Sinn Féin wants Irish unity, but do the economics make sense?

We have yet to see how the negotiations on a new government will pan out, but having got the largest share of the popular vote, Sinn Féin is in a strong position. And it has made clear that a key issue for the party is stepping up preparations to make a push for Irish unity, including a public forum to discuss the issue and a government White Paper. So what are the big economic issues on what would clearly be a massive project?

1. Politics versus economics

This is of course, about history and politics, and not just economics . And while the politics will remain hotly contested, there is no consensus on the economics either, with one study presenting reunification as a no-brainer and others warning about the potential costs to taxpayers in the Republic.

One issue, for example, would be whether taxpayers in the Republic would be prepared to pay higher taxes to substitute some of the revenues currently coming from the UK exchequer

A lot would depend on how unification happened and over what timescale – so if there is a forum and a White Paper there are a lot of questions to scope out and discuss. One issue, for example, would be whether taxpayers in the Republic would be prepared to pay higher taxes to substitute some of the revenues currently coming from the UK exchequer. Another is how the North might be put on a path towards sustainable growth.

A key challenge, with such a politically contentious issue, would be in ensuring that this work was trusted by all sides as being independent and thorough, clearly outlining the issues, the opportunities, the costs and the risks.

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2. The backdrop

The Northern Ireland economy suffered, not surprisingly, through the years of the Troubles and has not recovered strongly following the Good Friday Agreement. A 2019 paper by economists John FitzGerald and Edgar Morgenroth – The Northern Ireland Economy: Problems and Prospects – says it has suffered from a " lack of dynamism", a lot of which it attributes to a lack of investment, poor competitiveness and a sub-par educational system. This has left it reliant on transfers from the UK exchequer to maintain living standards.

On one estimate, the Troubles cost the economy some 25,000 manufacturing jobs in the 1970s alone

Before the Troubles, the Northern Ireland economy, with a strong historical manufacturing base, had performed quite strongly – but the lapse into violence caused economic as well as wider societal damage, discouraging investment and destroying jobs. On one estimate, the Troubles cost the economy some 25,000 manufacturing jobs in the 1970s alone. A rise in public sector jobs, funded from a rising contribution from the UK exchequer, compensated to some extent, while some improvement was seen through the 1990s.

However, while the post Belfast-agreement period has led to huge gains to society in the North, we haven’t seen the expected economic bounce. Northern Ireland remains reliant on the UK exchequer via welfare and public sector spending to the tune of about 20 per cent of GDP, making it the most highly subsidised of the UK regions.

A paper by ESRI researchers Séamus McGuinness and Adele Bergin, entitled The Political Economy of a Northern Ireland Border Poll, finds "no evidence to suggest that Northern Ireland has benefited from a peace dividend" as it remains one of the poorest regions in the UK and one of the most exposed to the risks from Brexit. The influx of foreign direct investment in the Republic has been a key factor raising productivity and incomes compared to the North, which has proved much less of a magnet for FDI.

3. The subvention

This is the subsidy from the UK exchequer to the North each year, which UK treasury figures put at around £9 billion (about €10.7 billion at today’s exchange rate). This is basically the gap between the public money spent in the North and what is taken in via tax revenues. You’d think debate about this would be straightforward. But it isn’t.

Sinn Féin has consistently argued that the £9 billion figure is falsely inflated

Clearly there would be a gap if the UK withdrew the subsidy, though the size of it is hotly contested. Sinn Féin has consistently argued that the £9 billion figure is falsely inflated and in a 2016 document – Towards a United Ireland – said that over-estimates of the North’s fiscal deficit represented a “political ploy aimed at closing down any debate on Irish unity”. On its calculations the “real”deficit was between £2.7 billion and £5.1 billion per annum.

Why is this controversial? There are a whole range of issues. For example, the £9 billion figure includes an estimate of what the North’s contribution would be towards the UK exchequer’s national debt service, the UK’s EU contribution and the pensions bill – which might not all be a factor if the North left the UK. There are also questions about how corporation tax is allocated and the contribution from the North to the general public services bill.

A detailed analysis by FitzGerald and Morgenroth said a reasonable estimate of the bottom line figure – the gap if UK funding were withdrawn – would be around £6.8 billion per annum, still a significant sum were it to be taken on by the Republic’s exchequer. If Northern Ireland remained liable for a share of the UK’s national debt, the figure would rise to £8 billion, they estimate.

