Let me start with a rock-solid fact: England receives considerably less Treasury funding per capita than any of the other home countries. This may come as a surprise to many, because the higher Treasury payments to Scotland get the vast majority of the media coverage and this gives the impression that Wales and N Ireland do not benefit in the same way. In fact, the Barnett Formula applies to all three Celtic home countries.
What is the Formula? Here is the Treasury‘s description: “Under the Formula, Scotland, Wales and Northern Ireland receive a population-based proportion of changes in planned spending on comparable United Kingdom Government services in England. Changes in each devolved administration’s spending allocation is determined by the quantity of the change in planned spending in departments of the United Kingdom Government, the extent to which the relevant United Kingdom programme is comparable with the services carried out by each devolved administration and each country’s population proportion.”
This means that the funding advantage of the Celts is permanent while the Formula remains in its present form. This is so for two reasons: there was a disproportion built into the Formula at its creation in the late seventies – higher payments to the Celts than England on the grounds of their relative poverty and the additional costs of servicing sparsely populated regions such as the Highlands – and every time funding to England is increased the Celts receive a proportionate increase based on their respective populations, that is, they get per capita the same increase as England.
The differences in public funding are considerable. The latest per capita Treasury funding figures are for 2008/9:
Scotland £9538 (£1567 more than England)
Wales £9162 (£1191 more than England)
NI £10,003 (£2032 more than England.)
Translating the per capita figures to the respective populations produces national additional funding to the Celts in 2008/9 of:
Scotland (approx population 5.1m) £7.99bn extra
Wales (approx population 3m) £3.57bn extra
N. Ireland (approx population 1.8m) £3.56bn extra
If the per capita funding of the Celts had been at English levels in 2008/9 UK government expenditure would have been reduced by approximately £15bn pa.
How much have the Celtic nations gained since the Barnett Formula was introduced? Mike Denham, a former Treasury economist, produced a report for the Taxpayers Alliance in September 2009 which came to the conclusion that in “ the last two decades (since 1985-86), higher spending in the three devolved territories has cost UK taxpayers a cumulative £200 billion (£102 billion in Scotland; £43 billion in Wales; £57 billion in Northern Ireland). http://tpa.typepad.com/home/files/unequal_shares_the_barnett_formula.pdfhttp://www.parliament.uk/documents/upload/TaxPayersAlliance.pdf
But not all government expenditure made inside Britain or is identifiable. The total identifiable spend on public services for 2008/9 is:
Scotland £ 48023bn
Wales £ 26777bn
NI £ 17322bn
Outside UK £14053bn
In addition there is the non-identifiable spending and accounting adjustments for 2008/9.
Non-identifiable public expenditure £79018bn
Accounting adjustments £22500bn
Total UK Expenditure 2008/9 £608359bn
(The identifiable and non-identifiable stats can all be found at http://www.hm-treasury.gov.uk/d/pesa09_chapter9.xls – tables 9.1-9.4).
The unidentified expenditure is important because nationalist Celts complain that England gets a larger amount proportionately of the expenditure than the Celtic nations. This is a claim with little force because the unidentified expenditure in 2008/9 accounted for less than 8% of the total UK budget spend . The three Celtic nations have a combined population of 10 million which is about 16% of the UK population. 16% of the 2008/9 unidentified expenditure is only £12bn. Even if all the £12bn had been spent in England, an obvious absurdity, the Celts would still be about £3bn to the good on the year ,for they have received £15bn more funding than they would have received if their per capita funding matched that of England.
The funding of the extra Celtic expenditure
Where does the additional funding for the Celts come from? In the cases of N Ireland and Wales it must come from England because the tax raised in those two countries is less than the amount they receive from the Treasury. (Exactly how much tax is raised in each home nation is a little problematical, because it is not possible to assign all tax revenue to a particular home nation. Nonetheless, it is clear that N Ireland and Wales with their significantly lower average wage and higher unemployment than England and Scotland and with no oil and gas revenues to claim must receive substantially more from the Treasury than they contribute).
The Scottish position is complicated by the Scots nationalist claim that all the North Sea oil and gas tax revenues are rightfully Scotland’s and consequently Scotland is a net contributor to the UK national tax pot. This is both irrelevant and wrong in fact.
It is irrelevant because while the UK is a unitary state, tax is gathered at the UK level and distributed to finance public spending throughout the UK as a whole. If England was poorer than Scotland, that would be an argument for Scotland subsidising England, because, as Unionist Scottish politicians have long argued, UK funding should be on need.
The nationalist claim is wrong on two counts. First, the tax from oil and gas has not covered the additional funding over an extended period and, second, not all the oil and gas is in Scottish waters.
The Taxpayers Alliance report mentioned previously concluded “North Sea Oil has not funded the Scottish spending gap, despite Scottish Nationalist claims to the contrary. In only five of the last 23 years have North Sea Oil receipts exceeded the cost of higher funding paid to Scotland. Even with current high oil prices, the income from the Scottish share of North Sea Oil only just covers the spending gap, and North Sea. Oil output is projected to fall by 50 per cent by 2020.”
