How might Scottish independence affect Northern Ireland’s economy?

Scotland and Northern Ireland share a long history, shaped by generations of migration and trade. If Scotland were to become independent, it would be likely to affect Northern Ireland: how would ultimately depend on the form of constitutional change pursued.

The economies of Scotland and Northern Ireland are strongly interconnected. The recently scrapped plan to build a bridge across the Irish Sea is perhaps one of the more fanciful manifestations of these links.

History provides more concrete examples – from the transfer of agricultural technology between the two nations to the growth (and subsequent) decline of the shipbuilding industry in both Glasgow and Belfast (Goldstrom and Clarkson, 1981; Kennedy and Ollerenshaw, 1985).

Today, in many ways, Northern Ireland’s economy more closely mirrors that of Wales than Scotland. Nevertheless, if Scotland were to become independent, it is likely that there would be knock-on effects for Northern Ireland. But these effects – on trade, migration and investment – would depend on the form of independence that Scotland pursued. This article considers a range of scenarios.

Scotland and Northern Ireland’s history

Scotland and Northern Ireland have deep-rooted and longstanding connections that are both cultural and economic (Walker, 1995). A steamboat service between Glasgow and Belfast was introduced as early as 1818, facilitating migration flows and urbanisation patterns that have lasted to this day.

Trade between the two nations has also spanned decades, as have industrial links. Both Glasgow and Belfast were centres of the shipbuilding industry in the late 20^th and early 21^st centuries. Indeed, Harland and Wolff and Workman Clark and Company – both Belfast-based companies – initially did not have engine works of their own and relied on sourcing engines from the Clyde.

If we look into economic history, we can see other examples covering factor, product and capital markets (Goldstrom and Clarkson, 1981; Kennedy and Ollerenshaw, 1985).

But just as Scotland and Northern Ireland’s industrial growth developed in parallel, so too did the effects of industrial decline in the latter half of the 20^th century.

Scotland and Northern Ireland today

In 2022, the structure of Northern Ireland’s economy more closely reflects that of Wales than Scotland. The role of manufacturing in the Welsh and Northern Irish economies is broadly similar, with around 10% of all jobs being in this sector, compared with 6.6% in Scotland. Total output per head is closer in Wales and Northern Ireland (at £24,586 and £25,656 respectively), compared with £30,560 in Scotland. Weekly earnings too are higher in Scotland at £622 in 2021, compared with £571 in Wales and £575 in Northern Ireland (see Table 1).

In other respects, there are more similarities. For example, all three nations rely on public sector employment to a greater extent than the UK as a whole (see Table 1).

Table 1: Economic statistics, summary comparison

	UK	Scotland	Wales	Norther Ireland
Total output per head (2019), £	33,151	30,560	24,586	25,656
Median weekly earnings, 2021, £	611	622	571	575
Jobs in the manufacturing sector, April to June 2021, % of all jobs	7.3%	6.6%	10.0%	10.5%
Employment in the public sector, April to June 2021, % of all jobs	17.6%	22.2%	21.9%	25.8%
Net fiscal balance per head 2019/20, £	-863	-2,948	-4,556	-5,430

Source: House of Commons Library, 2022
Note: latest available figures

At £10.3 billion, or approximately £5,400 per person, the difference between public spending and revenue collected in Northern Ireland – its net fiscal deficit – in 2019/20 was approximately 21% of its 2019 GDP figure. The equivalent figure for Wales was also 21%, compared with 11% for Scotland and a mere 1% for England.

These numbers are expected to be much larger for 2020/21 as a result of higher public spending and reduced tax revenues during the pandemic. For the two decades prior to the Covid-19 crisis, Northern Ireland recorded the most consistent negative net fiscal balance within the UK.

Before the pandemic, both Northern Ireland and Wales showed some recovery after the global financial crisis of 2007-09. Scotland, on the other hand, performed less well due to reduced revenues from North Sea oil and gas – reflecting both production issues and lower prices.

How might Scottish independence affect Northern Ireland?

First, as a result of the close links between the two nations, Scotland’s future economic success – whether as an independent country or within the Union – will affect Northern Ireland’s economic performance (and vice versa).

Second, it is important to note that the effects of Scottish independence on Northern Ireland would depend on the form of independence pursued, with each option bringing different economic implications.

The extent of policy divergence would be important. A more ‘radical’ form, involving the creation of a new currency, for example, would create more frictions in trade between Northern Ireland and Scotland (discussed elsewhere in this series).

In contrast, under a ‘brass plate’ scenario – which refers to brass plates declaring Scotland independent being put up in Edinburgh with barely any other changes – its relationship with the rest of the UK might not be significantly altered at least initially (Gordon, 2021). This outcome is similar to what historians of Irish independence have termed the ‘pale replica’ effect (Jacobsen, 1994).

