The domestic issue is actually pretty clear. Most heroin deaths occur as a result of the stuff being adulterated with other substances. This either means that deaths occur because of unintentional overdose because they had no idea what strenght gear they had, or because of the adulterated substances. Legalisation would remove both those issues at a stroke.
Currently, those stupid enough to use heroin cost the country loads of money in medical treatments (see above). If the drugs were taxed, then at least some of the cost would be recaptured.
Although I certainly wouldn't recommend it, Heroin can be used for years and years without significant bad effect, and users can be productive members of society. William S Burroughs - one of the greatest writers to come from the US and a junkie for nearly 20 years. He died of an unrelated heart attack.
As it's illegal, even if they do not commit any other crimes, users are brought into the criminal sphere from which it can be hard to break out. Legalising would decrease the chances of people becoming caught in a cycle of criminality from which it is difficult to break out.
There are clear issues around how heroin might be sold, since clearly heroin's not a great thing to be doing, even if one can be a productive member of society, and the government would clearly wish to ensure that uptake was minimised. It might be that supply was controlled via chemists etc.
However, the single largest downside is the supply countries. We don't grow the poppies. The Taliban does and they're a bunch of utter scrotes. Doing business with people like that has big knock ons for those economies that are completely out of the hands of the domestic government. There was a recent documentary with Alex James (formerly of Blur), where he saw the effects of the cocaine trade in South America. Much the same issues apply here.