THE ECONOMICS OF IRISH UNITY
Just as the Covid-19 crisis challenged the healthcare system in both jurisdictions, it altered the narrative about the policies required for the recovery of the economy and the prospect for a united or shared Ireland in the future. By almost every measurement, the standard of living for people in the South is better than for those in Northern Ireland. That was not always the case, but over recent decades, life expectancy, average incomes, educational achievement and productivity in the South have considerably exceeded those in the North. Until 2005, life expectancy in the North was greater than in the South. By 2015, according to 2020 data from Ireland’s Economics and Social Research Institute (ESRI), the people in the South were living longer and the gap in life expectancy was getting wider. By 2018, based on OECD estimates, women in the South were expected to live 1.5 years longer than those in the North, and men 1.4 years.
With an annual national output of over €360 billion, the economy of the South is over six times that of the North, which produces about £60 billion each year. The population of the South has reached 5 million people, compared to 1.9 million in the North (just 2.9 per cent of the UK), and has a vibrant, open economy, notwithstanding the economic damage inflicted by the recession and Covid-19.
On average, the people of the South produce and earn significantly more than those in the North, and the disparity is growing year on year. In 1911, Belfast had a bigger population than Dublin, had a larger industrial workforce and was a substantially bigger producer of goods and services. As noted in Bob Rowthorn’s 1981 essay ‘Northern Ireland: an economy in crisis’, until the 1930s, the North was a net contributor to the UK economy and substantially wealthier, per head of population, than the new state in the South.
Since before the 1970s and the onset of the Troubles, the North has become one of the poorest regions in the UK and is hugely dependent on the annual subvention it receives from the British government to manage its public services. In the 1980s, 52 per cent of workers were employed in the public sector, including many in the police and prison service as the conflict intensified, compared to an equivalent figure of 22 per cent in the UK. According to the ESRI, unemployment rates reached 20 per cent (and over 30 per cent in Catholic or nationalist areas) as the North fell behind other regions across the UK.
The economy in the South went through recession with high unemployment rates in the 1980s, but its dramatic recovery and expansion in the following decade was not matched by the North. In the decades following the GFA in 1998, the growth rate in the North was less than a quarter of that in the more prosperous southern and eastern region of the Republic where 75 per cent of its people lived. Instead, it was closer to the poorest Border, Midlands and Western (BMW) region in the South with its 25 per cent of the population.
Foreign direct investment (FDI) by multinational corporations that produce high value goods for export has contributed to the stronger economic growth and productivity of the South, particularly since the late 1990s. The tax rate of 12.5 per cent and other generous incentives that allowed multinational companies to avoid paying the full tax levy, have also drawn FDI to the South. The increase of the rate to 15 per cent, as proposed by the Organisation for Economic Co-operation and Development (OECD), along with action to eliminate the methods used by corporates to minimise their tax liabilities to other states, will reduce the annual, and disproportionate, contribution of international capital to the exchequer. As the South is the only English-speaking country in the EU since Brexit, however, its economy is likely to benefit from continued FDI that otherwise might have gone to the UK if it had remained in the trading bloc.
Rising standards in education, the English-speaking workforce and access to the EU market of 400 million consumers, have been key factors in the attraction of FDI into the South. Conversely, lower educational attainment has acted as a deterrent to high-skilled, high-value, export-oriented investment to the North, which contributes to the unfavourable comparison with the South in relation to gross domestic product (GDP) per capita. OECD estimates in 2018 showed that GDP per capita was $85,100 in the South and $36,700 in the North before the adjustment for the multinationals. After removing the influence of FDI from the accounts, GDP per capita was $51,900 for the South and $34,300 for the North. ESRI figures show that disposable household income, the money that families on average have to spend each year after essential costs are met, is also significantly different at $34,000 in the South and $29,400 in the North, a gap of $4,600, or 12 per cent, per household.
The subvention is the difference between the revenue raised and expenditure in the North in any year. It is provided by the government in Westminster, which sets and collects tax from citizens in the North. Expenditure is controlled by the UK government, which effectively decides how much is spent on public services, including health, education, social welfare, local government and security.
For many years, the debate on the cost of Irish unity focused on the issue of the subvention and whether the Irish exchequer could afford the estimated €10 billion that it costs the British government each year to run the North. In the years since the GFA, the subvention increased from less than £6.2 billion in 2002 to just under £9.2 billion in 2018. Even at £10 billon, the subvention is only a fraction of the overall value of the Irish economy and amounts to less than 2.5 per cent of annual output of the South. Adjusting for the distorting influence of the multinationals, the subvention remains at less than 5 per cent of the total value of the economy in the South.
