How to turbo-charge Scotland’s economy – Malcolm Offord
Scotland’s public finances are revealed each year in the publication named GERS (Government Expenditure and Revenue Scotland). Most recently published in August 2020, these figures do not make comfortable reading for the SNP, who have been in government in Scotland now for 14 years. In summary, GERS reveals that the British Dividend is more valuable to Scotland than ever before. In fact, it’s worth nearly £2,000 for every man, woman and child.
How so? The reality is that Scotland’s annual running costs are £81bn and our annual income is £66bn so our annual deficit has grown to £15bn (pre Covid), which equates to 8.6% of GDP. For comparison, the whole UK runs an equivalent deficit three times smaller, at 2.5% of GDP. This discrepancy is driven by public spending in Scotland rising to £81bn (again, pre-Covid), which accounts for 9.2% of total UK public spending despite Scotland contributing 8% of UK tax revenue, in line with our population share.
HM Treasury manages central funding of the Union using a mechanism called the “block grant” to the devolved administrations in Scotland, Wales and Northern Ireland. The block grant is in turn determined by the Barnett Formula. This formula was first introduced ahead of the 1979 general election by the then Labour chief secretary to the Treasury Joel Barnett. It was initially intended as a temporary solution for determining funding allocations between the UK’s four component nations, but it has remained in use ever since.
In essence, the Barnett Formula calculates devolved budgets by using the previous year’s budget as a starting point, and then adjusts based on increases or decreases in comparable spending per head in England. The main advantages of this formula are (i) it helps to depoliticise the process of setting devolved budgets by removing the need for protracted annual negotiations; (ii) it ensures relative stability and predictability each year; and (iii) the lack of ring-fencing gives the devolved administrations the autonomy to choose their own spending priorities.
In England the main grievance is that the formula results in significantly higher spending per person in the devolved nations. This is because the formula uses the previous year’s devolved budget as a starting point which locks in historic differences, and it is slow to respond to changes in relative population, especially where the population has grown more rapidly in England. The net effect is that spending per head in Scotland today is running at 129% of that in England.
Now, before my friends in the home counties get too grumpy about lazy and subsidised Scots, please consider some hard facts in mitigation:
- of the 12 regions of the UK (nine in England plus the three Celts), Scotland sits in fourth place in terms of GDP per head, behind London, the South East and the South West, ie the best of the rest;
- remember the whole point of the United Kingdom is that her citizens are treated equally wherever they reside. Therefore, the same standard of public services should be available to UK citizens irrespective of whether they live in Streatham or Stornoway. That Scotland contributes only 8% of the UK population but 33% of the geography means it is simply a fact that it is more expensive to run. This makes the Barnett Formula an equalisation mechanism not a subsidy; and
- there have been times in the past when Scotland sent net surpluses to Westminster. Treasury papers released after the 30 years embargo show how relieved were prime ministers Wilson, Heath and Thatcher to receive North Sea oil receipts as they battled with the unions in the seventies and eighties. The chart below from the pro-Union group These Islands shows graphically how these surpluses and deficits have balanced out over 50 years, making the ultimate case for the Union, and showing how perverse are Nationalist claims that Scotland has been unfairly treated in the UK.
For the historians among us, the geopolitical reality is that not much has changed since the Union was formed between England and Scotland in 1703. England worked out that she could not defend herself without Scotland and that she would benefit economically from the whole being greater than the sum of the parts by being an island united. If that meant a union dividend to Scotland, well so be it, that’s just the price of the deal – and, frankly, it’s still worth it to England today, which is why David Cameron renewed “the vow” in 2014.
However, that is not to say we Scots should not be running our economy much better. It should be a matter of principle and pride for any Scottish government, Unionist or Nationalist, to reduce the gap between expenditure and revenue in Scotland. I do not want the case for the Union in Scotland to be built on the idea of dependency; I want our Union to be constructed on the idea of mutual benefit and reciprocity where England, Scotland, Wales and Northern Ireland all do their best to raise and share resources for the common good. Whether pro-Union or pro-Independence, this is a goal we should all unite around.
