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!

Look at our GDP/Capita; Look at Ireland

This post is a distraction from the main argument but I have felt compelled to write it in response to some of the more ill-informed Twitterati...

I don't have the time or energy to go off on a massive side-bar analysis of UK versus Ireland and the impact of the financial collapse, bailout and austerity measures on the people of Ireland.

There's a good reason why the SNP don't point to Ireland (or Iceland) anymore as their exemplars of what an Independent Scotland could look like. Most people get that it has been pretty nasty, so it's a pretty niche argument I'm responding to here.

More generally I think those who quote GDP/Capita figures in an effort to make some vaguely undefined point about how Independence would "make us richer" are wide of the mark for many reasons. I'm not going to start explaining (and to be fair in many case understanding) the myriad of different measures that you would need to look at to make a balanced assessment of "in which country, over what period of time, who is 'better off'?"   Well not in this post anyway;  IMHO it is a distraction from the actual question that matters: "what will change for Scotland if we separate from the UK?"  [See my posts linked on the right for more focused analysis on that - far more relevant -  topic]

I'm sure someone with more time than me could find some better data and more rounded perspectives; I'm not going to expend more energy on this question so let me just throw this out there

1. For those who believe GDP/capita is the "best" measure
I'm not arguing that GNP is the best measure ... but it's arguably a better measure of how the nationals of a country are faring.  Ireland ranks behind the UK on this measure but I don't draw any conclusions from that; it simply illustrates that it is easy to find measures with rankings to support different cases if that is the game you choose to play (I don't).

Source: Diffen

Update 1: since I originally posted this following article was published in the Guardian which elaborates on this very topic:  New Doubt Cast Over Alex Salmond's Claims of Scottish Wealth 

Update 2: since I originally posted this I stumbled across the Tim Harford article below;

Update 3: this analysis by economists John McLaren & Jo Armstrong reinforces the GDP/GNP point with actual figures for Scotland > Scottish Independence: 'Richest Country' Claims Disputed


2.  For those who say "whats wrong with just comparing GDP/Capita"
Extracted from The Impact of Anti-crisis measures and the social and employment situation: Ireland

• "GNP is a better guide to per capita income but even it barely rose and has fallen, by 15.3 % from peak. A far better way of evaluating real economic welfare is to examine domestic demand [...] it fell by a massive 24.9 % in four years. Other indicators of falling demand include falling retail sales, falling tax revenue (when rate increases are excluded), falling employment (down by 306,000), falling employment participation (down from 64 to 60 %), rising emigration, rising long-term unemployment (now 56.3%), rising under-employment (currently 25 %), rising business closures (up 20 % last year), and falling confidence, as orders fall per the purchasing managers' index. The economic collapse is the main cause for this fall in domestic demand, followed by the failure of the private banks" Dr. Peter Rigney, Feb 2012

3. If you want to look at some broader factors the OECD Better Life Index is pretty interesting

Examples from the Better Life Index:

• "Money": 
• In Ireland the average household net-adjusted disposable income per capita is $23,721 vs. $25,828 in the UK
• "Employment": 
• 59% of people aged 15 to 64 in Ireland have a paid job compared to 71% in the UK
• 62% of men are in paid work compared to 76% in the UK
• 55% of women are in paid work compared to 66% in the UK

I've chosen those two areas to illustrate my point, not to draw conclusions. My point is precisely that it is lazy and weak-willed to leap to snap conclusions from a handful of simplistic measures; I'm sorry, but it's just more complicated than that. 

4. For those who may not have noticed what has happened in Ireland since 2007

• " in November 2010 the government had to seek a €67.5 billion "bailout" from the EU, other European countries (via the European Financial Stability Facility fund and bilateral loans) and the IMF as part of an €85 billion 'programme'. The Irish State assigned €17.5 billion to this 'bailout' an amount that was equal to the Total Discretionary Portfolio of the National Pensions Reserve Fund."Wikipedia (I know... I don't have time to go a level deeper for primary sources)

5.  For those (like the risible "@bizforscotland") who fire out Tweets like this (as if its making some kind of point);

If you look at the actual original Forbes table "best countries for business" it clearly explains that it's  "based on country’s major stock index returns for 12 months through November 20 [2013]".  Do I really need to spell this one out?  The Irish stock market has still lost about 50% of its value since 2008 even following the growth in 2013; hardly a great case for mimicking that particular Celtic Tiger is it?