Oireachtas Joint and Select Committees
Thursday, 2 May 2024
Joint Oireachtas Committee on the Implementation of the Good Friday Agreement
All-Ireland Economy: Discussion (Resumed)
Fergus O'Dowd (Louth, Fine Gael)
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Apologies have been received from Senator Blaney. On behalf of the committee I welcome Professor John FitzGerald, adjunct professor, Trinity College Dublin; and Professor Edgar Morgenroth, professor of economics, Dublin City University, who are here today to discuss their recently published research on the expected costs of replacing the UK subventions for Northern Ireland, in the event of a united Ireland. I thank them for their attendance. It is a very interesting report and we look forward to the debate.
Before we begin I wish to explain some limitations to parliamentary privilege and the practice of the Houses as regards references witnesses may make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. However, witnesses and participants who give evidence from a location outside the parliamentary precincts are asked to note that they may not benefit from the same level of immunity from legal proceedings as a witness giving evidence from within the parliamentary precincts does and may consider it appropriate to take legal advice on this matter. Witnesses are asked to note that only evidence connected with the subject matter of the proceedings should be given and they should respect directions given by the Chair. They should respect the parliamentary practice to the effect that, where possible, they should neither criticise nor make charges against any persons, person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech might be regarded as damaging to the good name of that person or entity.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I now invite Professor FitzGerald to make his opening statement.
Professor John FitzGerald:
I thank the committee for its invitation to appear. Our research on the cost of replacing the UK subvention to Northern Ireland in the event of a united Ireland was published recently by the Institute of International and European Affairs, IIEA. It updates work which we published in an academic journal in 2020. We presented an earlier version to this committee in May 2021. Last year Esmond Birnie, a Northern Ireland economist, also published an academic paper which reached very similar conclusions to ours.
It is normal in countries that rich regions support poor regions. In Ireland there are major transfers from Dublin to the rest of the country, in particular the north and west. In the case of the UK there are large transfers from central government to poorer regions, including Northern Ireland. This is normal. This transfer or subvention covers the difference between tax revenue raised in a region and the public expenditure in that region.
In the event of a united Ireland, the revenue and expenditure in Northern Ireland would be somewhat different from what it is today. We take account of several differences in this regard. Corporation tax would be higher because profits earned in Northern Ireland are reported in London, so there is an undercount there. Expenditure on defence would be much lower, by more than €1 billion, because the Irish Army is much smaller so the contribution which would be made to that would be smaller. Expenditure on development aid would be higher and is more generous than the Tory Government in Britain to the rest of the world. The EU budgetary contribution would be quite significant, at €500 million. Of course, there is no such budgetary contribution currently.
Using 2019 data, the result of these adjustments is that the transfer to the North would be approximately £1.1 billion, or €1.2 billion, lower in a united Ireland, amounting to approximately €10.9 billion, or approximately 5% of Irish national income. We used the 2019 data because the transfers are much higher in 2020 and 2021 but, as that is Covid-19 related, it is better to use the earlier data.
We estimated that to raise Northern Ireland welfare rates and public sector pay rates to those prevailing in the Republic would add another 5% of national income. A recent academic paper suggests that percentage could be higher.
The main debate about our analysis focuses on our base case, where we assume that Northern Ireland would take a share of the UK debt into a united Ireland, as happened with the Irish Free State in 1922, and that pensions in the North would continue to be funded from social insurance contributions paid in the North, with any deficit being covered by a subvention from Irish central government. Others take the view that the UK would be very generous with a departing Northern Ireland, continuing to cover a major part of the ongoing deficit for many years after unification. We think it unlikely that the UK would be exceptionally generous, as some have suggested. Northern Ireland ministers can tell you that the UK Government has not been very generous to Northern Ireland as of today. If precedents of other similar secessions were followed, the UK would not be as generous. In addition, generosity to Northern Ireland would be a strong incentive for Scotland to secede from the UK on the same generous terms. Together, both departures on these terms would be a very heavy financial hit for England and Wales. The two are related. In addition, expecting the poorer countries of the EU to fund an ongoing major transfer to rich Ireland is likely to prove a pipe dream.
Commentary on our report has rightly highlighted the fact that the subvention to the North is only one, probably minor, element of the major economic changes on this island which would result from unification. There would be a wide range of other factors, some of them positive and many of them negative. These have not yet been seriously examined. What would make a major difference to the costs of unification is if Northern Ireland dramatically changed its economy and society to greatly increase its productivity, narrowing the gap in living standards between the North and the rest of the island, and between the North and the rest of the UK. This would be very good for the people of the North, whether they chose to remain in the UK or in a united Ireland.
Extensive research has shown that the single biggest contributor to Northern Ireland’s low productivity and very poor economic performance is its defective educational system and the continuing loss of its graduates outside Northern Ireland. Research by the leading Northern Ireland economist, Vani Borooah, and others, has shown that the Northern Ireland system of education, where an elite 40% of children progress to grammar schools, with most of them going on to university, while the rest go to secondary schools, is very damaging. Too high a proportion of secondary school children leave school early, with the related economic and social costs. Recent research by Adele Bergin, Seamus McGuinness and Emer Smyth of the ESRI reinforces this picture. While our educational system offers significant equality of opportunity to children from different backgrounds, this is not the case in Northern Ireland. This is particularly damaging for working class kids in the North. If Northern Ireland immediately reformed its educational system to provide genuine equality of opportunity, after 20 to 30 years, as the children who are currently being failed progress through the educational system, there would be a big impact on productivity in Northern Ireland, as happened in this part of the island once we improved our educational system. It took 30 years, from 1970 to the mid-1990s.
If the North could attract back the high proportion of its graduates living in England, this would further improve productivity and it would do it faster. To achieve this, the Northern Ireland Government has to address the major obstacles identified in 2021 studies by Pivotal. These established that the problems of governance in Northern Ireland and the divided nature of its society were major obstacles to graduates returning, a majority of whom are from a unionist background. If they could be attracted back, that could make a big difference.
It is worth noting that despite having the same education system, Irish regions like the west continue to lag in terms of productivity, with regions diverging in terms of gross value added per capita. There is also no evidence of convergence across counties in terms of disposable income. This is consistent with the extensive academic literature on regional development that shows regional disparities tend to be persistent.
It is for the people of the North and the South, voting separately, to both decide whether they want Irish unity. If they were to decide to do so in the next decade, before major reforms in the North increase productivity, the cost for the South would be very high. If, instead, major reforms are rapidly undertaken in the North, as they began to mature after 20 years or so, the costs of unification would be much lower. Also, of course, if the people of Northern Ireland choose, instead, to remain in the UK, they would be much better off as a result of such reforms.
Fergus O'Dowd (Louth, Fine Gael)
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Does Professor Morgenroth have anything to add?
Fergus O'Dowd (Louth, Fine Gael)
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From what the witnesses seem to be saying, the key point is the reform of education. Equalising access is the key to getting people with third level qualifications to come back to the North. It is a major and ongoing issue in any event. Regardless of whether there is a united Ireland, there will not be true prosperity in the North unless that is done. That is the first point.
The second point is that I was surprised at the total amount of €20 billion over 20 years that was outlined in the report. That said, because it will be such a transformational change, the political work will have to be done first. Have the witnesses considered that there could be a significant contribution from Europe, a continuing significant contribution from the UK and even a contribution from some other places like America that have always had an intense interest in Ireland? In other words, could that figure of €20 billion be reduced by having a long-term pact in the interests of peace and prosperity on the island? I presume the North would be going back into the European Union, so that could be a game-changer as well. Do the witnesses have a view on that?
Professor John FitzGerald:
Education is crucial. It is very hard to see a large enough contribution from Europe to make a difference. Given that Ireland will still be one of the richest countries in Europe, we cannot expect the rest of Europe to subsidise Ireland when we have chosen to unify. It is unlikely, although it is possible. The UK could be very generous but, as I said, if they are very generous with Ireland, that has major implications in terms of Scotland. They were not that generous initially in 1922. If we look at the break-up of the Soviet Union, the assets and liabilities were shared out in the agreement at Almaty in Kazakhstan in 1991, and Ukraine got quite a number of Russian embassies as part of the deal. That is what has happened in the past in break-ups. Who knows? We do not know for certain but we just think it unlikely.
Fergus O'Dowd (Louth, Fine Gael)
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It is certainly a possibility, notwithstanding what Professor Fitzgerald is saying.
Professor Edgar Morgenroth:
From a planning perspective, it is best to be prepared for the worst and hope for the best. Obviously, there is a possibility that the EU could contribute something but, again, it is not clear how much that would be and over what period that might be maintained. Likewise, the US could contribute something and, of course, the UK could, but it is a could. It is better to think of the worst-case scenario and end up achieving something that is somewhat better.
It is important to stress that what we have done in this paper is look at just the subvention as it stands currently, with some adjustments. Unification would also lead to additional costs. There is a huge range of costs, some of them probably quite minor and others probably quite large, and they are ultimately on the practical side of things. There were costs associated with Brexit that nobody ever anticipated. Unification, because you are trying to unify two systems, is very similar but in the other direction. For example, road signs would need to change in Northern Ireland; that is not going to end up happening for free. There are many detailed things that we did not look at, so the potential cost would be much higher. Then, there are these one-off costs, whereas the subvention has been something ongoing for Northern Ireland. Therefore, perhaps the thing to think about with regard to how we can reduce this, as Professor FitzGerald said, is education, which is one of the big factors, and there are other factors that might help to reduce the subvention by improving the productivity of Northern Ireland.
Fergus O'Dowd (Louth, Fine Gael)
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If things go on as they are and if there is not a united Ireland, the UK Government will continue to meet those costs, so it has to be an advantage to them to pay a significant amount into the future but not have to pay what they are obliged to pay right now. Does that make sense? Is it a fair point?
Fergus O'Dowd (Louth, Fine Gael)
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It seems to me that the point is that if they are going to have to pay these costs anyway into the future, then they would have a significant but reducing and lesser cost. That is a good bargaining position for them. In other words, their taxpayer does not have to foot all of the bill all of the time, and there will be a benefit to the taxpayer in the UK from a united Ireland because it will not cost them as much as it does now or will.
Professor Edgar Morgenroth:
That is right, but it is also going to cost them to pay for Scotland because they would be incentivising Scottish voters to vote for Scottish independence. Those things would be part of the debate and probably part of the thinking. Again, one probably cannot second-guess how that pans out in reality.
Fergus O'Dowd (Louth, Fine Gael)
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The witnesses’ research and the paper are extremely important and informative and they are framing the debate for many people, as we know from public commentary. We had a quick discussion outside and we spoke about the cost of a united Ireland versus the value or benefit of it. I accept the point the witnesses made that the cost is one thing but the benefit to the whole island would be remarkable.
