Fiscal federalism, needs assessment for UK, or independence for Scotland?
Saturday, 8 December 2007
Iain McLean
Alex Salmond, Scotland's first minister, says that he wants Scotland independent by 2017. Some English conservatives, headed by the commentator Simon Heffer, agree. The Union is dead, they say. Why keep it alive artificially, at the price of shovelling money at those subsidy junkies the Scots, who get more public spending per head than the Welsh, the Geordies or the Scousers, although they are richer than any of those?
The Barnett formula, which governs the allocation of block grant from the UK exchequer to Scotland, Wales and Northern Ireland, is under its most sustained attack since Joel Barnett, former Treasury chief secretary, and his officials invented it in the 1970s. Much of the venom is misplaced, as Barnett is blamed for things that are not its fault. Nevertheless, the formula, which Lord Barnett once said he did not expect to last more than a year or even 20 minutes, is now beyond repair. What might replace it?
It is true that Scotland receives more public spending per head than any of the northern English regions or Wales, although it is richer. But this is despite, not because of, Barnett. Barnett gives Scotland, Wales and Northern Ireland an increment in their block grant, pro rata to their population, for every additional pound spent in England. It does not touch the 1976 baseline. But that is now trivial compared with 30 years' additions.
Barnett should therefore have led by now to equal spending per head in each of the four countries of the UK. But the Scots and Northern Irish lead has hardly moved since Barnett started. Scotland, Ulster and -- note well -- London receive more per head because they pose a credible threat to the UK government, which Wales, Yorkshire and East Anglia do not. This situation has been building up since Lord Salisbury decided to kill Irish home rule with kindness in 1886.
But Barnett has perverse implications for England. Here is one of them. A lot is now being spent on public transport in London. Not before time, you may say. The Barnett formula ensures that a pro rata sum is therefore available for Edinburgh's trams -- but not for Leeds' or Nottingham's. The alleged home of Robin Hood is, on one measure, the most deprived region of the UK. If spending per head is compared with gross value added per head, which may be regarded as a rough measure of relative need, the East Midlands is the worst-served region. If you think Robin Hood actually came from Yorkshire, it does pretty badly as well.
There are three main solutions: independence, fiscal federalism or needs assessment. Scottish independence is not a stupid idea - it would force Scotland to be fiscally responsible for the first time since 1706. The oil could be a curse, not the blessing that Mr Salmond expects it to be, but hey, that is the Scots' choice.
Under fiscal federalism, the four nations of the Union would have some tax proceeds assigned to them to pay for their domestic services. The appropriate taxes would be value-added tax, excise duties and a share of income tax.
There would have to be some horizontal equalisation, so that the richer territories (England and Scotland) subsidised the other two, in order for all four to be able to provide comparable services to comparable citizens. Such equalisation implies that there would be no harm in assigning (most of) North Sea oil revenue to Scotland. Equalisation would be up to the joint ministerial committee or another of the so far little-used devolution devices created in 1998-99.
If you do not like either of those ideas, you should replace Barnett with something like the Australian Commonwealth Grants Commission. It does a massive annual comparison of the states' relative needs, resources and costs of delivering public services. That delivers a single range of numbers, below 1 for the rich states and above 1 for the poor ones. Federal tax receipts are then assigned per head to the states in accordance with those multipliers.
Of course the rich states (Victoria and New South Wales) whinge every year. They would, wouldn't they? But the CGC has been a robust institution that has held Australia together since 1933.
As with cricket and electoral systems, the UK could learn a thing or two from Australia.
The writer is professor of politics, Oxford University. His recent report to the government on measures to improve the UK's regional public expenditure statistics has been adopted.
Alex Salmond, Scotland's first minister, says that he wants Scotland independent by 2017. Some English conservatives, headed by the commentator Simon Heffer, agree. The Union is dead, they say. Why keep it alive artificially, at the price of shovelling money at those subsidy junkies the Scots, who get more public spending per head than the Welsh, the Geordies or the Scousers, although they are richer than any of those?
The Barnett formula, which governs the allocation of block grant from the UK exchequer to Scotland, Wales and Northern Ireland, is under its most sustained attack since Joel Barnett, former Treasury chief secretary, and his officials invented it in the 1970s. Much of the venom is misplaced, as Barnett is blamed for things that are not its fault. Nevertheless, the formula, which Lord Barnett once said he did not expect to last more than a year or even 20 minutes, is now beyond repair. What might replace it?
It is true that Scotland receives more public spending per head than any of the northern English regions or Wales, although it is richer. But this is despite, not because of, Barnett. Barnett gives Scotland, Wales and Northern Ireland an increment in their block grant, pro rata to their population, for every additional pound spent in England. It does not touch the 1976 baseline. But that is now trivial compared with 30 years' additions.
Barnett should therefore have led by now to equal spending per head in each of the four countries of the UK. But the Scots and Northern Irish lead has hardly moved since Barnett started. Scotland, Ulster and -- note well -- London receive more per head because they pose a credible threat to the UK government, which Wales, Yorkshire and East Anglia do not. This situation has been building up since Lord Salisbury decided to kill Irish home rule with kindness in 1886.
But Barnett has perverse implications for England. Here is one of them. A lot is now being spent on public transport in London. Not before time, you may say. The Barnett formula ensures that a pro rata sum is therefore available for Edinburgh's trams -- but not for Leeds' or Nottingham's. The alleged home of Robin Hood is, on one measure, the most deprived region of the UK. If spending per head is compared with gross value added per head, which may be regarded as a rough measure of relative need, the East Midlands is the worst-served region. If you think Robin Hood actually came from Yorkshire, it does pretty badly as well.
There are three main solutions: independence, fiscal federalism or needs assessment. Scottish independence is not a stupid idea - it would force Scotland to be fiscally responsible for the first time since 1706. The oil could be a curse, not the blessing that Mr Salmond expects it to be, but hey, that is the Scots' choice.
Under fiscal federalism, the four nations of the Union would have some tax proceeds assigned to them to pay for their domestic services. The appropriate taxes would be value-added tax, excise duties and a share of income tax.
There would have to be some horizontal equalisation, so that the richer territories (England and Scotland) subsidised the other two, in order for all four to be able to provide comparable services to comparable citizens. Such equalisation implies that there would be no harm in assigning (most of) North Sea oil revenue to Scotland. Equalisation would be up to the joint ministerial committee or another of the so far little-used devolution devices created in 1998-99.
If you do not like either of those ideas, you should replace Barnett with something like the Australian Commonwealth Grants Commission. It does a massive annual comparison of the states' relative needs, resources and costs of delivering public services. That delivers a single range of numbers, below 1 for the rich states and above 1 for the poor ones. Federal tax receipts are then assigned per head to the states in accordance with those multipliers.
Of course the rich states (Victoria and New South Wales) whinge every year. They would, wouldn't they? But the CGC has been a robust institution that has held Australia together since 1933.
As with cricket and electoral systems, the UK could learn a thing or two from Australia.
The writer is professor of politics, Oxford University. His recent report to the government on measures to improve the UK's regional public expenditure statistics has been adopted.