Making Sense of the NI Subvention and the Economics of Reunification…

An excellent podcast on the NI subvention and the economics of reunification has just been made available by RIA/ARINS (Royal Irish Academy / Analysing and Researching Ireland North and South).

The participants are:

• Host Rory Montgomery (former Irish Ambassador to the EU and member of the Irish negotiating team for the BGFA).
• Dr. Esmond Birnie (senior economist, UU, and former UUP MLA for South Belfast 1998-2007), who argues that the subvention does matter.
• Professor John Doyle (VP for research at DCU), who argues that the subvention doesn’t matter should unity take place.
• Prof. Edgar Morgenroth (professor. of Economics at DCU), who researched how subvention works for poorer regions in the Irish Republic, and the economics of a reunified Germany.

All three interviewees have written extensively on the economics of NI and a reunified Ireland. More recently, Prof. Doyle and Dr. Birnie have engaged in academic call-and-response with three papers: Doyle (1): why the subvention does not matter; Birnie: the subvention matters (response to Doyle (1)); Doyle (2): response to Birnie’s response to Doyle1.

I am not an economist, but I learned a huge amount from this podcast and from these papers. The economics of reunification – and the economics of the status quo – is an enormously complex subject, and we are fortunate that we have such engaged experts willing to debate these complex and emotive issues in such a calm, reasoned and mutually-respectful manner.

There is much speculation about when a referendum might occur. The podcast participants suggest reunification may come with immediate tremors, if not aftershocks: for example, an upsurge in loyalist violence, or economic dislocation between NI and GB. These would put financial pressure on Dublin. If we look at the Irish Republic’s debt repayment schedule, we can see that more than half of the national debt has to be paid off by end-2031, and the amount to be paid off per annum increases each year between 2027 and 2031, more than doubling from €9bn. to €22bn. The Republic (RoI) would be in a much better position to cope economically with such aftershocks if a border poll was not held until 2032 at least.

I do encourage you to listen to the podcast. I list below some points that interested me (in time sequence) but, as a non-economist, I have probably missed other, more significant, points. I hope I have not mis-paraphrased the speakers. If so, apologies.

• The day one subvention requirement in the event of a United Ireland (UI) is not small change. It is not credible to argue that Irish unity in itself would cause such an economic upsurge that unity would pay for itself. (Birnie)
• The scale of subvention is generally agreed, preCovid £9.5-10bn., now c.£13bn. (Doyle)
• It is rare for one country to hand over part to another country: there are no precedents. (Doyle 8:40)
• Pensions and debt are the big issues. (Doyle)
• If the NI economy doesn’t pick up after UI, that will be a huge burden to RoI if public service wages, pensions and social welfare payments had been equalised (i.e. increased in NI).
• The subvention as % of RoI budget: could cause 5% RoI deficit. Pensions and debt interest … it could double to 10% deficit. Negotiation with UK government will be important. (Morgenroth 15:20)
• Comparing NI to the weakest region in RoI: the West region (MO, RN, GY). NI subvention per capita is 1.5 times the West region; and has 4 times the population. Dublin would be paying 6 times as much to cover NI subvention as it net-transfers to West region. (Morganroth)
• There are 12 regions in the UK: NI, Scotland, Wales, and 9 in England. Only two regions make net contributions: London and SE England. NI has the highest subvention per person in the UK. (Birnie 18:30)
• There is no equivalent of the Barnett formula in RoI.
• Pensions: c.£3.5bn p.a. There is, roughly, a 50-50 cost in NI between Occupational and OA pensions. There is no legal requirement for the UK government to pay it in a UI scenario. (Doyle 24:20)
• Hypothetical scenario from John Doyle: if UK government refused to pay pensions post-UI … a NI resident who moved to Spain or Dundalk just before unity date would still get pension, but a NI resident would not be paid by UK government and would get RoI pension.
• The UK governement would not want the resolution of pensions for NI in a UI to set a precedent for a Scottish independence campaign. (Birnie)
• It would be foolish to assume the UK government would cover full pension liability. There may be differences in the level of pension North and South post-unity. In Germany it took 30 years before pensions between East and West converged, and wages haven’t yet converged. Would NI have different (i.e. lower) public sector pay rates at the outset? (Morgenroth)
• Debt: c.£1.9bn p.a. … the second biggest spending component after pensions. Regarding pensions, UK has the stronger hand. However, as regards debt: the RoI does not owe a penny of UK’s national debt. He can’t imagine the Irish government would both lose on pensions and also be willing to pay part of UK debt. The RoI taking on some UK debt would make UK national economic statistics (e.g. debt-to-GDP ratio) better-looking. (Doyle)
• Paying pensions for a defined group of people: the amount decreases annually as people die. Paying pensions would enable the UK government’s share to decrease over time, as opposed to be stuck forever paying ‘peace and reconciliation’ money. (Doyle)
• Looking at the debt provisions of the 1921 Treaty: the Irish Free State assumed responsibility for part of UK debt, which was cancelled after the Boundary Commission débacle in 1925. (Birnie)
• There may be a need for higher security spending in NI post-UI. Paramilitary infrastructure remains: there are more than 12,000 members of loyalist paramilitaries … boots on the ground from PSNI and the Irish Army will cost money. (Birnie 37:00)
• Currently, security expenditure in NI is c.£1.5bn, and £1bn in RoI; there should be significant saving there post-unity. (Doyle)
• Regarding the RoI’s EU contribution: post-unity GDP will increase (so EU contribution likely to increase) but GDP per capita falls as NI average income is below RoI. (Montgomery)
• Economic benefit of reunification: Dublin is saturated economically (for example, housing). Typically, second cities are half the size of the capital city. Belfast has that size. If you draw a line from Dublin-Galway: north of that are the poorest RoI areas. It is very difficult to attract multinationals there. Belfast and Derry would have a big positive impact on the Southern part of the northern half of the island. Belfast is not doing that right now. If there was the same public policy package for all of the island post-reunification, why would the Belfast region not ultimately behave like the Munster region? You would expect Belfast to do better than Cork as it is bigger. (Doyle 43:00)
• UI would impact the linkages between NI and GB, causing significant disruption, a negative shock. German unification was initially a shock for East Germany. There is the potential for convergence, but keep the German example in mind: lagging regions stay lagging, there would need to be a bit more investment. Regarding German unification: you can still see the old E-W border on coloured maps that show economic indicators (example here). Convergence seems to be a 50-year process. (Morgenroth)
• There has been a massive decline in population in East Germany since reunification. Would there be several hundred thousand leaving NI for England, Scotland or RoI? Regarding NI’s historic lack of competitiveness: unification per se wouldn’t resolve it. Would education solve this? The more qualified NI people might leave, with a potentially significant loss of human capital. (Birnie 49:00)
• Recent ARINS polling: NI Protestants think that reunification would be bad in both short- and long-term. NI Catholics think reunification would be good both short- and long-term. Southerners: reunification would be bad in the short-term but good in the long-term. (Montgomery)