Professor Edgar Morgenroth:
It is a benefit in the wider sense. The example I tend to give is German unification, which has so far cost somewhere between €1 trillion and €3 trillion. It is ongoing and the costs will likely continue for perhaps another 20 or 30 years. That is a high price. If we ask people in Germany whether they are happy that their country was unified, the vast majority, over 70%, say “Yes”. In other words, they are quite willing to pay the price because they value what they got for it more than the price. That is the big distinction. We just talk about costs. We do not talk about the value of what might arise. That is a very important thing.
In that sense, our paper and our work are trying to stimulate some discussion about how unification could be done most efficiently and best for the people. Rather than saying that we should or should not do it; we are really saying that these are the issues that would arise and trying to identify how we deal with them.
Fergus O'Dowd (Louth, Fine Gael)
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The key point is that if the economy of Northern Ireland improves regardless, that makes the opportunity financially more attractive for unification. Is that it?
Professor John FitzGerald:
Yes. If we think about the significant problem with the education system in Northern Ireland, the ethos on this island is one of equality of opportunity, and whether someone is from a poor agricultural background or a working class background, they should have an equal opportunity. If we unify and the education system in Northern Ireland has not been reformed, do we immediately force the Irish system on Northern Ireland? I know that would be very unpopular with middle-class nationalists as well as people of a unionist background. Alternatively, do we leave it where it stands whereby there is an ethos that does not believe in equality of opportunity and does not look after kids from disadvantaged backgrounds in Northern Ireland?
We would really need to do that and have that in place before we unify. For the Republic to say “You are going to have to accept our ethos of equality of opportunity if you want to join us” is going to be a pretty difficult sell. That is why it is vital that Northern Ireland reforms itself first and then we can talk about unification.
Even if Northern Ireland wants to remain in the United Kingdom, it will be much better off. Kids from working class backgrounds would be much better off. The United Kingdom as a whole will be better off. So it is a win-win, but having presented the evidence on education in Northern Ireland, there is major resistance from parents who have kids in good grammar schools who will almost certainly go on to university. That is whether they are from a nationalist or unionist background. That is up to Northern Ireland. Northern Ireland has to sort that out for itself.
Rose Conway-Walsh (Mayo, Sinn Fein)
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I thank Professor FitzGerald for being here. I read his report with interest, as always. The committee is looking at constitutional change and has almost concluded its economic section. We thought it was important to bring Professor FitzGerald back today to talk about the most recent paper. Obviously, we will have others in to comment on it too.
It is difficult to understand how such strong conclusions were reached, especially considering the narrow focus of the work Professor FitzGerald has done. In fairness, it is stated that the report takes “no account is taken of the wider economic effects of Irish unification” even though these would “have major implications for the public finances”. It also states that there will be an ”immediate major reduction in their living standards”. I was really shocked to read such a conclusion. We know the biggest impact on our living standards was in the 2008 crash with the banks here. We saw how that failed to be predicted even though all the signs such as the over-reliance on construction and all that were there. My first question is how can Professor FitzGerald make such a claim?
I want to go into some specifics around the figures first and then we will look at education and some of the benefits. Professor FitzGerald includes the cost of increasing all public sector wages to southern norms from the outset, costing €4.2 billion per year, but he does not seem to allow for any tax or PRSI contribution on such an increase which would really reduce the cost. I think it would reduce it by about half to €2 billion per annum. Why did he not do that? Does that not skew the first element in the context of public sector wages?
Professor John FitzGerald:
Say the Republic pays 5% more of its national income in taxes to pay for the welfare payments and wage increase in Northern Ireland. If you take money out of the economy, it further reduces tax revenues and increases social welfare expenditure. The Deputy is quite right that in spending the money in Northern Ireland you would get back about a third, on average, in tax revenue. The cost within Northern Ireland would be reduced by a third but the cost in the Republic would be increased by the third. When you are just transferring money from one group to another group, there will be no net effect on national income. It is just making people substantially worse off in the Republic to make people substantially better off in Northern Ireland. The additional tax revenue raised in the North would be offset by tax lost in the Republic. Looking at this in a series of studies done by the ESRI over the years, when you pump money into the economy, the Deputy is quite right that you get back about a third, on average. It could be a quarter or it could be a bit more than a third but it is about a third on average. Remember, however, that you will have to lose that third in the Republic.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Would it not be more than a third when you consider tax and PRSI?
Rose Conway-Walsh (Mayo, Sinn Fein)
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But you are only looking at cost in this paper and saying €4.2 billion. Would you not look at the cost of just over €2 billion with the tax and PRSI?
Rose Conway-Walsh (Mayo, Sinn Fein)
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Yes. What I am saying, however, is that there are very serious conclusions drawn from this very short report. I think it is important that there are not too many nuances. Obviously, you have to have certain assumptions in any paper but the assumptions just seem to point towards a headline of €20 billion.
I want to go through some other specifics here on pensions. The report increases all pensions to southern level at a cost of €3.8 billion per year. This includes work-based pensions, which are obviously occupational pensions, which might not be supplemented by the government of a united Ireland.
Rose Conway-Walsh (Mayo, Sinn Fein)
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So is Professor FitzGerald saying the €3.8 billion does not include occupational pensions?
Rose Conway-Walsh (Mayo, Sinn Fein)
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That does not come across in the paper.
Rose Conway-Walsh (Mayo, Sinn Fein)
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That does not come through there. The estimated cost of increasing public pensions, that is contributory and non-contributory, to southern rates from year one would be €450 million not €3.8 billion. That is based on the fact that there would be 390,000 pensioners moving from British pension rates to the rates that apply in the South. The top-up would cost €1,040 per pensioner for a contributory pension - that would be the 390,000 of them – and €1,664 for the non-contributory pension. There are 70,000 of those.
Rose Conway-Walsh (Mayo, Sinn Fein)
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We know that. However, part of the problem again is that people see this short paper. Obviously, newspapers and editors are busy. They do not go back to what was outlined in previous papers. They look for the headline figure.
Professor John FitzGerald:
My point is that the paper, I have forgotten the two authors names, suggests substantially higher costs than we have. I may have underestimated the cost. We just put in the pension but in the UK system, there are other benefits that people receive in retirement over and above the pension where here the pension is the headline rate. I have relatives who are in receipt of UK social welfare pensions. I know it is much lower than here.
Rose Conway-Walsh (Mayo, Sinn Fein)
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I am very familiar with it, having lived there. Our guests assume that Britain would walk away without paying a penny towards pensions despite the huge reputational damage that would be done . Even in those circumstances, they assume that the Irish Government would still pay nearly €2 billion per annum in British debt for which it does not have a legal liability, does it?
Professor John FitzGerald:
All right. Separate out the debt. On pensions, we on this island, North and South, and people on the other island have social insurance systems. The pensions are not funded. The pension payments are funded by the contributions made every year. If Northern Ireland joins a united Ireland, everybody in Northern Ireland will continue to pay social insurance contributions and these will go to Dublin. Those are the contributions that would have gone to pay the pensions in Northern Ireland. It seems most unlikely that when the revenue is going to Dublin, the United Kingdom would continue to pay those pensions.
There are special arrangements that were put in place 50 years ago, partly under EU auspices, to allow labour mobility where people can aggregate their social insurance across countries. However, if all the revenue that currently funds the pensions in Northern Ireland goes to Dublin, for the UK to continue to pay the pensions is unlikely.
The debt is a different matter. The Deputy is right it is not necessarily a legal liability, but when Ireland left the United Kingdom in 1922 part of the deal was we would accept a share of the debt. That was subsequently written off in 1925 as part of a subsequent deal. I will not go into the details of that.
Rose Conway-Walsh (Mayo, Sinn Fein)
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London had the power to do it at that time. Is Professor FitzGerald saying it does not have the power to do it now?
Rose Conway-Walsh (Mayo, Sinn Fein)
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I saw them.
Rose Conway-Walsh (Mayo, Sinn Fein)
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There are about 110,000 English people living here and many of them are on British pensions. They get them directly from Britain.
Rose Conway-Walsh (Mayo, Sinn Fein)
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At no cost to the State.
Rose Conway-Walsh (Mayo, Sinn Fein)
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All right. I have a number of other areas to cover. We make the assumption, as do the professors, that things will stay the same. If we look at the duplication of services we have had since partition, there would obviously not be two services across the island. This would happen over time. Is there a calculation of what benefits would come from that, what would be saved due to that and how it would impact?
Professor Edgar Morgenroth:
Those potential savings depend very much on what is put in place. Initially, we may find the costs go up. If we need to pay redundancy to a bunch of people who are currently doing a job that is essentially duplicated in a united Ireland then that is going to be an additional cost.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Yes, but obviously when we look at all this we are not doing so over a short term. We are not looking at it over a one-, two- or five-year period. We are looking at it-----
Rose Conway-Walsh (Mayo, Sinn Fein)
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This is part of the problem in the assumptions. I wanted to mention it because this is a hugely important conversation. Dr. Adele Bergin and Dr. Seamus McGuinness have done many papers, but they made a key point in their recent one. They argued that necessary planning and preparation goes well beyond the use of frameworks and requires the use of macroeconomics and micro-simulation tools to model the impacts of various productivity-enhancing policy changes over a number of time horizons incorporating various tax and welfare scenarios adjusted for expected demographics and including sensitivity estimates that account for potential unknown factors.
Is it not true that until we have those simulations and macroeconomic projects we really cannot tell? The data is obviously a big problem we have talked about in this committee, as well as the integrity of the data because of the limitations on disaggregating that from the UK and the congruence between North and South regarding the data. I am just trying to get to the €20 billion figure being there in isolation without taking any of these other things into account.
Fergus O'Dowd (Louth, Fine Gael)
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Before we go on, we have 15 minutes party time, so if Professor FitzGerald answers this I will go on to Fianna Fáil and then we will come back. That is what we agreed.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Yes, I know.
Fergus O'Dowd (Louth, Fine Gael)
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The witnesses can answer the question fully. I just do not want people giving out.
Rose Conway-Walsh (Mayo, Sinn Fein)
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I have one short point to make. Does Professor Morgenroth want to answer my previous question? I really want to talk about the NEETS category as well.
Rose Conway-Walsh (Mayo, Sinn Fein)
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I know that.
Professor Edgar Morgenroth:
-----and we just looked at one aspect. You do not ever mix everything together. Again, I have debated it with Seamus McGuinness on public media. I think he is wrong and the literature certainly does things very differently. On changes, productivity changes and potential benefits, none of us knows the future, but we have many decades' worth of research that looks at regional development and convergence, including about the Republic of Ireland and the regions within it. That research shows there are no miracles. They are just not there. With German unification, shock therapy was applied to East Germany, with some very costly mistakes. There was some initial convergence and it has stalled out. We are now 30 years into German reunification and we are looking at at least another 20 or possibly 30 years before that process is actually completed.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Yes. It is a different thing and we have not time today to go into it.
