Economics of a united Ireland and the debunking of SF’s subvention denial

Every time the subvention is mentioned in connection with a prospective united Ireland it becomes ‘a matter of controversy’. That’s in large part because Sinn Fein are very keen in putting out their figures. [As opposed to everyone else’s? – Ed]

Now Tom Healy direct or the left of centre Nevin Economic Research Council has issued a paper which not only puts out the figures, but explains (in some measure at least) where some of the divergence between Sinn Fein and the rest emerges from.

The methodology used in the DFP report is that used by the Scottish Government in its annual publication ‘Government Expenditure and Revenue in Scotland’ (GERS). Using this methodology ‘non-identifiable’ expenditure refers to spending undertaken at UK level and which cannot be decomposed on an individual regional level.

Key examples would include the service of national debt or the cost of the UK military (except where, perhaps, components of military spending can be identified with a particular region). Strictly speaking, spending ‘for’ a region such as Northern Ireland may take place at central (Whitehall) level in government departments dealing directly with payments, receipts or administration of Northern Ireland.

Non-Identifiable Expenditure is considered to occur on behalf of the UK as a whole and cannot be decomposed on an individual country or regional basis. It is standard practice in studies of inter-regional government transfers to apportion or estimate part of national ‘overheads’ to a specific region even when these costs cannot be directly associated with the region.

The rationale is that all regions, without exception, are implicated in the cost or revenue. In the case of regional transfers among the regions of the Republic of Ireland a similar type of apportioning exercise is undertaken by researchers.

In summary, the DFP report estimates a total government revenue of £14.9 billion in 2013-14 compared to a total of £24.1 billion in public spending. However, when ‘non-identifiable’ spending is excluded total spending came to £20.1 billion. So, depending on which measure of spending is used, the ‘net fiscal deficit’, in 2013-14 was £9.2 billion or £5.2 billion. [Emphasis added]

Interesting supplementary point on the NHS versus HSE and the net effect they have on average incomes in Northern Ireland:

An important fact not considered in the current debates is that the share of total government revenue in total regional income (GDP if you like), in Northern Ireland, is approximately 50%. This is hugely above what it is in the Republic (35%) and in the rest of the UK.  In area of health spending less than 10% of households in Northern Ireland purchase private health insurance compared to a corresponding figure of nearly 50% in the Republic. The difference is explained in three letters: NHS. Would Northern Ireland taxpayers be willing to pay less tax to have a three-tier health service such as is the case in the Republic? [Emphasis added]

Here’s the really interesting section though. The mismatch between the profession of belief in a united Ireland and the current counter productive approach to that end:

To keep things simple for now let’s assume no change in GDP or its components for both parts of Ireland. (It may be objected that a united Ireland would release new possibilities and economic activity so as to boost productivity and government revenues. This might or might not be the case and the burden of proof rests with those making these claims.) On the basis of no policy change and no change to GDP, it is clear that a unification of Ireland would entail some additional financial cost to the government of a united Ireland compared to the current situation. After all Northern Ireland is the poorest region of the UK and if there is a transfer to it such as there is to Northern England regions then a transfer to the North of Ireland post-reunification is not unlikely.

That part of the net fiscal transfer from London to Belfast which relates to ‘identifiable’ spending (approximately £5 billion or €6 billion) would be required to maintain Northern Ireland public services at the current 2015 levels. But, the story does not end there. Living standards (and social transfer payments) in the Republic are significantly higher than they are in Northern Ireland so that there would have to be a process of adjustment over a number of years to bring the north up to the standards of the south. This would be analogous to the post-reunification German solidarity tax of 5-7% on all incomes (the size of an Irish unity solidarity tax may not be as big as that).

What of the ‘non-identifiable’ spending? There is a point that this spending would not be relevant particularly if any reunification scenario Northern Ireland’s notional share of UK national debt were written off under the new arrangements.  Instead of sharing in the UK national debt, Northern Ireland would now share in Irish national debt and the annual cost of servicing it (as well as Irish national administrative overheads).  In this case, southern taxpayer may not necessarily have to pay more by way of tax. The national debt (and its annual servicing cost) would simply be shared among 32 counties rather than 26.

However, given the ‘unknown unknowns’ Irish national debt might be higher than would otherwise be the case because of reunification due to lingering structural features of the Northern Ireland economy and society. And security costs might be higher than might otherwise be the case were there an absence of near universal enthusiasm for a united Ireland among both communities in Northern Ireland (a simple voting majority within Northern Ireland would not be enough to ensure enduring political stability and near universal buy-in by sides of the community).

So in short the share of the national debt legacy is a red herring, but bringing Northern Ireland up to the standard of living currently present in the south will have huge costs. That’s of course presuming that all things remain the same.

Given there is currently no nationalist party prepared to acknowledge the issues outlined here suggests there could be an opening for some form of Progressive Nationalism that Colum Eastwood has spoken of. But that in itself would entail some very uncomfortable questions.

Not least because:

Left wing think-tank concedes united Ireland would need a right-wing economy. Also, debunks SF’s subvention denial. https://t.co/rPPli8sFTd

— Newton Emerson (@NewtonEmerson) November 9, 2015

As one nationalist friend put it last night when we were discussing the current impasse that would require a rather different sent of political priorities currently in evidence, requiring people who can:

…articulate the reasons why the ROI is a model for NI: a model for healing after conflict; a model for creating an economy based on local genius, not dependency; a model for attracting global giants who respect and value local Irish people as the vanguard of Europe’s innovative workforce.

And people who can demonstrate the efficiencies available in integrating services and talent investment programs, rail tracks and crime fighting in Derry and Donegal, Fermanagh and Cavan, Dublin and Belfast.

The current model (popular amongst old guard SDLPers and Shinners alike) of telling Unionists they’re bigots over flags, parading and a dozen other real or imagined wrongs, as well as embedding dependency on UK welfare does not bring a UI an inch closer.

Time, perhaps, for a new type of conversation to emerge?

An all-island relationships conversation, led not by people who see unionists as enemies but by people that see opportunity in having a new type of conversation that doesn’t depend on the denial of reality.

And one in which a new type of relationship can emerge without being shouted down on the internet or strangled at birth.