Sunday, 2 February 2020

Pooling and Sharing: The English Regions

In a few weeks time I'll be chairing a conference in Newcastle - These Islands: Our Past, Present & Future

The conference will feature an impressive array of speakers and panelists including: Douglas Alexander, Philippe Auclair, Gordon Brown, Andy Burnham, Frances Coppola, Sir John Curtice, Simon Evans, Sophia Gaston, Ayesha Hazarika, Gerry Hassan, Fiona Hill, Henry Hill, Colin Kidd, Carwyn Jones, David Lidington, Ian Murray, Baronesss Quin, Mark Reckless, Willie Rennie, Lord Salisbury and many, many more. If you're interested in coming along, you can find more details and ticket booking information here > eventbrite page.

Needless to say: just as Bob Geldof wasn't going to go to all the trouble of organising Live Aid and not get on stage to perform with the Boomtown Rats, so I will not be passing up the opportunity to put some graphs in front of this captive audience1 .

We're holding the conference in Newcastle to highlight the importance of the English regions in any debate about the future of the UK. To this end I've been doing fresh analysis on the fiscal economics of the English regions and - because I won't have time to present detailed analysis at the conference - I though I'd quickly blog about it here.

Chokkablog regulars will be familiar with the concept of the implied fiscal transfer, but to recap: if a devolved nation runs a deficit per head (aka "per capita deficit") higher than the UK average, then that nation is benefitting from an implied fiscal transfer from the rest of the UK2.

The same principle can be applied to the English regions. Fortunately the data now exists to allow us to calculate and understand these regional fiscal transfers just as the (notorious?) Government Expenditure and Revenue Scotland (aka GERS) figures do for Scotland3.

The source data is Country and Region Public Sector Finances analysis as produced by the ONS4. All the figures we use here are those that allocate a "geographical share" of oil & gas revenues (i.e. Scotland gets to keep the oil & gas revenues generated by oil in Scottish waters).

The only other thing we have to remember before diving into this analysis is that the per capita deficit difference to the UK average is made up of two distinct parts: the per capita revenue difference and the per capita spending difference. The former reflects the economic performance of the region in terms of tax revenue generation, the latter reflects the cost of delivering public services to that region5.

So let's look first at per capita revenue generation differences by region:

Remember that what we're seeing here is how well these regions generate tax revenue versus the UK average. There has been a lot of talk in recent weeks of "levelling up" - that's basically about getting these bars to shrink back towards zero, so the size of the red bars is a decent guide to which areas are in greatest need of "levelling up".

It should come as no surprise that London and the South East are the areas which "out-perform" and - unless you've been deceived by the SNP's grievance rehetoric - it should also be no surprise to see Scotland (like the East of England) performing as per the UK average and significantly out-performing Wales, Northern Ireland and all other English regions.

So what's Scotland's problem?

Well let's look at per capita spending per region4:

Here's where we see the areas that enjoy (or require) higher spending per capita: Northern Ireland and Scotland most significantly, with London, Wales and the North East as the other "relatively high spend" areas. The extent to which this is based on greater need (e.g. to deliver equivalent services in areas of lower population density and/or with remote/island communities and/or to reflecting higher social costs driven by demographic factors and/or due to areas of endemic poverty) or greater investment (for better services than the UK average or to stimulate economic development) is the subject of some debate.

If we combine the per capita revenue difference with the per capita spending difference, we get to the per capita fiscal balance difference (and hence the implied fiscal transfer):

It's quite a striking picture isn't it? The Devolved Administrations in Wales and Northern Ireland receive far greater per capita fiscal transfers than Scotland, as does the North East.  London, the South East and the East of England are responsible for generating fiscal transfers that go to the rest of the UK.

It's perhaps helpful to summarise all of this data on one exhibit:

What this shows us is the extent to which the fiscal transfer to Scotland (caused by the much debated higher notional Scottish deficit) is a function of higher spending, not lower revenue generation (i.e. not "weaker economic performance"). This contrasts dramatically with Wales the Midlands and the North of England, where relatively poor fiscal performance is explained by weaker revenue generation (i.e. "weaker economic performance") far more than by any spending differences.