Fergus O'Dowd (Louth, Fine Gael)
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We have plenty of time but I want to rotate the groups properly.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Nobody is expecting a miracle, but we are expecting practicality.
Fergus O'Dowd (Louth, Fine Gael)
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In fairness to everybody here, there is plenty of time to ask questions and get them answered. If Professor Morgenroth wants to finish that answer I am happy for him to.
Rose Conway-Walsh (Mayo, Sinn Fein)
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I get his point.
Fergus O'Dowd (Louth, Fine Gael)
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I want to go back to Fianna Fail now. We will give that group the same time and then we will come back to everybody. We said we would keep it fair among all the parties and all the questions would be properly answered. Deputy Smith should go ahead.
Brendan Smith (Cavan-Monaghan, Fianna Fail)
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I thank the Cathaoirleach. Like previous speakers I welcome the professors back to our committee and thank them for the valuable contribution they have made to our committee's work over the years and at the British-Irish Parliamentary Assembly as well.
As the Cathaoirleach said at the outset, there is huge emphasis on the need for educational attainment to be improved in Northern Ireland. One of the basic tenets of the paper the professors have produced is the lack of educational attainment and the loss of graduates. All of us, in our own way, have always advocated a greater movement North-South and South-North at higher education level. It is slightly out of this context, but over the years did students from Northern Ireland who came here to study by and large return? When students from Northern Ireland go to England, Wales and Scotland many unfortunately do not return, especially those from the unionist community. It is just a point of interest. Is there any data available on whether students who come from Northern Ireland to study in this State continue to live here or return? Again, education plays into the whole area of productivity. I recall reading some commentary that 21% of 30- to 34-year-olds have not completed post-primary education in Northern Ireland. If that is accurate it is a very high percentage of people not finishing second level. Our figure here is less than 10%, to my knowledge. It is generally given as 9%. The professors might comment on that as well. It shows the difficulty there is and the need, as was mentioned, for reform of the second-level education system to provide equality of opportunity. I sincerely hope we will see a new constitutional arrangement in future, namely, a united Ireland. I am realistic enough to know it will not happen as quickly as I or other people would like, but the people in our jurisdiction are by and large used to a good education system and would not want an inferior one in any part of our island.
I think that is a basic philosophy of most people who want to see education opportunities. I have been a beneficiary of free education and access to third level. I would not have had that opportunity were it not for the policies that were implemented from the late 1960s onwards. A huge proportion of Irish people are beneficiaries of that improvement. From that point of view, progress in the area of education is key to progress and productivity.
With every policy and strategy in place to improve productivity in Northern Ireland vis-à-visthe South, that will not happen overnight. What would be the optimal period within which to achieve equalisation in productivity? I assume we are talking about more than a decade.
I saw another figure quoted and I do not know how right it is. I understand why the witnesses' paper is based on the 2019 statistics. It is because of the transfers due to Covid-related problems. In Northern Ireland, in 2019, the revenue was £17.7 billion and the expenditure was £28.4 billion. That is a deficit of approximately €12 billion. If the Northern Ireland welfare rates were brought up to the prevailing rates in this State, that is, equalised and improved, a figure that has been put out in the public domain is that the subvention would be around €20 billion. The witnesses might comment as to whether or not that is accurate.
One thing the witnesses will have heard us speak about here in the past is the benefits of the all-Ireland economy. They will be familiar with the territory I represent. In a relatively undeveloped area, the central Border region, I and the people north of Cavan-Monaghan have seen at first hand the huge benefits since 1998 of the developing all-Ireland economy. That is often the unsung part of the Good Friday Agreement. It is not talked about enough. We had IBEC here some time ago in the context of meeting the architects of the Good Friday Agreement and reviewing the benefits of it. It is an area that is not quantified enough. So much has happened, despite the political challenges with institutions in Northern Ireland not being in place for a substantial part of that period, despite the huge international downturn and despite Covid. The all-Ireland economy in trade North and South has grown hugely and has had a benefit. Trade North-South has grown much more dramatically, to my knowledge, than trade South-North, but we are all beneficiaries of it. I think we want to continue to talk much more about the all-Ireland economy and the huge benefits we are deriving from it. I would like to see that talked up much more because it is a great credit to the businesspeople, the entrepreneurs and the people who have driven the all-Ireland economy. Without any political ideology, without flag-waving, without talking about new political structures, they have gone on and created jobs that are benefiting the communities that I, Pauline and others represent, the same as our Cathaoirleach and Senator McGahon. In a new constitutional arrangement, I presume there would be an even greater impetus given to that all-Ireland economy.
Those are just a few of the comments the witnesses might refer to in their response to me.
Professor John FitzGerald:
On migration, when I was in college in the late sixties, there were a load of students from Northern Ireland all on grants. They were really well-off but they all went back to the North. Before Independence, very few people from the north came to the south or vice versa, and that has not changed. There is amazingly little migration between the North and the South. As regards the movement of graduates, it is kids who leave school with A-levels who go to England. They do not come to the Republic to go to university, predominantly. They go to England, not Scotland - I had thought it was Scotland - and two thirds of them do not come back. The study on that shows that they are predominantly from the unionist community and do not go back to Northern Ireland. It is a huge potential asset. Our kids go abroad. I have three daughters currently living abroad but they are homing pigeons that come back. I hope two will come home this year. The research shows that such people have helped make this economy grow more rapidly. Returned emigrants bring something back. Northern Ireland has lost out on that. If it could persuade such graduates in successful jobs in England and Wales to come back to Northern Ireland, there would be a reasonably rapid increase in productivity from that.
On the issue of the early school leavers, the Vani Borooah and Colin Knox study published in 2015 is a very detailed study of education in Northern Ireland. Vani was the leading academic economist in Northern Ireland for 20 to 30 years. He showed that it is because of the breakdown between grammar schools and secondary schools that 60% of kids are failed at the age of 11. The 11-plus is gone but what is in its place is possibly worse. Kids from a working-class or disadvantage background nearly all go to the secondary schools. Vani showed that 40% of kids from a unionist background and 30% from a Catholic background drop out early. He estimated from what he called a Catholic ethos advantage that working-class kids from a Catholic background did better. He did not know whether it was because the schools were better or whether it was because of parental expectations. My suspicion is that parental expectations are the reason. Whatever the reason, kids are failed at the age of 11, go into a school, which may be a very good one, and will not progress from it. They will leave school early. It should be remembered that free education came in in 1967. It took five or ten years to build out the schools and so on. Kids are kept two years longer in secondary school and then they progress to third level. That is what happened with us. There are ten years or maybe five years while the education system is being changed. Those kids are still in the education system for another five or seven years, so productivity begins to be affected only after 15 years. It is only after they have all replaced the elderly generation, my generation, that we will have the full productivity effects. If there is reform tomorrow, it will be 20 or 30 years before there will be a big productivity effect from that, but we could get a bigger productivity effect if we could attract back graduates from Britain. They come back and get a faster response.
Deputy Conway-Walsh raised the issue of efficiency gains. Peter Hain, in one of his last speeches as Secretary of State for Northern Ireland, in 2006, at the MacGill Summer School, went through the huge costs in Northern Ireland because towns have a Catholic and a Protestant secondary and grammar school, four schools. If they were to be boiled into one, there would be huge savings. There are other ways of saving money in Northern Ireland.
I have not broken down the cost of re-rating the social welfare payments. I have bundled that in with the cost of raising public sector pay rates in Northern Ireland to the same as in the Republic. That is where the €10 billion comes from. It is the two together. It is probably more 60:40 pay to social welfare, but I would have to go back and look at the detailed figures on that.
Professor Morgenroth will deal with the benefits of the all-island economy.
Professor Edgar Morgenroth:
As regards the length of time, we are definitely looking at more than a decade. That is the experience, as I mentioned earlier, as regards German reunification. It is more likely five decades than one decade. It takes a long time to change things.
Deputy Smith is absolutely right that there are a lot of North-South benefits, and without those benefits the Border region and Northern Ireland would be much poorer than they are currently.
It would be interesting to do a study of not having these benefits, even within the current constitutional arrangement. Not having them would come at a cost, particularly to the Border area that the Deputy represents, and of course also to Northern Ireland. The Deputy is absolutely correct.
Despite those benefits, however, the Border region is a relatively poor region of the Republic of Ireland, while Northern Ireland is a poor region of the United Kingdom and relative to the Republic of Ireland also. The benefits are there but they are not sufficient to have equalised GDP or productivity. If we did not have those benefits, it would be even worse.
Brendan Smith (Cavan-Monaghan, Fianna Fail)
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With regard to German reunification, there is a huge divergence between €1 trillion and €3 trillion. I presume there is a more definitive figure that the German authorities would quote.
Professor Edgar Morgenroth:
In our previous report, the 2020 publication, we had a section on German unification and that is from where those numbers come. It depends on what you include; what you think is part of the cost of uniting Germany, and what is not. We have seen this in the discussions here today. Sometimes it is not that easy to identify what exactly is the cost. Hence, there is a range, and it is a big enough range. If you take the lower figure, it is still a very large amount. As I said, it is still accumulating. In fact, in Germany, they did not equalise the wage and pension rates immediately. The pension rates in east Germany only equalised last year. For 30 years, pension rates in east Germany were lower than those in west Germany. This led to a lot of disgruntlement. In the event of a united Ireland, people in Newry may ask why they are getting less than people in Dundalk. That would be very hard to explain. As politicians, the members of the committee are very aware of this. It would be very hard to explain. However, that was actually done in the German case. It is quite an interesting case and there are quite a few lessons to be learned from it, including some mistakes that are best avoided.
Brendan Smith (Cavan-Monaghan, Fianna Fail)
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I have a final comment.
Fergus O'Dowd (Louth, Fine Gael)
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The Deputy is running out of time.
Brendan Smith (Cavan-Monaghan, Fianna Fail)
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I assume that east German living standards have increased substantially to come within reach of their west German counterparts?
Professor Edgar Morgenroth:
They have increased but they have not reached the levels of the west. There is a continued heavy subsidisation of east Germany and transfers from the richer federal states to the east German states. In fact, Berlin was merged - east and west - and the state of Berlin is constantly teetering on the verge of bankruptcy. There are structural issues that persist, and that is the point I have been trying to make. The evidence we have from regional development over many decades is not one of convergence and poor regions suddenly becoming quite rich. We do not really see that. We tend to see poorer regions staying poorer.
Brendan Smith (Cavan-Monaghan, Fianna Fail)
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I thank Professor Morgenroth.