In contrast, by every available measure the management of the Scottish economy by the SNP during the past 14 years has been shamefully incompetent and inept. How else can one explain statistics showing that GDP growth has lagged the UK’s in every year of their administration? Their record on job creation is woeful (England 15%, Northern Ireland 10%, Wales 8%, Scotland 5%) and productivity measured by business density and revenue per head is running at two thirds that of the West Midlands, which has a similar population. We have only 14,000 additional-rate taxpayers (ARTs) in Scotland; they comprise 0.5% of the population and contribute 16% of income tax. Contrast the UK, where ARTs comprise 1% of the population and contribute 30% of income tax. But more embarrassingly, every business investment the SNP has ever made on behalf of the taxpayer has turned into an eye-watering, loss-making shambles. The sorry roll call of Prestwick Airport, Ferguson Shipbuilders and BiFab sadly demonstrates that business acumen simply does not reside in the DNA of the Scottish National Party.
It does not have to be this way. A competent Scottish government would prioritise post-pandemic economic growth over any independence referendum. Here is a roadmap for how to turbo-charge Scotland’s economy in eight clear steps.
- Restore our education to world-class. The SNP has committed an act of national vandalism in driving down our once-revered education system from outstanding to average in the last 14 years. We should embrace the bespoke academy model which will drive up academic and vocational standards, especially in deprived areas, and we should give our citizens a lifetime voucher for continual educational development;
- Get our young people into work. It is a national scandal that 20% of our statutory school-leavers are not in employment, further education or training. In this modern 21st century no-one in Scotland should be denied the opportunity to work and we should embrace job schemes for the public good to ensure a lifetime job-guarantee;
- Make a national plan for prosperity. Under the recent Smith Commission, we can keep our excess tax revenues if we grow them ahead of UK, so let’s get a government department focused on that (instead of a vacuous 11-point plan for independence), and with a clear target to reduce Scotland’s deficit to 3% by 2030;
- Improve our infrastructure, both physical and digital. As my local shipbuilder Sir Willie Lithgow recently protested on the crumbling Rest And Be Thankful, it was easier to get around Scotland in 1728 when General Wade was building the roads. Let’s get our roads and railways upgraded and electric and commit to full 5G roll-out across Scotland by 2030;
- Promote immigration. If we had secured our proportionate share of UK immigration in the last 30 years, our population would be one million higher. Our population is ageing and we need more taxpayers. Targeting the three million British Overseas Nationals in Hong Kong would be a great start;
- Devolve corporation tax. This would allow a pro-business administration to design a bespoke regime of incentives to encourage entrepreneurs, inward investment, business start-ups and thereby create more higher-rate taxpayers;
- Promote exports. Small and medium sized enterprises (SMEs) are the heartbeat of the Scottish economy and these jobs only exist because we make world-class products which the rest of the world wants to buy. We need a joined-up and concerted campaign of “made in Scotland, sold abroad”;
- Create a sovereign wealth fund. Expand the Scottish National Investment Bank into a vehicle which can actively manage investments in strategic industries for the benefit of the taxpayer, on an arms-length basis from the politicians.
Ironically, if the SNP in these last 14 years had focused on the day job of making Scotland more prosperous, they might be within touching distance of the maximum 3% budget deficit demanded by their beloved EU. Instead, Scotland’s deficit of 8.6% is double that of the worst performer in the EU27, which is Romania at 4.3%. Hard reality says there are no circumstances in which the EU will step in to replace the £15bn British Dividend currently funded by the UK and, in the absence of a trusted currency, an independent Scotland will be unable to balance its books for at least a generation.
Sterling is the silver bullet of the UK which gives Scotland access to the international capital markets on a scale and at pricing which we could never achieve as an independent country. The loss of Sterling and the Barnet Formula would give Scotland the worst possible start as an independent county. Why choose the austerity of independence when instead we can thrive and prosper within the UK?
Malcolm Offord is chairman of Edinburgh-based investment company Badenoch and Co, and is a candidate on the Lothian list for the Conservatives in May’s Holyrood election