Wings Over Scotland

The prime raison d’etre of a government is to provide for its citizens defence, security and services that either an individual would be unable to provide for themselves, or where such services are in the public interest but cannot be adequately served by market forces. Government is there to act on our behalf and in the common interest of our society, and in order to do so is funded by the people through taxation.

It’s the responsibility of any government to ensure that the services that the public pay for are maintained and that the money that is paid in taxation is spent as effectively as possible in delivering those services. These are not “giveaways”, but the reallocation of public funds to meet the needs of the populace, a transaction in which the recipient of the service has already provided payment – in many cases far more than they would ever recoup themselves.

Historically this was the most basic founding principle of the Labour Party, which advocated socialist policies such as public ownership of key industries, government intervention in the economy, redistribution of wealth, increased rights for workers, the welfare state, publicly funded healthcare and education. These principles were duly enshrined in “Clause IV” of the Labour constitution.

In 1995, however, “Clause IV” was abolished by Tony Blair, heralding the birth of “New Labour” and the adoption of market based solutions and neo-liberalisation. Labour in Scotland was less keen to accept this new creed than its compatriots south of the border, but when Johann Lamont recently signalled Scottish Labour’s final submission to the triangulated centre-right doctrine, many whose traditional sympathies lay with the party rounded bitterly on her policy shift.

Lamont’s speech included the following passage:

“…if we wish to continue some policies as they are then they come with a cost which has to be paid for either through increased taxation, direct charges or cuts elsewhere. If we do not confront these hard decisions soon, then the choice will be taken from us when we will be left with little options.”

Thus alienated from the original goals of her party, Lamont found herself able and apparently willing to advocate ending free prescriptions (£57 million per year), abolishing free university tuition (£220 million per year), and ending the imperfect but popular Council Tax freeze that has helped keep money in the pockets of the poorest in society (£70 million per year). Labour’s “nothing is off the table” task force will also consider ending free bus travel for all over-60s (£192 million per year), and free personal care for the elderly (£340 million per year).

But while Johann Lamont may have been wrong about the affordability of universal benefits today, next year, and even the year after (the policies above combined cost under 3% of the Scottish Government’s budget), she was – perhaps somewhat to the surprise of readers of this site – not wrong in the long term. Not wrong, that is, if Scotland stays in the Union. The reason for this is the nature of the Barnett formula.

The Barnett formula, which has determined Scottish Government funding since devolution, works by taking the money spent in England on services and allocating an equivalent percentage (based on population and devolved service provision) to the Scottish Government. By its nature, the formula is therefore not linked to the actual money raised in Scotland, or even the affordability of services from our tax base – it merely gives a lump sum to Holyrood based on the previous year’s spending in England. And it’s this system that will eventually lead to the undermining of the Scottish Government’s finances.

This is largely attributable to moves by successive Westminster governments since the advent of devolution to bring market-based economics into English public-service provision, through PPP, PFI and privatisation. As more and more infrastructure is built on PFI/PPP and services are either privatised or funded through direct billing of the public in England, then less public money from government is spent on services.

This leads to an equivalent drop in the funding due to the Scottish Government under the Barnett Formula. This is despite the fact that the services in England are not losing overall funding, as this is being recouped through direct charging (such as in the case of tuition fees) or by having the service being provided completely independently of government by the private sector for profit.

Even if the people of England wound up paying substantially more for the same services, or the Scottish tax base took a rapid growth spurt upwards, it wouldn’t matter. The funding for Scotland is based on the money that Westminster and local government spends in England, and only the money they spend.

As privatisation advances and fees for previously free-at-the-point-of-need services become more commonplace, the Scottish block grant will be cut accordingly, removing the funding needed to support our public services and forcing the abolition of universal benefits, regardless of what the people of Scotland want or do.

As Nicola Sturgeon put it, “It’s a conclusion that has its roots in the deeply misguided belief… that this Parliament should be responsible for divvying up the national cake but have no power to influence the overall size of that cake.”

In other words, as the neoliberal free-market ideological consensus tightens its grip on the throat of England, so Scotland too will choke.