Dr. Stephen Farry:
I thank the Chair, and wish a good morning to our witnesses. For the record, I speak on behalf of the Alliance Party, which does not take a position on the constitutional question. We are open-minded to this and we welcome robust debate around these financial and economic issues. It is fair to say that for the people I represent, these will be key considerations with regard to any decision-making that may come in future years.
I wish to ask questions from a number of different angles. I am very conscious of the skills issues, how they feed into productivity differences on the island and how they would be the key drivers of any productivity convergence in due course. I ask the witnesses to discuss some of the other drivers relating to productivity, around research and development and investment in infrastructure - not exclusively transport infrastructure but more broadly - and the extent to which those types of expenditures, including at a capital level, can also play into an alignment in productivity, living standards and overall levels of income and wealth.
I also want to ask about the current assessment of barriers to labour mobility on the island. There is a certain degree of movement but there are restrictions. To what extent would there be potential for gains from a more efficient labour market across the island in terms of mobility and perhaps a spatial redistribution of economic activity, potentially out of Dublin and the south west of the island?
That leads me on to the next point around the potential benefits from a single strategy in respect of inward investment. I am conscious that at the moment we have the IDA working for the Republic and Invest Northern Ireland working for Northern Ireland, but they have different tools at their disposal. The IDA is serving a nation state and the Government has full control over taxation policy, with corporation tax being one element of several in the context of investment potential. In Northern Ireland, however, we are much more dependent on grants. That means we tend towards attracting cost centres, whereas my understanding is that the Republic can attract profit centres, which can be much more lucrative. If we end up with a single entity, to what extent will evening that out have benefits overall?
Professor Edgar Morgenroth:
I will start, and my colleague, Professor FitzGerald, will deal with the labour mobility issue. With regard to other drivers of productivity, there are obviously important ones. Dr. Farry mentioned infrastructure, and wider transport infrastructure tends to be an issue. In research I did with others a few years ago, we found that broadband infrastructure is more important than any type of transport infrastructure. Not each type of transport infrastructure is equally valuable, and again, that is important. Certainly, we found at the time that with regard to foreign direct investment and new startups, education was the biggest factor, followed by broadband. That is important. The digital agenda is very important.
Regarding inward investment, Dr. Farry is quite right. In a united Ireland setting, one would expect that there would be only one agency dealing with attracting foreign direct investment, and that the arrangements and benefits would be the same. There would be a corporation tax rate that is common across the island and it may attract different types of firms. As I said a moment ago, education is one of the big factors in attracting FDI, and so we keep coming back to the issue of the education system in Northern Ireland, which is one of the big constraints. If one implemented appropriate reforms, there could be significant benefits. Again, firms would look forward. They would not just look at what the position is now but, rather, at how the position will change in the future. Consequently, one could expect additional FDI into Northern Ireland, which would raise productivity and so on.
When it comes to choices of multinationals, there is essentially one pool of multinationals, companies that are based outside Ireland. If they make an investment in Northern Ireland, it is an investment that they will probably not make elsewhere on the island. The net effect for the island of Ireland will not necessarily be a huge increase. There may be some scale effects because we would be a larger market, but that would be a very modest effect. While Northern Ireland can pick up additional FDI and perhaps higher-value FDI, that might come at a cost to other parts of the island.
Professor John FitzGerald:
On FDI, Northern Ireland has a huge opportunity, which this jurisdiction does not, to attract British firms - it may not consider them foreign - to set up in Northern Ireland where they have full access to the UK market and the European market. For example, British Aerospace, which makes the wings for Airbus aircraft, is at risk because it is outside the EU. However, if it was making the wings in Belfast, it would be in the EU. There is an opportunity there to target GB firms. That is one issue.
Regarding labour mobility, I published a study with Sean Lyons of the ESRI in 2019 which looked at commuting across the Border. There is much less commuting than one would expect. We would expect commuting in both directions, with more commuting from the Republic into Northern Ireland despite the fact that wages are higher here. In particular, there is very little from what we call district electoral divisions - I have forgotten what they are called in the North - where there is a predominantly unionist population. There is an unwillingness to move on the island. There was a story in The Irish Times last week about consultants moving to the Republic because they are paid twice as much in the Republic as they are in Northern Ireland, which is not a desirable outcome for Northern Ireland.
Another aspect of mobility is the immigration into Ireland, which has been huge over the past 20 years. It has predominantly been graduates. I accept there is all this excitement about asylum seekers and so on but they are a minority compared with the graduates. We have run out of graduates from the EU and the United Kingdom. There is more immigration from the US into Ireland than from Ireland to the US at this stage. We are now increasingly seeing them coming from India. Among the best qualified group in Ireland are Indians. However, there are visa issues. Indians on a visa working for a firm in Northern Ireland is not permitted to enter this jurisdiction unless they also have an Irish visa. My son-in-law had a complicated visa status in the US and he did not want to go to Donegal because he would have to drive through Northern Ireland and he did not have a British visa.
There are complications with the labour market. Labour mobility is really important. When Intel was setting up in this jurisdiction in 1990, it had two concerns: availability of electricity and water - it was convinced on that; and it wanted more electrical engineers than there were throughout this island. The IDA did a survey of Irish emigrants and persuaded Intel that enough Irish people would come back from abroad and work for Intel. The last time I was down in Intel I found that all of the top management are Irish but none of them were recruited in Ireland; they had worked abroad. The ability to attract them to come back was crucial.
The corporation tax affects US FDI but not the rest. It is of no benefit to a German or French company. The labour, skills and infrastructure here are what attracts such companies. Professor Morgenroth talked about the infrastructure. I know Northern Ireland has major problems in providing services. It needs to save and devote more to investment in infrastructure because that represents the future.
Ms Claire Hanna:
I thank the witnesses for the material they have shared and their input. From my perspective and that of the SDLP, we are very keen not to go down the route of talking about sunlit uplands and to be honest about the challenge. We accept of course that there is a subvention, as is completely normal for any region outside a capital. As the witnesses' report outlined, the scale of it, though debatable, is precisely because of our sluggish economy. Our party is taking its current approach to unification because we know that the region and its people are very limited by the framework under which we are operating. We want to tap into the more open and dynamic economy that exists on this island and one that is more fully integrated in the EU. As others have indicated, in the report the witnesses do not analyse the impact on the economy that unification would have, but they delve into issues like potential negotiating scenarios post unification. While we cannot be Panglossian, it is a fairly pessimistic outcome. It is legitimate for us to point that out while at the same time pointing out the need for much more data, more analysis and interrogation of it.
Others have referred to some of the specific indicators which highlight how poorly our economy is doing, particularly some of John Doyle's figures around 40% lower productivity, and that we have only one fifth of the number of FDI-based jobs and similar ratios in tourism. The SDLP is pursuing this precisely because we want to have the vision and the tools to correct those issues.
The witnesses referred to education and the undoubted flaws in the Northern education system in terms of duplication and particularly the poor outcomes for those who do not get into grammar schools based on the fairly arbitrary selection at the age of ten or 11. Aside from education, what factors would hinder the North's economy in the event of unification if we were able to apply, as we would be able to, the same tax regime and the same policy framework in terms of investment in skills and in terms of immigration because access to talent is very much an issue for Northern businesses at the moment? In that scenario, what other factors would hinder our economy, assuming we apply the same framework? There is, of course, the debate over the scale of the subvention and, as I say, we accept that it exists. What can be done to get better access to the data on that? Is the information sufficiently in the public domain to allow people to make a fair assessment of what that subvention would look like?
Professor John FitzGerald:
For the direct tax receipts there is an attribution, but I am not sure how good that is. Corporation tax is paid by a company to the Inland Revenue in the United Kingdom by the head office. If Tesco makes profits in Northern Ireland, those profits are aggregated in London and that tax is paid by Tesco headquarters. Therefore, there is an undercount of corporation tax in Northern Ireland.
I took the national accounts gross operating surplus for Northern Ireland and the gross operating surplus for the UK and attributed the corporation tax on that basis. I added in a few hundred million more in corporation tax. It is more complicated. There is another item, that is, refunds of VAT to Northern Ireland of £700 million or £800 million. It is in under a miscellaneous cost to the UK, but it is actually a refund of VAT. I think the VAT figures are reasonably good.
Professor Edgar Morgenroth:
The more important issue that we do not know anything about is what a united Ireland would look like. What would be the service provision? We have different health systems, different education systems and all sorts of differences. What would we want a united Ireland to look like? If we knew a little bit more about what the aspirations in these areas are, then we could look at-----
Ms Claire Hanna:
There is no doubt about that. As I have said, from the SDLP's perspective, we are very clear that it is important we undertake this process of establishing the facts, interrogating them and having a genuine debate about reports received like this one. In the same way as we should not be overoptimistic, however, we are allowed to identify analyses we feel are relatively pessimistic. We are in agreement that the North's economy dramatically underperforms and always has done. I am not sure what the witnesses' view is, but I am of the view that we have not enjoyed good governance in this region either in the century of its existence and that this is hindering our economic performance.
I am also of the view that we do not adequately look to the future. Apart from sometimes considering it in the context of vague constitutional terms, we do not really talk about the future and about economic strategies. Aside from education, however, which has rightly been identified as a flawed system, and I agree with much of what has been stated in this regard and many of the prescriptions, what other factors do the witnesses think slow down the North's economy? The point I am making is that the application of harmonious tax and skills policies and infrastructural investment across the island would surely, as has been acknowledged, raise the value of the North's economy. What do the witnesses see as the drags on the North's economy, aside from education?
Professor John FitzGerald:
The Republic held it up. I was on the Northern Ireland Authority for Energy Regulation. When I was there, I was promised the interconnector would be started in 2007. We are now in 2024. I think the problems are now more in Northern Ireland than in the Republic, but that project is urgent. The energy strategy in Northern Ireland published in 2021 did not include Belfast Port. A story in today's newspapers in the Republic focuses on a €20 billion investment in offshore wind in the next 20 years. Whether that happens or not is another matter. We do not have a port capable of dealing with this. Belfast Port is the obvious one. I do not know why this was not included in the strategy. There is an obvious opportunity here. Northern Ireland could actually reduce the costs for the Republic of rolling this out if Belfast Port could do the job.
It is about sitting back and asking what we can do now on an all-island basis. This may or may not prepare us for unity but there are opportunities. The energy and water systems in Northern Ireland have huge problems. I was appointed by the Minister for the Economy, Conor Murphy, to the independent water review panel in 2007. We reported and said that Northern Ireland needed water charges, and he and the Assembly rejected it. That is fine. I had the unfortunate misfortune, however, to go to the Treasury in London to discuss the issue. I was treated like dirt because I came from Northern Ireland. My previous encounters with the Treasury in London were in the context of being with the ESRI in Dublin and we were treated with respect.
