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The Economics of a United Ireland - 2023

Introduction

This study sets out to answer the question of whether and under what circumstances a United Ireland is economically viable. Whereas the public finances of the Republic of Ireland (RoI) have been transformed in recent years Northern Ireland (NI) is still heavily dependent on a subsidy from the London Government and the question is what would happen were that burden to fall upon the Dublin Government. It is not necessarily a straightforward swap from one Government to the other as there are numerous variables to take into account:

- UK national debt interest included in NI budget - UK defense expenditure included in NI budget - UK pensions payable to residents of NI

There are various precedents regarding the transfer of sovereignty that cover these issues but in this case the UK would be offloading a substantial liability (presumably willingly) and the ROI negotiating position ought to offset the value of the liabilities assumed against the debt and other obligations. Thus, the ROI should not be assuming any UK debt liabilities for NI. The defense question does not arise as this expense will terminate on the transfer of sovereignty.

The pensions question is trickier. When, for example, the sovereignty of Hong Kong was transferred to China the public pensions continued to be paid by the Government of Hong Kong. The UK did not have any continuing obligation except for its own public servants. However, the difference with NI is that Hong Kong was always funded from its own resources - it was never part of the general UK budget. In NI it can be claimed that people have been making pensions contributions to the UK exchequer and that the accrued benefits should be payable from London at the time of transfer. I expect this point to be contested but it should be placed within the overall context of the liabilities assumed.

In addition to the above considerations the NI budget has its own idiosyncrasies and there is the question of how these would be handled by Dublin in a United Ireland. The RoI itself is in need of Constitutional reforms if it is to realize its potential and this includes its capacity to absorb NI.

One other extremely important question is the future value of Sterling versus the Euro. I will be arguing below that it is considerably overvalued and that a correction is due, something which would seriously alter the economic calculus of Irish Unification.

Employment

NI has a higher share of part-time employees compared with the UK (34% vs 26%). It also has a higher share of public services employees (32% vs 20%). Part-time workers are concentrated in services in NI. Self Employed not included below - about 15% of workforce and mostly full-time.

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NI has total public service employment of 221,000 compared with 368,000 in the Republic. That is, NI public employment is at 60% of the level of the Republic even though it has only 37% of the population.

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This chart shows that the totals employed in health and education are about twice as high per capita in NI. Also the Civil Service is disproportionately large.

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Public Expenditure per capita in NI is the third highest of 12 regions 10% higher than the UK average. Receipts per capita in NI are the second lowest and 74% of the UK average. Thus, there is a combined gap of 36% (10% + 26%) compared with the UK average.

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The table below shows that NI is bottom of the regions for Income Tax, VAT & Social Security contributions per capita, and third from the bottom for Corporation Tax. London & the South East are head and shoulders above the other regions as that is where the highest concentration of high earners is and where most large companies are domiciled.

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NI has the highest Education spend per head of all UK regions. This may be partly attributed to the policy of educating Catholics and Protestants in separate schools so there is duplication. The Health spend per head is the third highest. The other really significant number is Social Protection where NI is second, just behind Wales. It should be noted that London salaries are at least 10% higher due to the London weighting so that makes the NI spend in Education and Health seem even larger. Social protection includes public pensions and both Wales and NI experienced the demise of their old industries in recent decades, as did also Scotland and the North of England.

The UK budgeting process allocates to the Regions Identifiable and non-Identifiable expenditure. The latter is centrally incurred expenditure and debt interest and defense make up 87% of the total under this heading. Since we are assuming this expenditure would not be incurred in a United Ireland scenario it may be deducted from the total. This reduces the income/expenditure gap to £7,321bn, of which £2,086bn is capital expenditure, so the current expenditure deficit would be £5,378bn.

Included in this last figure are earned Public Pensions (i.e. above the Basic State Pension) of about, say, £2-3bn a year and if these are netted off the NI Current Deficit is reduced to a modest figure of about £3bn a year - or £5bn a year when capital expenditure is added back.

