Why resurgent Ireland can’t afford to reunite – yet

Two years after its collapse, Northern Ireland’s devolved government has been restored thanks in part to an emergency £3.3bn funding deal. 

With it comes the province’s first ever nationalist leader, inevitably reigniting talk of a united Ireland. 

First Minister Michelle O’Neill has said she thinks there could be a referendum on reunification in the next 10 years, which she has described as “a decade of opportunity”. 

However, whether the Republic of Ireland can afford it is a different matter.

Northern Ireland currently costs the UK around £14bn a year once tax revenues are accounted for, therefore any separation would mean the Republic would have to take on at least the bulk of this cost.

Economists warn that this could mean adding up to 10 percentage points to income tax rates in the country. 

Polls south of the border currently favour reunification but this political capital could erode quickly once the costs are laid bare. 

Altogether, the UK Government’s bill for Northern Ireland amounts to around £30bn a year. 

This includes a current resource budget for day-to-day spending of £14.2bn and a capital budget for long-term investments worth £2.2bn. 

Further costs are then spent on financing Northern Ireland’s state pension and health budget. 

This is far more than what the Treasury gets back in return, as Northern Ireland’s tax revenues are among the lowest in the UK. 

“In very simple terms, in order to maintain public services at roughly the same level per person as in Great Britain, Northern Ireland could never finance itself from its regional tax base,” says Esmond Birnie, senior economist at Ulster University and a former government adviser in Northern Ireland. 

The latest figures for 2021 show that the difference between what the UK Government spends on Northern Ireland and what it gets back is about £14bn a year. 

That money is known as Northern Ireland’s “subvention” payment and the amount is the touchstone for how much reunification could cost. 

John Fitzgerald, professor at Trinity College Dublin, calculates that the £14bn is currently worth 27pc of Northern Ireland’s gross national income (GNI), signifying its importance. 

He has previously suggested that a sudden withdrawal of that £14bn would trigger “a complete collapse in the regional economy”.

But just how much the Republic would need to pay is still open for debate. 

If Ireland took on the payments, it would include a smaller allocation of defence and international expenditure.

This has led to Fitzgerald estimating that Ireland would be looking at a “base case” cost of more than £8bn a year.

Some economists have argued that the payments would be even less because the UK would continue paying for Northern Ireland’s state pension, as well as interest on Northern Ireland’s share of UK debt. 

This would knock several billion pounds off, but Fitzgerald says it is highly unlikely that this would happen.

Instead, the bill could be even bigger. 

Welfare payments are 30pc to 50pc higher in the Republic compared to Northern Ireland, says Fitzgerald. 

Public sector wages are also far greater. If Ireland was reunified, the Republic would likely need to “uprate” these costs to cover the citizens of Northern Ireland. 

This would take the bill up to nearly £14bn, Fitzgerald calculates: “That’s nearly a tenth of national income.”

In this scenario, the cost would be equivalent to adding five to 10 points to Irish income tax, Fitzgerald says.

“Another option would be to cut public sector pay across the Republic but that is not something you can do in a market economy,” he adds.

There is a parallel with German reunification after the fall of the Berlin wall in 1989, says Fitzgerald, but he warns: “Germany is still paying for that.”

Yet on the face of it, Ireland’s economy looks like it could handle anything.

The country’s low corporation tax rate means it has attracted global businesses that will help the economy expand at four or five times the pace of the UK’s this year. 

The International Monetary Fund expects real gross domestic product in the UK to rise by just 0.6pc in 2024, whereas Ireland has forecast growth of around 2.75pc. 

Yet faster growth does not make up for the fact that it is a much smaller economy, says Alan Barrett, chief executive of Ireland’s Economics and Social Research Institute. “Relatively speaking, it would be a burden,” he says.

Much of the actual cost of the subvention would depend on the success of Northern Ireland’s economy after reunification, which could benefit from a transition to the Irish corporation tax system. 

This would mean businesses would pay only 12.5pc in tax on their profits, half the 25pc rate in the UK, meaning it would likely drive a boost in investment and benefit Ireland in return. 

This undoubtedly serves as an opportunity to transform Northern Ireland’s economy. 

But this will rely on educational reform, which Fitzgerald says could take several decades to pay an economic dividend.

From a broader perspective, Birnie says that reunification would also create a major logistical headache for businesses.

“Trade, supply and labour market relationships are heavily integrated with the rest of the UK,” he says. “Constitutional change would have a disruptive effect.”

The latest figures from 2022 show that nearly a fifth (19pc) of Northern Ireland’s total sales went to Great Britain, while only 8pc went to the Irish Republic. 

Businesses relying on raw materials and components such as manufacturing and food processing would have to grapple with significant overhaul, says Birnie. 

There could also be a cost adjustment for households, he adds. 

Retail food prices in the Republic are around a fifth higher than in Northern Ireland. “The penalty to households would be dear food prices and hence a reduction in the real standard of living,” says Birnie.

But on the other side of the border, the Republic may become increasingly wary of the costs too. 

Polls suggest there would be a strong vote in favour of reunification in the Republic, but Barrett says “the size of that majority does diminish if you start asking people about the cost”.

“I think there is an awareness and the consciousness that this would be somewhat expensive and if people were confronted with it, you know, they might get more concerned about it,” he says.