The UK government subvention to Northern Ireland, generally estimated at £10 billion (€11.6 billion), has raised doubts about the viability of a united Ireland based on the capacity of the Republic to absorb a subsidy of this size. Analysing the basis by which the subvention is calculated demonstrates that it includes significant costs which would not be carried over to a united Ireland and other costs that would be part of post-referendum negotiations between the Irish and UK governments.
The subvention is the public-sector deficit for Northern Ireland, and it has three components: public expenditure in Northern Ireland, taxation raised in Northern Ireland and an allocation to Northern Ireland of the costs of central UK government expenditure. The most significant element of public expenditure is the cost of pensions, which adds £3.5 billion to the subvention, including both public occupational pensions that are not covered by a separate pension fund, and means-tested pensions.
In the event of referendums being passed to create a united Ireland, this will be one of the biggest issues to be negotiated between the Irish and British governments.
The UK pays pensions to people who have worked in the UK but now live elsewhere, including in Ireland. It would be consistent with current practice for the UK to pay pension liability that had been built up, based on individuals’ tax and social insurance contributions or caring responsibilities, during Northern Ireland’s membership of the UK. This would also be similar to the pension arrangements in the UK’s withdrawal agreement from the European Union.
It is more likely that a simple standstill agreement would be reached, where Ireland waives any claim to UK assets outside of Northern Ireland and in return takes on no debt
Such an agreement would leave the Irish Government with responsibility for all pension liabilities built up from the date of the creation of the new Irish state. While the UK could renege on this commitment, it is a very unlikely outcome, and the most probable diplomatic agreement is one which sees the UK meeting such its pension liabilities.
UK national debt
The subvention also includes a £1.6 billion allocation to the UK national debt. This is a legal liability of the UK state, and a future united Ireland would have no legal responsibility for this debt. If an Irish government agreed to make some voluntary contribution to UK debt, as part of a larger deal, they would be entitled to claim a share of UK assets proportionate to Northern Ireland’s size, offsetting the debt contribution. In practice, and following the precedent when the Irish Free State was created, it is more likely that a simple standstill agreement would be reached, where Ireland waives any claim to UK assets outside of Northern Ireland and in return takes on no debt.
The allocation of central UK defence expenditure adds £1.14 billion per annum to the subvention, including a per-capita contribution to the Trident nuclear weapons programme and the military costs in Iraq and Afghanistan. Almost none of this allocation relates to expenditure in Northern Ireland and would not transfer to a united Ireland. To put this figure in context, Ireland’s current defence budget is €1 billion, so even allowing for an increase in a future Irish defence budget of about €200 million this would still represent a saving of more than £900 million per annum.
An additional £765 million per annum is allocated as Northern Ireland’s contribution to ‘outside UK expenditure’ including the large UK Foreign Office. Again, little of this would automatically transfer to a united Ireland, reducing the subvention by at least £500 million.
The subvention underestimates tax revenues for Northern Ireland, as corporation tax, capital gains and VAT are paid by companies from their head-office address regardless of where that profit was earned, exaggerating the tax earned in London. Previous studies have estimated that this underestimation of tax revenue actually earned in Northern Ireland adds £500 million to the size of subvention.
The economic debate on unity needs to move on to the more important questions of the policy decisions necessary to support sustainable economic growth
A further lack of precision in the UK published accounts is the net impact of ‘accounting adjustments’ due to depreciation, which increases the subvention by £873 million. The accounts also include ‘unidentified’ UK central government expenditure of £450 million per annum. It is impossible from the published data to estimate how much of this expenditure would transfer to a united Ireland, but it will not be the full published amount.
Taking the latest UK published figure for the subvention of £9.4 billion, and excluding UK pension liabilities, debt repayments, 80 per cent of defence expenditure, 65 per cent of ‘out of UK expenditure’ and £500 million in underestimated tax, but erring on the side of caution, and not making any reduction for “accounting adjustments” or other “unidentified expenditure”, leaves a remaining subvention figure of €2.8 billion.
A subvention of this size would require once-off economic growth and tax revenue growth in a future united Ireland of about 5 per cent to absorb this deficit without disruption. Existing economic models of an all-island economy predict a positive impact on economic growth within a range sufficient to cover this deficit. In the context of a united Ireland if “Northern Ireland’s” economy improved so that it simply reflected average Irish economic performance, no subvention would be required.
A subvention of €2.8 billion does not present a significant barrier to Irish unity and the economic debate on unity needs to move on to the more important questions of the policy decisions necessary to support sustainable economic growth to maximise the benefits of a larger and integrated all-island economy and to support improved public services in health, welfare, education and infrastructure. These will be the real issues that will shape the costs and benefits of a united Ireland and they will be central in the future referenda debates. Compared with those decisions the subvention is irrelevant.