Any decision, post Brexit, for the UK exchequer to allocate less to the North “could prove very disruptive for Northern Ireland and its standard of living”, the economists warn.

In terms of London’s focus, it is notable that the major project just announced as the key move in UK regional policy,the HS2 rail line through England, will by its nature be of no benefit to Northern Ireland, directed instead at central and Northern parts of England.

4. The debate

The size of the subvention is just one of the issues that would feature in the debate, which would also consider the hard-to-measure issue of the impact on the wider economy, North and South. Such calculations must now be made in the context of a changing picture due to Brexit and the withdrawal agreement terms, which will lead to some checks and controls on goods crossing from Britain into the North, in order to avoid checks at the Irish Border. In turn, Brexit could give some boost to cross-Border trade in Ireland.

Its latest study estimates that reunification would lead to a €23.5 billion boost to the island economy by 2025

Sinn Féin regularly quotes studies by Dr Kurt Hubner and Dr Renger Herman Van Nieuwkoop of KLC Consulting , a Canadian firm, commissioned by an Irish-American association, KRB – the Knights of the Red Branch. Its latest study estimates that reunification would lead to a €23.5 billion boost to the island economy by 2025, compared to big losses which would result from Brexit. These gains would largely accrue to Northern Ireland, they say, based on a flood on inward investment and the adoption of the euro, which would benefit the North's exporters. The report assumes that whatever bill would come from the withdrawal of UK support would be met by the Republic through increasing borrowing.

However FitzGerald and Morgenroth, in their paper, take a more sceptical approach. They focus on the potential significant costs to the Republic and argue that the North’s economy would require massive investment to underpin future growth. They warn that the cost to the Republic , if it had to pick up the bill after a withdrawal of the subvention, would push the exchequer heavily into deficit, requiring significant tax increases and spending cuts, and hitting growth and jobs in the Republic significantly. Alternatively, were the subsidy from the UK exchequer to be removed and not replaced, the consequences for Northern Ireland would be “ extreme”.

They take issue with the Hubner analysis, saying it does not take enough account of potential further damage to trade between the North and Britain of a united Ireland and fails to consider the impact of the Republic picking up the financial tab for the subvention. They also question the assumption that the North would benefit quickly from a flood of inward investment, saying a long period of upskilling of the workforce would be needed before this could happen. The paper by McGuinness and Bergin of the ESRI points out that around four out of ten young people in Northern Ireland have a third-level qualification, versus six out of ten in the Republic.

The political issue is that the costs, if the subvention were to be withdrawn, even gradually, would be short-term, while the benefits in terms of increased growth in the North would be contingent on investment and would take time to emerge.

5. The key issues

As the paper by the ESRI researchers points out, a lot of work remains to be done to even scope out the economic issues. Some of this comes down to establishing the facts and some of it to taking an informed view of how Irish unity might be brought about. Among the factors they identify as important are the length and nature of any period of transition to unity and how the subvention issue might be handled over this period. Another is how the key weaknesses in the North’s economy would be addressed during this period, who pays and what results could be expected in terms of improving the North’s productivity. And a third is how the North’s national debt obligations would be handled.

Beyond that, there is a need for a longer-term plan to address the infrastructure and education deficits in the North to lay a basis for future growth – as happened in the former East Germany after Germany reunited. The large gaps in educational attainment North and South “are a major concern and should form a key part of any border poll discourse”, according to McGuinness and Bergin.

Clearly there would be opportunities to merge parts of the public service North and South and save money, but again this would have a short-term cost

The FitzGerald and Morgenroth paper suggests that the North should reallocate substantial amounts of cash from public services towards the necessary investment – but says that this would be “painful initially” as it would lead to job losses and lower incomes. Clearly there would be opportunities to merge parts of the public service North and South and save money, but again this would have a short-term cost. And merging the two health services, if this was the chosen route, would be a highly a complicated and potentially contentions exercise.

The bottom line is that there is a lot of work and planning to do to set out an economic route by which Irish unity might be achieved and to reach the best possible estimate of the implications. Much would also rest on negotiations with the UK – and the EU, which Northern Ireland would then rejoin. Irish unity may be a project driven by politics, but the economic detail will be vital.