Professor John FitzGerald:
Yes. I understood Northern Ireland's problem with London after that. It is clear the Treasury is going to screw Northern Ireland until it has water charges. Even in the context of the current negotiations, this is affecting things. Whether Northern Ireland concedes on that is another thing. Investment in the water and energy systems is needed, whatever the eventual outcome is on unification.
Professor Edgar Morgenroth:
If I can come back in on the question of what would hold Northern Ireland back, in the event of there being a united Ireland, there would obviously be all sorts of alignment and there could be benefits from that. There is one aspect where there would definitely not be a benefit and that is with the current economic integration with the rest of the UK. Costs will arise in terms of additional trade costs and so on. We have seen this in relation to the Brexit debate and the need for a special arrangement for Northern Ireland. In the event of unification, there would be a separation of the two economic systems and that will come at a cost. These costs would eventually reduce as Northern Ireland integrates better with the rest of Ireland but initially they could be quite substantial. In fact, they would initially be bigger than the integration effects with the rest of Ireland. Eventually, that will be wiped out but it will certainly be an issue initially.
Ms Claire Hanna:
Now, we really are being Panglossian. Professor FitzGerald is right, of course, to talk about doing these things whether they result in unity or not. I should point out that I am not obsessing and viewing everything in this context. We have invited the witnesses here to discuss precisely their report on the impacts of unity and this is why I am framing my questions in this regard. There is no disagreement here on energy. It is a policy area that I work on. I think the Republic is bringing renewables on stream at a rate of something like 20 times the pace. The strategy is not the problem. It seems to be fair enough. The problem lies in getting to it in terms of grid capacity. Everything the witnesses have said, including the disposition of the Treasury, underlines the fact that the current constitutional and governance frameworks are thwarting our economy. What I think I am reading from the witnesses, however, is that deficits in education and infrastructure are holding us back. I do not think this gives any reason to believe that pursuing unity is not going to be better for the North. My time is up, so I will hand over to my colleagues.
Mr. Chris Hazzard:
Go raibh maith agat. I thank the witnesses for their evidence today. I will pick up on a couple of the points made, mostly around this notion of generosity. I will also touch on some aspects regarding debt. Much of the analysis, about debt especially, appears to be built on this notion of generosity. A few historical examples have been given to back this up, but I do not think they stand up to any sort of scrutiny at all.
The 1921 Treaty example, for instance, is not comparable at all. The realpolitik and interstate power play, and the reality of that event, were dramatically different. Treaty negotiations were conducted between the British Empire and what was an insurgent revolutionary government. If anything, one of the lessons of the Brexit negotiations in recent years is that the British Empire is long dead and gone and Ireland is not left begging for crumbs from London's table, and has not been for a long long time. The 21st-century reality is that the British State is under an international legal obligation to permit the exercise of Irish national self-determination without external impediment. This means the modern Irish State has real and tangible levers of power to ensure this comes to pass.
I think this notion of generosity is misplaced. States are led by strategic interests and in respect of debt, Britain's strategic interest will be the absorption of that debt. One of the examples in the witnesses' paper that lays this out is the Russian example. I believe the example is inaccurate. The report refers to the debts and assets of the former USSR being divided up between the various post-Soviet states, but that did not happen.
In fact, the Russian Federation absorbed the entire debt of the USSR and, indeed, even the debt of the former tsarist empire. It did so to protect its successor state’s status to ensure it retained Russia's permanent seat on the UN Security Council.
Why would London not follow Moscow's example in this regard to retain Britain's role on the likes of the UN Security Council and in other international organisations? Surely Britain's international state interests will be to do so. Instead, our guests seem to suggest Dublin will have to absorb a share of the British debt, but they make no symmetrical assumption that Dublin would also receive a proportionate share of the British public assets, such as North Sea revenues, capital values of public properties or even a share of the assets of the British royal family? Why would there be that asymmetrical relationship between debt and assets and why would Dublin allow that to be the case? Surely it is much more likely that assets will stay where they are and existing debts will stay with the relevant sovereign government. Surely that is a much more likely outcome that reflects not only the strategic interests of Britain but also the modern Irish position in the world and the interplay between the two states.
Finally, the British state currently pays the pensions of British citizens in Ireland, Spain and the US. Why would it cease doing this in Ireland?
Professor John FitzGerald:
On the British debt, my understanding is the file on the 1925 agreement between the Irish Free State and the United Kingdom was retrieved by the UK Treasury in the month before the Scottish independence referendum, and its view was that Scotland was not going to get away with what the Free State had got away with. It is interesting that during those negotiations, at one stage when the Irish had left the room, Lord Birkenhead said the Irish could not afford to pay, and as soon as he said that, the UK caved in and allowed the Free State to get away without the debt. The inability to pay was important.
I like Mr. Hazzard's idea of dividing up the assets if we were to take the liabilities. I want the UK Embassy in Washington for the Irish State, and I would pick a few other nice embassies. We have a good one in Paris. We do not want the Falkland Islands or Saint Helena, although it should be said the Free State looked at borrowing Saint Helena to put De Valera and the republicans on it but wisely did not go down that route. Creating a Napoleon would have been unwise. In any event, Mr. Hazzard is correct. We would divide up the assets, but the UK assets are tiny relative to the liabilities, as is the case for Ireland. Who knows what would happen? It would be a matter for negotiation.
If we think about how Irish unification would happen, the trigger would be a referendum in Northern Ireland. We would then have to work out in detail what had happened and we would have to have a referendum in the Republic. Would we negotiate with Britain before the referendum in the Republic or after it? In either case, once Northern Ireland had voted for unification, our negotiation position would have been weakened because we would be going ahead with it whatever happened, if we got agreement from the people of the Republic. I do not know what would happen. Is the figure €1.5 billion? It is not massive. The big one is the re-rating of social welfare and so on.
On the pensions question, the way I look at it is that, currently, people pay social insurance contributions in a country and those are used to pay for pensions. In a united Ireland, people in Northern Ireland would be making social insurance contributions in the united Ireland, not in the UK, but to expect the UK to continue to pay for all the pensions, when it would not be getting the revenue, is unreasonable. In the settlement of 1921, in the context of the unemployment insurance fund, the Irish side never suggested that because we had paid into the fund, the UK was liable. I think it is most improbable, therefore, on the pensions. There is a possibility that, in negotiation, we would get away without the debt.
Professor Edgar Morgenroth:
In any case, in our calculations, we both included and excluded this, and even when we take the most benign scenario from our perspective, whereby we would not pay off the debt and the UK would still pay for the pensions, we would still be looking at a very sizeable subvention.
Mr. Chris Hazzard:
An issue that was touched on previously is that, given the high level of uncertainty, which Professor FitzGerald acknowledged, the paper draws very hard and fast conclusions from issues that are far from having been decided. To go back to my earlier point, I think the realpolitik of this and the interstate play between Britain and Ireland will ensure assets will stay where they are and debt will be absorbed. I think that is fairly clear, but it does not appear to be that way in the paper.
I thank our guests for their contributions to the meeting.
Pauline Tully (Cavan-Monaghan, Sinn Fein)
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A lot of what I had intended to ask has been covered. The subvention exists because of low productivity in the North, and there is a huge assumption being made here that that is going to continue. Research has shown Irish unity would boost the Irish economy, and we know partition has caused the economy here to suffer. You would hope, therefore, that the removal of partition would end up boosting the economy. We have even seen since Brexit that trade between the North and the South has increased greatly, although I acknowledge that is a benefit of part of Ireland being in the EU. As our guests said, it is hard to make assumptions because there is a lack of a plan or preparation, so the Irish Government needs to start planning and looking at what a new or future Ireland might look like. As Mr. Hazzard said, a lot of assumptions are being made without knowing all the facts.
Professor Edgar Morgenroth:
On previous research, a study modelling Irish unification that was published in 2015 came up with benefits on the basis of assuming that whatever subvention there was would, somehow or other, simply be found. There was no macroeconomic impact on the Twenty-six Counties, which is unrealistic, and a very substantial portion of the benefits were simply due to devaluation. The study also completely failed to take account of the current trading relationships between Northern Ireland and Great Britain, which would be disrupted in the event of a united Ireland. Personally, I do not take these results terribly seriously. They are interesting, but I think we can do a lot better in terms of modelling.
I agree with the Deputy about assumptions. There are probably differences among political parties as regards what they might like to see in the event of a united Ireland, so perhaps all parties could help in setting out what they think it should look like. That would give us some more concrete details that we could then model to see what the benefits of different possibilities might be. That would be a very interesting exercise.
I look forward to doing some of it.
Frances Black (Independent)
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I thank the witnesses for coming in to the Good Friday committee today. It is my understanding that in order for the €20 billion reunification cost published in the witnesses’ recent study to occur, a number of assumptions need to be met. Some of them are, for example, that following a border poll, the Republic of Ireland Government would immediately agree to paying Northern Ireland’s share of UK debt; it would immediately agree to pay the entire pensions bill; it would immediately increase Irish social security payments and public sector pay levels in Northern Ireland to match those in the Republic of Ireland; and it would immediately incorporate Northern Ireland into a policy environment under which it would achieve no productivity growth for a period of 20 years. I do not think our or any future Irish Government would allow such a disastrous scenario to occur because it suggests absolutely zero prior planning. What is the value of placing such an extreme estimate in the public domain? What was the witnesses’ thinking on that?
Frances Black (Independent)
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Do the witnesses think that the Irish Government would allow that to happen?
Professor Edgar Morgenroth:
The numbers are the numbers. This is the situation. These are the facts. We set out the pensions, with or without, the debt, with or without, and so on. We set out in detail a range of scenarios. The Senator is focusing in on the worst-case scenario. The facts are as they are. These are the data.
Frances Black (Independent)
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What suggestions do the witnesses have for our Government? Do they think there should be more planning and preparation? Do they have any recommendations?
Professor Edgar Morgenroth:
Of course there should be more planning. If you think about this from a Government’s point of view and in the situation of being the Irish Government, of course you would try to negotiate that you would not have to pay the debt, you would negotiate that the British Government continues to pay the pensions and you would negotiate that the British Government would continue to pay some of the subvention. However, to know what you want to do in this case, you need to know what would happen if you did not do this, which is precisely what we set out here. If we did not negotiate these things, under the circumstances we set out, we would end up with such a situation.
Professor John FitzGerald:
In negotiation, one needs to remember Scotland. Scotland is an awful lot bigger than Northern Ireland. It has pondered independence and it will be an issue for the foreseeable future in Scotland. In any negotiation with the United Kingdom, it must be remembered that the United Kingdom faces the much more difficult prospect of Scottish independence. Any deal for Northern Ireland could encourage that and would certainly set a precedent for it. One needs to remember that is what the UK negotiating position would be.