The experience of Ireland’s independence may offer further insights here. In the early years of Irish independence, the government did not pursue radical policy change. In this case, formal political independence and undoing a longstanding reliance on the UK economy were related but distinct transition processes, which moved at different speeds (O’Rourke, 2017).

Following independence, the Irish punt was pegged to sterling until 1979 – a decision that largely eliminated Ireland’s monetary policy independence. In contrast, after partition, Northern Ireland and the Republic of Ireland did not co-ordinate fiscal policy in order to minimise the threats to their respective revenue streams. In the case of Northern Ireland, this was not a power devolved under the Government of Ireland Act of 1920. That the Republic of Ireland’s fiscal policy did not diverge more from the UK’s after independence was more the result of conservatism rather than any attempt at harmonisation in order to eliminate smuggling.

Overall, we can assume that the more radically different an independent Scotland’s policies are from those in the rest of the UK, the greater the implications there might be for gaps between the two nations.

Taxation and investment

One study presents the choice as being between a low tax market-based model or a more Nordic alternative focused on social investment and redistribution (Keating and Harvey, 2014). The Irish model that emerged, against the backdrop of European integration, was a hybrid of the two, albeit with a number of weaknesses associated with incoherence.

If Scotland were to pursue the more redistributive (‘Nordic’) approach, this could deter some investors that would be more drawn to lower corporate taxes and/or lower labour costs. If such investors were deciding between locating in Scotland or the rest of the UK, they may choose the lower tax option.

But equally, the Nordic model may offer benefits to those wanting to establish new enterprises or to engage in research and development. This approach is argued to provide safety nets and high levels of human capital (education and skills development), which alter the paths that industrial development follows. By raising the cost of labour, the Nordic model of industrial development may be better suited to indigenous capital-intensive and skills-intensive sectors rather than the attraction of more ‘footloose’ and labour-intensive industries.

The prospect of an independent Scotland being able to offer more generous tax incentives for investors would be likely to be seen as a risk to the future economic prospects of Northern Ireland by many policy-makers in Stormont.

The worst-case situation for Northern Ireland may be to find itself squeezed between its southern neighbour and a newly independent Scotland in an intense tax competition. Politicians might try to respond by seeking – once again – to cut taxes in Northern Ireland. But such an ‘arms race’ of inducements would be costly and could cancel itself out in terms of investment benefits.

Depending on the legislation arising from Scottish independence, if there were tax competition, any future Northern Irish Executive could (along the lines of the Azores judgement) find itself having to reduce public spending to match its reduced revenue base.

But how likely is this?

First, the public finances of an independent Scotland might make it difficult to offer generous incentives, particularly given that North Sea oil may not provide as much income for an independent Scotland as it once would have.

Second, Scotland’s room for manoeuvre is likely to be more limited than was the case for Ireland in the 1980s and 1990s. The ability of Ireland to conduct its own inward investment policy, against the backdrop of European economic integration, was instrumental in its transformation. The scope for following a low tax route has now changed. The recent announcement by the Irish government agreeing with the OECD to end its 12.5% corporation tax rate is a case in point.

Human capital and educational migration

Another concern for Northern Ireland relates to human capital, skills and the existence of a graduate brain drain to the rest of the UK.

Northern Ireland has an unenviable combination of students leaving to study elsewhere and a low number of incoming students. In 2018/19, over 17,000 students were studying elsewhere, and a mere 3,470 came to study at Northern Irish universities (Pivotal, 2021). In part, this relates to supply. For example, it is estimated by Queen’s University Belfast that for every 100 home applicants, there were only 60 available places in 2018/19.

This is particularly problematic, as once a student leaves for study, there is an increased likelihood that they will not return to Northern Ireland after graduation. The issue of student migration, quite apart from any implications for social attitudes, can only reinforce the nation’s weak productivity performance.

A post-independence Scottish government would be well aware of its own demographic and productivity challenges. As a result, it may encourage educational migration from Northern Ireland, which could lead to even greater numbers studying elsewhere. Such encouragement could take a variety of forms.

If this were the case, the Northern Irish Executive may need, in turn, to reallocate resources towards higher education. Further under-investment in this sector would make improving the supply of university places in Northern Ireland all the more difficult. There could be considerable financial, accommodation and planning repercussions for the Executive if Scotland were able to attract more Northern Irish students.

Public finances

While controversial, it is argued that both Scotland and Northern Ireland are currently net beneficiaries of the UK’s inter-regional finance system.

