The key political choices that will determine the cost of Irish reunification

The economics of a united Ireland has been a disputed territory for years, with analysis ranging from claims of large gains to significant costs. How do we make sense of this?

A new analysis from Professor Stephen Kinsella of the University of Limerick- The Economics of Reunification – published by Fine Gael as part of its ardfheis initiative on the topic, provides a vital guide through the arguments.

It shows, above all, two things. One is that the costs depend crucially on what model is chosen, how it is implemented and crucial negotiations with the UK on the issue of pensions and debt. And second, that the long-term growth performance of Northern Ireland will be crucial in determining the economics of reunification and whether it can be financed.

There is no one answer to the question of what a united Ireland would cost. It all depends. And this underlines the vital role of planning and preparation.

Kinsella, who is an adviser to Tánaiste Simon Harris, draws on a range of previous work, much of it undertaken post-Brexit. He estimates that the first-year cost of reunification ranges from about €3 billion to €25 billion.

This is obviously a huge range. But this is where the story lies. As the assumptions and political choices change, so do the potential costs.

Kinsella frames the issue of the economics of the reunification debate around two questions. The first is who should pay which parts of the difference between Northern Ireland’s income and its expenditure. The second is what structures can be put in place to improve convergence between income and productivity levels in Northern Ireland and the Republic.

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Disposable income per household is 13 per cent higher south of the Border, and the FDI model has boosted the Republic’s economy and its public finances. In contrast, the North has a net fiscal deficit of €17 billion, funded by the UK exchequer. This does not transfer automatically to the costs of reunification, but it is important nonetheless.

In a best-case scenario, if the UK agreed to take on the historic cost of the North’s pensions bill and the debt interest on the part of the UK’s national debt which would be attributed to Northern Ireland, then much of the €17 billion deficit would fall away.

Kinsella assumes some additional costs would accrue to the Republic from investment and running a separate administration if a federal model was chosen. This is one of a range of integration models in the paper, which also includes what he calls a “managed integration” plan – involving phased harmonisation in areas like pay and welfare rates over 15 years – and a costly scenario that harmonises everything at once.

This variety of political decisions on what form unification would take and who picks up various bills leaves a potential matrix of costs not only, of course, in year one but for many years into the future. Bringing public pay and welfare rates in the North up to the Republic’s level, for example, would be a hugely expensive exercise.

The most important decisions are:

The pensions and debt issue

What happens to the accrued pension liabilities of Northern Ireland pubic servants and those who qualify for a state pension has been a key difference over the years between those taking an optimistic and pessimistic view of the economic benefits of reunification. Added to this is the interest on the part of the UK national debt, allocated to Northern Ireland in relation to its size within the UK.

Together these sum to close to €10 billion of the €17 billion annual UK estimate of the Northern Ireland deficit.

Pay convergence

Partly relying on what model of unification is chosen, it is clear that, as Kinsella puts it, “a nurse, teacher or civil servant in Belfast would expect the same pay as one in Dublin and a pensioner or jobseeker in Derry would expect the same weekly payment as one in Cork.” This would cost between €2.3 billion and €12.4 billion on day one, depending on how the gaps are measured, according to the report.

[ Northern envy at Republic pay ratesOpens in new window ]

Huge decisions would lie ahead in this area and on the wider issue of how – or whether – public services would be integrated. Savings might be expected here from unified structures, but this would mean job losses, and Kinsella warns that the gains might be modest enough.

The model chosen

Choosing between the different possible models for reunification also has an impact on the economics.

A key message is that trying to unite the two economies in an unplanned rush is potentially very expensive and would require strong growth in Northern Ireland to make the finances add up in any fashion.

So-called managed integration over 15 years would still carry a high cost, on his calculations. Extra investment needed to increase productivity in the North would also need to be factored in.

As Kinsella says in his conclusions, a key message is that political choices will drive the cost of reunification – “the price depends far more on decisions made by policymakers than on any fixed bill.” The pensions and debt issues are vital in the short term, while over time closing the pay and welfare gap is crucial.

In any scenario, the financing is complicated, requiring significant borrowing even if there is financial assistance from the UK or even the EU (where other member states might look askance at the idea given the public finance constraints they face).

For the financing to work, growth becomes vital. Northern Ireland has averaged 1.3 per cent a year GDP growth since the early 2000s. Under a managed transition scenario, this would need to rise – depending on the assumptions – to between 3 per cent and 4.7 per cent on average each year to underpin a funding model.

Kinsella concludes that “this is a high bar, but it is possible.” Other assumptions might lower the growth targets a bit – again showing the importance of the key decisions.

A key conclusion from reading the report is that the potential financial implications for the Republic and its citizens are significant. Kinsella points to a range of potential costs per head in the Republic, which runs from €650 in year one to over €2,600, with ongoing significant costs in future years.

[ Cross-Border tax rules putting off employers and workers, says reportOpens in new window ]

Ireland’s public finances give it leeway to fund reunification, but this still carries costs. “However the costs are shared,” Kinsella writes, “someone has to pay them year by year”.

Like previous work by economists John FitzGerald and Edgar Morgenroth, the report points to the investment needs of Northern Ireland in areas like education and skills, infrastructure and other measures to boost productivity.

There are potential gains from unification, too, as – for example – corporate taxes are cut in the North, encouraging inward investment, and new trade opportunities open up as the Irish Border disappears and Northern Ireland becomes a full part of the EU.

The extent of the resulting dynamic is hugely difficult to model with any confidence, but the North’s lacklustre economic performance compared to the Republic does point to some potential gains.

As the report concludes, whether reunification happens is a political and constitutional question. But the economics will be vital, and the report again underlines the complexity of the task and the huge preparations which would be required.