Wednesday, 10 January 2018

Having Reservations

As "architect of the Scottish Parliament", Donald Dewar argued that everything that could be devolved should be devolved1. A corollary of that would be to say we should seek to devolve powers unless there is a compelling reason not to.

With my These Islands hat on, I've recently been looking at devolution from a Welsh perspective.  In doing so I discovered that Wales offers a perfect case-study of why devolving spending powers is not necessarily a good thing for the devolved nation concerned. Those arguing for further devolution of spending powers to Scotland would do well to take note.

If the United Kingdom stands for anything, it stands for the pooling and sharing of resources. Without such pooling and sharing, Scotland, Wales and Northern Ireland wouldn't each be currently receiving many billions annually in fiscal transfers from England. Without those fiscal transfers, public spending in the devolved nations would need to be dramatically reduced (or, less realistically, tax revenues would somehow need to be dramatically increased).

Using ONS data2 we can see how significant these fiscal transfers currently are on a per person basis, not just nationally but also across England's regions.

 [To understand this chart: if you multiply each regional per person amount by the regional population you would get the cash amount transferred in or out - add these figures together and they net out to zero (I've checked, it works) - We're just shuffling money around within the UK here.]

To head off the standard Scottish Nationalist response: no this data doesn't show that Scotland is somehow being damaged by being in the UK. In fact it reflects the fact that Scotland is able to spend more on public services than it would be able to if it wasn't part of the UK. It's worth noting that transfers "in" for Scotland are caused almost entirely by relatively high spending, for Wales mainly by relatively low revenue and for NI by a mix of both relatively low revenue and high spend. I'll publish more complete analysis by nation/region soon.

The current mechanism for adjusting the budget available for devolved nations is the Barnett Formula. There are detailed briefings on the These Islands Website which explain both the history and mechanics of the Barnett Formula (How does the Barnett Formula actually work? and What is the Barnett Squeeze?), but all you really need to know is this: the Barnett Formula is not needs based, so changes in devolved budgets do not reflect changes in need.

The Barnett Formula in practice is highly sensitive to rates of change in population, resulting in it serving Scotland (with its declining population) relatively well compared to Wales and Northern Ireland. This is not in any way "fair" or "needs based". The chart below shows the impact over time of applying the Barnett Formula for Scotland, Wales and Northern Ireland, using realistic assumptions and where the only difference between the three nations' formula driven per capita budgets is their actual relative rates of population growth/decline.

This in-built unfairness is why whenever anybody sensible takes a look at the Barnett Formula, the conclusion is the same: it needs to be replaced by a needs based formula.

That the Barnett Formula remains in place today is testament to the combined forces of political inertia and the strength of the Scottish parliament. Scotland is most likely to suffer (relatively) if a "fairer" mechanism for allocating spending among the devolved nations is put in place.

This is of course why, when "The Vow" was being delivered, the SNP insisted that the Smith Commission recommendations included the line "the block grant from the UK government to Scotland will continue to be determined by the Barnett Formula". It's also why the SNP dropped their brief flirtation with the idea of "Full Fiscal Autonomy" for Scotland, because that would mean scrapping the fiscal transfers that enable Scotland's higher public spending.

What struck me when looking at the relative per capita spending data for Wales (see table below) was that the only comparable area of spending where Wales receives a higher per capita spend than Scotland is Social Protection. Social protection is of course not devolved, it's fully reserved. Being fully reserved it is effectively guaranteed to be allocated on a needs basis, because the entitlement to (for example) a State Pension is standard UK3 wide - if there are proportionately more pensioners4 in Wales, they'll get proportionately more funding.

Now look at all those other areas where Wales has less per capita spending than Scotland
  • Health and Education are fully devolved  - so we know that Wales' capacity to spend in these areas has suffered relative to Scotland due to the way the Barnett Formula works
  • Transport is c.80% devolved, so tells a similar story
  • The mix of devolved vs reserved is less clear for other areas - but we can observe significantly lower spend for Wales relative to Scotland in "Economic Affairs", "Housing & Community Amenities", "Enterprise & Economic Development", ...

At this point the analysis only really takes me far enough to ask a pointed question: are these lower spend levels for Wales justified by lower need, or has the Barnett Formula left Wales unfairly starved of funds?

