Battle lines are being drawn in the escalating row over the cost of Irish reunification

The dirty war over the cost of Irish unification has kicked off, after rumbling under the academic surface now for a few years. An estimate this week of a cost to the Republic’s exchequer of up to €20 billion annually put it on the front pages and on the radio chat shows.

The paper from economists John FitzGerald and Edgar Morgenroth for the Institute for International and Economic Affairs (IIEA) that contains this figure makes clear what it is — and is not — doing. And in turn, this helps us to understand what underlies the debate and to look at why estimates of the economic and financial cost of a united Ireland are so hugely different.

The IIEA analysis focuses on the financial support from the UK exchequer for Northern Ireland — the so-called subvention — and what the removal of this would mean for the Republic in a united economy. What it explicitly does not look at is the wider economic impact of unification — though it factors in the possible pressure to increase welfare, pensions and public pay rates in the North to the Republic’s levels and the substantial cost this would entail.

On different assumptions, other economists and politicians have speculated on a likely cost of €3bn to €6bn. There is no ‘right’ answer. It just comes down to a view of how negotiations would play out

And so we see the two big battlegrounds in the debate to come. The first is calculating what bills would transfer from the British exchequer to the Irish one post-unification. FitzGerald and Morgenroth reckon that most of the annual subvention — which was close to €12 billion in 2019, before being skewed upwards by the pandemic — would fall to be paid by the Irish exchequer post-unification. There is no way to be certain on this — it comes down to issues like whether Northern Ireland would be obliged to take on its share of the UK national debt, and whether the UK exchequer would pay for pension liabilities that accrued over the years, but will only fall to be paid post-unification. These questions would probably need to be negotiated in detail after a unification vote.

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Battle lines are being drawn in the escalating row over the cost of Irish reunification

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The IIEA paper reckons that this could cost the Irish exchequer some €10 billion a year. On different assumptions, other economists and politicians have speculated on a likely cost of €3 billion to €6 billion. There is no “right” answer. It just comes down to a view of how negotiations would play out.

The second battleground is the complicated question of the economic impact of unification, the unpredictable dynamic impact of this unprecedented project. Germany reunified in 1990, yielding some important lessons, but the Irish case would have its unique circumstances. The only step the IIEA paper takes into this territory, that is linked to its analysis of the public finance impact, is to speculate that there would be immediate pressure to raise welfare and public pay rates in the North to the Republic’s level. This doubles its estimate of the cost and brings it up to the headline €20 billion a year figure.

Of course, the dynamic impact of unity would go well beyond this as Northern Ireland divorces from the UK and forms part of a larger Irish economy with full membership of the EU. More optimistic researchers — notably from the University of British Columbia — have predicted that tens of billions in economic gains could accrue over a seven- or eight-year period as a result of unification, with the North’s economy benefiting from a big jump in investment and productivity. This analysis looks over-optimistic — productivity and investment in Northern Ireland can be improved, but this will not happen magically in an All-Ireland economy.

What kind of transition period would be involved after a vote and how would Northern Ireland’s exchequer be financed during this and in the longer term?

How on earth do we make any sense of all this and the wildly different views from different researchers?

One way to think about it is that if voters in the Republic are presented with an annual financial cost of €20 billion — or even one north of €10 billion — then unification is unlikely to be voted through, as it would imply large tax increases, either immediately or to repay borrowed money in future. Yet, wherever you land on the sums, the withdrawal of the UK exchequer will be a reality sooner or later in a united Ireland.

So the question is what terms this happens on and, crucially, what kind of transition period would be involved after a vote and how would Northern Ireland’s exchequer be financed during this and in the longer term? Pretending that the unification vote could happen on a Friday and Ireland could be reunited the following Monday if the vote passes is not realistic.

The second leg of planning needs to look at the Northern Ireland economy and particularly the low productivity levels that have left it as one of the poorest regions in the UK and thus requiring a chunky annual subvention from London,. Work in the ESRI by Seamus McGuinness and Adele Bergin has looked in detail at the reasons for this — among them low educational attainment, lack of investment in infrastructure and poor industrial policy.

There is a cost to fixing this and progress will take time, particularly from investment in education, perhaps the vital cornerstone of what needs to be done. Quicker gains might come via attracting foreign investment. Political stability in a united Ireland could attract investors who were put off from investing in Northern Ireland first by Brexit, then by the suspensions of Stormont and now by remaining uncertainties about the political stability of the institutions and their commitment to working the Windsor Framework. A single marketing campaign for foreign direct investment for the island would be possible in a way that two diverse offerings mean it is difficult at present. But success in this would require an expectation that, after the vote, vital political stability would result.

The debate from here has to be based not on fuzzy ideas of some sudden dynamic jump from unification but on how the North’s economy could be upgraded to take advantage of new opportunities

In mapping out the economics of a united Ireland, it is difficult to put exact numbers on the cost of the required investment in Northern Ireland’s economy and its pay-off. But a detailed assessment of this needs to be part of the package put to voters. What FitzGerald and Morgenroth have done is provide a valuable start to the public conversation and underline that the subvention cannot simply be ignored in any conversation.

But the debate from here has to be based not on fuzzy ideas of some sudden dynamic jump from unification but on how the North’s economy could be upgraded to take advantage of new opportunities. And the question of who would pay — might EU funds help, for example? — as well as what the pay-off over time would be. This needs to fit within a framework of how a united Ireland would work constitutionally and how public services like health would be delivered.

If this kind of work is not done, then the debate in advance of any vote will be based on slogans. And we saw with the Brexit-bus effect in the UK the kind of misinformation that fills the vacuum if the proper research is not undertaken.