The economic impact of an all-island economy

Posted on April 22, 2018 · Posted in Self-published

The economic impact of an all-island economy

 

April 2018


 

This report considers the potential economic impact of Irish reunification, with particular consideration given to the likely effects of Brexit.  The potential impact of Brexit could be devastating to the Northern Ireland economy and serious consideration needs to be given to what political strategies could mitigate the damage.  North-south economic integration would generate substantial benefits for all of the island.  This report concludes that there is a significant positive potential economic benefit from Irish reunification, particularly for the citizens of Northern Ireland.  It is recommended that preparations begin now in accordance with Article 3 of the Irish constitution, as amended following the Good Friday Agreement.  Progress towards achieving an all island economy should be reviewed annually by the Oireachtas.  This report includes a ten point plan for how Irish reunification might be achieved.

 

“The Republic of Ireland sits atop the European growth charts, while Northern Ireland is closer to the bottom.” EY’s Economic Eye, Winter 2017  

 

 

 

 

 

 

 

Author:

Paul Gosling is a financial journalist and economic commentator based in Northern Ireland

www.paulgosling.net

 

April 2018


 

Ten Point Plan

 

  1. The UK government agrees to continue its subvention to Northern Ireland (currently operating through the Barnett formula) but on an annually tapering basis, with the UK subvention removed entirely within a negotiated period beyond reunification. UK support might be needed until 2050, supporting pension liabilities for civil servants, etc, under an arrangement similar to that with EU withdrawal. Over the long term this would produce a significant fiscal gain for the UK, which is likely to be welcomed by taxpayers in GB.  For Northern Ireland, the subsidy would be replaced by higher tax revenues as Northern Ireland benefits from the economic impact of reunification and the Republic’s economic policies.  Sovereignty might also transfer on a gradual basis.  Stormont might continue to operate as a devolved assembly, but of Ireland rather than of the UK.  There could also be a graduated move towards a truly all-island economy, with both sterling and the euro accepted by businesses during the transition process.  Substantial efforts must be made to accommodate the fears and concerns of those who have a British or Ulster Scots identity throughout the island of Ireland in order that a successful unified economy is achieved.

 

  1. Increased spending on capital projects is required to bring infrastructure up to modern European standards. The infrastructure deficit that was carried forward from the period of direct rule needs to be addressed, which means that the UK government has an obligation to help meet the cost of correcting the infrastructure deficit. A UK government investment of £10bn would assist significantly with this, towards the cost of roads, health reform, education facilities and water and sewage systems. A bridge or tunnel connection with Scotland could provide reassurance to unionists that economic, social and political connections with Great Britain could actually be strengthened through new arrangements.

 

  1. A reduction in the number of civil servants in Northern Ireland to the same level as the Republic would assist in making Northern Ireland financially self-sufficient. This would take place on a gradual basis to reduce the impact on individuals and on the wider economy. Ideally the impact would be spread over several years, achieved as much as possible by natural wastage. All redundancy, pension and restructuring costs would be paid for by UK. This restructuring would assist in boosting Northern Ireland productivity.

 

  1. The European Union would be asked to assist in the reunification of Ireland, which would address the problems caused by the Irish border post-Brexit. A new 32 county administration should be empowered to borrow cheaply to invest in the economy and all-island infrastructure. The European Investment Bank would play a key role in this.  

 

  1. A political agreement on a new all island basis, inside the EU, would attract increased EU funding through Interreg, including financial assistance in restructuring Northern Ireland’s infrastructure to improve its competitive position and integrated all-island economy.

 

  1. IDA Ireland would promote all of the island on the world stage. This would produce benefits for all. Given its track record in attracting FDI worldwide it should prove to be a major player in turning the Northern Ireland economy into a world class competitor with the added benefit for the Republic that the two agencies would no longer be in competition  but would be working together to produce economic growth.

 

  1. Improved direct links between education and industry in Northern Ireland as per the Republic would lead to a more competitive market-oriented economy, over time producing improvements in living and working environments. While Northern Ireland needs to learn from the Republic with regards to elements of its education and skills system, the Republic needs to learn from Northern Ireland in terms of the cost and efficiency of its health system. Neither system is adequate at present.  The Bengoa reforms need to be implemented in Northern Ireland as at present it has too many general hospitals, without sufficient specialist expertise.

 

  1. A harmonised corporation tax would make all the island more attractive to foreign direct investment and lead to domestic companies throughout the island being more competitive, thus leading to economic growth for all.

 

  1. As part of the post-Brexit response from the European Union, a special case should be presented to the European Union for assistance with the cost and social pressures involved with Irish reunification. This might be structured in ways that learn from the Marshall Plan and the experience of German reunification.

10.      A single and integrated Ireland would create economies of scale and a more competitive economy. A single Ireland would be a world leader in the fields of research and development (eg Trinity College, UCD and Queen’s, all in the same country), higher education, pharmaceuticals and new technologies.

 

 

 

 

Summary

 

  1. Since partition, the economic strength of the north and the south have gone into reverse. In 1920, 80% of Irish industrial output was in and around Belfast, with Belfast the largest city in the island of Ireland.  The economy of the Republic is now four times larger than that of Northern Ireland, with industrial output ten times larger than that of Northern Ireland.
  2. Average full time income per head in the Republic in 2016 was £40,403, compared to £25,999 in Northern Ireland. In other words, a worker in the Republic is typically paid half as much again as someone working in Northern Ireland.
  3. The cost of living in the Republic is much higher than in Northern Ireland, mitigating the benefits of higher pay. Housing availability and costs, in particular, would have to be addressed by a new state formed through reunification.  Regional policy would also need to be re-assessed by the new state.
  4. Since the Good Friday Agreement, increased investment has flowed to the Republic, rather than to Northern Ireland. Some £312bn of US investment has gone into the Republic since the GFA.
  5. GVA – gross value added – per capita in the Republic in 2014 was €38,100, compared to €22,000 in Northern Ireland, just 57% of that in the south.
  6. The Republic is much more globally and export focused than is Northern Ireland. As of 2015, exports accounted for 39.5% of Irish economic output, twice the level of Northern Ireland.
  7. The Republic is Northern Ireland’s main export market, accounting for 31% of international exports – a market likely to contract significantly following Brexit.
  8. Northern Ireland sells more goods and services to GB than to RoI. However, much of that trade is dependent upon all-island supply chains that could be disrupted by Brexit.  More NI businesses trade with the Republic than with GB.  An effective strategy for either retaining or replacing the trading relationships with GB would be needed as part of reunification.  Reunification is likely to greatly increase trade between the north and the south.
  9. The Republic has a fundamentally stronger economy than has NI and the economic performance gap between the Republic and Northern Ireland is widening. According to the latest Economic Eye study from accountancy firm EY, economic growth last year in the Republic was 4.9% and in Northern Ireland it was 1.4%.
  10. The Republic is expected to increase its employment level, while Northern Ireland is predicted to lose jobs. EY predicts that the Republic will generate an additional 91,000 jobs by 2020 compared to 2016, whereas Northern Ireland will lose 3,500 jobs.
  11. The Central Bank of Ireland’s latest economic bulletin predicts strong continued growth in the Republic, with pay expected to grow 3.3% in 2018 and 3.3% in 2019, with the Irish economy growing 4.8% in 2018 and 4.2% in 2019, despite the moderating influence of Brexit. Unemployment is predicted to fall, with an additional 99,000 persons forecast to be in work by the end of 2019.
  12. Northern Ireland suffered significantly as the UK moved its focus from manufacturing to being a service economy. Devolution arrangements since partition have been insufficient for Northern Ireland to create its own economic policies that are truly independent of London’s and have been insufficient for the north to generate the level of jobs growth required.  That policy weakness was exacerbated by the Troubles, which discouraged foreign direct investment.  Devolution has failed to deliver for Northern Ireland in terms of the economy: the gap between Northern Ireland’s and the UK’s employment rate has actually increased since the Good Friday Agreement.
  13. Northern Ireland compensated for the loss of manufacturing and private sector investment by relying on the public sector for employment, with a big growth in public sector employment between the mid 1960s to the late 1980s.
  14. The Republic generated substantial economic growth through its use of a low corporation tax base, a strongly skilled labour market and business friendly policy, attracting large levels of foreign direct investment. Northern Ireland was unable to compete, generating investment instead in low cost support services, while profit centres went to the lower tax jurisdiction of the Republic.
  15. The Republic has benefited from a very effective IDA Ireland, which has been more successful than Invest NI in attracting foreign direct investment, with the assistance of a more helpful business operating environment in the Republic.
  16. The Republic has been clever in its targeting of growth sectors, particularly those that prosper in a globalised economy. RoI has an open economy, from which it is easy to trade internationally.  Dublin’s International Financial Services Centre has been a major success.
  17. The Republic continues to benefit from membership of the European Union, with investors from countries outside the EU using Ireland as a bridgehead into the EU. Ireland is currently benefiting from some Brexit relocations from London.  Germany is the second highest source of inward investment into RoI, after the US.
  18. There is a greater focus on skills and qualifications in the Republic than in Northern Ireland. While 45% of young people in the Republic complete their education with a degree or higher, this is true of only about 31% in Northern Ireland. More than a third of Northern Ireland school leavers who go on to university do so in Great Britain, most of whom do not return to work in Northern Ireland. While 26% of Northern Ireland’s adult working age population are graduates, the figure is over 35% in Dublin and Cork.  Both the Republic and Northern Ireland suffer from a problem of too many adults lacking basic skills.
  19. Ireland’s health system is widely criticised as inefficient and costly. If Irish reunification takes place, any merged health care system should be based on a reformed NHS.  A united island would have to take the best from each jurisdiction, not simply add Northern Ireland onto the Republic.
  20. There are around 403,000 public servants in the Republic of Ireland, 8.4% of the population. There are around 205,700 public servants in Northern Ireland, 11.4% of the population.  This is also much higher than the UK average, where the figure is 8%.  More than 50,000 jobs would go if the public sector in the north were proportionate in size to the Republic and GB.  This could save more than £1.7bn a year in pay costs and national insurance contributions.  But any such process should be achieved as far as possible by natural wastage to limit redundancies and the negative impact on individuals and the ‘multiplier’ impacts on the wider economy.
  21. The possible retention of Stormont as a devolved assembly might limit to a small extent the level of job cuts.
  22. Experience in Great Britain suggests that the economy can generate more private sector jobs than are lost in the public sector, but that many of the new jobs are less well paid and insecure.
  23. Northern Ireland is less economically productive than is the Republic. PwC calculates that the Republic is 60% more productive than the north and that the UK is 15% more productive than Northern Ireland.  A review by Ulster University concluded that Great Britain is 25% more productive than Northern Ireland.  The productivity gap between GB and Northern Ireland is widening.
  24. Factors causing weak Northern Ireland productivity include lack of private and public sector investment, an inadequate skills base, lack of R&D and innovation, a weak culture of entrepreneurship and an insufficiently competitive economy. The small size of Northern Ireland may influence these factors, for example by reducing the level of internal market competition.
  25. Poor infrastructure is a key factor in the productivity weakness. Symptoms include long commuting times, delays in taking goods to market and slow broadband speeds in rural areas.
  26. The CBI and Ibec have called for substantial infrastructure investment to support the all-island economy. Northern Ireland’s weak infrastructure is, in part, the result of inadequate investment during direct rule years: it can therefore be argued that the UK government should contribute to addressing this deficit.
  27. Northern Ireland’s Investment Strategy plans for a capital spend on infrastructure projects of £8.2bn for the five year period 2015/16 to 2020/21, including road projects (including Belfast to Derry, Derry to Dublin, Belfast’s York Street interchange, Belfast to Larne and Greenisland); healthcare, schools; water and waste water; and housing.  This investment is insufficient to address Northern Ireland’s existing infrastructure deficit.
  28. Brexit will severely damage Northern Ireland’s economy, whatever type of trading relationships replace membership of the European Union.
  29. Leaked analysis conducted by officials in the Treasury concludes that Northern Ireland will be one of the UK regions most negatively affected by Brexit. According to reports, it concluded that without a deal with the EU, Northern Ireland’s economy will be 12% smaller than it would otherwise be; with a hard Brexit deal, the negative impact will be 8%; and with a soft Brexit deal it will be 2.5%.  This economic damage would be either eliminated or mitigated by Irish reunification and the retained membership of the European Union.
  30. A European Parliament report predicts a likely 3% reduction in Northern Ireland’s GDP through withdrawal.
  31. The economic cost to Northern Ireland of Brexit is likely to be severe. A 2.5% underperformance by the economy would equate to a loss of around £930m a year in potential economic activity compared to a non-Brexit scenario; a 3% underperformance in  the economy would be an annual £1.1bn loss of potential activity; an 8% hit would cost the economy £3bn; and a 12% hit would make the economy £4.5bn smaller than it would otherwise be.  That is equivalent to £2,500 per person.
  32. If the jobs impact was pro rata to the loss in potential economic activity, then we would have 67,000 fewer jobs in Northern Ireland under the 8% assumption and more than 100,000 fewer jobs under the 12% scenario.
  33. Northern Ireland’s agri-food sector is particularly at risk from Brexit. There are more than 29,000 farmers in Northern Ireland, with 87% of Northern Ireland’s total farming incomes coming from the EU’s Single Farm Payment. Common Agricultural Policy (CAP) payments are crucial for Northern Ireland’s farmers, who receive 9% of the UK’s total allocation of EU pillar payments.
  34. Brexit provides a further threat to the agri-food sector in depriving it of access to an EU-wide labour market, on which many producers are dependent.
  35. There has been a significant increase in cross-border commercial operations in recent years, as agricultural and food producing organisations achieve economies of scale through cross-border mergers. Dairy production, in part as a result of this, can cross the border repeatedly during the production process.  It is as yet unclear how these activities, and these business structures, will be affected by Brexit and a UK/EU border.
  36. The most comprehensive analysis of the potential economic benefits of Irish reunification was led by Karl Huebner. It concluded that using its assumptions (which predate the Brexit vote), unification could benefit people across the island of Ireland by €1,497 per year in the year of implementation, rising to €2,810 per person per year within seven years of implementation.  Most of the financial benefits would be felt in the north.
  37. There are different ways to calculate the level of subsidy Northern Ireland receives from the UK government. In 2013-14, total government revenues in Northern Ireland amounted to £14.9bn, with expenditure of £24.1bn.  Some £4bn of this was on ‘non-identifiable’ items – Northern Ireland’s share of general UK government expenditure.  Many of the non-identifiable items – such as international relations – would not continue as costs to Northern Ireland after reunification.  If these costs are ignored the deficit of revenue against expenditure for Northern Ireland is reportedly £5.2bn. A range of figures have been suggested for the size of the subvention to NI.  It would be useful for there to be more work undertaken to provide a less contested figure.  But it seems unlikely that any UK subvention in the range of £3bn to £11bn (the range of estimates) can continue indefinitely and despite recent years of austerity in GB – even if Northern Ireland continues as part of the UK.
  38. A major restructuring of Northern Ireland in terms of its fiscal position within the UK seems likely, or is arguably inevitable.  The removal of Northern Ireland as a cost to the UK would be welcomed by large numbers of taxpayers in GB, particularly in England. It seems very likely that whatever happens politically that there must be substantial reform in the coming years to the Northern Ireland economy and structure of public service delivery. While London generates an annual fiscal surplus of £3,070 per person, Northern Ireland is the cause of the largest fiscal deficit, at £14,020 per person.
  39. If the UK government agreed to gradually taper its subsidy of Northern Ireland, it is reasonable to believe that the adoption of the Republic’s economic policies could increase tax revenues substantially, reducing the continued level of subvention for the north. The objective would be for the north to become economically self-sufficient, not dependent on fiscal transfers from either the south or GB.
  40. A Ten Point Plan for how to achieve Irish reunification is included as a conclusion to this report.