The other thing is that if people on this island wanted unification, we would want to see the reforms made in Northern Ireland first. You cannot have people in the Republic saying, “We will take you but you will have to do the following.” That would not go down well in Northern Ireland and it would not be good for a future united Ireland. Northern Ireland has to make the changes. It has to reallocate investment into infrastructure and it has to reform its educational system. If that happens, the costs over time fall very significantly. That Northern Ireland does it for itself is more important than any negotiations with the UK Government.
Frances Black (Independent)
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Would the witnesses recommend to our Government now that there must be more detailed planning and preparation going forward in case of unification?
Professor John FitzGerald:
With regard to the shared island project, there has been a huge amount of research done that fills in many gaps. I refer to the Adele Bergin-Seamus McGuinness paper on education. I knew that working-class kids are failed by the system in the North but I had not realised that in terms of equality of opportunity in Northern Ireland, who your parents were determines your future to much greater extent than in this part of the island. That research was funded by the Irish Government. The shared island research is important. It is laying the ground work for whether Northern Ireland remains in the United Kingdom, hopefully as a good neighbour, or whether there is eventually reunification.
Professor Edgar Morgenroth:
We can do with more of it. If we had more detail as to what we might want a united Ireland to look like, we could do more research on that and the effects of it, and try to optimise what might happen. We opened up with this. We set out scenarios for potential costs - values are completely different. We want to minimise those costs and maximise the benefits. That is what we should be doing, and I think doing more research will help us do that.
Frances Black (Independent)
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Regarding the paper, I was a bit concerned that it does not allow for any improvements in the Northern Ireland economy in the years following reunification. It was said it would take perhaps 20 years for productivity growth to improve in Northern Ireland following reunification. This statement has received much attention. What is the witnesses’ assessment based on with regard to economic modelling? Could they say a little bit more about that please?
Professor John FitzGerald:
There are a series of papers on Northern Ireland. The most important one is the Vani Barooah-Colin Knox paper of 2015. The ESRI published a second paper by Emer Smyth and the latest paper by Adele Bergin, Seamus McGuinness and Emer Smyth. I also published a paper in 2021. There is a load of evidence on education. I cited nine or ten papers in how the Irish success story is built on education. If those models are applied to Northern Ireland, it will take, as I explained, 20 to 30 years, if the educational system is reformed now. I was asked 15 years ago in France about the Irish success story in terms of unemployment - at the time, things were not that successful here – and I said, “Education”. My French colleague said that would take 20 or 30 years, and I told her that if you do not start now, it will not happen. In the 1980s, education was the one thing protected from cutbacks. We have had a consistent policy but the policy began in 1967 with free education and it has been continued ever since. However, it took 30 years before it paid off. If Northern Ireland starts today, perhaps in 25 years we will see the benefits. Growing children takes a while.
Professor Edgar Morgenroth:
There are hundreds – maybe thousands – of pieces of research that have looked at regional development. I have been involved in some of this, including in the context of EU structural funds, looking at regions throughout the European Union. The evidence simply is that growth in weaker regions takes a long time. A decade is almost like a heartbeat in regional development terms. The structural issues that lead regions to be poorer tend to take a long time to overcome, if you overcome them at all. Looking at southern Italy, for example, there have been 100 years of regional subvention and policy and nothing has happened; they have not converged. The evidence is that this will not happen overnight and we really are talking about decades.
Professor John FitzGerald:
If one looks at the use of the EU structural funds, Ireland in 1993 – my wife was actually responsible for it as Minister of State – decided to spend 40% of the structural funds on education and training while Portugal went for 20%. The benefits can be seen today. We made the right decision to invest in education before the infrastructure. There are great bridges in Portugal.
They have great buildings but their education system has not improved and the difference can be seen.
Professor Edgar Morgenroth:
It is the same in Spain. The point we keep coming back to is education and people. Ireland is not rich in natural resources. The scarcest thing in the international business world is skilled employees. This is where we have done well. That explains why Ireland has achieved what it has in the past three or four decades. The obvious approach to improving the living standards of Northern Ireland is to follow through on what we have done in the Republic in Northern Ireland and-----
Fergus O'Dowd (Louth, Fine Gael)
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Political change is fundamental and accepting all communities together into one school system to create equality of educational opportunity.
Fergus O'Dowd (Louth, Fine Gael)
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Yes, of course.
Frances Black (Independent)
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Do the witnesses think microeconomic modelling is needed to inform the debate on the costs and benefits of unification?
Professor John FitzGerald:
I have spent my life on and love getting funding to do modelling. It has been my life. Yes, it would be useful. The shared island unit is funding the ESRI to undertake that task and develop that economic model, jointly and with assistance from the National Institute for Economic Social Research in London, NIESR. It is being developed and is in train.
Frances Black (Independent)
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It is already in process.
Frances Black (Independent)
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In the previous research Professors FitzGerald and Morgenroth did, The Northern Ireland Economy: Problems and Prospects, they concluded that Irish unity would not be affordable because standards of living in Northern Ireland were 10% to 20% higher than those in the Republic and it would cost too much for the Republic to maintain Northern Ireland's high standard of living. Five years later, it is almost the opposite case. Irish unity is unaffordable now, partly because of the cost of bringing lower living standards in Northern Ireland up to the level of those in the Republic. How did that change?
Professor John FitzGerald:
We did not say it was unaffordable. It is for the people of Ireland to decide. We set out what the costs are. The numbers have not significantly changed since we published that paper in 2020. I updated them and presented them to this committee in May 2021 and we have just updated them further from 2017 to 2019.
Professor Edgar Morgenroth:
The one issue that is important to be mindful of is that the Republic of Ireland, as a member of the eurozone and the EU, is required to adhere to certain fiscal frameworks. We are required to have a deficit of less than 3%. Otherwise we end up in a procedure. We had one not all that long ago. We will have to find the money to spend on whatever the subvention might be - we can debate the numbers for a long time - and it will have an implication either for our deficits or our tax-take, our revenue. If we do not find the money and end up running a large deficit we will have problems. In that sense, it could be argued that it is unaffordable without some actions being taken. Governments can take actions. What the people of Ireland decide comes down to the value they place on things. If they place a value on something and vote for it, the money will be found, a solution will be found.
Fergus O'Dowd (Louth, Fine Gael)
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The burden will be on the Irish taxpayer for how to make up the difference. That is the problem. The referendum could theoretically be successful in the North and unsuccessful in the South. Is that not a possibility?
Professor John FitzGerald:
That is what scares me, not as an economist, but as a citizen. If the North votes for unification and the South says it is too expensive and you have not made changes in the North, where does that leave everyone on this island? It would be massively destabilising. We should not go ahead with a referendum unless we are certain both will pass. We have seen what happens in referendums in the Republic. Otherwise, both places will be worse off.
Professor Edgar Morgenroth:
We have seen what happens with referendums in the UK when people do not have the detail and then suddenly find themselves with all sorts of problems that were not foreseen. We had better be prepared with analysis. We contribute some and others will contribute more. We will be much better off if we and the Government are prepared and the citizens are informed than if we have essentially what Britain did with the Brexit referendum. That would also be a disaster, if people suddenly find that they voted for something they do not like. That is probably the situation in the UK now in relation to Brexit.
Fergus O'Dowd (Louth, Fine Gael)
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That is a stark potential outcome which we have to address.
Frances Black (Independent)
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I totally agree. That is why we are holding these meetings. This is about planning and preparing. That is why, in fairness to the Cathaoirleach, he has agreed to host these meetings on planning and preparing. Professor Morgenroth mentioned earlier the long-term benefits to Germany of unification. Will he say a little more about that?
Professor Edgar Morgenroth:
As economists we tend to think of the economic benefits. In the case of Germany, it meant an additional 18 million citizens so the scale of the country increased. It also received some natural resources and so forth. However, one should think about the wider benefits and not only the economic benefits. That is what I refer to when I talk about value versus cost. There is a price. There are things that cost money. Change will cost us something, but that is not to say we do not value it and even put a value on it that is much bigger than the cost. As I said earlier, in the case of German unification there is a high price tag, but the vast majority of people are quite happy to pay it because they value what they got more than the money.
There would be an even larger number in favour of unification if some mistakes had not been made. Those mistakes were made because there was a lack of planning. I remember it relatively well and I did research on German unification very soon after unification. I spent some time in east Germany. It happened suddenly - that could happen in the case of Irish unity as well - and no one had a plan. A plan was needed very quickly so it was made up on the hoof and certain mistakes were made. We are seeing the fallout in the political dimension at the moment in the growth of extreme parties because there was disgruntlement in east Germany, some of which was quite justified. That came through mistakes that were made. If we can avoid mistakes, that would be optimum.
Professor John FitzGerald:
I am old enough to have lived through a regime before united Germany. The other thing about Germany is the impact of the fall of the Wall on the increased security of Europe, moving the Russian threat 1,000 miles to the east. Germany had a huge expenditure on defence because the Russian army was right in the middle of them.
That benefit was really important and Germany dramatically saved on defence over the subsequent 30 years, which they are now having to ramp up.
Frances Black (Independent)
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Were there long-term economic benefits?
Professor Edgar Morgenroth:
For the people of the former East Germany there were, yes. The standard of living in east Germany has improved significantly. I can remember going to East Germany soon after unification and there were villages that did not have paved roads. It is hard to imagine now but the standard of infrastructure was extremely poor. There had been very low investment in East Germany. The standard of environmental protection was terrible, so much so that even the then Head of State Erich Honecker's grandchild had serious health issues due to air quality problems. Again, that was all sorted out. The environmental degradation was cleaned up. The standard of living in the wider sense for people in East Germany has improved massively. Obviously there is also the different situation when compared to the time before unification when those people did not have freedom of movement. They could not move, they did not have all sorts of political freedoms and so on, which they got with reunification. Again, this is a very different situation to us. The people of Northern Ireland can go where they like and they do not have the kind of constraints that were faced by East Germans.
There are some similarities and there are also a lot of differences and we need to be aware of the differences. The standard of living, however, has improved and if one goes into an east German city now and compares it with 1989 there is an enormous difference.
Frances Black (Independent)
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I have a final comment.
Fergus O'Dowd (Louth, Fine Gael)
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I have no issue there but just before the Senator comes in I just want to say that the other members remaining are Senators Currie and McGahon.
Frances Black (Independent)
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Out of today's session can we take it the witnesses agree that planning and preparedness are absolutely vital when it comes to the possibility of a new and unified Ireland? Am I right in saying that?
