there will be short-run costs but long-run benefits.

Some intellectuals, by contrast, are outright doomsters.

In Oliver Goldsmith’s The Deserted Village the “boding tremblers” feared reading “the day’s disasters” in the morning face of their schoolmaster. Today’s boding tremblers are told to fear decades of disaster in accounting notes from economists John FitzGerald and Edgar Morgenroth. Their suggestion implies that Irish reunification will lead to the mutual ruin of the North and the South.

In their IIEA report titled “Northern Ireland Subvention: Possible Unification Effects”, FitzGerald and Morgenroth focus on two fears: the possible transfer of the bulk of the UK’s current “subvention” of Northern Ireland to Ireland as a whole, including Northern Ireland’s imputed share of UK public debt; and the cost of increasing currently lower public sector wages, pensions, and benefits in the North to match those in the Republic.

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Our view is much more positive, on evidence of work published under the auspices of ARINS (Analyzing and Researching Ireland North and South). And our view is more political – in a positive sense.

Subverting the subvention

The “subvention” is the UK’s official estimate of the gap between what is allegedly raised in taxation and what is allegedly public expenditure in the North. Our use of allegedly is deliberate.

It is widely accepted, including by FitzGerald and Morgenroth, that the UK estimates undercount what is raised in taxation in the North because many firms report their Corporation tax and VAT receipts to London, at their headquarters.

On the other side of the ledger, the UK estimates overcount public expenditure in Northern Ireland because they include a measure of average public expenditure per head across the whole of the UK, and then impute a share to Northern Ireland – though such monies may not be spent there.

We are not claiming that there is no subvention, but it should be decomposed and exposed to strong light. The residue when that is done, is much, much less.

The largest single element of the actual subvention is the cost of public pensions, perhaps £3.5 billion per year. But Ireland has no liability for UK public pensions incurred before the appointed day on which reunification occurs. The UK does.

People who have worked part or all of their working life in the UK, but who live in the Republic, Spain, or the US, currently receive their UK public pensions, according to the number of years they worked and contributed.

The doomsters fear that no law obliges the UK to pay public pensions, funded out of current governmental revenues or borrowing – but for which people have paid national insurance contributions. This fear should cause no one to go weak at the knees.

The UK Parliament can legislate as it pleases, without constitutional constraint, but the UK has been in the habit of paying its citizens their pensions. Those born in Northern Ireland are British citizens, or Irish citizens, or both, under the provisions of the Good Friday Agreement, and may remain so. That agreement is entrenched in two treaties – the original British-Irish Agreement (1999), and the EU-UK Withdrawal Agreement (2020).

The most ardent anglophobe, scouting the horizon for Albion’s next perfidious act, must acknowledge that the UK is paying its debts, including its pension debts, to the European Union. The fear of non-payment of pension obligations is a mistaken anxiety.

Terminating payments of UK public pensions for former veterans, police, nurses, and teachers with full British citizenship rights would have devastating reputational disadvantages. It would be political folly.

The reasonable conclusion is that those receiving UK pensions would continue to do so the day after unification. And for those in work in Northern Ireland, on the appointed day, their future public pensions would be determined by their past UK contributions (for which they would get a future UK pension, if they have paid sufficient contributions) and their Irish contributions to an Irish pension going forward.

The next largest subvention item is Northern Ireland’s imputed share of the UK’s national debt, estimated at £1.6b per annum.

The UK, however, is legally responsible for the UK’s debts, eg, to bondholders. Not Northern Ireland, and not a united Ireland. If the UK tries to insist in future negotiations that Northern Ireland’s share of its debts should be transferred, then Ireland can simply refuse. No provision in the Good Friday Agreement obliges Ireland to accept any UK debt in the event of unification.

The IIEA report claims that the debts and assets of the USSR were divided up between the various post-Soviet states. That is misleadingly inaccurate, but we don’t suggest this big mistake was deliberate. The Russian Federation actually agreed to accept responsibility for the entirety of Soviet debt; and all the other ex-Soviet republics began life debt-free. Among other reasons, Russia agreed this settlement to confirm its “successor status” to the USSR, and to keep its UN Security Council seat. We suspect Great Britain will be keen to keep its successor status to the UKGBNI.

The doomsters also make too much of past UK history. In 1921 Ireland was negotiating its secession under duress from the UK, and in 2014 the SNP was negotiating the right to hold a referendum on independence. Debt was part of these negotiations because the London government had the power to insist upon it.

Under the Good Friday Agreement, majorities, north and south, determine whether there will be a united Ireland. No qualifying phrase states, “subject to debt discussions.” The Agreement is enshrined in UK law, and in international treaties – including that recently ratified between the UK and the EU, with which the UK wants better relations.

These observations reveal how doomsters underestimate Ireland’s future bargaining power.

Imagine a Westminster government threatens the public pensions of the Northern Irish unless it gets “its debt” repaid. One of Ireland’s immediate responses would be: if you insist that we accept Northern Ireland’s share of UK debt, then Northern Ireland must also receive its full proportionate share of UK public assets, eg, future North Sea oil royalties and tax revenues, the capital value of all public properties, the assets of the royal family, public assets held outside these islands, and Northern Ireland’s share of all public art held in Great Britain.

Another would be to call in aid our US and EU friends, and observe the UK’s legal failure to permit the exercise of Irish self-determination, North and South, “without external impediment.”

We believe the rational UK option will be that of the Russian Federation, the “zero-option.” Immobile assets will stay where they are, and existing debts will stay with the relevant sovereign government. That will ease future relations between Great Britain and Ireland, and UK relations with the EU and Irish America.