 

A tale of two economies

David McWilliams gained respect as the best known Irish economist to predict the global economic crash of 2007 and who warned that Irish property prices had become a bubble.  He might now be the economist who reads it correctly about the financial benefit of Irish reunification.  McWilliams examined the issue in some detail – and very few economists have done so – after Ireland’s foreign affairs minister Simon Coveney said he would like to see a united Ireland in his lifetime.

 

McWilliams presented various economic facts that illustrate that since partition, the economies of the Republic and Northern Ireland have increasingly diverged.[2]  The northern economy that was strong in 1922, is now weak.  The southern economy that was weak in 1922, is now strong.   “The union with Britain has been an economic calamity for Northern Ireland,” said McWilliams. “All the people have suffered, Catholic and Protestant, unionist and nationalist.”

 

Key statistics illustrate the difference.  McWilliams explained:  “In 1920, 80 per cent of the industrial output of the entire island came from the three counties around Belfast. Belfast was the biggest city in Ireland in 1911, larger than Dublin, and was home to Ireland’s innovation and technology.  At partition the North was industrial and rich, the South agricultural and poor….

 

“The Republic’s economy is [now] four times larger, generated by a work force that is only two and a half times bigger. The Republic’s industrial output is today 10 times that of the North. Exports from the Republic are 17 times greater than those from Northern Ireland, and average income per head in the Republic, at €39,873, dwarfs the €23,700 across the Border…. Dublin is three times bigger than Belfast, far more cosmopolitan and home to hundreds of international companies.”

 

McWilliams also pointed out – in an article published in the Belfast Telegraph – that while a peace dividend was expected for Northern Ireland, it was actually delivered for the Republic.  “Since the Good Friday Agreement, American corporations alone have invested close to $400bn (£312bn) in the Republic,” he explained. “This is equivalent to 56 years of the British Government’s annual subvention to keep Northern Ireland afloat!….  At the moment, the Republic’s budget deficit is 1% of GDP. If Northern Ireland had to pay for itself in the morning, the budget deficit would be about 22% of GDP!”[3]

 

Economies are often compared on the basis of GDP per person.  In the case of the Republic, GDP per head is a flawed measure owing to the movement of capital and the transfer of asset ownership by multinationals domiciled in Ireland for tax reasons.[4]  GVA (gross value added) is regarded by many economists as a more relevant measure.[5]  (Ireland’s CSO is experimenting with the GNI measurement, but this has also been criticised as providing misleading information.)

 

In 2014 – before the latest Irish economic acceleration – GVA per capita in the Republic was €38,100[6].  By comparison in Northern Ireland it was £18,682[7], the third lowest of any UK region.[8]  Using current exchange rates that equates to less than €22,000, or about 57% of the figure in the Republic.  Average full time income per head in the Republic in 2016 was £40,403 (€45,611[9]), compared to £25,999[10] in Northern Ireland.  In other words, a worker in the Republic is typically paid half as much again as someone working in Northern Ireland.

 

However, disposable income is comparable in real terms north and south.  In 2015, average household income by purchasing power parity was €13,300, in the border, midlands and western region of Ireland and €15,500, in the southern and eastern region (containing Dublin and Cork).  In Northern Ireland in 2015, the figure was €15,400 per household.  In 2007, before the crash, the figures were €13,700 in the border, midlands and western region, €15,800 in the southern and eastern region and €14,500 in Northern Ireland.  Pay figures in the north are to a significant extent flattered by higher average pay in the public sector (but the same is true in RoI, albeit with a proportionately smaller public sector).  In 2017, average weekly pay in Northern Ireland was £501 (£26,052 per year). There is a significant variation between average full time pay in the public and private sectors.  In 2017, average private sector weekly pay was £446, compared to £623 in the public sector.[11]  That equates to £23,192 in the private sector, or £32,396 in the public sector.

 

In the Republic, in 2017, average income was €734.60 in Q4 2017, while in the public sector it was €946.55.[12]   This was a 28.9% higher pay in the public sector than the average pay in both public and private sectors.  That compares to 24.3% higher pay in the public sector over average pay in Northern Ireland.

 

The Republic was severely damaged by the global financial crisis of 2008 and the picture over the longer term has been different, with average real incomes growing much faster in the Republic than those of the UK as a whole – and Northern Ireland lagging the UK as a whole.  These graphs from an academic paper by Cormac Ó Gráda and Brendan M Walsh and published by Queen’s University provide the historical context.[13]

 

 

 

 

The unemployment rate in NI is officially 3.2%, which – unusually and amazingly – is below the UK rate of 4.3%.  (Figures as at end of January 2018, published in March 2018.[14])  In the Republic it is 6.1%.[15] Superficially, the unemployment position seems much better in Northern Ireland than in the Republic.  But economic inactivity is very high in Northern Ireland.  Consequently, the employment rate is a more useful indicator of the state of the labour market.  Northern Ireland’s employment rate at March 2018 was 69.8%; while the Republic’s was 68.3% at the end of 2017.[16]  While the official unemployment situation is worse in the Republic, the real level of unemployment is only marginally worse.

 

The Republic’s economy is much more globally focused than is Northern Ireland’s.  Based on statistics from the International Monetary Fund’s World Economic Outlook Database, Ireland’s total Gross Domestic Product amounted to $324.3bn as of November 2016. Therefore, exports accounted for 39.5% of total Irish economic output.[17]  For Northern Ireland, exports accounted for 20% of output (as measured by GVA), which is above the UK level of 17%. The Republic of Ireland is NI’s largest export destination (31% by value), with the EU as a whole (excluding GB) responsible for 55% (by value) of NI’s exports.[18]  Northern Ireland’s export levels are likely to be significantly diminished by Brexit, whatever form it takes.  The Republic’s global focus makes it much more vulnerable than the UK to global shocks, but much better positioned to take advantage of global growth.

 

Irish economic policy in the 1990s was the basis of remarkable growth.  Kevin Hjortshøj O’Rourke explains: “EU membership, and the single market programme of the late 1980s and early 1990s, were essential in allowing Ireland to finally reap the full economic rewards of its independence. The policy mix that we adopted is well known: a low corporation tax and other incentives for inward investment, including investment in education and infrastructure.”[19]  The author adds that social partnership, wage restraint, stable industrial relations, political independence and EU membership were all part of this attractive policy environment.  “Underpinning everything was two crucial factors: our political independence, which allowed us to adopt a policy mix well suited to our own circumstances; and our membership of the European single market, without which none of this would have worked.”[20] While economic policy was subject to some major errors (such as weak banking regulation), which exposed Ireland disproportionately to the global crash of 2008, it is clear that Ireland had a fundamentally strong economy – strong enough, in fact, to deal with the punishing regime of bailing-out its failed banking system.

And the economic gap is getting wider

 

EY’s latest Economic Eye study (winter 2017[21]) found that while economic growth in the Republic last year was an estimated 4.9%, in Northern Ireland it was a mere 1.4%.  Worse still, EY’s previous Economic Eye[22] predicted that while the Republic will generate an additional 91,000 jobs by 2020 compared to 2016, the north will lose 3,500 jobs.

 

According to EY, factors behind the strong Irish performance include being well positioned to benefit from global economic growth – which Northern Ireland may not be.  Mike McKerr, EY Ireland’s managing partner, commented: “The RoI economy is generating significant momentum suggesting some resilience to Brexit, though it differs across sectors and locations. The retail and consumer sector appears to face a profoundly challenging time in Northern Ireland.”

 

EY’s Winter 2017 Economic Eye reported: “The headline data suggests an increasing divergence in economic fortunes across the island. The Republic of Ireland sits atop the European growth charts, while Northern Ireland is closer to the bottom.”

 

The strong underlying economic growth position of the Republic was illustrated by the latest economic bulletin (dated 12 April, 2018) from the Central Bank of Ireland.[23]  This predicted pay in the Republic to grow by 3.3% in 2018 and again by 3.3% in 2019, with the labour market tightening because of demand for additional workers by businesses taking advantage of domestic and global economic growth.  The Central Bank predicts the Irish economy will grow 4.8% this year and 4.2% next year, despite the moderating influence of Brexit.  Unemployment is predicted to fall marginally, to 5.6% in 2018 and 4.8% in 2019, with an additional 99,000 persons forecast to be in work by the end of 2019.