The subvention covers costs that will not become liabilities on the Irish exchequer after unification, including UK defence spending, debt interest payments and diplomatic and other international services which, along with other expenditures, could amount to 26 per cent of the total. These are non-identifiable items of current expenditure, which are estimates of the regional contribution of the North to wider UK spending and will not constitute part of the costs to the new Irish state of administration after unification.
Further, the UK will remain liable – morally, if not legally – for the cost of pensions it administered and to which generations of workers paid contributions over their lives in the North. According to the UK treasury, expenditure on pensions for public service workers in the North was £3.2 billion in 2017. During the debate on independence in advance of the 2014 referendum in Scotland, the UK government publicly conceded that it would continue to bear the costs of public sector pensions owed to retired workers there. Similarly, the EU took responsibility for the pensions of British citizens who worked for it before the UK exit in 2016.
Removing these liabilities will reduce the cost to the new Irish exchequer of replacing the subvention even further. These and other subvention-related factors – including the level of UK debt assigned to the North and what assets would be shared by the British – make it difficult to assess the real cost of unification to the Irish people. However, removing these liabilities will reduce the subvention to less than £5 billion from the current estimated cost of £9.2 billion and potentially much lower.
The cost of the subvention is relatively insignificant in relation to the overall finances of the Irish state, notwithstanding the legacy of debt which is outstanding from the financial crisis of 2009–2011 and the Covid-19 pandemic. It is evident that low productivity levels in the North created the necessity for the subvention in the first place. Rather than an argument for how well the North is faring, the subvention is, rather, a reflection of its economic failures and dependence.
It can also be argued that the economic and human cost of partition has greatly exceeded the cost of the subvention. From its formation in 1921, the Irish state struggled financially to survive and hundreds of thousands of people left the country in successive waves of emigration over the decades. The reality, of course, is that financial negotiations between Ireland and Britain following a vote in favour of unity could take several years and will, more than likely, involve a transition period during which operational and fiscal responsibilities would be gradually transferred. As ESRI economists Seamus McGuinness and Adele Bergin explain:
A key aspect of the current debate around a border poll relates to the potential cost of reunification. We conclude that it is difficult to be specific about this as it is determined by a number of unknowns, including the length and nature of any adjustment or transition period, the relative role of both governments during that transition period in addressing some of the key issues … in reforming educational, industrial and regional policy, the relative success of such policies in raising NI productivity levels, the role and significance of the EU and USA in potentially reintegrating post-Brexit NI into the EU and assisting and promoting FDI to the region and the outcome of discussion on the issues of debt, assets and pension obligations.
As a result of the decision by the European Council of Ministers in 2017, a reunified Ireland would be a full member of the EU, which will have a stake and direct involvement in the financial and transitional arrangements and negotiations following the transfer of sovereignty from Britain. It can also be assumed that the US government – which helped to broker the GFA, has remained committed to its terms and conditions and has major economic interests on the island – will contribute financially to the new state following unity.
There will be a range of other economic returns from unification, not least the economies of scale that can be achieved from managing a society and economy of almost 7 million rather than two separate administrations of government. Further investment in integrated transport, energy, broadband and other infrastructural networks, particularly in depressed and previously divided border economies, can yield major advances in productivity levels and generate increased trade, business and employment across the island, as well as improving tax revenues.
The experience in other countries, notably of Germany in 1990, has confirmed the potential for a dramatic boost in the value of goods and services produced (the GDP) in the wake of unification. Canadian firm KL Consulting, along with academics from the University of British Columbia, estimated in 2016 that a unified Irish economy could generate an additional €35.6 billion in GDP within eight years of unification.
According to Intertrade Ireland, cross-border trade between small-and medium-sized enterprises in 2018 was valued at £6.5 billion, while the number of businesses trading between North and South was already higher than those between the North and the UK.
Economist and columnist David McWilliams said that preparations should be made for a referendum on Irish unity in order to release the potential of an all-island economy and revive the fortunes of what was once a thriving industrial centre in the north-east. When the two states were formed in 1921, one was heavily industrialised, with much better levels of education. The balance sheet 100 years later shows the complete failure of the North, which was twice as rich per head as the South in 1921 and is now twice as poor. The economy of the South is now six-to-eight times bigger on a GDP basis. Like many parts of the United Kingdom, the North has become infantilised by Westminster, McWilliams said in an interview with this writer:
Only a country that issues its own bonds is an adult country. By that I mean, when you go out to the market and the Republic of Ireland says we want to borrow €20 billion tomorrow and the market says, ok this is your rating, you have an adult conversation.