The third largest item in estimates of the subvention is Northern Ireland’s imputed share of the UK’s defence budget, over £1 billion pa. But UK defence expenditure – including nuclear weapons, naval bases, army camps, air force bases, and the salaries of soldiers, sailors, pilots, and Ministry of Defence officials – is overwhelmingly incurred in Great Britain or UK bases outside these islands.

Under Irish unification, there will not be anything like the future level of defence spending in Northern Ireland imputed in the subvention estimates.

In calculating the subvention Northern Ireland is allocated an implied contribution to the costs of government departments providing UK-wide services. These offices, however, are overwhelmingly based in England, and taxes paid by their employees are credited to the English region in which they work or live. In a united Ireland the taxes of equivalent employees would be paid in Ireland.

The real subvention of the North required under unification will therefore be radically less than FitzGerald and Morgenroth imply. We do not have to accept their pessimistic arithmetic or assume that Ireland must fold like a weakling in negotiations over the transfer of sovereignty.

Costs and benefits of transition

FitzGerald and Morgenroth honestly declare that in their IIEA note, “no account is taken of the wider effects of Irish unification.” We agree. Their “Note” is confined to adding the costs of hiking public sector wage bills in the North and upgrading Northern welfare benefits to their worst-case scenario on pensions and debts.

Mike Tomlinson’s recent ARINS contribution explored the impact of Northern Ireland joining the tax and social security system of the Republic. He estimated that the average employee at every income level up to the 70th decile (ie, except the 30 per cent of highest earners) would have between €12 and €19 per week in additional take-home pay – primarily because of lower social security/PRSI payments by low to middle income earners. However, the state would still collect €769 million more income annually because of higher taxes on higher earners and greater employer contributions to social security.

Collectively these adjustments, and other minor savings, would reduce the annual subvention of the North by the rest of Ireland on day one of a united Ireland to around €1.3 billion. The figure would rise to €4.8 billion if and only if the UK reneges on its pension responsibilities, which we have just suggested is unlikely.

There will of course be transitional costs attached to unification – and the public in the Republic know that; and it is willing to invest portions of budgetary surpluses in Irish sovereign wealth funds to prepare for such costs. It should be possible, in the time available before reunification referendums, to build sufficient capacity in an Irish sovereign wealth fund to address these costs, an idea to which ARINS surveys show the public is open.

Moreover, the calculations in the IIEA note seem to include the full cost, before tax, of increasing public service salaries in the North to the higher southern levels, without any allowance for taxes collected from Northerners. However sums from those taxed at the higher rate, along with all-island PRSI, USC and pension contributions, would offset some of the costs – we believe as much as half of the amount suggested.

Dynamic considerations

In any case, the economics of Irish unification is not just a matter of arithmetic accounting and the transfer of liabilities (and assets), as all professional economists know.

The key question is whether a united Ireland will be a more dynamic economy for all of Ireland, ie, including Northern Ireland. In comparison to a Northern region that stays in the UK (outside the EU)—'shackled to a corpse,’ as the Brexiteers used to say.

Currently, the North’s economy, especially its private sector, is much weaker than the Republic’s. But comparatively it is in better shape than East Germany was in 1990, and the Republic, however we measure matters, is significantly richer per head than West Germany was in 1990.

Jobs based on Foreign Direct Investment in the North are a fifth of the level in the South, after allowing for population size. Tourism revenues are at a similarly low level. Adel Bergin and Seamus McGuinness have shown that productivity levels per worker, the main driver of wage levels, were very similar North and South in 1998, but are now forty per cent higher in the Republic (even allowing for the distorting impact of the multinational sector).

We should all agree with FitzGerald and Morgenroth that better educational and skills attainments, more foreign investment, EU membership, and sustained political stability help explain the growing North-South gap in economic performance, and between Ireland and all regions in Great Britain outside London. We should also agree that the North’s economic performance can improve before unification.

But we should also ask: are the people of the North incapable of catching up on the performance of the Republic – under the same laws and incentives?

It is not hyper-optimistic to believe that if reunification extended demonstrably successful Southern economic and educational policies across the island, then Northern Ireland would benefit, with or without a devolved government. If the North’s economy begins to be like that of Cork and Kerry, private sector wage levels and tax revenues would rise, and after transition, pay its own way.

There may be other benefits: Belfast is still large enough to become a high-performing second city again, relieving congestion inside the M50. The West and Northwest will be more attractive regions for development without any border, or border functions. Long-limited all-island market integration should see a step-up in performance.

In short, it rational to believe that the whole island will benefit from the Republic’s policies in the long term. Yes, there will be uneven development – there always is. But redistribution, done properly, will be from rich to middle and poor, not from the South to the North.

The costs of unification are therefore overdone, and the benefits often underplayed.

Doomsters should be free to dislike the prospect of a united Ireland, but, on current evidence, they are not right to suggest it is likely to lead to the mutual ruin of the North and South.

The manufacture of “boding tremblers” should give way to the mature preparation required by current and future Governments of Ireland.

That will include deciding what health service system(s) to apply in the event of unification (and before). We suspect that health economics will matter more in deciding future referendums and the trajectory of reunification than anything related to the subvention, pensions, and debt.

John Doyle is Professor of Politics and Vice President for Research at Dublin City University.

Brendan O’Leary is Lauder Professor of Political Science at the University of Pennsylvania. The paperback edition of his Making Sense of a United Ireland is published in May.

The authors are founding members of the ARINS project (Analyzing and Researching Ireland North and South), a joint initiative of the Royal Irish Academy and the University of Notre Dame. Not all members of ARINS favour Irish reunification, but some do.