 

In the 2016/17 period economic growth in the Republic was 7.8% and in the UK it was 1.4%, while in Northern Ireland the economy contracted by 0.2%.[24]  This is clear evidence of the direction of the various economies.

 

How the difference is explained 

There are a variety of reasons for the difference in economic performance since partition.  Clearly, the Troubles was one factor.  This damaged the economy of Northern Ireland and of border counties in the Republic, particularly Donegal.  The Good Friday Agreement failed to deliver the ‘peace dividend’ at the levels expected.

 

Partition has also been damaging to the whole of Ireland, particularly the border region.  The economic damage to border areas has eased, but remains noticeable.  Average disposable incomes in Donegal and the north east border areas rose from 75.6% of the Irish national average in 1973 to 92.5% in 1994, and in 2002 it was around 90%.[25]  The most recent statistics published by the EU on average regional pay shows the Republic’s border, midland and western region still has average pay below that of the southern region.[26]

 

The continuing situation is well described by the Irish Borderlands website, published by Queen Mary college, part of the University of London[27].  “The borderlands of Northern Ireland and Ireland are amongst the most disadvantaged and deprived areas of the island. Though places near the border’s eastern region, including the cities of Newry in Northern Ireland and Dundalk in Ireland, have recently grown in prosperity as part of the Belfast-Dublin axis of development, most of the borderlands were badly affected by the Troubles and continue to suffer the significant negative economic and social effects of the border. As in other contexts, the creation of a border in an area previously traversed by long-standing and multiple networks – familial, social, economic – dramatically distorted or destroyed these existing links and interconnections. While some pre-partition social networks continued on a cross-border regional or all-island basis, for many people old patterns of family connections and friendships were broken, severely curtailed, or a struggle to maintain.”

 

A more fundamental economic reason over the longer-term for the difference in performance relates to the different sectoral focus of the two economies.  At partition, Northern Ireland was dependent on heavy engineering, such as shipbuilding, and on shirt making.  These industries have been badly affected by globalisation and Northern Ireland has been only partially successful in stimulating replacement industrial sectors.

 

The UK economy has refocused away from manufacturing to the service economy.  This has tended to increase inequality and the wealth divide in the UK.  London has prospered, while regions that have traditionally been more dependent on manufacturing have suffered.[28]  The ‘Great Recession’ has increased regional disparities, with London recovering more strongly and more quickly than have other, weaker, regions.[29]

 

The restrictive nature of devolution for Northern Ireland limited the regional assembly’s capacity to develop its own industrial strategy that reflected its distinctive needs – recovering from the collapse of the shipbuilding and linen sectors – and the challenge of geographical marginalisation.  “The inability of the new Northern administration to deviate in any significant way at all from UK-wide policy simply reflected the extremely limited scope for local autonomy that was provided for in the 1920 Government of Ireland Act under which its local parliament (Stormont) operated.”[30]  Northern Ireland’s economic decline resulted from the lack of international investment because of the Troubles and the “serious crisis” in economic policy in the north.[31]  Northern Ireland “tracked” the manufacturing decline of the UK as a whole, but without generating a new private services sector to compensate.[32]

 

Northern Ireland has compensated by becoming increasingly reliant on the public sector for employment, with a big growth in public sector employment between the mid 1960s to the late 1980s.[33]  With Northern Ireland having a higher corporation tax rate than the south, inward investment has tended towards low cost support services, rather than profit centres.  Multinationals have tended to prefer to locate profit centres in the Republic, where they can pay a significantly lower rate of corporation tax.  (It should be noted that the Republic’s corporation tax advantage is being challenged both by proposals from the European Commission and US tax reforms, which make Irish tax residency less attractive for corporations.  Despite this, the Republic is still very attractive from a corporate tax perspective.  As a globally-focused and nimble country, the Republic is particularly capable of responding to economic events and attract foreign direct investment.)

 

The Republic has benefited from IDA Ireland (formerly known as the Industrial Development Agency), which has been assisted by the low rate of corporation tax to be much more effective than the north’s Invest NI in attracting foreign direct investment (FDI).  But multinationals have been attracted to Ireland not just because of the tax rate: other factors include a highly skilled and motivated labour market; a welcoming culture for migrant workers and managers; the English language (an important advantage with regards to attracting US investment destined for the EU); and substantial investment in infrastructure (particularly in the big cities).  It is important to note that another important factor has been IDA’s ability to influence government policy, for example to improve roads infrastructure to assist with attacting FDI to regions away from Dublin.  The perception in Northern Ireland is that Invest NI does not have the same policy influence, with the result that there are high levels of unemployment and lower levels of inward investment in the north west of NI.

 

“RoI in recent decades has performed well globally in attracting inflows of foreign direct investment (FDI), despite challenging economic circumstances,” reported a Northern Ireland Assembly research paper.[34]  It added that FDI was disproportionately attracted to Dublin and Cork, with less investment attracted to other cities and regions.  However, following the global crash, IDA was given a target of 50% of new investment being located outside these two cities.

 

In 2017, IDA Ireland attracted 111 new foreign investors, as well as working with 76 existing investors who expanded their operations in the course of the year.  This created almost 20,000 (19,851) new jobs from FDI companies, with the result that 210,443 people in the Republic are employed by overseas businesses, with the support of IDA.[35]  By comparison, Invest NI ‘promoted’ 5,600 new jobs in the 2016/17 year.  ‘Promoted’ is not the same thing as created, as it includes jobs that have been promised by inward investors, but not yet delivered – some of which may take several years to arrive, and some of which may never be delivered. It attracted 22 new investors into NI during the year.[36]  There is a clear and strong difference in performance between the two agencies.  However, this may be less to do with the competence of Invest NI and more to do with more effective policy levers being applied in the Republic.

 

The Republic has also been clever in its targeting of growth sectors, particularly those that prosper in a globalised economy.  RoI has an open economy, from which it is easy to trade internationally.  As a committed member of the European Union, the Republic has benefited from investment from both within and outside the EU.  Ireland is recognised by investors from countries outside the EU – particular the United States, but also other countries such as Israel – as an excellent bridgehead into the EU.  But the second largest foreign investment source is Germany[37], above the UK’s level of investment and helps explain why ‘Irexit’ has little traction in Ireland.  Dublin’s International Financial Services Centre has been a major success, attracting banks, accountancy firms and fund managers, and acting as the major global base for various niche activities, such as aircraft leasing.

 

Current factors affecting RoI growth include:

  • Brexit relocations from London
  • FDI from US continuing into RoI, despite US tax cuts
  • Effectiveness of IDA
  • Lower CT rate
  • Stronger skills base
  • Ability to attract global talent, both Irish returners and others, because of strength of economy, nature of existing FDI, increasingly socially liberal society.
  • Focus on key sectors, eg IT, pharma, activities with profit centres within RoI
  • The financial services sector likes Ireland – English is spoken, the CT rate is low, the effective tax rate is even lower, Dublin’s International Financial Services Centre has created a cluster of mutually-supporting firms.
  • RoI is more integrated into the global economy than is NI, so is better positioned to benefit from growth in the global economy
  • Political stability in RoI, vs instability in NI
  • A relatively harmonious society

 

There are a number of variations in terms of public policy between the two jurisdictions.  The Republic of Ireland’s corporation tax rate is 12.5% (some corporations have been able to avoid even this).  Northern Ireland is subject to the UK rate, which is currently 19%.

 

There is a greater focus on skills and qualifications in the Republic than in Northern Ireland.  While 45% of young people in the Republic complete their education with a degree or higher, this is true of only about 31% in Northern Ireland.[38]  More than a third of Northern Ireland school leavers who go on to university do so in Great Britain, most of whom do not return to work in Northern Ireland.[39]  While 26% of Northern Ireland’s adult working age population are graduates, the figure is over 35% in Dublin and Cork.[40] Both the Republic and Northern Ireland suffer from a problem of too many adults being without basic skills.

 

Ireland’s health system, however, is widely criticised as inefficient and costly.[41]  While Northern Ireland’s NHS is in severe crisis and in urgent need of reform, it is a more productive and less expensive system than the Republic’s.  Any merged system would need to be based on the NHS, but reformed.  This is similarly true of other aspects of the Republic – social housing policy in the Republic, for example.  Regional policy is inadequate in both the Republic and Northern Ireland.  It must be stressed that a united island would not merely have to take from the best of each jurisdiction, but must exceed this in some regards and needs to be regarded by unionists, for example, as a new nation.

 

There are around 396,100 public servants in the Republic of Ireland,[42] 8.4% of the population.  There are around 206,430 public servants in Northern Ireland,[43] 11% of the population. This compares to 8% for the whole of the UK.   (The statistics for RoI comprise the civil service, defence, the garda, education, regional bodies, health and semi-state companies.  For Northern Ireland, the figure comprises employees of NI central government, arm’s length government bodies; UK central government employees based in Northern Ireland, local government and public corporations.)

 

More than 50,000 jobs would go if the public sector in the north were reduced in proportionate size to that of the Republic.  However, the possible retention of Stormont as a devolved assembly might limit to a small extent the level of job cuts.  Average weekly public sector pay in Northern Ireland is £623[44]: this suggests the potential annual cost savings of a loss of 50,000 public sector jobs in Northern Ireland is around £1.6bn per annum in wages, plus £145m in national insurance contributions.  In addition, workplace accommodation costs would be saved.  However, the loss of these jobs would potentially create additional welfare benefits costs and loss of spending in the wider economy, unless equivalent jobs could be created in the private sector.  In recent years across the UK, the loss of public sector jobs has been less than the creation of new jobs in the private sector – but these have typically been at lower rates of pay and a high proportion of them have been self-employed or otherwise insecure.

 

While the direct cost savings to public sector bodies would potentially be in excess of £1.7bn a year, the net benefit to public expenditure would be significantly less than this.  It should also be recognised that the capacity of the public sector in Northern Ireland to reduce assumes not only greater efficiency, but also that the security situation is normalised, with no increase in politically-motivated violence before or after Irish reunification.

 

How RoI created its vibrant economy

 

The European Commission explained:

“As a small open economy Ireland’s financial fortunes are dependent on international trade and influenced by global markets.  That means it’s important for the country to build overseas partnerships and being part of the European Union enables us to do just that in solidarity with other nations.

“Before joining the EU in 1973, Ireland’s largely agricultural based economy was choked by its dependence on the UK market.  At that time, industrial trade and international co-operation were becoming the norm and EU membership helped Ireland move towards a modern, free market economy.

“The EU’s Single Market environment, together with decisions to introduce low corporate taxes and develop an Industrial Development Agency (IDA Ireland) to promote Ireland abroad, eventually enabled the new Irish economy to flourish.

“One of the difficulties with small open economies like Ireland’s is that they can be vulnerable to global factors and Ireland’s strongest period of economic growth, from the mid ‘90s to the mid ‘00s, was followed by a spectacular crash sparked off by a worldwide financial meltdown.

“After several difficult years, Ireland’s economy is now growing again and the European Union has introduced several new, powerful measures to better protect the economies of Ireland and all Member States in the future.”[45]

 

Productivity

 

According to PwC, the Republic of Ireland is around 60% more productive than is Northern Ireland, while the UK average is 15% above the level of Northern Ireland. [46]

 

Productivity across the UK has been a challenge in recent years, holding back recovery after the Great Recession.  But productivity is a significantly greater challenge in Northern Ireland than in Great Britain.  “Whilst productivity has slowed at national [UK] level and the UK has lost some ground relative to competitor nations, the gap between NI and the UK average has been persistent and widening for many years despite being the target of a number of economic strategies.”[47]  “GVA per head in NI is only 75 per cent of the GB average. This means that there is a 25 per cent productivity gap between the GB and NI.”[48]

 

There are a number of factors that dictate the level of economic productivity, most come down to policy decisions, including investment.  The UK’s ‘productivity handbook’ named five factors as being critical in determining productivity growth.  These are investment, innovation, skills, enterprise and competition.[49]

 

In terms of private sector investment, this has lagged because Northern Ireland has been insufficiently attractive to international investment, while also not producing enough high margin indigenous businesses.  In part, this is a circular argument – investment is not attracted to locations that have the reputation and reality of suffering from low productivity.  Moreover, footloose capital is typically attracted to a low tax jurisdiction, other factors being equal.

