Economists in Dublin are prone to report huge favourable gaps in living standards between the UK and Ireland and between Ireland and Northern Ireland. They do this despite the advice of Patrick Honohan, former Governor of the Bank of Ireland. Writing in 2021 Dr Honohan said that:
“Ireland is a prosperous country, but not as prosperous as is often thought because of the inappropriate use of misleading, albeit conventional statistics.”
Instead of being the richest country in the EU as commonly claimed, Dr Honohan concluded that it was probably 12Th richest. He went on to add that: “There is less consumption per capita than in the United Kingdom, and on this metric we are closer to New Zealand, Israel and Italy, than to the United States, Switzerland or Norway (which is where the GDP comparison would put Ireland). The same conclusion is drawn if GDP is replaced with the Ireland-specific GNI* indicator.” (The GNI* measure is explained below)
Despite these admonitions, economists and the media in the Republic continue to claim ludicrously high levels for Irish living standards relative to those of neighbouring countries. These include comparisons with Northern Ireland, where it is difficult to suppress a feeling that motives are political. Dublin’s Economic and Social Research Institute (ESRI) is a leading culprit here. Its latest report, widely publicised in the Irish media, and funded by the Irish Government’s Shared Island Unit, stated that, “Internationally, gross domestic product (GDP) per capita is the most commonly used measure for comparing living standards across countries. GDP-based measures can be misleading for Ireland so here we focus on measures using modified gross national income (GNI*), as it is a more reliable measure of output in Ireland. Comparing GNI* per capita in Ireland to GDP per capita in Northern Ireland shows there was a gap of 57 per cent in favour of Ireland in 2022”.
As is well-known, Ireland’s official statistics for GDP are hugely distorted by multi-national companies diverting global profits into Ireland to take advantage of some of the world’s lowest corporation tax rates and laxest tax rules. Taking a straight comparison of GDP per head at current exchange rates Ireland’s per capita GDP is second only to Luxemburg in the EU and is exactly double that of the UK. Although widely included in international statistical comparisons, this headline measure of GDP gives zero insight into comparative living standards. To combat this problem Ireland’s Central Statistical Office uses alternative measures of national income which attempt to exclude the profits of multi-national companies.
The most accepted of these measures is Modified Gross National Income (GNI*). This is GDP excluding profits repatriated abroad by multinational companies, and also excluding profits of foreign-owned companies which have registered their HQs in Ireland for tax purposes. Finally, depreciation is excluded on aircraft leasing and intellectual property. What US Commerce Secretary Howard Luttnick rightly calls ‘a tax scam’, revolves around (mainly American) multi-national companies registering in Ireland their intellectual property (brands, patents etc.) derived from R&D conducted abroad. This hugely magnifies their profits declared in Ireland but also means that huge amounts of annual depreciation are added into Ireland’s GDP. A significant part of this comes from aircraft leasing, since around 90% of the world’s commercial airliners are owned in Ireland purely for tax reasons.
Irish living standards are of course not double those of the UK but nor are they 18% higher than the UK as suggested using the GNI* measure. This is because the modified GNI measure is still not free of distortions since there is no adjustment for intellectual property produced in Ireland by multi-national companies.
The authors of the ESRI study recognize that their 57% estimate for southern living standards relative to those in Northern Ireland may be exaggerated (but they still quote it several times). Instead, they calculate another measure which they say is free of distortions caused by multi-national firms. This is household disposable income (i.e. household incomes including benefits, pensions etc. net of tax). Allowing for differences in prices north and south (but not school or medical fees which need to be paid in the South) they calculate that living standards in the South are 18% higher than in Northern Ireland. This figure seems wrong. OECD data for household incomes per head in 2021 in purchasing power parity show approximately equal levels between Ireland and Northern Ireland with the UK average 20% higher than either.
Household disposable incomes is still not a direct measure of living standards. To return to Dr Honohan, a superior measure is consumption per head including both consumer spending by households and spending by government on behalf of households on such things as health, education and housing. This measure has the not very catchy title of Actual Individual Consumption (AIC) and is published regularly by the OECD and by the EU statistical agency Eurostat. It is adjusted for differences in the prices of goods and services, which are 15% higher in Ireland than in the UK.
This easy to access AIC measure shows that Irish living standards were 12th in the EU in 2023 and 12% below the UK. Northern Ireland is not separately identified by OECD or Eurostat but a simple calculation using UK official data indicates that its AIC is 7% below the UK average. A simple subtraction indicates that living standards in Northern Ireland are thus 5% above those in the Republic of Ireland.
Northern Ireland is ninth in the list of the UK’s 12 regions ranked by GDP per head and close to the seventh. It is below the UK average for living standards but by no means the poorest. Its living standards are boosted by generous levels of public services where spending per head is 10% above the UK average, and by low house prices. Northern Ireland’s economic model based on generous subsidies to a peripheral region is this more advantageous for its citizens than Ireland’s tax-haven model.
Much of this has been documented previously, for instance in a detailed study by the Policy Exchange thinktank in London. The fact that neither this study nor the article by Dr Honohan are mentioned in the ESRI study indicates a lack of scholarly rigour and perhaps a determination to show Northern Ireland in a poor light. Similarly, the failure of the ESRI study to mention the AIC figures, despite the authors being on record as describing them as a “useful indicator” of living standards, is unprofessional. A more interesting study might have been to explain why Ireland’s tax-haven economic model has been unable to generate higher living standards than in Northern Ireland, one of the UK’s poorer regions, in more than half a century of application.
