Subvention denial (and why GDP is a terrible metric)

The Nevin Economic Research Institute (NERI), not known for its right-wing leanings by any means, recently put forward this very helpful piece.

It is particularly helpful in taking on subvention denial, which is the latest game being undertaken by the Nationalist Left, most obviously Sinn Fein. It is odd how they are obsessed by numbers around £700 million. Having previously had their figure of “£750 million out of the economy due to welfare reform” demolished (no one mentions it any more, and it would be good to hear people apologise for having put it about so carelessly), they are now trying to suggest Northern Ireland’s subvention is less than that, at only around £700 million. This is garbage.

This does, of course, lead us on to a real issue of what the “subvention” actually is. There, NERI is particularly useful, by defining something different but very relevant – the “net fiscal transfer”. It is in fact this which most people are calculating when they refer to the “subvention”, namely the gap (broadly) between what Northern Ireland raises in tax revenue and what Northern Ireland spends on public services and welfare – a gap which would have to be covered in extra expenditure by the rest of Ireland in the event of Irish unity, in order for Ireland to maintain a budget surplus (as the Republic currently does).

It is worth adding, however, one area where NERI is a little careless (although not strictly inaccurate). It bands around words like “poorer” based solely on GDP. It is far from unique in this – the European Union does likewise. To be fair, NERI itself warns that it is focusing on figures only.

Based on GDP, Northern Ireland is indeed considerably “poorer” than the Republic of Ireland. Northern Ireland’s GDP per head is around 10% below the European Union average; the Republic’s, on the other hand, is around 35% above. It is equally dodgy to equate the term “living standards” to GDP levels, as many do.

However, here is a pecular thing: despite GDP levels, household spending in the Republic of Ireland is in fact below the European Union average; whereas household spending in Northern Ireland is nearly 20% above the European Union average. This would explain why visitors to both parts of Ireland – on one side of the border there are more BMWs (and indeed cars generally) sold, more money spent on eating out and more money spent on household goods, and yet it is not the side of the border you would expect according to the GDP figures. So the word “poorer” requires care – it would be better to specify “lower GDP per capita”.

The problem with GDP is threefold. Firstly, it only measures product, not outcome – for example, it is surely beneficial if you have a neighbour who fixes your pipe (rather than a plumber) or a family member who looks after your kids (rather than a paid child minder), and yet these “benefits” will reduce GDP because they do not contribute towards an overall product in any calculable way (whereas an expensive plumber or child minder would increase GDP because they do). Secondly, albeit linked to this, it only measures product within the country at point of production, which is why the Republic of Ireland has such a marked differential between GDP (measured at point of production, a figure which for the past decade or so has been typically around 20% higher than the UK’s) and GNI (measured effectively at end of production – a figure which in recent years has typically been almost identical to the UK’s) – for example, if Apple produces lots of value in Cork this goes on to Irish GDP, but the profits in terms both of research value and straightforward money gained will still make their way back to the California where the company is based and thus be added to GNI in the United States, not Ireland). Thirdly, GDP is designed to be used at a national rather than a regional level – in fact, the UK’s Office of National Statistics does not even assess GDP at a regional level because it is too complex and almost redundant (for example, if someone buys something from Tesco in Northern Ireland, it is arguable whether that should be assessed as beneficial in Northern Ireland or where Tesco is based in London; if it is the latter, regions with lots of nominal company headquarters within them, not least national capitals, will almost always gain ludicrously on the statistics charts). The simple fact is also that most countries have a system of internal transfers designed roughly to equalise the actual living standards experienced across the country (although whether they do this perfectly is contested, of course); indeed, the nonsense of regional GDP is that it at once suggests Northern Ireland is the “poorest” region of the UK, but Belfast is the third “richest” city – neither of those can seriously be right, and as ever the truth in terms of the actual living standards experienced is somewhere in between.

None of this, however, makes life any easier for people trying to wish away Northern Ireland’s fiscal imbalance, evened up as it is each year by the UK Treasury to the tune of (now) nearly £10 billion – the “net fiscal transfer”. This is made up of current public spending by the devolved departments (health, education, justice etc. – currently typically just over £10 billion), current infrastructure spending by the devolved departments (construction and upkeep of roads, hospitals, schools etc – just over £1 billion), social welfare spending (pensions, housing benefit, jobseeker’s allowance, etc.; in theory devolved by in practice from the UK Government – currently nearly £8 billion although by nature in varies from year to year), and UK-wide “non-regional” spending (defence, diplomacy, debt repayments, some Treasury spending such as tax credits, etc. – over £4 billion to Northern Ireland if assigned roughly equally across the UK) minus the tax revenue received from Northern Ireland (around £10 billion directly plus roughly another £3 billion in UK-wide tax take – this latter figure in particular is tricky to assign given individuals/companies operating across the UK, the nature of online purchases and even tax payments, etc.). This gives around £23 billion minus around £13 billion as a best guess (including £19 billion minus £10 billion in clearly regionally assigned expenditure and revenue).

It should be noted this is not all strictly “subvention” – despite “austerity” (or because, unlike in the Republic of Ireland, “austerity” has not been implemented anything like fully in Northern Ireland), the UK Government still spends more on public services and welfare than it receives in tax revenue, to the extent that all four countries of the UK actually receive a “net fiscal transfer” and thus the whole of the UK has a “subvention” from borrowed money. Welfare is also tricky because it is not budgeted, and is spent on the basis of need rather than prior calculation (the crux of the Conservatives’ current problems having specifically pledged to reduce it).

The truth around GDP only makes matters worse for Northern Ireland were it to leave the UK, because its low GDP figure is converted into a relatively high public consumption (household spending) figure by that net fiscal transfer – most obviously in the form of lots of extra public-funded jobs (not just in the civil service but also including the likes of most construction workers, most professional consultants, half of the voluntary/community sector) which would simply not exist without it, and thus whose salaries would not exist either. Even community grants, sports sponsorship and other types of aid are sought almost entirely in Northern Ireland from “the government” (or “the council”, or whatever) rather than from the private corporate sector as would be the norm elsewhere in the UK and (notably for the purposes of this comparison) Ireland. Thus Northern Ireland’s whole financial culture is abnormal and dependent on the net fiscal transfer which is itself dependent on remaining in the UK.

Northern Ireland is nowhere near paying its way, and that is what defines it economically and socially. Plainly, it is that which has to be resolved before any serious debate about its constitutional status can ensue. Subvention denial is not going to cut it.

And by the way, quite frankly, Northern Ireland needs more public spending the same way an alcoholic needs more drink. Those who seek to change its status should be the first to see that…

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