 

The lack of public sector investment is arguably at least equally relevant in the case of Northern Ireland.  It has a significant infrastructure deficit, for example in terms of roads, rail and digital connectivity (see below).  This damages productivity as it takes longer to get goods to market, for executives to travel to meetings and for commuters to get to work.  The lack of fast broadband speeds in rural areas of Northern Ireland is a major impediment.

 

The absence of innovation is itself the result of a combination of factors: the lack of foreign direct investment; the limited tax incentives to locate state-of-the-art private sector R&D facilities in Northern Ireland; the small size of the university sector (the number of Northern Ireland school leavers going on to university elsewhere would be sufficient to populate an additional university in Northern Ireland[50]); and the absence of a more competitive commercial environment (see below).

 

Northern Ireland lacks skills at all levels: it has too few graduates; it has a shortage of technical vocational skills; and it has too many people without basic skills.  “The skills deficit in NI is sizeable and enduring and the most worrying statistic is for those with no level 1 National Vocational Qualifications. NVQ stratifies a range of qualifications ranging from GCSEs to trade apprenticeships and University degrees. In 2015, 16 per cent of 16 to 64 year olds did not have a level 1 NVQ. To have less than a level 1 NVQ means less than 5 GCSEs at A-C grade.”[51]

 

With a sub-par economy, people with the best skills tend to be attracted elsewhere, leaving behind those with inadequate skills – for whom other places are not welcoming.  In effect, the market works in ways that leave the least skilled people in Northern Ireland, without offering sufficient incentives to retain or attract those with the highest skills.  With private sector pay lagging behind that of the public sector, more than half of graduates in Northern Ireland are attracted to work in the public sector.[52]

 

The issue of enterprise is a regular bug-bear for Northern Ireland.  Too few new businesses are created in Northern Ireland and too few of those that are set-up survive.  Northern Ireland has the weakest entrepreneurial environment of the UK’s four nations and the lowest rate of new business start-ups.  “The distribution of TEA [Total early-stage Entrepreneurial Activity – the intention to start a business] rates in 2015 was similar across the home nations: England at 7.2%, Wales at 6.8%, Scotland at 6.7% and Northern Ireland at 5.4%”.[53]  “Northern Ireland is the one UK region where businesses births and deaths (registration and deregistration) were almost equal, at roughly 9% of registered businesses in 2014; the UK business birth rate in 2013 was 14.1% and the death rate was 9.7%. Since 2009, Northern Ireland has been persistently below the rest of the UK in terms of the net change in the number of business registrations, with an annual decline in the total number of businesses registered.”[54]

 

One of the major challenges for the Northern Ireland economy is the lack of progression from small to large.  If more small firms could become large, then Northern Ireland would have a bigger and more competitive economy.  Instead, the indigenous economy is dominated by small firms.  “Small and medium-sized companies and self-employed people, together, provide 75% of employment, 75% of turnover and 81% of GVA in NI’s private sector. Furthermore, SMEs actually employ more people than NI’s large companies and the public sector combined.”[55]

 

It can be argued that these problems relate to a significant extent to the small size of Northern Ireland, with a population of just 1.8 million people and a land border to the south and a sea border to the east.  There are cost barriers to competing with Great Britain and trade barriers – some regulations and differences in tax regimes – with the Republic of Ireland.  Becoming a more integrated part of a larger all-island economy should generate a more competitive environment, strengthening productivity in the process.

 

This report assumes that policy-based causes of weak productivity would be addressed and corrected post-reunification.  This would lead to a gradual levelling-out of economic performance between the Republic and Northern Ireland.

 

John Fitzgerald has examined the issue of weak NI productivity in an article in the Irish Times.  He explained: “The low investment rate in the North has been translated into a steady fall in labour productivity, measured as output per person employed, relative to the UK average. Between 2000 and 2014, the North’s productivity fell from 93 per cent of the UK average to 80 per cent. What makes that even worse is that the UK’s productivity has itself been declining over the last decade relative to European Union partners. So the North has been experiencing a falling share of a falling index.”[56]

 

Politics (and economics) is often about making assumptions.  The assumption of this author is that following an extended period of austerityin GB and a one-off deal from the UK government involving a £1bn additional fiscal transfer to NI, that there will be a point where UK government generosity towards NI recedes.  At some time it is likely that NI will suffer GB levels of reduced public spending.  Moreover, Brexit will inevitably lead to a significant change in economic focus, which will have a major impact on NI.  There needs to be a rise in NI levels of productivity, which is likely to involve a further reduction in the public sector headcount.  So the conversation should not be about comparing a united island with the status quo – rather comparing two alternative future visions of where NI society moves towards.

 

Northern Ireland’s infrastructure deficit

Northern Ireland’s infrastructure is inadequate and is a key factor in its weak productivity.  Evidence for this is clear: long commuting times in Belfast, limited motorway and rail connectivity, poor road connections in the North West and large parts of the rural areas without fast broadband speeds.

 

In summer 2016, a joint report from the CBI and Ibec argued for improved infrastructure to support the all-island economy.  It called for:

 

  • A major upgrade of the island’s road network:The road network will remain the most important means of connecting key urban centres.
  • A proposal mapping the completed Network: So that 85% of the island’s population live within 10km of their nearest inter-urban route.
  • Planning for this Network to start now:So contracting and construction can get underway at the end of this decade.
  • The immediate priorities to include: completing routes already in development such as A5 and A6 upgrades to Derry/Londonderry and the entire north west and the M1/A1 Sprucefield bypass to better link Dublin and Belfast and major upgrades to the N20 from Cork to Limerick; the capacity of the M50; the N15 linking Letterkenny to Sligo and the A5 route extension to Letterkenny.
  • New funding streams for this vital investment: The cost to upgrade the transport network is affordable, but the funding sources need to be agreed and sources other than public investment are needed.
  • All possible financing options are explored:including off-balance sheet financing from strategic investment funds, EIB loans and European Commission funding via the Juncker plan.

 

“If delivered, Ibec and the CBI believe this network will make it easier to:

“Move around and across the island: 
The ease of movement for people will be significantly improved especially where there are no motorways now.
Do business: The network will make it easier for companies to transport, market and sell goods and services on reliable predictable all-island basis.
Connect with the rest of the world: by linking the entire island into a network that connects with all the island’s international ports and airports.
Promote technology/innovation: Driving adaption and use of new fuels and other possibilities such as driverless and electric vehicles for goods and people.
Improve competitiveness: From new infrastructure delivering reduced costs, and more predictable journey times.
Support Tourism/SportThe Network will strengthen the island’s credentials as an ideal location to hold a major sporting tournament.
Embed peace and prosperity: World class infrastructure helps to bring economic opportunities and prosperity to every region, locality and community.”[57]

 

Northern Ireland’s Investment Strategy plans for a capital spend on infrastructure projects of £8.2bn for the five year period 2015/16 to 2020/21.  Priorities include £1.2bn for road projects (including the A6, Belfast to Derry, and A5 Derry to Dublin connections, Belfast’s York Street interchange, the Belfast to Larne road and the A2 at Greenisland); £1.9bn for healthcare buildings (hospitals, primary care, etc); £1.2bn on schools; £1bn on water and waste water; and £855m on housing.[58]

 

However, this investment is insufficient to address Northern Ireland’s existing infrastructure deficit.  Northern Ireland’s weak infrastructure is, in part, the result of inadequate investment during direct rule years: it can therefore be argued that the UK government should contribute to addressing this deficit.

 

The devolution effect

 

Devolution has been disappointing for Northern Ireland in terms of its economic impact.  When the GFA was signed in April 1998, the NI employment rate was 65.4%.  By the end of last year it had improved modestly to 68.7%.  Compare that to the UK situation.  At the time of the GFA the UK employment rate was 71.7%, which increased to 75.6% by the end of last year.  In 1998, NI lagged the UK employment rate by 6.3%.  At the end of last year, it lagged it by 6.9%.  So despite devolved government, the employment rate differential has widened.

 

The failure of devolution to improve the fundamental strength of Northern Ireland’s economy has been noted by commentators.  John Fitzgerald observed: “The history of the Northern economy, since the Good Friday agreement, is that there has been little progress in transforming it into a self-sufficient economy, which could sustain the standard of living currently supported through transfers from London.”[59]  Overall, devolution in Northern Ireland has been a failure in terms of economic development policy and outcomes.  As John Simpson observes, looking at what has happened since the Good Friday Agreement and based on what has happened elsewhere, Northern Ireland should now be in a much better position. “UK and Irish comparators suggest that average personal incomes might be about 6%-8% higher, employment could be 5% higher and net emigration several thousand lower.”[60]

 

Northern Ireland’s trading relationship with Great Britain

 

In 2016, 15% of Northern Irish sales and exports of goods and services beyond its own geographical borders went to the Republic of Ireland.[61]  This had a value of around £4.3bn[62] and represented 5% of total NI production[63]. The value of trade to the north from RoI was worth much less to the Irish economy, at around £1.3bn.[64]  Northern Ireland’s exports of goods to the whole EU, including RoI, was about £7.8bn in 2016.[65]  Northern Ireland’s sales to GB were of much greater value, at about £15bn.  This compares to internal sales within Northern Ireland, of about £50bn.  However, much of Northern Ireland’s sales to GB contain materials or ingredients sourced from the Republic, via integrated supply chains: Brexit therefore threatens the basis of much of NI trade with GB.[66]  Moreover, one and a half times more Northern Ireland businesses sell to the Republic than sell to GB.[67]  Exports are more important to NI than to GB: they constitute 20% of NI output, compared to 17% of the UK as a whole.[68]  These factors demonstrate the need for NI businesses to be able to freely trade with both GB and RoI, both post Brexit and post reunification.  The statistics imply that far more individual items are carried across the Irish border than across the Irish sea.  If there is any kind of enforced border post-Brexit, it therefore makes more sense for it to be located between GB and Northern Ireland where the administrative burden would be less.

 

The big questions, then, are: would Northern Ireland’s sales to GB significantly fall if Northern Ireland left the UK and became part of a united island?; would sales to RoI and the rest of the EU increase at a scale to compensate for that?; and would a gradual transfer from being part of the UK to being part of a united island mitigate the negative impact on sales to GB?  It is important that an economic plan be drawn up to consider how traders in Northern Ireland could either continue to trade at the same level with GB after reunification, or else replace that trade with the EU.  It is important that NI maintains a close relationship with GB, whether or not it becomes part of a united island.  That could best be achieved by avoiding tariffs and border controls and to allow for trade to continue to be conducted in sterling.

 

 

Source: Northern Ireland Assembly (Research Matters)

 

It is impossible to predict to what extent these goods exports to GB would continue following a united island.  There would be a particular challenge for Northern Ireland’s manufacturing sector, which sells more goods into GB than it does into Northern Ireland, RoI and the rest of the EU combined.[69]

 

The potential impact of Brexit on NI

 

This report has already established that Northern Ireland’s economy is weaker than the Republic’s and that the performance gap is increasing.  Those realities are correct without taking into account the impact of Brexit.  Most respected commentators and economists believe that Brexit will be seriously damaging to the economy of Northern Ireland, whatever form Brexit takes and whatever type of trading relationships replace membership of the European Union.

