John FitzGerald: Fiscal implications for a united Ireland are stark

Over the past century, successive Irish governments have had a pipe dream of a united Ireland. However, since independence, the changes that have happened in both parts of the island have made such an outcome increasingly unlikely.

Brexit has shaken up the relationships on this island and has undoubtedly also disturbed the links between Belfast and London. Nonetheless, in my view, a united Ireland still appears as a distant mirage that may never happen.

While economics alone does not drive political choices — otherwise Brexit would not have happened — it still plays a vital role in influencing voters’ decisions. If any referendum on Irish unity were to take place over the next decade, you can be sure that the potentially large cost to people in the Republic would influence opinion in the South.

The best way to estimate the underlying fiscal shortfall in Northern Ireland is to look at 2019 and leave out the pandemic period

Northern Ireland is one of the UK’s poorest regions, with very low productivity, and the UK itself is also now significantly worse off than the Republic. As a result, the tax revenue generated in the North goes nowhere near covering the cost of its public services. To fill the gap, over the past century, Northern Ireland has received huge fiscal transfers from the central government in London.

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The best way to estimate the underlying fiscal shortfall in Northern Ireland is to look at 2019 and leave out the pandemic period. That year, Northern Ireland’s fiscal deficit amounted to 21 per cent of the region’s income, while the UK as a whole ran a deficit of 2.5 per cent of national income. By contrast, the Republic had a surplus of 0.8 per cent.

If we had a united Ireland in the morning, Dublin would have the responsibility of filling the North’s fiscal gap. That gap would be a bit lower in a unity scenario, mainly because paying its share of the Irish defence budget would come to a lot less than paying its share of the proportionately much larger and better-equipped British armed forces.

That would knock about €1.2 billion off the North’s fiscal gap. Nevertheless, if nothing else changed, the net effect of unification would mean Dublin having to support Northern Ireland to the tune of about 5 per cent of the Republic’s national income.

But in a unity scenario, it’s highly unrealistic to expect the North’s social welfare rates, and its public sector salaries, to remain at their current levels, which are well below those in the Republic. If not immediately, certainly in the short term the North’s social welfare rates and public sector wages would have to converge to those of the Republic. Pay and welfare equalisation would double the cost of supporting Northern Ireland to about 10 per cent of current Irish national income. That’s a pretty hefty sum, amounting to a quarter of all government expenditure.

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Some commentators have suggested that the UK would be liable to pay for Northern Ireland pensions after any separation because it had collected the relevant national insurance contributions. However, the North’s welfare pensions, like those here, have been funded on a pay-as-you-go basis. This is where each working generation pays the pensions of the retired generation from its social insurance contributions.

Under these circumstances, the UK would have no ongoing liability. It’s very similar to what happened in 1922 when the full cost of the unemployment insurance scheme transferred to the new State and did not remain with London.

On its divorce from the UK in 1922, the Republic took on a pro-rata share of the British national debt, as provided for during the Treaty negotiations. A similar arrangement was in prospect for Scotland if the independence referendum there had been carried in 2014.

Aside from the fiscal challenge, unification could prove a shock to the North’s economy, breaking the umbilical link between the mainland economy and that in the North

While some argue that Britain would forgive the North its share of the national debt on achieving Irish unity, that would create a precedent for the treatment of Scotland’s share of the UK debt, which London would be most anxious to avoid. So expecting Britain to write off the North’s share of the overall UK national debt is just wishful thinking.

Aside from the fiscal challenge, unification could prove a shock to the North’s economy, breaking the umbilical link between the mainland economy and that in the North. That would be hugely disruptive in the short term, adding to the deficit, while the benefits from rejoining the EU would take decades to mature.

In the long run, dramatic action to increase productivity in the North could narrow the gap between it and the South and reduce the Northern fiscal deficit. However, because this would take decades I don’t expect to see unification in my lifetime.