The Independence Debate: who subsidises who?

As the date for a referendum becomes firmer the issue of "who subsidises who" will be bandied around as a political football. The SNP will claim that "the English have robbed Scotland of its oil and wasted the proceeds". English politicians will respond that the Barnett formula allocates around £5 billion a year more in public spending Scotland than would be the case if allocation was based on need. It is claimed that this Barnett over-allocation amounts to a subsidy from the English taxpayer. This subsidy, it is argued, allows Scotland to enjoy better public services such as free tuition fees, prescriptions and social care which the English cannot afford.

So who is right and what are the facts?

It is true that Scotland has receives more public spending per capita than the UK average. In broad terms this equates to about 20% per head more. Over the last 25 years this spending gap has resulted in Scotland receiving around £135 billion more than would have been the UK average. This amounts to about £1000 per person per year.

But, the SNP are partially right, this is not a subsidy. That figure is roughly equal to the tax raised from Scotland's share of North Sea Oil over the same period: around £140 billion. The truth is that more or less every penny of Scotland's oil revenues has been, and is being, spent on better public services in Scotland. The Barnett formula can be seen for what it is: a mechanism to deliver to Scotland their share of oil revenues.

So that's alright then, you might think. The arithmetic might not work exactly, but is it fair. But Policy makers need to consider the following:

  1. In a "United" Kingdom, the quality of public services should surely depend on the need of the individual region, not on its tax base. Nobody seriously argues that Kensington should have better services than Hackney or that Cheshire should have better services than Warrington simply because they have a larger tax base. Failure to link funding to need will, over time, create the sort of tensions that have been fuelling the independence debate from South of the border. Indeed for a self-proclaimed "progressive" party like the SNP to make this case is pretty strange.
  2. Labour's botched devolution settlement has resulted in a Government in Scotland with no tax raising powers but plenty of tax spending authority. The result has been the emergence of a Scottish political class who have become used to spending money without having to face the consequences. Scottish politicians can take credit for better public services while refusing to acknowledge the "oil bonanza" which continues to be spent in Scotland. The Scotland Bill goes some way towards addressing this issue, but we need to go much further. The Treasury's unwillingness to devolve greater tax raising powers needs to be challenged to enable us to move to a more stable model. Scottish politicians should look to the Scottish electorate for money. This will increase their accountability and give an incentive to spend efficiently, not just to spend more.

Finally, what does all this mean for the referendum? The issue to be decided is far larger than mere pounds and pence. But money matters too: in financial terms, an independent Scotland would be betting that oil revenues will remain stable or increase over time so as to mitigate the effect of losing Barnett. That is quite a tough judgement to make. Either way it is time that both sides start dealing in facts not peddling assertions.


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