 

According to the European Parliament: “Northern Ireland is the part of the UK most distinctly affected by Brexit.”[70] It points out: “Growth in exports to EU countries from Northern Ireland has considerably outpaced that to non-EU countries in recent years and amounted to £3.63bn in 2014, compared to £2.53bn of non-EU exports….  The importance of Northern Ireland’s current tariff-free and quota-free trade relationship with the Irish Republic is apparent, with 34% of Northern Ireland’s EU exports heading there (21% of the region’s total exports).  This makes Ireland the largest market for Northern Irish exports. More broadly, the majority of Northern Ireland’s exports (57%) head to the EU.  The UFU reports that “87% of Northern Ireland’s total farming incomes comes from the Single Farm Payment.”[71]  Northern Ireland’s farmers receive one of the highest payments-per-hectare annual awards in the EU and nine per cent of the UK’s total allocation of EU pillar payments.   Northern Ireland’s EU trade dependence has been such that a 3% reduction in the region’s GDP has been calculated as the likely outcome of withdrawal.”[72]

 

Leaked analysis conducted by officials in the Treasury concludes that Northern Ireland will be one of the UK regions most negatively affected by Brexit.  The analysis has not been published by the Treasury.  According to Sky News[73], the analysis concluded that without a deal with the EU (an outcome that now seems unlikely), Northern Ireland’s economy would be 12% smaller than it would have been without Brexit; with a hard Brexit deal, it will be 8% smaller; and with a soft Brexit deal (retaining membership of the customs union through EFTA, for example) it will be 2.5% smaller.  At the time of writing (April 2018), the most likely outcome would seem to be something between a hard and a soft Brexit, with perhaps some kind of customs ‘partnership’.  This would seem to infer an outcome between the 2.5% and 8% negative impact.  This economic damage would be either eliminated or mitigated by Irish reunification and the retained membership of the European Union.

 

The most recent figures of GVA for Northern Ireland were for 2016, at £37.2bn.[74]  Given the current state of negotiations, it would be optimistic to believe that a ‘soft Brexit’ deal will be negotiated.  If it were, the likely economic impact would be a loss of potential economic output of a ‘mere’ £930m a year, based on the lowest Treasury assessment.  The potential loss would be £1.1bn, using the projections from the European Parliament’s report.  The economic impact of a ‘hard Brexit’ that hits potential output by 8% would be £3bn (£1,600 per person) and a no deal situation would reduce potential size of the economy by 12%, which would be £4.5bn (nearly £2,500 per person).  If we assume (as a rough guide) a reduction in employment pro rata for the reduction in the potential size of the economy, that would mean 67,000 fewer jobs under the 8% impact scenario, or more than 100,000 jobs fewer under the 12% scenario.  (There were 837,000 people employed in Northern Ireland as at November 2016.[75])

 

The Agri-food sector

 

The agri-food sector is particularly important for the Northern Ireland economy – and especially put at risk by Brexit.  There are more than 29,000 farmers in Northern Ireland, who receive more in EU Common Agriculture Policy payments than from market prices.[76]  “Currently, 87% of Northern Ireland’s total farming incomes comes from the Single Farm Payment”, says the UFU.[77]  Total income from farming in 2016 was £244m.[78]

 

Brexit represents a threat on three levels to the farming sector.  Firstly, there is the potential loss of labour, with many food producers reliant on workers from elsewhere in the EU, with a shortage of local labour willing to do this work.  Secondly, there has been a significant increase in cross-border commercial operations in recent years, as agricultural and food producing organisations achieve economies of scale through cross-border mergers, such as Lacpatrick and Fane Valley.  Food processing, in part as a result of this, can involve crossing the border repeatedly.  Thirdly, there are fears that the replacement of the Common Agricultural Policy is likely to lead to a loss of support to farmers generally[79] and to Northern Ireland farms in particular[80].

 

Brexit is a potential disaster for Northern Ireland’s farmers and food producers, who are dependent on EU financial support.

 

Northern Ireland receives funding from a number of EU funding schemes[81].  Once NI leaves the EU it will be unable to receive several of these, though Peace funding is likely to continue.  Should NI become part of a united island, it will again be eligible to receive EU funds.

The European Regional Development Fund (ERDF) Programme focuses on improving Northern Ireland’s sustainable economic growth:

  • promoting research and innovation
  • promoting SME competitiveness, and
  • supporting the shift towards a low-carbon economy

The European Social Fund (ESF) Programme addresses employment and social inclusion issues:

  • promoting employment and supporting labour mobility
  • promoting social inclusion and combating poverty
  • investing in education, skills and life-long learning

Rural Development Programme (RDP) aims to improve competitiveness in the agriculture and forestry sector, safeguarding and enhancing the rural environment and fostering competitive and sustainable rural businesses and thriving rural communities.

European Territorial Cooperation Peace IV Programme focuses on:

  • shared education
  • children and young people
  • shared space and services and
  • building positive relations at the local level

The ETC Interreg VA Programme focuses on:

  • research and innovation
  • environmental protection and resource efficiency
  • social inclusion and combating poverty
  • sustainable transport

Northern Ireland also participates in the UK Fisheries Programme under the Common Fisheries policy.

 

In total, Northern Ireland is due to receive €3.5bn in EU funding between 2014 and 2020.  It is unclear whether schemes currently funded by the EU that will not continue post-Brexit will be replaced by the UK government.  There has been speculation that Northern Ireland will receive a smaller share of CAP funding in future which is relative to its population share of the UK, 3%, rather than its current 9% of the UK allocation of CAP.  If that were to happen, that would be an annual loss of around half a billion euro coming into NI.

 

 

 

Farmers in Northern Ireland are particularly dependent on EU subsidies: “the [EU’s] Basic Payment Scheme currently accounts for 103% of the average Farm Business Income in Northern Ireland. The ending of such support could threaten the viability of many farms, particularly if there was neither a replacement or gradual wind down to enable readjustment. The income shock of removal of direct support could see a significant drop in the number of farmers. This could well create a rural unemployment impact that would extend beyond the farm gate as many rural shops and businesses indirectly benefit from farmers spending their BPS. There could also be a large scale abandonment of land if farmers go out of business and dereliction could also be a problem due to a lack of incentives to maintain environmental standards. A drop in the number of farmers could theoretically benefit those who managed to continue to operate as prices might rise for certain produce providing demand exceeded supply and farms might be able to expand if land became cheaper/available. This could make remaining businesses more profitable/efficient and potentially lead to employment generation.”[82]  However, as this Assembly report adds, there is no certainty that the EU will continue with the CAP scheme, not least because of its cost.  One possible outcome, the report suggests, is that any policy on continued direct payments will be devolved to the national administrations, but , if so, it is unclear whether this would be fully funded.[83]

 

It is worth noting that it is predicted that the UK’s farming sector will shrink by perhaps around 15% as a result of Brexit.  One academic, Dr. Michael Wallace of Newcastle University, has projected that “close to 100%” of UK farms are likely to be worse off.[84]  Some of the strongest advocates of Brexit – Economists for Brexit/Economists for Free Trade, who have close links with some parts of the Conservative Party – argue that abolition of CAP is one of the most important aspects of Brexit.  “The CAP system leads to high food prices for UK consumers, increases inflation and reduces disposable income, which otherwise would boost consumer spending and thus the economy. Moreover, it artificially inflates agricultural land values, which further increases the cost of food and has wide knock-on effects to prices across the entire economy.”[85]  Under policies influenced by that group, there would be significant reductions in support payments for produce, plus lower land values.  A double whammy for Northern Ireland farmers, though potentially cheaper land for housing development.  It is likely that agri-food exports from NI to GB will anyway decline as a result of Brexit, with more food imported from around the world that takes advantage of weaker regulation and greater economies of scale.

 

UK government reform to CAP will reduce support payments to farmers, disproportionately affecting Northern Ireland.  “Leaving the European Union and the CAP will give us the opportunity for fundamental reform,” says a government consultation paper on farming support payments in England. “We want a more dynamic, more self-reliant agriculture industry as we continue to compete internationally, supplying products of the highest standards to the domestic market and increasing exports.”[86]  It adds: “We believe this is a vision that could work for the whole of the UK but we recognise that devolution provides each administration with the powers to decide its own priorities.”  But not, presumably, with devolved funding at current levels after 2020.  “We therefore propose to further reduce and phase out Direct Payments in England completely by the end of the ‘agricultural transition’ period, which will last a number of years beyond the implementation period.”

 

It is also worth noting the sub-regional impact of CAP payments within Northern Ireland.  “£266.3million was paid out in single farm payments and £83.1million in rural development funding. … Beneficiaries based in the Enniskillen area received the largest amount of CAP funding – £38.9million in total. This was followed by the Omagh area (£33.3million) and then the Ballymena area (£27.3million). The top ten town/city areas each received over £10million in EU payments – Enniskillen, Omagh, Ballymena, Newry, Dungannon, Armagh, Derry/Londonderry, Craigavon, Coleraine and Magherafelt. The majority of these towns/cities are west of Northern Ireland which is an area that historically struggles to attract as much funding as the east.”[87]

 

The Huebner analysis: ‘Modelling Irish Unification’

 

The Huebner report has made an important contribution to the analysis of the potential economic benefits of Irish reunification.  It was widely criticised at the time of publication, primarily because although it was written by independent and respected academics, it was commissioned in the United States by supporters of Irish republicanism.  However, this does not in itself undermine the conclusions, given the authors’ credibility.

 

It concluded that using its assumptions (which predate the Brexit vote), unification could benefit people across the island of Ireland by €1,497 per year in the year of implementation, rising to €2,810 per person per year within seven years of implementation.  Most of the financial benefits would be felt in the north.[88]

 

The report’s reasoning included:

  1. Tax harmonisation at RoI levels will be beneficial to the north.  Lowering corporation tax levels to those of the Republic is likely to generate higher levels of foreign direct investment. (However, a working NI Assembly could choose to do that without reunification).
  2. Diminished trade barriers will increase trade. (Clearly this is correct in terms of trade between NI and RoI and will be even more true post-Brexit.)
  3. Adoption of the euro in the north, because the pound was over-valued at the time of the report’s publication. (Given sterling’s devaluation means that the pound is no longer obviously over-valued against the euro, this point is out of date.  Sterling is now competitive with the euro.)
  4. Productivity improvements. (It is reasonable to assume that if NI adopts the industrial strategy of the south then it will – over time – move towards the productivity levels of the south.  But this could take decades.  27 years after German reunification, productivity remains lower in the east than in the west and wages remain lower.  Achieving economic benefits from unification is a slow process.)
  5. Political union will lead to rationalisation of the public sector in the north.
  6. Fiscal transfers will become the responsibility of the Republic, not the UK.

 

One key finding of the report is how important borders are, in terms of disrupting trade. It explains: “Numerous studies done in a variety of settings (the US and Canada, among Canadian provinces) demonstrate that ‘borders matter’ to a much greater degree than most observers would expect.” The return of a hard border on the island will obviously be detrimental. The most aggressive unification scenario in the report estimates a boost in all-island GDP of €35.6bn over eight years with the north benefiting significantly more than the south.

 

(The report concludes: “The model… suggests unification will raise GDP in NI by 2.1 to 2.6 billion Euro in the year the policy is implemented, depending on the extent to which NI government expenditure is cut and the amount of FDI attracted by the new tax regime. These gains could accumulate to as much as 25.3 billion Euro in the first eight years following unification. GDP in the ROI could rise by 30 million to 152 million Euro in the year of policy implementation, again subject to the same assumptions. Across the first 8 years of unification, GDP gains in the ROI could rise from 10.3 billion Euro to 18.5 billion Euro. In total, Irish unification could boost all-island GDP in the first eight years by as much as 35.6 billion Euro.”)

 

As the authors of the report point out, in the case of German unification the smaller partner – East Germany – benefited the most.  However, it should be noted that the benefits spread slowly – reunified Germany is still far from being an equal society, or having equivalent economic output.  It should be noted that west and east Germany remain different places in terms of economic performance, social relations and political outlook.[89]  Despite this, reunification can be regarded as having been a success.  And it is reasonable to say that the task of German reunification was more challenging than would be the case of reuniting Ireland.  The economic systems on both sides of the Irish border are broadly similar, though performing at different levels.  In Germany, one jurisdiction had free market capitalism, while the other had state capitalism – involving subsidies for state run factories, for example.  Since reunification, East German productivity has risen from 73% of the German average in 2000 to almost 80% by 2014.[90]  This is significant, if slow, progress.  Reintegration of divided countries is not easy.

 

The attitude of the British

Any discussion of the prospect of a united island needs to take into consideration the attitude of the population of Great Britain.  Given the absence of concern for the impact of Brexit on Northern Ireland within the Brexit debate (other than within Northern Ireland), it seems reasonable to infer that it is not a major issue for large numbers of people in Britain.  Indeed a post-Brexit opinion poll suggests that the majority of the British population are indifferent to Northern Ireland.