[Note that the UK accounts also show a figure of Total managed Expenditure for NI of £33,238bn for 2021-22. We assume that the difference between this figure and the £30,635bn above refers to Covid related expenditure]

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In 2021 NI had exports of £24.9bn and imports of £22.2bn. If, after Unification, the Republic of Ireland sales were to be netted off the figures would have been £19.7bn for exports and £19.1bn for imports. Trade with the RoI is changing rapidly due to Brexit so the figures will look quite different this year.

NI exports are approximately 2/3 goods and 1/3 services. If NI were an independent country these external sales figures would be considered healthy for a population of its size.

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Summary NI

NI has a healthy internationally traded sector with an overall external surplus. Its manufacturing and internationally traded services are robust and continue to grow in terms of sales and employment. Whilst most of the old Ulster industrial base has disappeared there are dynamic new industries in their place. In services there is a large outsourcing sector and a growing creative industries (media, film etc) sector. From a budgeting perspective the main issue in NI is the disproportionate spend on health, education, social security (pensions?) and the size of the Civil Service. Presumably, after Unification the Civil Service would be merged with the Republic and the numbers reduced and health and education spending would be reduced proportionately after a transition period.

A key question is the responsibility for accrued public pensions. Were this to fall to the UK then the Social Security cost would fall and also the cost of reducing the size of the public sector going forward. However, the potential economic viability of Unification does not depend solely on the economy of NI and the terms of transfer. It also depends on the economy of the Republic which has various issues to address as we shall see below.

Republic of Ireland Economy

The economy of the Republic has been transformed in the last few decades. Whereas previously it was an exporter of mainly agricultural produce it is now a significant exporter of high value added manufactures as well as international services.

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This shows that some 529,000 worked in the internationally traded manufacturing and services sectors at the end of 2022. To this should be added those employed in farming and tourism, potentially bringing the totals working in the international sectors to more than 700,000. In per capita terms relative to population this is about twice as high as in Britain or indeed Northern Ireland.

However there is a problem which the following charts will show. The first chart dates from 2019 and includes the UK whereas the second chart is for 2022 and does not have UK data. The first chart shows RoI consumption about 20% lower than the UK and below the EU average.

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The second chart, which does not include the UK, shows per capita consumption in Ireland at 87% of the EU average, about the same as Romania, Spain, Portugal, Turkiye and Poland. This is despite the Republic being head and shoulders above these countries in terms of high added value international employment per capita.

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The Republic of Ireland is, therefore, not reaping the benefits of the success of its internationally traded sectors in terms of improving living standards and even has lower per capita consumption than the UK. This is because the Republic has not made the same level of progress regarding its internal costs. Housing, internal transport and other costs are seriously out of line.

In fact, within the UK, even though Northern Ireland is at the bottom of most economic indices it has actually a better living standard than the top-line data suggest as, for example, compared with London housing and commuting costs are significantly lower which means people have more money in their pockets.

The following tables are based on a private survey rather than official data but can be seen to make intuitive sense.

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What this data shows is that Belfast is 10th highest for average annual disposable income and London is last, and this in spite of London having by far the highest average incomes. In terms of living costs London is at the top of the scale and Belfast 2nd from the bottom with the index indicating costs about a quarter lower.

Taking all of this information together what we observe is that

(I) The UK has significantly higher consumption per capita than the Republic of Ireland,

(Ii) Northern Ireland, despite being at the bottom of the table in terms of output, has higher disposable income than the UK average.

Ipso Facto - Northern Ireland has paradoxically a better living standard than the Republic even though its internationally traded output per capita is about one half.