In its attempts to stave off the asphyxiation of public funds, the SNP government has worked minor miracles of efficiency savings, and is taking other steps such as consolidating public services where possible, an obvious example being the amalgamation of Scotland’s police forces into a single one. Johann Lamont proposes instead to save money by reducing the provision of universal services and charging for some of them via means-testing. And then there’s also the constant background rumble within Scottish Labour with regard to ending the Council Tax freeze.

But none of these steps will solve the problem. Increasing Council Tax, for example, offers very limited scope for returns. It would be highly unpopular with Labour’s core vote to raise it across the board, so the party might propose to hike only the upper bands as a means of wealth redistribution. But a problem then arises in poor areas, which by definition tend to have very few households in the upper bands. Unless you charge the wealthiest £1m a year, the only answer is to raise the tax for the poor too.

To understand the scale of the problem, we must first note the reason the country’s finances are under such strain. Since Margaret Thatcher came to power in 1979, the UK has only run a budget surplus for six of the last 33 years – two under the Chancellorship of John Major and four under Gordon Brown’s. When Labour took office in 1997, the nation’s debt stood at £352 billion. In 2001, after four years of “prudence” produced small surpluses, Gordon Brown declared an “end to boom and bust” and began spending more than was raised in taxes.

By 2008, before the banking crisis, the national debt had risen to £527 billion and the deficit (the amount the government was borrowing every year to finance extra spending) was £56bn a year. When Labour left office in 2010, the banking crisis had devastated public accounts and left the UK with a debt of around £760 billion and an annual deficit that had soared to £157bn.

Today, the coalition government has overseen a dramatic increase in the debt to £1,159 billion (and bear in mind that this doesn’t even count the “off the books” debt of PFI and other “creative” accounting solutions). The annual cost of simply servicing that debt amounts to around £43bn. Every household in the UK pays around £2,000 per annum in tax merely to finance the interest on the debt alone, never mind paying down the principal.

Scotland’s share of debt repayment was accounted for in GERS at £3.7bn in 2010-11 (more than we contributed to UK defence spending). That’s billions of pounds being given away every year with nothing to show for it – and what’s worse is that we have to borrow that money to pay the debt interest, from the very people we are paying it back to, with interest on top of that since we’re running a deficit. Westminster’s grand plan to drag us out of recession/depression is the economic equivalent of applying leeches to stop blood loss.

What all this means is that as the Barnett Formula continues to be applied, we’ll slowly get worse off until we cannot fund public services regardless of whether or not we can afford them. But there’s another reason too.

From GERS we know that in 2010-11 the total budget attributed to Scotland by Westminster (ie both the Scottish block grant and the money spent by London “on Scotland’s behalf”) was just under £64 billion, including all debt repayment and other costs. The total tax revenue raised in Scotland over the same period when a geographical share of North Sea revenue is included was £53 billion, which left Scotland with an estimated net fiscal balance deficit of £10.7 billion (or 7.4% of GDP).

In 2010-11, the equivalent UK position including 100 per cent of North Sea revenue was a deficit of £136 billion (or 9.2% of GDP). This means that Scotland pays for itself better than the UK as a whole.

But it has an extra burden to carry too. Scotland was allocated a share of that UK deficit, which was added to the nation’s debt balance, on a per-capita basis rather than being related to Scotland’s own finances. The per-capita share amounted to £11.4 billion, whereas as we’ve seen the actual Scottish deficit was £10.7 billion. In other words, £730 million that was not spent by or on Scotland has been added to our share of the UK’s crippling debt, in just one year.

This is an invisible annual subsidy by Scotland to the rest of the UK. It’s a bit like going out to lunch with your friend and getting a £9 main course, while your friend gets one that costs £11. When the bill comes your friend insists you split the bill at £10 each, thereby charging YOU £1 for the meal THEY ate.

That might be fine once in a while, but if it went on every week for 30 years, and all the time your friend was calling you a scrounger living off their money who should be grateful to be allowed to eat with them – after all they take you to all the nice places: the UN Security Council canteen, NATO’s sandwich shop, etc – then you might start to think it was time to get your own lunch.