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):

---

Notes

---

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!

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.

---

NOTES

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