A worrying aspect of Northern Ireland’s economy since the Good Friday Agreement in 1998 has been the persistence of the gap (or so called ‘subvention’) between tax revenue and government spending (Morgenroth and Fitzgerald, 2020). While this gap peaked in 2010 at £12.7 billion, recovery from the global financial crisis brought this down to £9.5 billion (pre-Covid-19 in 2019).

Yet even at this level, the transfer from Westminster to Belfast remains at approximately £5,000 per person (Teague, 2021). Scotland too has a ‘notional’ fiscal deficit – identifiable public spending per capita in Scotland (at £11,566) is second only to Northern Ireland (£11,987) of any devolved nation or English region (Keep, 2021).

Regardless of the financial terms of any prospective Scottish ‘settlement’ with the rest of the UK, there could well be pressures to reform the Barnett formula (which determines a ‘block grant’ for the devolved nations based on population shares of public spending changes in England) and perhaps fiscal decentralisation more broadly.

The current Barnett settlement is population-based rather than needs-based, which has led policy-makers in Cardiff (as well as some regions in England) to consider themselves hard done by (Bailey and Budd, 2016). The Treasury had intended to use the Barnett formula until expenditure reached its preferred level and then to introduce a more needs-based approach, but this has never happened.

The Barnett settlement was preserved by the Smith Commission and the agreement between the UK and Scottish government in 2016 (McLean, 2019). It easy to imagine that if Scotland were to vote for independence, there might well be strong pressures to revisit the Barnett formula, particularly to reallocate funds that had previously been spent in Scotland. But this could serve as a point of contention for Northern Ireland if such discussions were used as an opportunity to curb public spending.

Political implications

In addition to possible economic effects, Scottish independence could also have a political impact on Northern Ireland.

Debates over Irish reunification and a potential border poll have increased in recent times, in part due to Brexit. Scotland leaving the rest of the UK may add a further (and arguably more complex) dimension to such debates.

Of course, constitutional and economic futures, while related, are also distinct. A variety of scenarios may work themselves out; some would have similar implications for Scotland and Northern Ireland, while others may diverge.

Currency choice, for example, will be shaped by the constitutional settlements that are agreed. Currently both Scotland and Northern Ireland are part of the UK fiscal and currency area, but this would be likely to change if one or both were to leave the UK. While an independent Scotland, regardless of its currency choice, would have to rely on its own fiscal resources, for Northern Ireland, membership of the euro area and reliance on an Irish fiscal union would be the consequence of unification.

An independent Scotland’s formal economic and institutional agreements with the rest of the UK and the European Union (EU) would have important implications for the nature of the relationship between Scotland and Northern Ireland. Just as 19^th century Belfast was integrated with Glasgow’s economy through the maritime sector, so new industries of the future – irrespective of the constitutional future of either nation – may bring new opportunities and align Scotland and Northern Ireland’s economic futures.

This final point is perhaps most salient because of the Northern Ireland Protocol implemented as part of the Brexit Withdrawal Agreement. In short, by attempting to avoid a hard border on the island of Ireland, the Protocol ensured that Northern Ireland would remain in the UK customs territory, as well as preserving dedicated EU funding in some areas.

But from a regulatory point of view, it would be subject to EU rules governing customs codes, VAT/state aid rules, energy supply and single market regulations for goods. The UK government for its part was made responsible for implementation. In other words, the Protocol was designed to involve some element of ‘hybrid’ status for Northern Ireland.

Some may see this set-up as representing the ‘best of both worlds’ for Northern Ireland’s economy. They may point to aggregate trade flow shifts to support such an optimistic assessment of the opportunities. Equally, Northern Ireland’s status within the integrated UK internal market ensures that the volume of east-west trade outweighs that on the island of Ireland. The result of this is that any adjustment towards north-south trade (and away from east-west trade) is far from costless overall.

While transaction costs are an important feature of business, they are also hard to measure. At the level of industries and firms, such changes may be even more complicated to determine. In terms of the balance between these effects, more heat than light has been generated in the politicised debates.

A recent empirical exercise that focuses solely on trade in goods and service affecting Northern Ireland concludes that the ability of Northern Irish producers to switch away from British intermediate inputs and goods for the EU is important for Northern Ireland (Duparc-Portier and Figus, 2021).But the scale of the distortions involved is such that the ‘best of both worlds’ scenario is seen as implausible.

The tentative lesson of this for Scottish independence is that regulatory changes matter and that any frictions created could alter the way that firms and industries operate. But understanding exactly how they will affect organisational structures is complicated and it is dependent on regulatory design.

Interdependencies between Scotland and Northern Ireland will not end with Scottish independence: they will merely take on a new form.