It's clear that any debate about the future of the UK has to grapple with these two related questons
  • How are resources most fairly and efficiently distributed between and administered in the devolved nations and English regions?
  • What practical steps can be taken to "level up" economic performance across the UK?

For those who like to see the figures behind the pictures:

For those who wonder about regional difference within Scotland, I offer the following GDP/capita chart - suffice to say we could expect there to be similar fiscal transfers happening within Scotland, and the variance of economic performance within Scotland appears not dissimilar to the variance across the UK (or indeed in continental Europe):


1. Yes, I'm aware how ridiculous it is to imply that this conference is some sort of constitutional Live Aid

2. We share the burden of the UK's deficit UK-wide - both in these analyses (i.e. the cost of the total UK debt is allocated to the regions and devolved administrations on a per capita basis) and as widely assumed and accepted in the case of inherited liabilities (i.e. were Scotland to separate from the UK, it would inherit a population share of he UK's debt, as accepted by the Independence White Paper and the SNP's more recent Sustainable Growth Commission)

3. This figures differ from GERS, but not materially so at the deficit per head level - comparing 2018-19 ONS and GERS, it looks like there is a different approach to what is taken as revenue vs what is netted off against cost (but I'm guessing here) - all that really matters is that the figures used for the exhibits on this blog post are all compiled on a comparable basis
  • Spend/head: ONS = £14.5k; GERS = £13.9k
  • Revenue/head: ONS = £12.0k; GERS = £11.5k
  • Deficit per head: ONS = £2.5k; GERS = £2.6k
4. It is worth noting that these are not qualified as National Statistics, but rather Experimental Statistics

5. It's worth noting that those costs which are shared on a population basis (mainly debt interest, defence and international aid) have no impact on this analysis - there is by definition zero difference between per capita costs allocated on a per capita basis!


Anonymous said...

"Scotland gets to keep the oil revenues generated by oil in Scottish waters)"

should be "Scotland gets to keep all the oil and Gas revenues generated by oil and Gas in Scottish waters"

Petty I know but you know how conspiracy theorists work . ps enjoy Newcastle.

Kevin Hague said...

iirc there are no active gas fields in Scottish waters, but point taken - if there were, their revenue would be allocated to Scotland!

Anonymous said...

You may be right about gas fields as such but there are plenty of fields that produce gas in Scottish waters (gas being produced alongside liquids of various sorts). See for example Laggan/Tormore I don't think it changes your analysis but I think its a matter of fact.

Anonymous said...

Kevin Hague said... 2 February 2020 at 15:04
iirc there are no active gas fields in Scottish waters, but point taken - if there were, their revenue would be allocated to Scotland!
I wonder if Fraser Whyte with his experience would know if there any are left ? I thought there was a Gas component in any condensate recovered but perhaps its not recovered and flared off.
For anyone wishing to know how Scotland derives its own tax revenues the 2018/19
GERS methodology document of the SNP's own choice can be found here. North Sea Revenues
are on page 42

Keith Macdonald said...

Can I suggest that interested parties should look at . This is quite a detailed strategy/tactics analysis by one of the saner non-SNP nationalists and it seems to me that many of the ideas are likely to be taken up by Nicola Sturgeon. It also, unwittingly, exposes some of the weaknesses in the nationalist case, particularly by, for once, discussing what "independence" actually means.

Anonymous said...

Mr Hague, like most Scots you seem to have an issue with using the word 'England'!

For example you state rUK transfers to Scotland - when in fact Wales and N Ireland are not in a position to transfer to themselves let alone Scotland.

Why 'big up' Scotland by comparing it to regions, too embarrassed to compare against England?

Reminds me of the snp Scottish government who often use the term 'UK as a whole' which is code for 'England is outperforming Scotland' but Scotland 'is outperforming the UK'

Kevin Hague said...

Fair point re semantics of "rUK" = hangover from looking at this purely from the perspective of prospective Scottish indepdendence - by rights I suppose I should say "from London and the South East"

Fraser Whyte said...

Hi Kev,

Re comments above and as discussed, there is gas as well as oil production within the Scottish sector of UKCS. I can't recall the specific figures but, iirc, Scotland typically accounts for 85-95% of UK oil production and between 40-60% of gas production.

Kevin Hague said...

aha - thanks Fraser, i stand corrected