Growth and the ‘subvention’

Economist Michael Burke writes for us on the British government subvention to Northern Ireland. 

The economic case for Irish unity is a growth story; that people across the whole of the island would be substantially better off. So, as the author of a recent report, the Economic Case for Irish Unity I was disappointed but not surprised to find that most commentary on it related to the issue of the ‘subvention’.

Apparently, supporters of the Union want to make the case that the NI economy, which has always been part of the UK, is such a basket-case that there is no future for it except as a subsidy-junkie; Stockholm syndrome economics. Fortunately this caricature is not accurate. But it does mean that the outlandish assertions on the subvention do need to be addressed.

In my own report (and previously on Slugger) I have offered Office for National Statistics data on the scope of the household subvention. To repeat, these are official ONS data not my own. These show that that the entire net effect of all direct and indirect taxes and benefits (including social security, pensions, education, health spending and so on) is an average transfer of £981 per household in NI. As there are 739,000 households this means that the total household subvention is approximately £700 million per annum. Again, in an effort to reduce the silliness about the provenance of the data, here is the entire ONS report .

£700 million is not nothing. But it doesn’t suggest NI is a basket-case either.
Of course there are other elements of government spending, but it is this household net transfer (‘subvention’) which people have in mind when making assertions about the dis/benefits of the Union for the population of NI.

As well as other elements of government spending there are also other sources of government revenue, primarily the tax and National Insurance contributions from businesses. In order to gauge the net effect of these it would be necessary to compile them all.

Unfortunately the DfP efforts in this regard are woefully inadequate. The DfP claims that its own ‘Net Fiscal Balance Reports’ are comparable to the Government Expenditure and Revenue in Scotland (‘GERS’). This is simply untrue. Again, this is not personal verdict, but that of the main statistical body in the UK, the ONS. The ONS treats GERS as official data, a status it does not accord to the DfP’s efforts, with good reason.

To take one example of expenditure , much of the notional allocation of capital investment is simply done by DfP on a per capita proportion of the UK total. No data on public sector net investment is published for NI. But Crossrail in London costs £15 billion and HS2 is said to cost £40 billion, the new nuclear power stations at Hinckley Point will be more expensive still, and so on. On DfP methodology the ‘subvention’ will include an allocated share of these costs. The true picture is shown in the Coalition government’s £200 billion ‘National Infrastructure Plan’ in 2010 – there is nothing down for NI at all.

Further, the gaps in the revenue side render the DfP report valueless. In Table 3.7 of the latest report, of 28 revenue categories either the DfP or HMRC has no estimate for 12 of them. The ONS is right to withhold official status from the DfP reports. Yet the entire outlandish case on the ‘subvention’, and all the repetitions of it, are built on them.

The only hard data on the ‘subvention’ is provided by the ONS on the household component, which amounts to just £700 million. Perhaps, if all other items of government expenditure were also included (defence, civil service, state bodies, capital investment, interest, etc.), alongside the government revenues from the business sector (NICs, corporation tax, CGT, a small proportion of VAT, etc.) then the UK deficit was approximately £72 billion in 2013/14. A crude per capita allocation of that for NI would mean its share was £2.25 billion. This is an extremely crude method – but exactly the same as DfP’s.

Unfortunately, all the wild and foolish claims made on the subvention bring us no nearer to an understanding of the benefits and challenges of a unified Irish economy. This is because no serious economist would begin by asking what the fiscal implications of Irish unity would be without asking first about the growth implication. The fiscal position of any economy is determined primarily by its growth.

At the time of the founding of this state no country in Europe had a higher standard of living than Britain and NI. Now, half a dozen or more do. Britain is in a long-term relative economic decline and the economy in NI has fared even worse. It is the semi-detached carriage of a very slow-moving train.
A unified Irish economy provides the basis for an entirely new economy, marrying efficient public services with a dynamic multinational sector and requiring strategic public investment. In a growing economy the deficit takes care of itself.

 

This is a guest slot to give a platform for new writers either as a one off, or a prelude to becoming part of the regular Slugger team.