This is a blog, so you'll perhaps forgive a rambling conclusion (Chokkablog's motto is "thinking allowed" after all):
  • From a "UK-wide" perspective, devolving further spending powers without replacing the Barnett Formula with a needs based formula would be both imprudent and reckless - because the Barnett Formula is not "fair"
  • Devolving revenue raising powers carries similar risks. Even if you allow some base level fiscal transfer to remain (i.e. so that if 100% of revenue raising powers were devolved, Scotland would still receive some of England's tax revenues) you would still be exposed to the problem of how that figure was adjusted over time. It's also hard to see how such a situation would be tenable from an English perspective - the more revenue powers are devolved, the closer we edge to Full Fiscal Autonomy. Regular readers of this blog know that would be a terrible idea for Scotland
  • Devolving Social Protection powers (for Scotland or Wales) would take away the assurance of  "needs based" funding that reservation of those powers gives
  • There's a democratic trade-off involved in accepting that the UK-wide priorities may not be the same as those Scotland or Wales alone would choose - but being in a union is all about compromising how much influence you have in return for enjoying the benefits that accrue from being part of a greater whole. The data suggests Scotland does pretty well out of "the greater whole". At least as far as the Barnett formula is concerned, that's more by accident than design.


1. Profile: Donald Dewar the architect of the Scottish Parliament

2. Country and regional public sector finances: Financial year ending March 2016

These figures are used to allow consistent comparisons between regions and nations. The "geographic" (favourable to Scotland) N Sea revenue allocation methodology figures are used, but in the year in question N Sea revenues were only c.£60m or about £11/capita for Scotland (so frnaly irrlevant).

The deficit for Scotland using these figures is slightly higher than that shown by the 2016/17 Scottish Government GERS Report (£15.2bn vs £14.5bn in GERS for 2015/16 - a £130/capita difference).

The figures are very close also to the GERW data produced by Cardiff University for Wales (£14.8bn vs £14.7bn).

3. Except NI

4. As indeed there are: ONS data


Ian Sommerville. said...

The problem with any 'needs-based' formula is how to define 'need'. NI has a high education spend because it maintains separate Protestant and Catholic schools. Educationally, it certainly does not need to do so. But from a public order perspective, perhaps it does. When is capital spending 'needed' e.g. is Crossrail 'needed', HS2, a new bridge over the Forth? Do we need to spend large sums of money on expensive drugs to keep people with terminal illness alive for a few more weeks?

I don't think it is possible either politically or practically possible to define a standard 'need' that could be used as basis for allocation.

John Silver said...

So your little map of arrows clearly shows the bottom right hand corner of the UK selflessly subsidising the rest of the UK.
Do you think that is a true picture of he way the UK works?
Does it take account of the contribution made by the rest of the UK which has for decades sent its best and brightest head off to London to relentlessly build London's wealth while giving no credit to Belfast, Birmingham or Barra where the wealth builders came from.
London & the south east may well create the wealth but it can only do it with the human resources the rest of the UK supplies it.
You were brought up in Islay, I believe. Do you think its contribution to the wealth and wellbeing of the UK can be accurately reflected in a map of arrows?

Kevin Hague said...

John, you make a compelling case for why the UK is better viewed as a coherent whole that works for all - I'm merely highlighting the data which shows what happens if (as independence supporters desire) yo break it up and turn off those internal flows - I'm not the one arguing to make those little arrows become the sources of real economic hardship by turning them off

Kevin Hague said...

Ian - I'm inclined to agree, but HM Treasury has had a go at least twice in the past, and surely even a flawed needs-based formula is better than the (demonstrable, structural) unfairness of Barnett Formula?

Anonymous said...

I just don't understand why, if this was truly how the UK worked, the blatantly money hungry Tories would be so against Scottish independence?! I support indy, always have, but it interests me to hear the other side of the arguement especially from people who are clearly intelligent and still against Scotland giving it a go.
Labour I kind of get, they once had strong support in Scotland and could feasibly have that again if they sorted their act out.
But the information you've laid out here and the Tories position on independence just does not add up for me. It's completely at odds with everything the Tories have done or tried to do for as long as I can remember.

Genuine questions - What's in it for them? What does Scotland have that the UK is so desperate to keep if it's not our money?

Kevin Hague said...

Anonymous: I think the problem you have is in thinking that the Tories would only want to keep Scotland in the Union if it was a net fiscal contributor - I'm no Tory, but I fear you're confusion stems from your own rather narrow-mined view of how "Tories" think.

FWIW I think there are broader issues of moral solidarity involved which I believe cut across party-political boundaries, not to mention wider questions of how a break-up of the UK would weaken the UK's position on the world stage (something that, in an increasingly unstable world, should maybe concern us all)