Fergus O'Dowd (Louth, Fine Gael)
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The paper by the witnesses is enlightening all of us regardless of what position we take on the arguments. It is certainly adding to the debate and the reality of how we do it, which is exactly what Senator Black said.
John McGahon (Fine Gael)
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This has been a really good debate so far. Professor FitzGerald touched on my view around this, which is that if a referendum was held it is somewhat likely to be passed in the North but could get defeated here based on the cost. I say that as someone who comes from the Border region in Dundalk. I say that as someone who would vote for a united Ireland regardless of the cost. That is my personal position. Where I come from one would think that because of its proximity to Northern Ireland people would be quite in favour of it but I could see quite a lot of people saying, "Do you know what, that is just too much money for us and I am not interested in paying a tax or an increase on my income tax for the next 20 years for that." This could be the case particularly if there were no moves in Northern Ireland to try to initiate reforms, for example, as the witness suggested with the education system, that would minimise the cost somewhat. I am talking anecdotally here and it may not be a lot of people saying this, but if this position is being considered by people in a Border region what are people in Munster or at other ends of the country thinking about it who have no kind of real lived experience of Northern Ireland or the Border, or who have family connections across it, or are even in Northern Ireland for X amount of time? This is difficult. Perhaps the difficulty of it is trying to convince Northern Ireland to make those reforms in the first instance because it is beneficial for them whether they stay in a united Ireland or not. That is the issue with it. I believe that would be extremely difficult to do.
We spoke of East Germany. Recently I met someone from where I live who went to Germany in 1988 and worked in East Germany. He says that Dresden is now an economic hub and is absolutely flying. I do see how that would happen with Northern Ireland after unification but there are also questions about that. I agree with the premise that there is no way Britain will turn around and be generous towards this. Why would they when they have to look at Scotland as well? They would just be looking at a bill. I believe the cost will end up on the Irish Government. What does the Irish Government do? Will it be a solidarity tax or something like that where a person pays another 6% on income tax for 20 or 30 years afterwards? Is that what people in Ireland would have to pay? Should the Government turn around now - and this could be difficult - and say "Look, for the next 20 years in anticipation of a referendum perhaps happening in ten or five years we will start putting money aside to mitigate the cost? What do the witnesses believe the Irish Government should be doing with that? What is more likely? I do not believe it is likely the Government will start putting money aside now so it necessarily is going to be an increase on the Irish taxpayer for a united Ireland.
Professor John FitzGerald:
My own view is that it will not happen in my lifetime. I am 74 and with my life expectancy I should make my eighties. A decision to put money aside for this now is not going to happen when it is uncertain whether unification will ever happen. If it is going to happen it will be because the gap has narrowed significantly between the two jurisdictions, and this is under Northern Ireland's control. The Government here can do very little about that. One must also think about the transfers within this island. There are very substantial transfers. Dublin, not Cork, funds the rest of the island. We do not complain about it because this is normal, as Professor Morgenroth said, but it is not made explicit. Once there is a united Ireland, and even if it is a federal system with jurisdiction in the North in Ireland, it would be made explicit that there is a €10 billion or €20 billion transfer from Dublin to Northern Ireland. Then Galway and Donegal would say, "Well we are going to get less". There are issues there with regard to regional transfers. We gloss over that. We are happy with the current situation where the rich fund the poor but once one makes explicit a huge transfer from this part of the island to Northern Ireland one could open up a can of worms in terms of regional transfers within this island.
John McGahon (Fine Gael)
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I absolutely agree that the gap has to narrowed and that this must come from Northern Ireland. I do not mean to be disrespectful but I just do not see how that gap is going to be narrowed when Northern Ireland has only had a government up and running and functioning for some of the past few years. How are these radical changes in Northern Ireland to be made? These changes would be beneficial whether it stays in the United Kingdom or not. It would be beneficial for everyone there. I just do not see how that gap is going to be narrowed at any stage.
Professor John FitzGerald:
It could happen. When the 11-plus exam was abolished by Caitríona Ruane who was the Sinn Féin education minister, it was disastrous because now the selection to grammar schools is much more arbitrary. I was very critical of this but it was a very senior member of the SDLP who said to me not to blame Caitríona Ruane and that she was prevented by the rest of the administration. Having presented the evidence done on education in Northern Ireland the resistance is huge from parents whose kids are in good grammar schools with great prospects. That is something Northern Ireland has to address. It is a difficult question and certainly none of the parties seems to have a policy on how to deal with that.
Professor Edgar Morgenroth:
It is ultimately a political question. In terms of what we can bring we can put evidence on the table. That is what we do and other colleagues do. I believe there is pretty much unanimity amongst the scholars about the education system, for example. One will not find disagreement there. It is up to the politicians to actually make the changes. We cannot make those changes. We can only suggest where the changes will have the biggest benefit.
We know it will not be easy. Our role is to point to the evidence.
Fergus O'Dowd (Louth, Fine Gael)
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To inform the debate.
Emer Currie (Fine Gael)
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I thank the witnesses. It is great they are here again. I thank them for their report on the subvention. I have a couple of questions and I hope the witnesses can answer them. Since the last time the witnesses came before the committee what work has been done to come up with this report? Did it purely examine the financials of the subvention in more detail?
Professor John FitzGerald:
Yes, we have more up-to-date data. Esmond Birnie's paper, and remember Mr. Birnie is an economist on the Fiscal Commission in Northern Ireland, suggests that things have got worse in terms of the subvention in the interlude. We stuck with the 2019 data. We updated the data from 2017 to 2019. Essentially, it is the same paper as we presented.
Professor Edgar Morgenroth:
We do have more up-to-date data in the paper. In terms of what Mr. Fitzgerald just said on it getting worse, if we look at what has happened since the Executive came back, one of the first things that was agreed across the parties was to look for more money from Westminster. They did not look for a lower subvention but a higher subvention. The First Minister came to Dublin to discuss the potential of joint infrastructure projects such as the A5. This makes the subvention not smaller but bigger. In the negotiations to bring the Assembly back the Secretary of State for Northern Ireland indicated there possibly may be more money available for certain things. Again, this makes the subvention higher. If anything, it is going in the wrong direction. In terms of the commentary and the conclusions we draw, we just used the 2019 data because they are not affected by Covid extra payments. Every jurisdiction saw public expenditure increase during that period. It would not be fair to Northern Ireland to take that subvention so we stuck with the 2019 figures. In terms of what is happening at present, if anything it is going in the wrong direction.
Emer Currie (Fine Gael)
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For some people this could make it harder to buy into the concept of a united Ireland because the cost has increased. When the witnesses speak about another 5% of Irish national income to fund a united Ireland, will they give me a comparison? They work in economics and they are used to this. If we are going to sell this to people on this island how would we describe what it looks like?
Professor John FitzGerald:
It would be twice €10 billion. This is not re-rating. It would be more than twice all of the revenue from excise on motor vehicles, petrol and other things. I do not have details on what the health budget is. I know what Senator Currie is asking for but I do not have the numbers. I would need to have the estimates in front of me but it would take time. I will come back to Senator Currie.
Emer Currie (Fine Gael)
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It would help. We seem to be continually having a debate on whether planning and preparation has started. This work is part of it. It would be useful to be able to position the cost in a relatable way for people, for example in comparison to the effect that austerity had or the cost-of-living crisis.
Emer Currie (Fine Gael)
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That is the impact it could have.
Emer Currie (Fine Gael)
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This is why the witnesses have been very clear about having to address productivity which, unfortunately, has decreased over the years.
There is a focus on the spectrum of generosity from the UK in the paper but it takes quite a pessimistic view based on the current vista. What type of spectrum could we be looking at where it could improve?
Professor John FitzGerald:
The best we could expect is that it keeps the debt and that pensions continue to be paid out of income in Northern Ireland. This would be my best guess. If I were the UK I would see some long-term savings from not having to fund Northern Ireland so this might be reasonable.
Professor Edgar Morgenroth:
One could expect something from the US. It is not totally unreasonable to think the EU might make some kind of contribution. As Mr. Fitzgerald said, and as we have put in the paper, if Ireland is one of the richest countries in Europe it is very difficult to say to someone in the poorest countries that we need to get more money from the EU budget.
Emer Currie (Fine Gael)
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Let us remember we are framing this discussion in relation to costs and value. Where to from here? Is this it? Is it over to us to do what we want with it? Are there other areas the witnesses think need to be examined from an economic point of view?
Professor John FitzGerald:
I am working on some other projects. For me climate is more important. I am looking at migration over the past century North and South. There is a lot of research under the Shared Island initiative. The ESRI has been funded to do a model of the Northern Ireland economy jointly with NIESR in London. There is also ongoing work on the labour market.
Professor Edgar Morgenroth:
It is worth noting that a model is being built now but attempts were made to get funding to do so at least 20 years ago. I certainly contributed to a number of proposals over the years to do this type of work. We would be in better shape if we had invested a bit more into that research. It is good to see more investment is going into this area but we should have done more on it in the past.
Emer Currie (Fine Gael)
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I have another question, and it is a personal question for Mr. Fitzgerald. How did he feel about some of the feedback when this report was launched? What impact did this have on having an open debate? If we are voting for united Ireland we need a majority of people of all perspectives and backgrounds to support it. How did Mr. Fitzgerald feel about some of the reaction to the report?
Professor John FitzGerald:
I have lived with two politicians from different parties over my life. I am used to this. I am not on social media. The one thing which has amused me is that in 1972 my father Garret FitzGerald wrote a book and what he argued is almost exactly what is in the Sinn Féin programme for a united Ireland.
Fergus O'Dowd (Louth, Fine Gael)
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Very good.
Professor John FitzGerald:
He was an eternal optimist. He dealt with the subvention and the issue of the pensions in the book. He was very optimistic and thought he would see a united Ireland in his lifetime. The book is rather like the Sinn Féin document; it plagiarised him but did not know it.
A paper was published by ESRI economist Brendan Dowling two years later saying he was actually wildly optimistic. The political system hopes we just look at numbers and we are boring.
Professor Edgar Morgenroth:
What happens on social media and outside of social media certainly disimproved the culture of debate. As politicians, members are probably more aware of this. It does not happen to us too often. Some things get a lot of attention. I remember publishing a report on Brexit in 2015 and it got a lot of attention but it was positive attention. This report got all sorts of attention, which does not happen too often. We are not in the firing line too often but I can see politicians in particular are very unfairly treated in some of those debates. It is very nice to have a debate, we can disagree about something here in terms of numbers but it is all done with respect and so on, which is what we should have more generally.