 

 

An opinion survey which asked the population of Great Britain about whether they would prefer to retain Northern Ireland as part of the UK, or make a saving of several billion pounds a year in the subvention to NI, may well produce an outcome in favour of making the saving.

 

Could the Republic afford Northern Ireland?

 

It is commonly said that Northern Ireland is subsidised to the tune of around £10bn a year by the UK government.  But that depends on how the figure is calculated.  There is one calculation that takes into account Northern Ireland’s share of total UK government expenditure – the armed services and central government administration in London, for example, which are collectively termed the ‘non-identifiable’ items – and a very different figure if only the direct costs of Northern Ireland are taken into account.

 

NERI – the Nevin Economic Research Institute – explains: “In summary, the DFP [former Northern Ireland Department of Finance and Personnel] 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.”

 

Upon Irish reunification, there would be no need for much of the non-identifiable items to be incurred by the Irish government.  Instead, central (‘non-identified’) costs such as the armed services would remain British overheads.  Whether the Irish Defence Force and overseas embassies, for example, would need to increase in size and cost as a result of reunification is not pre-determined.  While a £9.2bn additional cost would be significant for the Irish government, a £5.2bn cost would be less significant.  Moreover, a political agreement could result in the UK government’s £5.2bn subsidy being phased out over a period of time.  During that period, it would be hoped that tax revenues in Northern Ireland should increase, removing the need for much of that £5.2bn subsidy.

 

The £5.2bn equates to around €5.9bn at current exchange rates.  Total Irish government expenditure in year 2016 was €55.3bn, with revenue expenditure of €51.3bn.  In short, if the Irish tax system had to cover a subsidy of €5.9bn, this would be a significant burden on taxpayers.  If a phased arrangement could be agreed, it is not unreasonable to expect that additional tax revenues could cover a large proportion of the amount through Northern Ireland developing a stronger economic system.  Moreover, the Huebner analysis suggests that the Republic’s economy would itself expand through reunification – though not to such an extent that it would generate sufficient tax revenues to cover this additional cost.

 

A major restructuring of Northern Ireland in terms of its fiscal position within the UK seems likely, or is arguably inevitable, even if it continues within the UK.  The removal of Northern Ireland as a cost to the UK would be welcomed by large numbers of taxpayers in GB, particularly in England. (See the IPPR survey results above.)  It seems very likely that whatever happens politically that there must be substantial reform in the coming years to the Northern Ireland economy and structure of public service delivery. While London generates an annual fiscal surplus of £3,070 per person, Northern Ireland is the cause of the largest fiscal deficit, at £14,020 per person.[91]

 

Conclusions

 

If Irish reunification is to be achieved, it has to be achieved by consensus.  That means that the unionist population needs to be persuaded that reunification is in their collective best interests.  At the heart of this would be the recognition that a genuine all-island economy would produce significant economic benefits for Northern Ireland, with more jobs and higher incomes generated.  Social and political concerns would need to be addressed and satisfied.  Unionists would need to be convinced that their chosen identity would be respected and their relationships with Britain would be protected.  There also needs to be significant preparation, not least to achieve the economic stability during the transition and to maximise the subsequent economic benefits.  These preparations should begin now in accordance with Article 3 of the Irish constitution, as amended following the Good Friday Agreement.[92]  Progress towards achieving an all island economy should be reviewed annually by the Oireachtas. Given the pressing need for the reform of the health systems in both Northern Ireland and the Republic, a separate study should be commissioned by the Oireachtas on how an all-island health system could be organised on the basis of an NHS-type arrangement.

 

 

 

Ten Point Plan

 

  1. The UK government agrees to continue its subvention to Northern Ireland (currently operating through the Barnett formula) but on an annually tapering basis, with the UK subvention removed entirely within a negotiated period beyond reunification. UK support might be needed until 2050, supporting pension liabilities for civil servants, etc, under an arrangement similar to that with EU withdrawal. Over the long term this would produce a significant fiscal gain for the UK, which is likely to be welcomed by taxpayers in GB.  For Northern Ireland, the subsidy would be replaced by higher tax revenues as Northern Ireland benefits from the economic impact of reunification and the Republic’s economic policies.  Sovereignty might also transfer on a gradual basis.  Stormont might continue to operate as a devolved assembly, but of Ireland rather than of the UK.  There could also be a graduated move towards a truly all-island economy, with both sterling and the euro accepted by businesses during the transition process.  Substantial efforts must be made to accommodate the fears and concerns of those who have a British or Ulster Scots identity throughout the island of Ireland in order that a successful unified economy is achieved.

 

  1. Increased spending on capital projects is required to bring infrastructure up to modern European standards. The infrastructure deficit that was carried forward from the period of direct rule needs to be addressed, which means that the UK government has an obligation to help meet the cost of correcting the infrastructure deficit. A UK government investment of £10bn would assist significantly with this, towards the cost of roads, health reform, education facilities and water and sewage systems. A bridge or tunnel connection with Scotland could provide reassurance to unionists that economic, social and political connections with Great Britain could actually be strengthened through new arrangements.

 

  1. A reduction in the number of civil servants in Northern Ireland to the same level as the Republic would assist in making Northern Ireland financially self-sufficient. This would take place on a gradual basis to reduce the impact on individuals and on the wider economy. Ideally the impact would be spread over several years, achieved as much as possible by natural wastage. All redundancy, pension and restructuring costs would be paid for by UK. This restructuring would assist in boosting Northern Ireland productivity.

 

  1. The European Union would be asked to assist in the reunification of Ireland, which would address the problems caused by the Irish border post-Brexit. A new 32 county administration should be empowered to borrow cheaply to invest in the economy and all-island infrastructure. The European Investment Bank would play a key role in this.  

 

  1. A political agreement on a new all island basis, inside the EU, would attract increased EU funding through Interreg, including financial assistance in restructuring Northern Ireland’s infrastructure to improve its competitive position and integrated all-island economy.

 

  1. IDA Ireland would promote all of the island on the world stage. This would produce benefits for all. Given its track record in attracting FDI worldwide it should prove to be a major player in turning the Northern Ireland economy into a world class competitor with the added benefit for the Republic that the two agencies would no longer be in competition  but would be working together to produce economic growth.

 

  1. Improved direct links between education and industry in Northern Ireland as per the Republic would lead to a more competitive market-oriented economy, over time producing improvements in living and working environments. While Northern Ireland needs to learn from the Republic with regards to elements of its education and skills system, the Republic needs to learn from Northern Ireland in terms of the cost and efficiency of its health system. Neither system is adequate at present.  The Bengoa reforms need to be implemented in Northern Ireland as at present it has too many general hospitals, without sufficient specialist expertise.

 

  1. A harmonised corporation tax would make all the island more attractive to foreign direct investment and lead to domestic companies throughout the island being more competitive, thus leading to economic growth for all.

 

  1. As part of the post-Brexit response from the European Union, a special case should be presented to the European Union for assistance with the cost and social pressures involved with Irish reunification. This might be structured in ways that learn from the Marshall Plan and the experience of German reunification.

 

  1. A single and integrated Ireland would create economies of scale and a more competitive economy. A single Ireland would be a world leader in the fields of research and development (eg Trinity College, UCD and Queen’s, all in the same country), higher education, pharmaceuticals and new technologies.


 

Appendix One, David McWilliams in the Irish Times

Writing in the Irish Times, David McWilliams said: “Ironically, despite the fact that Ireland’s future is framed in demographics, demographics are rarely actually examined. Without data we just have opinions; with data we have forecasts.  Data from the 2011 census in of Northern Ireland show the Protestant population in the North is falling more quickly than most appreciate. The Catholic population is doing the opposite. One striking number is the comparison, by religion, of the very oldest cohort in Northern Ireland with the very youngest.  The Catholic population of children, as a percentage of the total, has nearly doubled in 90 years while the Protestant population has practically halved.

 

“In the over-90s the religious split is 70 per cent Protestant and 28 per cent Catholic. There are just over 10,000 people over 90 in the North. Children of the 1920s, they are the first generation born in the newly created Northern Ireland, and the religious split in this age group demonstrates the demographics that underpinned partition. Now look at the population in Northern Ireland, from the same census, of children under five. There are 147,000 under-fives, and this age group is 48 per cent Catholic and 37 per cent Protestant.

 

“So between the births of these two groups, 90 years apart, the Catholic population of children, as a percentage of the total, has nearly doubled while the Protestant population has practically halved.  Every politician needs to be aware of these facts when considering Brexit and the future relationships on this island. They help us to forecast the political future of the North using numbers rather than opinions or slogans. (For the sake of transparency, let me declare that my Protestant family in Belfast were split down the middle, half voting for Brexit, the other half to remain. Christmas dinner at the in-laws’ should be interesting.)

 

“Extrapolating from these figures, I calculate that Catholics will become the absolute majority in Northern Ireland around 2036, and this majority will only strengthen from then on. That’s less than 20 years away. The Belfast Agreement was signed 20 years ago, and it seems like only yesterday.

 

“What does all this mean? It means changes are coming, and coming quickly. Could Coveney be right about a united Ireland? Maybe.  But could the Republic absorb the North economically? To answer this we have to understand that the two economies are very different. The union with Britain has been an economic calamity for Northern Ireland. All the people have suffered, Catholic and Protestant, unionist and nationalist.

 

“In 1920, 80 per cent of the industrial output of the entire island came from the three counties around Belfast. Belfast was the biggest city in Ireland in 1911, larger than Dublin, and was home to Ireland’s innovation and technology. At partition the North was industrial and rich, the South agricultural and poor. Fast-forward to now, and the contrast couldn’t be greater. The collapse of the Northern Ireland economy compared with that of the Republic has been unprecedented. East and West Germany come to mind.

 

“Economically, the Union has enfeebled the North while independence has enriched the South – particularly since the peace process. Commercially, there was a huge peacdividend, but it went south.  The Republic’s economy is four times larger, generated by a work force that is only two and a half times bigger. The Republic’s industrial output is today 10 times that of the North. Exports from the Republic are 17 times greater than those from Northern Ireland, and average income per head in the Republic, at €39,873, dwarfs the €23,700 across the Border.

 

“Immigration is a traditional indicator of economic vitality. In the Republic one in six people are immigrants, the corresponding figure for the North is one in a hundred.  Dublin is three times bigger than Belfast, far more cosmopolitan and home to hundreds of international companies.

 

“It would still be a huge challenge to the Republic’s economy to absorb the North – and many Southerners mightn’t want to if asked.  The differences aren’t just economic; they are cultural, not only in the sense of flags and commemorations but also socioculturally.  And this is where the TripAdvisor index comes in, revealing that the North is another country in a different sense. Take Kilkenny and Armagh, a similar-sized Northern town with city status. TripAdvisor has reviews of 176 restaurants in Kilkenny but of just 43 in Armagh. The entry for Coleraine has only 58, for Antrim just 49.

 

“This tells its own story of small-business activity, how we socialise, how we spend money and how society is structured. The North is different.

 

“Demographics are leading to a changed North, but Coveney’s dream of a united Ireland might not be the end point. Some Northern Catholics may want to remain in the Union, which ironically could be more attractive if the Catholic population were in the majority, because they’d have the power without having to pay for it.  Also, many people in the Republic might baulk at the unification bill. But the demographic patterns pose the most significant and immediate challenge for unionism, because, within a generation, democratic politics in the North will come down to whether unionism can persuade nationalism to keep Northern Ireland intact.”

 

 

 

Appendix Two, Tom Healy of NERI

 

Tom Healy of NERI – the Nevin Economic Research Institute – wrote:

 

“In the past, the union between Northern Ireland and Great Britain was defended on economic as well as other grounds on the basis of the claimed benefits flowing from integration into the much larger British and commonwealth or imperial markets as well as the economic and political backstop of a strong united kingdom. The demise of manufacturing, in Northern Ireland, and the huge shifts in global power and trade position of the UK means that these claimed benefits are less obvious today than was the case 100 or even 50 years ago. From being a basket case economy southern Ireland showed remarkable dynamism and growth potential from the 1960s onwards and especially during the period of rapid growth in 1993-2007. By the turn of this century the south had overtaken the UK and Northern Ireland in terms of GDP per capita.

