When a region leaves a country to form its own independent unit, it’s usually a divorce centred on political issues. The issue of a financial agreement may be low among the priorities of all involved. Nevertheless, as when Ireland split from the UK a century ago, there always has to be a financial settlement eventually. In most cases, such settlements have involved a sharing of historic liabilities and assets.
At one extreme, for countries such as Finland and Estonia that separated from Russia after the revolution of 1917, the financial issues were simplified by the fact that the new Soviet Union defaulted on Russia’s debts. There was no settlement made providing for agreed legacy debts to be shouldered by the newly independent states.
The more usual experience over the past century and a half has been that assets and liabilities are shared between the parting entities in an agreed divorce settlement. An early example was when West Virginia split off from Virginia during the American Civil War, although it took until 1911 for the finalisation of the financial deal, when the US Supreme Court assigned West Virginia responsibility for one third of the historic debt.
In the 1921 Treaty, Ireland signed up to take a share of the large UK debt, but the exact share was to be determined later. Initially, the Free State adopted the ostrich approach of ignoring the problem, hoping to postpone indefinitely a final resolution. However, matters came to a head in November 1925, following the leak of the controversial Boundary Commission report, which would have made minimal changes to the Border.
In a series of meetings in November and December 1925 between Dublin and London, the Irish side first sought a more favourable redrawing of the Border. When that went nowhere, they looked for measures that would protect the rights of Catholics in Northern Ireland.
In response, the Northern Ireland premier, James Craig, suggested that negotiations might focus instead on easing Ireland’s debt to the UK under the terms of the Treaty. Discussions began immediately with Winston Churchill in the treasury and this change in objectives eased the pressure on Stormont to introduce reforms.
Initially, the UK sought a large payment from Ireland, worth 80 per cent to 100 per cent of national income, a sum that would have crippled the Free State economy. However, after the Irish side left the negotiations for the day, Lord Birkenhead of the British negotiating team called attention to “the unfortunate economic situation of the Free State, and to the undesirability of fixing payments which they could not possibly hope to discharge”.
The next day the UK side caved in. In return for a small annual payment, London wrote off Ireland’s very large parting debt to the UK. And the original Border stood.
The UN Vienna Convention of 1983 in Article 40 set out an appropriate financial framework for the break-up of a country, although few countries have ratified it. Consistent with this approach, the background documents prepared before the Scottish independence referendum in 2014 showed that, if Scotland had left the UK, it would have accepted its share of UK debts and assets, much along the lines of Ireland’s agreement in the Treaty.
If Scottish independence had passed, Scotland would have had to shoulder these debts, where Ireland had been able to trade its share of the debt for the shelving of the Boundary Commission report.
These lessons are instructive in considering the possibility, however distant, of a united Ireland. As with Scotland, a departing Northern Ireland would have to take its share of UK debt. With another Scottish referendum a possibility at some stage, the UK can hardly be more generous with Northern Ireland than with Scotland.
Inability to pay, unlike in 1925, would not be a factor. Today Ireland is better off than the UK and our debt burden is falling, unlike theirs. Shouldering a large burden of UK debt in a united Ireland would not collapse our economy but it would be very unpleasant, making everyone much worse off.
Advocates of a united Ireland, from Garret FitzGerald in 1972 to Sinn Féin today, have suggested the UK would continue to pay social insurance pensions after unification. Not likely. In 1922, the Free State took on the cost of paying for social insurance benefits out of contributions by Irish workers. Likewise, an independent Scotland in 2014 would have had to pay its own pensions.
On public finances, when it comes to who will pay, optimism bias seriously clouds the judgment of some supporters of a united Ireland.