An economic united Ireland raises many questions - the big one is, who pays?

Like just about everything else in relation to a united Ireland, the economics is hotly contested. Much of the debate centres on support for Northern Ireland from the UK exchequer – and the potential cost to the Republic of replacing this. Underlying this is a deeper issue: the underperformance of the Northern Ireland economy in recent decades, even since the Belfast Agreement, with the absence of an expected economic "peace dividend". Addressing this would require major investment and again raises the question – who pays?

Brexit, opposed by a majority of Northern Ireland's voters, has put the future of the island economy firmly back on the agenda. Prof Katy Hayward of Queen's University says Brexit has made the Irish unity question more "live" as an issue.

“All political considerations aside, the fact is that under the withdrawal agreement there will continue to be free movement of goods across the Irish Border whereas that won’t be the case across the Irish Sea. It will change the dynamics for competition and commerce across and within these islands,” she says. Consumers, business and farmers will all notice the change.

New tensions over the implementation of the Northern Ireland protocol now complicate the picture further and may create uncertainty over how trade will flow in and out of Northern Ireland. There is a lot to play for in a short period of time in the Brexit talks.

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Hayward points out that the 2019 Northern Ireland Life and Times Survey (see graphic) shows that Brexit has increased support for – and expectations – of a move to a united Ireland among the nationalist population, but not among Unionists. Fraught ongoing negotiations over how the special trading arrangements for Northern Ireland will work, meanwhile, show the Brexit reality is finally arriving. If these talks collapse, fears of a hard Irish Border could return.

“Brexit has changed the debate and put the whole issue in the melting pot,” according to Séamus McGuinness, research professor at the Economic and Social Research Institute (ESRI) in Dublin. His recent work has been aimed at scoping out the key issues and he believes a large research agenda lies ahead ,work that needs to be done to plan for the possibility of a Border poll being called under the terms of the Belfast Agreement – and to provide vital context to the debate.

Scotland's voters had a 670-page report on independence to absorb when they voted in 2014 and McGuinness argues a similar body of work is needed here. It remains to be seen if this is one of the questions which will be addressed by the Shared Island Unit, which has been established by the Government to work from the Department of the Taoiseach.

A crunch issue is the financial support from the UK exchequer from Northern Ireland, which rose sharply during the Troubles (see graphic) and is running at a bit over £9 billion per annum, or about €10 billion at today’s exchange rate. This is the gap between the amount the UK spends in Northern Ireland and the tax it takes from there.

Back in the 1950s and early 1960s, Northern Ireland was richer and had a more developed industrial structure. But the impact of the Troubles was profound

This is where the economic arguments on a united Ireland are the fiercest. Economists John FitzGerald and Edgar Morgenroth in a paper, The Northern Ireland Economy, Problems and Prospects, argue that whatever form Irish unity took "there would be a heavy economic cost for both Northern Ireland and Ireland". A straight withdrawal of the UK subsidy would destroy the North's economy, they argue, while if the Republic took on the cost it would cut living standards south of the Border by 5-10 per cent a year.

At the opposite end of the argument stands Sinn Féin. Its finance spokesman Pearse Doherty argues that the £9 billion figure is a gross overstatement as it includes items like pension payments, which he says would remain the liability of the UK exchequer, and charges for items like UK defence spending and national debt repayments which should also remain the responsibility of the UK.

Adjusting for this cuts the bill to €4 billion a year at most, Sinn Féin says. The party also point to a study by Dr Kurt Huber of Canadian company KLC Consultants which argues that the island economy – while threatened by Brexit – could benefit by €23.5 billion over seven years from the synergies in trade and commerce from a united Ireland.

The economic case for a united Ireland is “evidence-based and clear-cut”, Doherty has insisted.

So how do we make sense of this debate ?

A vital point in this argument, according to McGuinness, is the time over which a move to a united Ireland might happen. A rushed move could create disruption and confusion over who would pay for what in future, particularly if the big issues had not been agreed between Ireland and the UK, he says. He agrees that some of the current £9 billion-plus subvention costs are not likely to be relevant in a united Ireland context, but points out that funds are needed, too, for investment.

A transition period in the move to uniting the two economies would be vital, McGuinness says. Complex negotiations between the UK, Ireland and the EU would be needed. This time could be used to invest in a planned way in improvements in the North’s economic and social structure, particularly education – the key to raising the potential growing rate of the economy – and, over time, reducing the need for a financial subvention. It is impossible to say how long a transition might be, he says, but points out that the transfer of Hong Kong ownership from the UK to China took 13 years.

The starting point of the unity debate are two economies which, despite being on one island, are strikingly different. Back in the 1950s and early 1960s, Northern Ireland was richer and had a more developed industrial structure. But the impact of the Troubles was profound.

In a paper entitled The Political Economy of a Border Poll, published recently by the Cambridge Journal of Economics, McGuinness and ESRI associate research professor Adele Bergin point out that in 2014 – before the Republic's economic data took on another level of distortion due to multinational activity – income per capita in the Republic's richer eastern and southern regions, where around three-quarters of the population live, was twice that in Northern Ireland. The poorer Border, midlands and west region in the Republic, however was roughly in line with the North.

Uniting two separate economies – albeit on the one island – is not easy. There are many questions

Even these comparisons are contentious – FitzGerald and Morgenroth argue that, taking into account the level of public services supported by the UK exchequer, particularly in areas like health, the North actually has a higher standard of living on average.

But it is clear that the North’s underlying economic performance remains weak and there is little sign of an economic dividend after the Belfast Agreement. According to McGuinness and Bergin: “With respect to per capita incomes, there is no evidence to suggest that Northern Ireland has benefited from any peace dividend.” Before account of transfers from the UK exchequer, it remains one of the UK’s poorest regions.

While earlier underperformance can be attributed to the Troubles, according to FitzGerald and Morgenroth “these more recent problems stem from policy failures by the Northern administration, frittering away the benefits of exceptional support from the central government in London”. They argue that part of the cost of future investment will likely mean less spend in the short term on supporting living standards.

A key problem in Northern Ireland has been under-investment, particularly in education but also infrastructure. Cash from the UK exchequer has been used to support living standards, FitzGerald and Morgenroth say, rather than to invest. And this has had a long-term impact on economic growth. The Republic’s period of “catch-up” growth with the rest of the EU was fuelled by massive investment, supported from Europe – this simply hasn’t happened in Northern Ireland.

“Probably the most serious problem for the Northern Ireland economy is that it has the highest share of early school-leavers of all UK regions and the lowest share of the workforce with third level qualifications,” say FitzGerald and Morgenroth. Investment in physical assets has also fallen off – those of us old enough remember the immediate move to the smoother and sleeker roads in the North when crossing the Border in the 1970s or 1980s. Now it is the other way around.

Uniting two separate economies – albeit on the one island – is not easy. There are many questions. Would Northern Ireland adopt the euro and when would this happen? Would the two health systems be merged? Remember that the NHS in the North and its free universal access is a key reason why many have reservations about unity.

When would public administrations be merged and what would this mean for jobs? What about social security systems? And tax structures? Naturally much of this would be driven by whatever political structures were to be put in place.

The lesson of Brexit, McGuinness says, is that this will be complex and so analysts and thought leaders need to be considering these issues and providing robust, objective evidence. Neither is it certain that post-Brexit the same level of support for Northern Ireland will come from the UK exchequer indefinitely.

And of course we have one other key issue - Covid-19. The huge toll it has taken on growth presents another big challenge. Brexit developments may continue the political momentum towards a Border poll, but coronavirus means less cash and resources to pay the bills.