 

“Advocates of a united Ireland frequently use economic arguments to make the case for unity on the grounds that an island economy would benefit from integration and lowering of costs and inefficiencies associated with two separate jurisdictions and currency areas, etc. There is some truth in this claim (although difficult to assess because it is a very hypothetical one). It is also the case that Northern Ireland benefits from integration in to a single large UK market while both Ireland the UK benefit from partial integration into a much larger market of 500 million in the European Union.

“Two key inter-related questions arise in debates about these matters:

  1. The extent of fiscal transfer from the UK centre to Northern Ireland
  2. The hypothetical ‘cost’ to the southern Irish taxpayer of a united Ireland.

The ‘Net Fiscal Transfer’ is the estimated value of the difference between, on the one hand, what Northern Ireland contributes by way of total taxes and government revenue collected (most of which is remitted to the central UK authorities), and on the other, what is spent by public authorities for and by and in Northern Ireland. The reference to ‘for’ and ‘by’ and ‘in’ is important!

“The Department of Finance Personnel (DFP) report ‘Net Fiscal Balance Report, 2012-13 and 2013-14’ provides an estimate of the overall position with regard to ‘for’, ‘by’ and ‘in’ as well as splitting out the ‘in’ by means of ‘identifiable’ public spending in Northern Ireland. 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.

“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? Perhaps this question should have been asked in the recent RTE/BBC survey?

“The methodology used in the DFP report has been the subject of controversy (see ‘The Economic Case for Irish Unity’). Apart from the question of ‘non-identifiable’ expenditure there have been questions about what parts of administrative spending ‘for Northern Ireland’ by Departments located in Britain should be included as well as estimations of tax receipts from households and corporations. It is suggested, for example, that the DFP report under-estimates Northern Ireland taxes paid by UK companies headquartered in Britain but sourced in Northern Ireland. While this is a possibility it is unlikely to be that large. The DFP report, on page 46, provides a summary of the various official data sources used in estimating revenue streams. The report authors are careful to point out the following:

“Particular caution should be used in relation to individual components of the fiscal balance as many revenue streams have been estimated and are not true values.

“Were an alternative approach to be taken using HM Revenue Commissioner estimations total government revenue for Northern Ireland would be £14.3 billion instead of £14.9 per DFP report – widening the estimated fiscal deficit to £9.8 billion.

“Whatever about revenue estimate differences, is it legitimate to include non-identifiable spending in regional estimates of fiscal transfer? I believe that the answer is yes. It is a standard part of regional economic analysis and it reflects the extent to which transfers act to reduce inequalities by region. This is the pattern in many countries where regional disparities exist such as in Italy, Germany, France and even the Republic of Ireland (difficult as it is to measure regional transfers).

“So much for net fiscal transfers. Estimation of how much a united Ireland would cost the southern taxpayer (and not forgetting about the Northern taxpayer) is quite another matter. And this is where the story gets even more complicated!

“If, hypothetically, in the year 2115 Northern Ireland were to leave the UK and be united with what is now the 26 counties to form a single all-island state what might the implications be for fiscal policy in Ireland?

“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).

“The harsh reality so often avoided – North and South – is that unless we wish to turn Ireland into a prototype of a low-tax and low-public spend economy such as prevails in the USA then taxes will have to increase especially in the South where a rising and ageing population will require additional taxes to pay for public services in education and health. This is why a policy of cutting income taxes in the South is socially inequitable, fiscally irresponsible and economically damaging and not supported by any solid empirical evidence (see a recent working paper by my colleague Dr Tom Mc Donnell – ‘Cultivating Long-run Economic Growth in the Republic of Ireland’).

“The first question to be considered is not where to draw political lines on maps but what quality of society and economy we wish to establish in Ireland and in Britain. And it should not be forgotten that integration of the island economy especially in areas such as energy, health and agri-business does not necessarily require Northern Ireland’s exit from the UK. However, a Brexit could change all that quickly. Beware of black swans.

“It can be safely concluded that the south as well as the north have a lot of work to do to transform their respective economies and societies to make unity attractive if such were to be seriously proposed. However, at the end of the day, these matters will be resolved on the basis of political choices by all of the peoples of this island reflecting historical and social ties and loyalties.”

Appendix Three

Kevin Meagher, author, A United Ireland: why unification is inevitable and how it will come about

 

Kevin Meagher wrote:

 

“Bluntly, Northern Ireland, with a population of just 1.8 million people, is of no strategic economic importance to Britain, representing just two per cent of the UK’s GDP. Northern Ireland’s best bet, economically, is to join with the South and align its economy to benefit from the Republic’s strong record of attracting foreign direct investment”, p. 297

 

Appendix Four

 

One respondent to the draft report requested that the report also consider the situation regarding income tax and pensions in the two jurisdictions.

 

Taxation of income on the two sides of the border is significantly different.  This is a factor that could influence many people’s attitudes to reunification.  UK rates as at April 2018 are: income up to £11,850 is tax free; taxed at 20% from £11,851 to £46,350; 40% from £46,351 to £150,000; and 45% for income above £150,000.[93]  In the Republic, income up €34,550 is taxed at 20%, above that at 40%.  (This is for a single person without children, the threshold is €38,550 or €43,550 for a person with dependents.)  The Universal Social Charge also applies on income above €13,000.  But a range of tax credits mitigate the total tax liability.  Because of the complexity of the Republic’s tax system it is difficult to compare the results of the two systems.  Broadly, low paid workers pay less income tax in the Republic than in the UK because of the impact of the Republic’s tax credits, while middle and higher income individuals pay more tax.[94]  At present, the state pension is higher in the Republic than in the UK, but begins a year later.

 

 


 

Appendix Five

Responses.  The original draft report generated a large number of responses.  Most of these welcomed the attempt at generating an evidence-based discussion about the impact of an all-island economy.  A few responses were hostile or negative.  A large number of responses came via Twitter, the comment pages of the Belfast Telegraph and as online messages on the report’s web page.  Most of these did not provide details of the respondent’s identity: consequently they are not listed.

 

I am pleased to acknowledge the assistance of these responses, especially those writers who went to the trouble of providing contributions suggesting how the report could be strengthened.  I also acknowledge that a small number of people criticised the report as not sufficiently recognising, in their view, the unacceptability of Irish reunification to the unionist population.  This report attempts to show the economic benefits, to all people in Ireland, an all-island economy.

 

It is clear, at least to this author,  that moves towards Irish unification must be predicated on: making as many unionists as possible comfortable about the transition and creating a new state which is independent of any religious identity, rather than asking people in the north to join an existing state.

 

This report would not have been possible without the support and commitment of Colm McKenna and Pat McArt.

This report’s conclusions, and decisions on which evidence to include, are the responsibility of this author and those whose help is acknowledged are not responsible for the report’s contents.

Particular thanks go to the following for making helpful detailed observations:

Esmond Birnie

John Campbell

Richard Ramsey

Another senior economist who provided comments on a non-attributable basis

Representatives of most of the political parties operating in Northern Ireland, the Orange Order, the Irish Congress of Trade Unions and Mr David Campbell all provided responses.  Their contributions are appreciated.

 

 

 

Appendix Six

 

Observations from respondents

 

Esmond Birnie, Ulster University

 

Your paper proposes that the NI % public sector employment should be reduced to the RoI average rate implying 50,000 direct job losses. There could be long run benefit to NI economy if so-called “re-balancing” could be achieved- preferably through expansion of private sector rather than absolute decline of public.

BUT:

  • If this reduction is done suddenly it becomes very problematic.
  • Arguably, the Voluntary Exit Scheme was very much a second best (with perhaps unintended negative consequences- loss of some of the most experienced and best staff) but this would be VES on a super scale.
  • How many of the 50,000 would get other jobs? What about multiplier effects?
  • In fact 50,000 represents c 6% of total employment in NI. Once multiplier effects are included we start to get into the terrain of the upper scale losses (as in the Feb. 18 leak) produced by the Treasury modelling on Brexit. Your report describes such losses as “devastating”.

The Fiscal Transfer

Your paper suggests it is “only” the gap between identifiable spending and NI tax revenues which we should really worry about i.e. c. £5bn. rather than c. £10bn.

BUT:

  • You need to assume about the “international services” (e.g. consul rep. for NI abroad and investment promotion) some of the following: (1.) RoI currently has great spare capacity and so could expand delivery without spending more or (2.) RoI could dramatically up the productivity of these services or (3.) the quantity/quality of services delivered per head post-unity would go down.
  • You also need to assume no increase defence spending despite acquiring extra territory and coastline (and also assuming public order stays the same).
  • Assuming the “rest of the UK” imposes no debt obligations on the new state (later on, you concede that dealing with NI’s infrastructure may require borrowing).
  • You’ve treated the accounting adjustment as just a technical (or paper) exercise but is it ? (amounting to £1bn p.a. re. capital consumption and proportionally larger in NI than UK average). But such Non-Market Capital Consumption is a reflection of higher proportional public sector capital stock- as this depreciates, to the extent it is replaced, there will be a “real” call on the NI+RoI taxpayers (a point you partly recognise when you call for GB to continue to pay for some infrastructure spend in NI).
  • Interestingly, you impose on the generosity of the GB taxpayers by the possibility they may have to transition out of the transfer payment over a long period of time (and also pay for an infrastructure fund- which suggests to me the “real” transfer is more than £5bn p.a.).

HM Treasury modelling

You quote the figures from the leaked document. It is very unsatisfactory that we have only the end figures without access to the underlying modelling (especially assumptions). It is probably reasonable to assume Treasury made similar assumptions to those made in their April 2016 document. So, we probably have the same flaws in their “gravity modelling” and their assumptions about very strong trade/output to productivity effects.

Use of the recent RoI national accounts

As the Dublin government and CSO Ireland have recognised, we cannot assume that in any meaningful sense RoI national output grew by 26% in 2015.

RoI comparative wage levels

It is not helpful to imply these are 50% higher than here in NI- cost of living differences.

(Devolved) Political economy of a united Ireland

Whatever the representational merits of devolution, I think there is a lot of evidence the Executive-UK government relationship has not worked well in terms of a sensible fiscal arrangement; Stormont has been “irresponsible” relying on HMG as the funder of last resort. Would that relationship be any better Stormont-Dublin, might it be even more problematic?

  1. Hubner’s modelling of unity

I’ve critiqued this elsewhere (blog for ThisUnion website).

There is a general point- be it Brexit or German unification in 1990 or possibly Korean- about reservations about using these types of “Competitive General Equilibrium” models to make point predictions about the future and this even more so when economies undergo big structural changes.

Then specifically to this model re. NI and RoI (some of these points you make):

  • The exchange rate situation is now very different.
  • Their assumptions about the fiscal transfer seem very unclear.
  • It is unrealistic to assume NI productivity would rapidly converge on the RoI level.
  • There is no allowance for the negative impact of greater frictions to NI-GB trade (which is four times greater than NI-RoI).

Identity issues

As you say, people do value these. Sometimes more than economic gains/losses. I think it would be misunderstanding of the position of many pro-Union people to say they would settle for a status akin to, say, the Donegal Orangemen.

 

A senior economist provided comment on a not for attribution basis:

1)     GDP and performance: Over-reliance on GDP data to measure wealth or standards of living. The NI appearance at the top of happiness and quality of life charts should not be discounted, nor the employment / unemployment rate and other socio economic measures (homelessness, crime etc.) A young worker in Dublin trying to buy or rent a house compared to one in Belfast may not recognise the narrative in the report which paints NI as painfully far behind Ireland. Looking at many counties in Ireland it would be hard to draw that conclusion. And following on from that if Ireland has struggling to achieve growth in certain locations currently why would NI under Irish rule suddenly make better policy choices. Of course, subsidy plays a (big) part in that, but a wide range of indicators are worth referring to in showing the difference.