Rose Conway-Walsh (Mayo, Sinn Fein)
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I am a politician as well. This is absolutely critical and I think the witness underestimates politicians in a sense by putting it all into one category. We absolutely know that we need evidence. The issue with this - and obviously the reason it attracted attention - was that for the first time, it used the €20 billion figure. The focus was so narrow that to have a conclusion like that means there are a lot a gaps that need to be discussed, some of which we have discussed here today. I apologise, because I had to go to the Chamber for questions to the Minister for public expenditure while the witnesses were here. We agree, however, that it is critical that when they go to vote, and long before then, that people will know exactly what it will mean for their families, for themselves and so on and that we can project that into the future.
Macroeconomic modelling is vital and I absolutely agree it should have been done years ago. I am glad it is being done now. I am concerned, in respect of the data available, that we do not have proper congruence between North and South and we do not have the disaggregation with regard to the UK. Pressure needs to be put on politically across the board in that regard, as well with economists, to have that data. The press will pick out parts of the report. I note in the conclusion the witnesses suggest, when going into the benefits, that this could substantially reduce the cost of unification.
I will go back to the education issue again because respectfully, I disagree with our guests about it taking 20 to 30 years for any policies that are implemented now to take effect. I am particularly looking at the NEET category, that is, those not in education, employment or training. In some bits of work I did myself, I have looked at Germany, where they have such a low number of the 18 to 24-year-olds in that category. They have a rate of 7.7% as opposed to the South, where we have a rate of 12.4%. We only have the overall UK rate in this regard, which is at 13.5%. If we were to make interventions at that level for those youngsters, I really do not believe would take 20 to 30 years to see. We are not going from zero to 100 and would see incremental changes that would raise productivity.
In terms of FDI, and this may have been talked about in respect of corporation tax harmonisation, obviously there is the four-point difference there. Have the difference that a 1% rate reduction would make, as well as the dual market access, been modelled? If we look at the figures since the protocol, the Northern Ireland Statistics and Research Agency, NISRA, figures indicated a 13.2% increase in sales in the North, as well as a 14.5% increase amounting to £3.2 billion in external sales in 2021. They also indicated a 23% increase, that is, £1 billion, in exports to the Republic, as well as a 13.6% increase, £9.2 billion, in total sales. Rather than us having a negative approach, there is a trajectory there, provided we invest in the drivers. I welcome the investment from the South as well and the investment in infrastructure obviously will have an impact on productivity. It would seem that the trajectory is positive and provided we make the interventions in the right places, we can increase productivity and foreign direct investment and that the future is much more optimistic than our guests would say, regardless of what the constitutional preference might be when people come to vote.
Professor John FitzGerald:
On data, education and FDI, Professor Morgenroth will deal with FDI and trade. As for data, I was consulted by NISRA 18 months ago on their cutbacks and what they were going to cut back. On data in Northern Ireland, giving NISRA the money to do a good job would be helpful. On education, if one thinks about the ageing process - and I do think about it sometimes-----
Rose Conway-Walsh (Mayo, Sinn Fein)
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I try not to.
Professor John FitzGerald:
In the case of a kid who is 15 and at GCSE level, if that kid is kept for another two or three years in school and maybe, even better, they go onto third level, it will be seven or eight years before the kid enters the labour market. This problem has been going on for a century in Northern Ireland. Before they reach 40 and half of the people who have been failed by the system have been replaced, that will be another 20 years. We have seen that with the investment in the Republic. Free education began in 1967. The first free cohort was in 1968 or 1969 and participation then built up slowly. Hopefully it would be built up very rapidly in the North. We had to build schools, which took time, and then they moved up through the system.
I have modelled this and there are nine papers on this subject, all of which look at it. There is a paper by Joe Durkan, Doireann FitzGerald, my daughter, and Colm Harmon from 1999 that looked at this. They estimated the benefits of education added about 20% of the growth in the 1990s. It is much higher in the 2000s because it takes time for that to build up, until the kids who have been educated move up through the system. Out of my cohort in their 70s - I am pre-free education - only one eighth went on to university, while 40% or 50% of my generation left school early. They are all retired now, so that benefit took time. Education takes time.
Rose Conway-Walsh (Mayo, Sinn Fein)
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My point, however, is that there is life long learning and education investment. One of the most significant things I found in making comparisons between North and South was the introduction of the DEIS programme here and the difference that made. Were a DEIS programme introduced tomorrow morning, looking at the socioeconomic factors that are impacting education, I do not agree with the timeframe of 20 to 30 years. I acknowledge what Professor FitzGerald is saying in terms of the long term but I think it is greyer than that in respect of what the incremental benefit would be. I not only think it but have looked at other countries as well in terms of how it might work.
Professor Edgar Morgenroth:
The ESRI has done research on DEIS, which is a very successful scheme. Were it to be introduced in Northern Ireland today, it would affect the pupils in school today. It would not affect any of the people currently in the labour market or unemployed or whatever. Those are unaffected. Until they literally are out of the system, which is what Professor FitzGerald was trying to say, you will always have a lower average. At least 50% of the labour force needs to be affected by the DEIS schools but that is going to take years. There is no way of overcoming this because-----
Rose Conway-Walsh (Mayo, Sinn Fein)
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There is. Sorry for interrupting but let me tell you. When you investment in lifelong learning as well, you do not take any of these in isolation. It is like we have here in the South. We know the importance of it. We know the importance of upskilling, of digitisation and all of that.
Otherwise we are wasting our time here in respect of the investment we are making in workers, in upskilling and all of that. Surely that must have an impact on productivity.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Are we wasting our time here in terms of the lifelong education we are doing across the board?
Rose Conway-Walsh (Mayo, Sinn Fein)
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It is good for productivity.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Economically, however, it is not right to say it does not have an impact on productivity.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Not 20 to 30 years.
Rose Conway-Walsh (Mayo, Sinn Fein)
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No, no.
Professor Edgar Morgenroth:
-----or that we just ignore the evidence but that is what the evidence says.
We will move on to the FDI. In a united Ireland context, corporation tax would be identical North and South. That is going to have a benefit to Northern Ireland that they do not currently have. Consequently, that should attract some extra FDI into Northern Ireland.
If there are educational reforms on top of that, that would attract some more FDI into Northern Ireland. If there is additional investment in infrastructure, I said this earlier and I am not sure if the Deputy was in the chamber, particularly around broadband, that will bring in some additional FDI into Northern Ireland. The question is where this comes from and whether that displaces FDI that is currently going into the Republic of Ireland, which has the benefits of better infrastructure, better corporation tax, the better education system and so on. We do not know this for sure but there is only a certain pie of FDI out there and as the Republic of Ireland, we are currently picking up a disproportionate share. Ireland is doing very well in this.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Can Professor Morgenroth speak to the dual market access?
Rose Conway-Walsh (Mayo, Sinn Fein)
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No, up until then, while we are looking at the-----
Professor Edgar Morgenroth:
In the current situation, the dual market access is an advantage that Northern Ireland has, Professor FitzGerald mentioned this earlier, that is a big asset to it. It is somewhat surprising that some people, including some politicians in Northern Ireland, do not seem to share that view. It is a significant benefit to Northern Ireland on which it can and should capitalise and from which it should benefit. That absolutely is the case. In a united Ireland context, there might not be the dual market access. In fact, I think there probably will not be. There will be other benefits and then the question is whether the additional FDI Northern Ireland gets is simply displacing what might currently go into some other part of Ireland. Within Northern Ireland, the chances are that Belfast in particular might benefit. Some of the more rural parts, we have seen this in the Republic of Ireland, do not seem to do as well in attracting FDI.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Obviously, there is preparation and a run-in to all of this. What have our guests done around the exchange rate because that would be relevant as well? One would assume that the North would give up the British pound and move to the euro. In terms of the figures being put forward, what exchange rate have the Professors assumed?
Professor John FitzGerald:
We are assuming that it converts at the conversion rate between sterling and the euro on the day. We have used the current conversion. That study which Professor Morgenroth mentioned had this crazy idea that Northern Ireland would devalue by 20% on the day of unification, which would make everybody in Northern Ireland suddenly 20% worse off as prices would adjust instantaneously. They would get that back after wages adjusted, probably after three years, but that suggestion was mad because Northern Ireland's problem is not a lack of competitiveness. Northern Ireland is cheap. That is not the problem. Reducing wages for everybody in Northern Ireland on the day of unification by 20% is crazy. It is solving the wrong problem. There is no way in unification it will convert. Now, that was an issue in Germany.
Professor Edgar Morgenroth:
In Germany, there was a one-to-one conversion of the East German Mark that was really worthless. That was a big transfer from West Germany into East Germany. At the same time, there were significant interventions, not all positive, in the state-owned enterprises, most of which were wound up. Again, that is a big difference. This devaluation would actually be akin to the shock treatment that was applied in East Germany and in Russia, which could have some significant, nasty effects. It is not something I would do. As Professor FitzGerald said, we just used the current exchange rate. We do not know what the exchange rate will be in the future. We do not know if and when unification should happen, so nothing really can be assumed other than what we currently know.
Rose Conway-Walsh (Mayo, Sinn Fein)
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I think that is it, in terms of the assumptions that have to be made. I am looking forward to the macroeconomic model and I do want to commend the ESRI and IBEC on their initiative. That will tell us a lot and give us a lot to work on. There have been many contributions made to this debate and the better data we have, the more we can accurately take the emotion out of it. We all have emotions around Irish unity but there are things to be worked out. I will conclude with the point that it is awfully important, when we are talking about the cost, to also make a legitimate effort to talk about the benefits in all the information we have to hand in order that we do not have crazy headlines without looking underneath. I acknowledge our guests referred to other papers but editors and broadcasters do not look at previous papers that have been written. They will go for the headline figure and I do not think that part of it is helpful. I thank the witnesses for their contribution to the debate on all this and I look forward to other contributions..
Fergus O'Dowd (Louth, Fine Gael)
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The Deputy has put her finger on it there, in that our guests are really informing the debate and giving us challenges to think about. They are outlining how they see the facts and it is up to us as politicians to make the changes we can. Ultimately, however, it is a huge task to persuade Northern Ireland and the South to agree to a process if we do not think it through fully in every respect. I thank the witnesses for their contributions. No doubt we will have them back in again, even if it is not us sitting around this table. Was the Deputy finished?
Rose Conway-Walsh (Mayo, Sinn Fein)
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You are all right.
Fergus O'Dowd (Louth, Fine Gael)
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I thank you very much indeed. It was both really informative and challenging.
Rose Conway-Walsh (Mayo, Sinn Fein)
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The figure was not €20 billion that time, was it? It was not at €20 billion when the other papers were published.
Rose Conway-Walsh (Mayo, Sinn Fein)
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No, but it said €20 billion.
Fergus O'Dowd (Louth, Fine Gael)
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As I have a question to put to the Tánaiste in the Chamber, we will adjourn the meeting now, if that is okay. I thank you very much.