Hence, even if Scotland had been granted all the tax revenue from the North Sea for the past 23 years, they would still have been subsidised very substantially by England over that period. As for the future, that will see an ever diminishing tax return from the North Sea even if the price of oil remains high because output is falling rapidly. Should the oil price falls substantially, as it might well do if alternative energy sources are developed or massive fresh sources of oil such as the Canadian oil shales are exploited, the North Sea tax receipts could rapidly become a minor consideration for Scotland’s economy – at the low point of oil prices in the 1990s ($11 a barrel), North Sea receipts were less than £2bn pa..
But the oil and gas tax revenue position is even less promising than that for Scotland, because not all the oil and gas is indubitably in Scottish waters. Much, possibly the large majority of gas, is in English waters ( Scotsman North Sea Oil & Gas 13 Dec 2006 Andrew Stuart). Then there is the question of territorial waters at the English/Scotland border. Where there is a boundary between two countries which ends at a coast, international law allows the territorial waters of each country to be determined by extending a line at the angle at which the land boundary meets the coast. In the case of the boundary between Scotland and England abutting the North Sea the angle is 45 degrees, which means some of the oil and gas fields off the Scottish coast would fall within English territorial waters.
Oil and gas production is self evidently no basis on which to build Scotland’s future.
The differing size of the public sectors
The Celtic countries have dangerously high proportion of their GDP concentrated on public spending. While England has a a public sector which is 43% of GDP, Scotland has one of 56% of GDP, with Wales posting over 60% and Northern Ireland over 70% (The Sunday Times
January 11, 2009 Scotland on a par with Cuba for state largesse Jason Allardyce)
Bad as these figures are the near future is much bleaker. A recent report by the Centre for Economics and Business Research projected the Scottish public spending to rise to 67% of GDP by 2012. (Telegraph Auslan Cramb, Scottish Correspondent 11 Jan 2009).
The reason why the Celtic countries can sustain such a high level of public spending when their private wealth creating sector is so small is beautifully simple: the subsidy provided by England both openly and covertly. The Celtic countries GDPs are considerably inflated by this subsidy.
Public spending also has an effect on tax revenues. Income tax and National Insurance deducted from public servants is simply a book-keeping event. It does not add to the tax gathered, merely, moves it from one government ledger to another. The larger the public sector, the smaller the amount of tax actually gathered.
The costs of independence
Independence would mean much more than losing the direct English subsidy. A Celtic nation seceding from the UK would have to (1) take a share proportionate to .their population of the UK national debt (currently £800bn and rising), (2) shoulder the costs of any government contracts (especially PPP and PFI obligations) which are solely for the benefit of the seceding country, (3) establish their owned armed forces, (4) create their own free standing civil service including a diplomatic corps and (5) fund their own benefits system. In addition, any public sector jobs in the Celtic countries which cater wholly or partly for English affairs, for example, the administration of English tax and benefits in Scotland and Northern Ireland or the DVLA centre in Wales and UK defence expenditure such as that on Trident in Scotland would return to England.
They would also lose the advantage of being part of a large nation state with an unparalleled history of meeting its financial obligations. The dire economic condition of Iceland and the Republic of Ireland (RoI) show how easily small countries can be capsized by irresponsible behaviour by governments and financial institutions. What causes pain in large nations can be mortal with small ones, vide Iceland and the Republic of Ireland. Imagine what Scotland‘s position would be if it had to fund the fall out from RBS and HBOS. The vast sums required would simply overwhelm it.
The Celtic nations might imagine that if they were independent they would be automatically be welcomed with open arms by the EU which would act as a substitute for England as a financial protector of the last resort This is far from certain because the EU has rather a large number of financially incontinent members at the moment and is unlikely to welcome others.
Will things change?
There is one thing which would alter matters radically is an English Parliament, but that, sadly, is not on offer. Labour and the LibDems are committed in practice to the status quo because it suits their parties who draw much of their representation from seats outside England., while the Tories offer not even an English Grand Committee..
All that Cameron has had to say on the matter is that those sitting for Scots seats (not Welsh and N. Irish seats note) should be excluded from votes on issues which only affect England, a concept he has signally failed to define and which Scots MPs have already said they will routinely challenge on the ground that anything which affects England affects Scotland because of the English predominance within the Union. It is noteworthy that Cameron has recently promised greater powers for Scotland. ( David Cameron in Holyrood powers pledge Simon Johnson Telegraph 14 Feb 2010) which will make change more not less difficult.
The likelihood is that the next Parliament and Government will stumble on with things largely as they are on the devolution front, That is England’s tragedy, but in the long run the Celtic nations’ tragedy as well for the longer the inequity of the present situation continues, the greater will be the English backlash when it comes.