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Commentary

How do we explain the above paradox where living standards are, de facto, higher in the North than in the Republic of Ireland, a situation which postpones Unification for the time being? Well there are two sides to the story - (i) the UK and (ii) the Republic of Ireland. In my view the UK is living on borrowed time. I explain the tecnica of my argument in the following article:

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`UK Trade Statistics - 2023 Paul Dixon`⁠
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Essentially what I am arguing is that the UK runs a Trade in Goods deficit of 8.3% of GDP and supposedly makes this up by a Trade in Services surplus but to me the numbers don’t add up and the official statistics look like they’ve been baked, or rather, altered according to some obscure accounting rules to give the required outcome.

So, if this is true why isn’t everyone dumping their UK holdings and rushing for the exit? Good question and maybe it’s just me! That said, the Trade in Goods statistics are what they are and this will eventually catch up with them and the £ Sterling would need to shed 50% of its value to get back to balance after which the economics of a United Ireland will look very different. I am not offering a timetable for when I think this will occur however.

The other factor affecting the economics of Unification is the high internal costs in the Republic of Ireland which affect disposable income.

Costs in the Republic of Ireland

The RoI has acquired a high value-added exporting economy in recent decades, something which most countries aspire to, but its cost structures are seriously out of line. The underlying cause for this phenomenon is the manner in which the RoI industrialized compared with other countries.

In countries with an indigenous motor industry, for example, the manufacturer typically has some 40,000 suppliers; that is the 10-20,000 components plus the materials transformation, machine tools, design, testing etc. Every one of these suppliers’ costs goes into the end price of the finished vehicle and the manufacturer is working towards an ex-works price of, say, €25,000 such that there is enormous peer pressure to keep costs under control and this ripples right through the supplier ecosystem of 40,000 companies.

The peer pressure on costs does not stop with manufacturing but rather works its way right through every part of the economy. This is the type of economy most of the Central European countries have. In the Republic of Ireland, by contrast, there is no single industrial ecosystem as manufacturing companies often work in isolation or have at most a handful of local suppliers. Thus, while individually competitive there is not the same type of peer pressure rippling though the economy. Beyond the manufacturing and internationally traded sectors vested interests ensure that costs are elevated and not subject to competitive pressure. This is because the culture of fussiness about costs, which is indispensable for scale intensive industries, has not taken root in the RoI.

The way forward for the RoI is a number of Constitutional Amendments which would limit the blocking power of vested interests and allow competition and sensible administrative practices to take root. This applies to sectors such as housing, insurance, transportation, infrastructure, planning etc. There is no underlying reason that the RoI should not achieve the same cost structures as the Central countries, which would imply a 30% increase in disposable income. As things stand the RoI is tripping over its shoelaces in spite of its enormous potential.

The Government of the RoI is continually trying to address cost issues by piecemeal legislation but the lesson should have been learned by now that it is not working as vested interest continually game the legal and political systems and find workarounds to protect their privileges. Only constitutional change will work. It would be appropriate to look at other countries in terms of what is desired and then work backwards to draft the appropriate amendment wordings.

Concluding Remarks

This article explores a number of themes regarding the economics of a United Ireland which cover:

The terms of the transfer from the UK including the UK National debt and earned UK pensions

The disproportionate size of the Public Sector in NI, particularly in Health, Education and the Civil Service

The paradoxical higher disposable incomes in NI compared with the RoI in spite of the vastly high output of the latter

The optical illusion of the UK’s external accounts and the likelihood of a large devaluation of the £ sterling in the future

The issue of costs in the RoI and how addressing these via Constitutional Amendments is a necessary precondition of Reunification as well as being worth doing for its own sake.

In my view a large Sterling devaluation is looming, due to the manufacturing shakeout in the UK, though it could be 5 years or 10 years hence. When this occurs it will put Reunification into play in terms of a majority in NI seriously considering its attractiveness.

If the Republic of Ireland is to seriously prepare for this eventuality, rather than just dealing with it when the time comes, it needs inter alia to address the cost issues in its economy. Once these are fixed the economics of Unification will be manageable.

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The Economics of a United Ireland - 2023

⁠UK Trade Statistics - 2023 Paul Dixon⁠⁠

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`UK Trade Statistics - 2023 Paul Dixon`⁠
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