Smith and the Subsidy Myth Makers
The following is a letter we have today sent to the Director General of the BBC. The issue is extremely important given the negotiations that are about to start on possible devolution of further powers. Unless the widespread misapprehension south of the Border that Scotland is a subsidy junkie is corrected, Scotland’s strength in the negotiations will be greatly weakened.
On 19th September 2014, Robert Peston, BBC Economics Editor, stated the following:
“The big question about the Prime Minister’s plan to hand more control over taxes, spending and welfare to the four nations is how far this would end the subsidy of Scotland, Wales and Northern Ireland by England, and especially by London and the South East.”
This is a clear statement that Scotland is subsidised by the rest of the UK. The statement is factually wrong.
As we now show, Scotland has actually heavily subsidised the rest of the UK over the period since the introduction of the Barnett formula.
To examine whether an area is being subsidised or not by the rest of the country, one has to look at revenues and expenditures both in the area in question, and in the rest of the country. The determination of whether an area is being subsidised or not is actually not simple: for example, if expenditure is higher than revenue in an area, that does not necessarily mean it is being subsidised – because all areas commonly run deficits, (which are ultimately funded by borrowing). The fact that one area has higher public expenditure than another area does not necessarily mean it is being subsidised – as what it is contributing by way of revenue might be greater.
The acid test of whether an area is being subsidised or not is: suppose that area had not been part of the overall country, then would the rest of the country now be better or worse off? If the rest of the country would be better off, then it has indeed been subsidising the area in question.
On this test, and taking a starting point of 1980, round about when the Barnett formula was introduced, the position is very clear as regards whether the rest of the UK has subsidised Scotland or vice versa. If Scotland had become independent in 1980, and if it had at that point taken over a population share of UK debt, had enjoyed the same level of public expenditure on services now devolved as was funded by Barnett, had experienced the same levels of public expenditure on non-devolved services, (including a population share of services like defence, foreign affairs etc.), then Scotland today would have been at least £150 billion better off: and the rest of the UK would have been worse off by the same amount. In other words, under the Barnett formula, Scotland has subsidised the rest of the UK by at least £150 billion.
The relevant calculation of the subsidy is set out in the attached spreadsheet: which was provided to the Finance Committee of the Scottish Parliament at their request, (May, 2014). Also attached is a note accompanying the spreadsheet which was also provided to the Finance Committee. A more accessible discussion of the issues involved in this calculation is also attached: this consists of sections 6 and 7 of our paper “Issues surrounding the sharing of UK debt post independence”, published by the Jimmy Reid Foundation, January, 2014.
In the light of the above, the statement made by Peston amounts to “serious factual errors”, and is in clear breach of the commitment to truth and accuracy in the BBC’s editorial guidelines. In line with paragraph 3.4.26, we take it that you will move to correct this mistake quickly, clearly, and appropriately. We look forward to hearing how you propose to do this.
Dr J R and Mrs M Cuthbert.
The attachments referred to in the letter can be found on our website, www.cuthbert1.pwp.blueyonder.co.uk , under Theme 1.
Direct links are as follows:
The Jimmy Reid Foundation Paper on Issues surrounding the sharing of UK debt post independence is HERE.
The notes explaining the calculations are here: cumulative fiscal balance note 5 5 2014
Background to these calculations in Excel file HERE.