2)     Consent: Consent is mentioned but only in passing, the life and times survey matters I think and should perhaps get more coverage. If post Brexit the percentages wishing for change are not more compelling does this suggest that people simply don’t understand how good it is in Ireland or could it be that point 1 is true and actually life in NI is actually rather good (lower personal tax, no prescription charges, subsidised education, no need for private health or schooling, low rates etc.)? If we credit the public with being able to know if they are happy or not it seems that those views need greater prominence. Watching Ireland’s boom and bust partly as a result of the macro realities of being in Europe does suggest you are wanting to swap ‘steady’ performance for a much more volatile environment, that is not something everyone would choose.

3)     Subvention: The subvention is complex (And Tom Healy’s piece referred to in the annex is excellent) but given how long it has been paid and how UK govt choices spared NI of the 20% unemployment and Troika etc. that Ireland endured it would seem curious as to why UK would keep picking up the tab over a sustained period, why would UK taxpayer agree to that? Surely the ‘offset’ to losing NI would be a fiscal saving to spend on other UK priorities? It seems asymmetric to say NI could leave, take no cut of the national debt (which has helped NI so much over the decades) and enjoy continued subsidy to keep standard of living high. I think from the UK lens this seems a curious proposition, when it has other parts of the UK crying out for more funding and investment.

[1] https://www.brisbanetimes.com.au/world/europe/more-peaceful-but-facing-uncertainty-northern-ireland-20-years-on-20180409-p4z8i1.html

[2] https://www.irishtimes.com/opinion/northern-ireland-and-the-tripadvisor-index-of-economic-vibrancy-1.3311077

[3] https://www.belfasttelegraph.co.uk/opinion/news-analysis/demographics-are-shifting-towards-a-united-ireland-we-must-have-a-plan-35865222.html

[4] https://aib.ie/content/dam/aib/investorrelations/docs/economic-research/irish-economy/irish-economic-updates/irish-economy-update-august-2016.pdf

[5] https://www.quora.com/What-is-the-difference-between-GDP-and-GVA-and-why-GVA-is-more-relevant

[6] http://www.cso.ie/px/pxeirestat/Statire/SelectVarVal/saveselections.asp

[7] https://www.ons.gov.uk/economy/grossvalueaddedgva/bulletins/regionalgrossvalueaddedincomeapproach/december2015#regional-nuts1-gva-estimates

[8] https://www.nisra.gov.uk/statistics/economic-output-statistics/gross-value-added

[9] http://www.cso.ie/en/releasesandpublications/er/elca/earningsandlabourcostsannualdata2016/

[10] www.nisra.gov.uk/sites/nisra.gov.uk/files/publications/4xu-NI-ASHE-Bulletin-2017.PDF

[11] https://www.nisra.gov.uk/statistics/labour-market-and-social-welfare/annual-survey-hours-and-earnings

[12] http://www.cso.ie/en/releasesandpublications/er/elcq/earningsandlabourcostsq32017finalq42017preliminaryestimates/

[13] https://www.qub.ac.uk/research-centres/CentreforInternationalBordersResearch/Publications/WorkingPapers/MappingFrontiersworkingpapers/Filetoupload,175406,en.pdf

[14] https://www.nisra.gov.uk/statistics/labour-market-and-social-welfare/labour-force-survey

[15] http://www.cso.ie/en/releasesandpublications/er/mue/monthlyunemploymentmarch2018/

[16] http://www.cso.ie/en/releasesandpublications/er/lfs/labourforcesurveyquarter42017/

[17] https://www.ucc.ie/en/media/academic/economics/documents/research/wp00-3.pdf

[18] http://www.assemblyresearchmatters.org/2017/06/14/goods-northern-ireland-export-much-worth-go/

[19] https://www.economics.ox.ac.uk/materials/working_papers/2828/150-final.pdf

[20] ibid

[21] http://www.ey.com/ie/en/issues/business-environment/ey-economic-eye-2017

[22] http://www.ey.com/ie/en/issues/business-environment/financial-markets-and-economy/economic-eye

[23] https://www.centralbank.ie/news/article/strong-growth-forecast-but-take-nothing-for-granted-12-April-2018

[24] https://www.economy-ni.gov.uk/node/33117

[25] https://www.qub.ac.uk/research-centres/CentreforInternationalBordersResearch/Publications/WorkingPapers/MappingFrontiersworkingpapers/Filetoupload,175406,en.pdf

[26] http://ec.europa.eu/eurostat/tgm/table.do;jsessionid=4pG0W6-BXFtjhx_6IF_4G5YrzZ1qOnmk5Wt0GhuR6xUa-vPIeHwj!-1102445943?tab=table&plugin=1&language=en&pcode=tgs00026

[27] http://www.irishborderlands.com/index.html

[28] https://academic.oup.com/joeg/article-abstract/13/6/889/924921?redirectedFrom=fulltext

[29] http://blogs.lse.ac.uk/politicsandpolicy/britains-spatially-unbalanced-economy/

[30] https://www.britac.ac.uk/pubs/proc/files/98p035.pdf

[31] ibid

[32] ibid

[33] ibid

[34] http://www.niassembly.gov.uk/globalassets/documents/enterprise-trade-and-investment/inquiry—corp-tax/research-papers/20150319-assembly-research—ida-ireland.pdf

[35] https://www.idaireland.com/newsroom/end-year-results-2017

[36] https://secure.investni.com/static/library/invest-ni/documents/annual-report-investni-2016-17.pdf

[37] https://www.irishtimes.com/news/politics/government-looks-to-push-closer-german-ties-ahead-of-brexit-1.3458515?mode=sample&auth-failed=1&pw-origin=https%3A%2F%2Fwww.irishtimes.com%2Fnews%2Fpolitics%2Fgovernment-looks-to-push-closer-german-ties-ahead-of-brexit-1.3458515

[38] U4D, https://www.londonderrychamber.co.uk/…/1403886149–U4D—need-to-increase-graduates

[39] U4D, ibid

[40] U4D, ibid

[41] http://www.publicpolicy.ie/expenditure-and-outputs-in-the-irish-health-system-a-cross-country-comparison/

[42]  http://www.cso.ie/px/pxeirestat/Statire/SelectVarVal/Define.asp?maintable=EHQ10&PLanguage=0

[43]  https://www.nisra.gov.uk/sites/nisra.gov.uk/files/publications/hY5t1a_20174_Publication%20Document.pdf

[44] https://www.nisra.gov.uk/statistics/labour-market-and-social-welfare/annual-survey-hours-and-earnings

[45] https://ec.europa.eu/ireland/news/key-eu-policy-areas/economy_en

[46] https://www.pwc.co.uk/who-we-are/regional-sites/northern-ireland/press-releases/northern-ireland-productivity-amongst-lowest-in-the-developed-world.html

[47] https://www.ulster.ac.uk/__data/assets/pdf_file/0008/118385/Understanding_productivity_in_Northern_Ireland_27_September_2016.pdf

[48] https://www.nerinstitute.net/download/pdf/industrial_policy_wp_2016_061216.pdf

[49] file:///C:/Users/Paul/Downloads/productivityhandbookchapter3_tcm77-187890.pdf

[50] file:///C:/Users/Paul/Downloads/1403886149–U4D—need-to-increase-graduate-numbers%20(3).pdf

[51] https://www.nerinstitute.net/download/pdf/industrial_policy_wp_2016_061216.pdf

[52] http://eprints.lincoln.ac.uk/7652/1/u4dreportlow-res.pdf

[53] https://www.enterpriseresearch.ac.uk/wp-content/uploads/2016/05/GEM-UK-2015-final-report.pdf

[54] https://www.fsb.org.uk/docs/default-source/Publications/the-contribution-of-small-businesses-to-northern-ireland.pdf?sfvrsn=1

[55] https://www.fsb.org.uk/docs/default-source/Publications/the-contribution-of-small-businesses-to-northern-ireland.pdf?sfvrsn=1

[56] https://www.irishtimes.com/business/economy/john-fitzgerald-north-remains-land-of-lost-opportunities-1.3270295

[57] http://www.ibec.ie/IBEC/Press/PressPublicationsdoclib3.nsf/vPages/Newsroom~ibec-cbi-set-out-ambitious-plan-for-all-island-economy-24-07-2016?OpenDocument?OpenDocument

[58] http://isni.gov.uk/PDFs/Investment%20Strategy.pdf

[59] https://www.irishtimes.com/business/economy/sustaining-northern-standard-of-living-is-a-costly-exercise-1.2597861

[60] https://www.belfasttelegraph.co.uk/business/northern-ireland/weve-yet-to-see-the-full-economic-potential-of-the-1998-agreement-36789890.html

[61] https://fullfact.org/europe/irish-border-trade/

[62] http://www.assemblyresearchmatters.org/2017/06/14/goods-northern-ireland-export-much-worth-go/

[63] http://www.bbc.co.uk/news/uk-politics-42223732

[64] https://fullfact.org/europe/irish-border-trade/

[65] http://www.assemblyresearchmatters.org/2017/06/14/goods-northern-ireland-export-much-worth-go/

[66] Department for the Economy briefing on Brexit

[67] Department for the Economy briefing on Brexit

[68] http://www.assemblyresearchmatters.org/2017/06/14/goods-northern-ireland-export-much-worth-go

[69] https://www.irishtimes.com/opinion/a-united-ireland-would-be-worse-off-than-the-republic-1.3010177

[70] http://www.europarl.europa.eu/RegData/etudes/BRIE/2017/583116/IPOL_BRI(2017)583116_EN.pdf

[71] https://www.ufuni.org/farming

[72] http://www.europarl.europa.eu/unitedkingdom/en/ukevents/brexitstudies.html

The report cites Aidan Stennett (2016) ‘The EU referendum and potential implications for Northern Ireland’, Northern Ireland Assembly Research and Information Service Research Paper, NIAR 32-16, p.8.

[73] https://news.sky.com/story/hit-to-northern-ireland-and-north-east-england-gdp-revealed-in-new-brexit-impact-papers-leak-11240254

[74] https://www.ons.gov.uk/economy/grossvalueaddedgva/bulletins/regionalgrossvalueaddedbalanceduk/1998to2016#wales-was-the-fastest-growing-country-in-the-uk-in-2016

[75] https://www.nisra.gov.uk/sites/nisra.gov.uk/files/publications/RY6v9-labour-market-report-january-2018.PDF

[76] https://www.ufuni.org/farming

[77] ibid

[78] ibid

[79] https://www.ft.com/content/cd9323b8-ad0e-11e7-beba-5521c713abf4

[80] http://www.irishnews.com/paywall/tsb/irishnews/irishnews/irishnews//business/2018/01/16/news/ni-agriculture-subsidies-to-fall-after-brexit-warns-report-1232572/content.html

[81] https://www.finance-ni.gov.uk/articles/european-structural-and-investment-fund-programmes-northern-ireland

[82] http://www.niassembly.gov.uk/globalassets/documents/raise/publications/2016-2021/2016/aera/6616.pdf

[83] ibid

[84] https://www.agriland.ie/farming-news/close-to-100-of-uk-farms-could-be-worse-off-after-brexit/

[85] https://www.economistsforfreetrade.com/wp-content/uploads/2017/09/Economists-for-Free-Trade-NME-Paper.pdf

[86] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/684003/future-farming-environment-consult-document.pdf

[87] http://www.thedetail.tv/articles/the-eu-s-common-agricultural-policy-should-we-stay-or-should-we-go

[88] http://prcg.com/modeling-irish-unification/report.pdf

[89] http://www.euronews.com/2018/02/05/how-fall-of-the-berlin-wall-paved-way-for-germany-s-populists

[90] https://www.irishtimes.com/business/economy/john-fitzgerald-north-remains-land-of-lost-opportunities-1.3270295

[91] https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/articles/countryandregionalpublicsectorfinances/2015to2016

[92] http://www.irishstatutebook.ie/eli/cons/en/html#part1

[93] https://www.gov.uk/income-tax-rates

[94] https://www.irishtimes.com/business/personal-finance/ireland-v-the-rest-of-the-world-do-we-pay-too-much-tax-1.3230432