If you look at what is happening to Wales and Scotland and, of course, Northern Ireland in the context of the United Kingdom, there’s an infantilisation of economics. The economy becomes a game of ‘How much dole can I get?’ The unfortunate thing is the answer to the union now, the only answer they have is, ‘We will get more dole’ and that is not a long-term way of living.
Northern Ireland is a concubine economy, it exists to service and favour the central government of the union, and it’s really, really bad for it. It’s really bad for Scotland and Wales too. The United Kingdom is a series of regions which are dependent on the largesse of London.
Married to Sian, who is from a Protestant and unionist background in the North, McWilliams has witnessed over recent decades the steady withdrawal of younger, middle-class people from the unionist community:
For the first 25 years of Northern Ireland’s existence it was a net contributor [to the UK exchequer] so it was richer. Now what I see is this constant brain drain of my Protestant-born friends from the North and this unwillingness or a lack of interest in building a society there. They end up in Newcastle, Bristol and other parts of England and they don’t come back. The Northern Prods, the middle-class ones just disappear.
In relation to the subvention, McWilliams agreed that it is minuscule in the context of the economy in the South:
It’s about 4 per cent of Irish GDP, it’s not a big deal. You could raise a bond for that in the morning, you could raise today a perpetual bond to finance Northern Ireland for the next 100 years. Money is the least of the problems with the new Ireland. Money is never the problem. And it’s not a lot of money. It’s only peanuts in a €400 billion economy.
Taking the example of transport strategy, McWilliams said that it is possible to develop a mental map of what a new Ireland could be like following a referendum on unity:
What is very important when you conceive of a new idea and a new country is new geography. What partition has been extremely good at is creating an unusual mind map in our minds of what Ireland looks like. For example, the idea of a Derry-to-Cork connection is abstract to most people. Whereas if you asked an Italian about a Milan-to-Naples connection, it would be something they can picture in their heads. They can picture the roads, the trains, how you get from A to B. In the same way in the UK: from Newcastle to London, people can picture it. The most unusual thing about Ireland is that our mind map of what our country looks like has been totally contaminated by the border.
The destruction of the railway network accelerated the process of rural decline in both jurisdictions and, along with the border, cut off large swathes of the west and north-west from their natural urban hinterlands. McWilliams continued:
I don’t think I’ve ever heard of an Irish person in my life talking about a road trip from Derry to Cork. When you change the transport infrastructure, it forces upon people a new mental map of what the country looks like. If I were in power, the first thing I would do is move Dublin and Belfast port simultaneously to a port somewhere around Drogheda. Unification has to be something real so you have to say, ‘We are preparing for this.’
In the future, the Belfast–Dublin conurbation will be home to more than half the people on the island. If you draw a line from around Wicklow town straight up to Ballymena and in from the sea around 20 miles, that corridor is going to be home to half the population. Your infrastructural thought has to go into that. Then you deal with the western corridor, which is Derry to Cork and west of that. Transport systems are much more than ways of travelling from A to B, they’re actually extraordinarily unifying maps of how the country should look.
Partition has been very successful in dividing the economy as an entity and I think from that, everything else flows. Dublin and Belfast should be trading with each other every day but are not and Belfast should be trading with the likes of Cork but it’s not, so all we have is this Dublin–Cork nexus. It strikes me that in the course of this new Ireland there will be a re-balancing, a more logical economy. The all-island economy is not as big as it should be and that’s a function of the fact that the Northern Irish economy is totally and utterly dependent on the UK economy. Meanwhile, the North has yet to recover from decades of conflict and the destruction of many small businesses.
Don’t underestimate how much the Northern small business [model] was destroyed by the Troubles. It was destroyed intentionally and wantonly and that takes a long, long time to get over. But business has always been a much more revolutionary and incendiary part of the political infrastructure and it does recover.
McWilliams predicted that there will be an all-island economy of eight million people by 2050, richer than the some of the wealthier regions of the UK:
This will be an economy much richer than Manchester, much richer than many regions in the UK. If it adopts the growth model of the Republic, there’s no reason to believe that it cannot compete and almost become like Connecticut or Massachusetts in the United States: a reasonably well-off part of the world which is centrist or maybe left of centre in its feel and is a successful civilised country.
What we have is a story that is potentially the most interesting economic political story in Europe. There are more immigrants on the island than there are unionists. At most, the unionist population will constitute about 18 per cent of the entire (all-island) entity. This is not something to be afraid of. This is something to be worked with. I do happen to think that the model should be Switzerland. There are three big cultures in one country, and they don’t particularly like each other, and they’ve remained very separate as cultural entities for many hundreds of years and the way in which they have lived together is profoundly devolved direct democracy. That’s the way we’ve got to go, so the people in north Antrim who feel very threatened by this [unity] idea, should be given the opportunity to almost rule themselves.