Northern subvention: No barrier to serious planning for a united Ireland

Post-Brexit, it is now imperative that Ireland prepares for constitutional change. The ‘Northern Ireland subvention’ is not a valid barrier to the initiation of plans for Irish reunification and is unlikely to dominate such plans argues John Doyle, professor of law and government at Dublin City University.

Before the 2016 Referendum on Brexit there was a widespread consensus that the 1998 Good Friday Agreement had created a platform for gradual change, and although the agreement provided for referenda on a united Ireland, there was no serious expectation that it would happen in the short-term.

Brexit and the continuing difficulties in agreeing the future EU-UK relationship has however fundamentally changed political opinion in Northern Ireland, where Irish unity is now a means by which Northern Ireland can avoid the post-Brexit chaos and re-enter the European Union. Serious professional opinion polls have judged that the result in Northern Ireland is now too close to call and the result in the Republic is consistently and strongly in favour of unity.

There is, therefore, an unexpected and now urgent need to prepare for future constitutional change. There is widespread agreement that holding referenda without detailed preparation, as happened in the Brexit referendum would be a disaster. The UK Government control the timing of that referenda, it is not a co-decision with the Irish Government. While it is hoped that a future UK Government would consult, there is no legal requirement on them to do so. Policymakers, state agencies and businesses therefore need to start contingency planning for future referenda decisions to create a united Ireland.

For public policymakers and businesses, one of the key issues which impacts on contingency planning for a united Ireland is the scale of the UK subvention to Northern Ireland. This subvention, widely reported as being £10 billion per annum, has raised questions about the viability of a united Ireland based on the capacity of the south to absorb a subsidy of this size.

However, analysing the basis by which the UK Government calculates this subvention, demonstrates that the actual figure to be absorbed by a united Ireland is far less than £10 billion and, depending on post-referendum negotiations between the Irish and UK governments, may be as low as £2.4 billion.

The calculation of the subvention involves three components: public expenditure in Northern Ireland; taxation raised in Northern Ireland; and an allocation to Northern Ireland of the costs of central UK Government expenditure.

Some elements such as tax paid by individuals and costs of health or policing within Northern Ireland are relatively easily calculated and would transfer to a united Ireland at a similar level. However other aspects of the subvention are estimated, would be irrelevant to a united Ireland or will be the subject of post-referenda negotiations between the Irish and UK governments.

The largest single expenditure item of this type is the cost of pensions, which adds £3.5 billion to the subvention, including both public occupational pensions that are not covered by a separate pension fund, and state pensions paid as benefits. The UK currently pays pensions to people who have worked in the UK, but now live elsewhere, including in Ireland. It would be consistent with current practice, for the UK to pay pension liability that had been built up, based on individuals’ tax and social insurance contributions or caring responsibilities, during Northern Ireland’s membership of the United Kingdom.

While the UK could renege on this commitment, and there is no legal requirement to pay future pensions, that would be an unlikely outcome. A diplomatic agreement which sees the UK meeting such its pension liabilities would also be similar to the pension arrangements in the UK’s Withdrawal Agreement from the EU. A united Ireland would only therefore have responsibility for pension liabilities built up from the date of Irish unity.

Secondly, UK national accounts allocate the national debt payments to different regions including £1.6 billion per annum for Northern Ireland. This debt is the legal liability of the UK state, and a future united Ireland would have no legal responsibility for this debt, in the same way as the Free State did not take on any UK debt in the 1920s.

“It would be consistent with current practice, for the UK to pay pension liability that had been built up, based on individuals’ tax and social insurance contributions or caring responsibilities, during Northern Ireland’s membership of the United Kingdom.”

Thirdly, UK defence expenditure is also allocated to regions, adding £1.14 billion to the Northern Ireland subvention. This includes a per capita contribution to the Trident nuclear weapons programme. To put this figure in context, Ireland’s current defence budget is €1 billion, so even allowing for an increase in a future Irish defence budget to cover a larger state, the relevant size of the subvention would reduce by over £900 million per annum.

Fourthly, ‘outside UK expenditure’ including the large UK Foreign Office adds £765 million per annum to the subvention and again, even with some increase in costs, it is unlikely a united Ireland would choose to create a Department of Foreign Affairs at the scale of the UK Foreign Office.

Simultaneously, the subvention underestimates tax revenues for Northern Ireland, as corporation tax, capital gains and VAT are paid by companies from their head office address regardless of where that profit was earned, exaggerating the tax earned in London. Previous studies have estimated that this underestimation of tax revenue, actually earned in Northern Ireland, adds £500 million to the size of subvention.

Taking the latest UK published figure for the subvention of £9.4 billion, and excluding UK pension liabilities, debt repayments, 80 per cent of defence expenditure, 65 per cent of ‘outside UK expenditure’ and £500 million in underestimated tax, but erring on the side of caution, and not making any reduction for net “accounting adjustments” or other “unidentified expenditure” which cannot be further analysed and which together add another £1.3 billion to the UK published figure, leaves a remaining subvention of €2.8 billion.

A subvention of this size would require once-off economic growth and tax revenue growth in a future united Ireland of approximately 5 per cent to absorb this deficit without disruption. If ‘Northern Ireland’s’ economy improved so that it simply reflected average Irish economic performance, no subvention of any sort would be required to sustain public services in Northern Ireland.

A subvention of €2.8 billion is not at a scale where it needs to dominate contingency planning for Irish unity. Every government department, state agency and large business needs to devote resources to considering the implications of Irish unity for their role and future, as the possibility of unity referenda in a five-to-10-year timeframe is now very real.

How would a united Ireland integrate public services such as health, welfare, education, policing or infrastructural development? How might inward investment and tourism be developed to match the record of the Republic? Voters will need answers to these questions before referenda and, therefore, the planning needs to start now.

John Doyle is a Professor in the School of Law and Government in Dublin City University.

This article is based on peer-reviewed research published by the Royal Irish Academy in its journal Irish Studies in International Affairs, as part of the ARINS project and the full research paper is freely available at www.arinsproject.com