Tuesday, December 19, 2006

Remember the "Barnett Squeeze"? It's happening.

No spending announcement on Scotland is complete without a quote from Lord Barnett saying his formula should be scrapped. Yesterday he was at it again, saying that the Barnett Formula was “unfair” and giving the Scots “more than they should have” in comparison with England. He was commenting on the latest “GERS” figures on Scottish public spending.
The funny thing about this is that Lord Barnett doesn’t appear to understand how his own formula works. Rather than ensuring that Scotland gets a bigger slice of the cake, it is designed to ensure fiscal convergence. By allocating increases in spending in proportion to population, the Barnett Formula reduces Scottish spending over time relative to England.
Or rather it should reduce it. In the 1980s and 1990s the Barnett Formula was bypassed for political reasons, essentially because successive Tory secretaries of state wanted to placate Scotland. But not any more. Under Labour, Barnett is working with a vengance, radically altering the entire spending debate.
Buried in the Government Expenditure and Revenue in Scotland (GERS) report published this week are figures (table 6.4) which show Scotland’s relative spending advantage per head declined from 19.1% above the UK average in 2004 to 15.8% in 2005. That is a big fall in the space of one year -
equivalent to several hundred million in spending on hospitals and schools. At this rate, Scotland’s crude spending advantage could be obliterated in five or six years.
Why hasn’t anyone noticed that Scotland’s “Barnett bonus” - which was such a hugely controversial issue only a few years ago and remains so in the London press - has declined so sharply? Well, the main reason is that overall UK public spending has been increasing very rapidly as a result of the Chancellor’s economic policy in the last few years. Indeed, so many billions have been pumped into the public sector that the Scottish Executive has been having difficulty spending it all. Scotland’s share of this largesse is rising more slowly than England’s.
This sounds academic, but the Barnett Squeeze could be a ticking time bomb. It is widely accepted in Westminster that the Chancellor’s spending spree cannot continue, and that public spending will have to be reined in over the three or four years years. Once this starts to happen, the effects of the Barnett Squeeze may become only too apparent in Scotland, as hospital wards are shut, nurses laid off and schools closed down because of falling rolls.
Scotland’s “extra” spending under the Barnett Formula was always something of a fiction. The reason that Scots figures were higher than England for services like health and education is largely because Scots are unhealthy and it is more expensive to provide services to areas with low population density. It costs a lot more per head to provide a school for a few children on a Scottish island, say, than for an inner London borough. It’s the same with roads and hospitals.
If the spending tap is turned off these costs don’t simply go away. You just don’t build the schools and roads anymore, or maintain the ones you have. It doesn’t mean Scotland is going to be plunged into penury, but ministers are in no doubt that things might get difficult. Some MSPs have even hinted that this might be a good time to put the SNP into government so that they are landed with the spending crisis.
The paradox of GERS is that Scottish spending appears to be going up and down at the same time. For the expnditure figures also show that Scotland’s budget deficit has ballooned to #11 billion, excluding oil, which is the number that hit the headlines this week. This deficit is increasing largely because the Scottish economy is growing more slowly than spending is increasing. High relative spending is not an expression of London generosity, but low tax revenues in Scotland.
We have been told all week that this black hole has destroyed the economic case for independence (or federalism) because it shows Scotland is functionally bankrupt. We need this “Union Dividend” as the Prime Minister called it, to stay afloat - as if the deficit were some kind of bribe to stay in the UK.
But just adding up government spending in Scotland and subtracting tax revenues is no substitute for an economic policy. The enthusiasm with which some politicians have embraced the Scottish deficit, as if it were something to be proud of, just betrays economic illiteracy.
The low tax revenues in Scotland are because Scottish businesses are growing very slowly, or not at all, bcause Scottish wage rates are so lower than England’s, and because business formation in Scotland is feeble.
What would happen if, by some miracle, the Scottish economy were to bloom and generate prodigious tax revenues - like Ireland? Presumably, government ministers would then have to apologise for the relative decline in spending. That would of course be nonsensical.
Economic policy should be geared towards improving he dynamism of the Scottish economy, and should not become fixated on any particular level of public spending. In no sense is Scotland being featherbedded or subsidised by England, as the ministers try to suggest.
Of course, an independent Scotland would have a deficit, of a greater or lesser degree depending on oil prices. Nothing wrong with that - all governments borrow. A nationalist government would almost certainly have to cut state spending considerably, in the early years at least, if it cut corporation taxes. The gamble would be that the Scottish economy would boom like Ireland’s or Latvia’s, which is by no means certain.
But nor is lower public spending necessarily an evil. It depends what you spend it on. The number of civil servants has increased hugely in the last ten years, as have public appointments generally. An independent, or federal Scottish government might well choose to lower public spending as a matter of choice, not of necessity.
I don’t believe that people in Scotland are afraid of this prospect any more. Voters are becoming much more sophisticated in their understanding of how the economy works. Nor do they feel particularly happy about constantly being told they are living off London subsidies - which is how the present arrangement is being presented by the UK Press.
Last month we were then told that an independent Scotland would be swamped by illegal immigrants and a prime target for terrorists. This month that Scotland would be impoverished. “We’d be broke if we went it alone” said the Daily Record. It’s the politics of fear again.
But the economic debate has moved on from the days when Scotland’s economic well-being was measured by the level of public spending.
Scotland is saying in effect: who’s afraid of the big black hole?

18 comments:

Anonymous said...

Ian mcwhorter stated:

Scotland’s “extra” spending under the Barnett Formula was always something of a fiction. The reason that Scots figures were higher than England for services like health and education is largely because Scots are unhealthy and it is more expensive to provide services to areas with low population density. It costs a lot more per head to provide a school for a few children on a Scottish island, say, than for an inner London borough. It’s the same with roads and hospitals.
If the spending tap is turned off these costs don’t simply go away. You just don’t build the schools and roads anymore, or maintain the ones you have.

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