Peter Jones: Jim Murphy’s false Barnett formula

THE Scottish Labour leader has got it wrong about how much Scotland would lose under SNP financial plans, writes Peter Jones.

By PETER JONES Tuesday, 17th February 2015, 12:48 am

Jim Murphy at a Nurture Class at Sandaig Primary School, Barlanark, Glasgow yesterday. Picture: Robert Perry

Here we go again. With 11 weeks to go until the General Election, more and more of the initial trumpet sounds of political battle north of the Border are signalling a drearily familiar tune. It’s not quite the independence v union jangles that rattled our heads for the past two years, but an almost identical quasi-independence v quasi-union riff.

And it looks as though it will be just as discordant, just as full of red herrings and downright untruths as the referendum campaign was.

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Yesterday a distressingly good example was produced by Jim Murphy, Scottish Labour’s hyperactive leader. He tooted what he hopes will become a well-known melody – that the SNP want to abolish the Barnett Formula, thereby depriving Scots of public spending worth £1,300 per head.

This was on the basis of some media reports that SNP leaders plan to demand “hundreds of millions of pounds” in Barnett consequentials to pay for capital spending projects north of the Border as part of their price for propping up a minority Labour government.

This needs a bit of explanation. The Barnett Formula, some of you will know, decrees that for every £100 of extra spending on services in England which are devolved in Scotland (like the NHS), Scotland should get a population share (now about 8.4 per cent or £8.40) to spend on its devolved services. This £8.40 is what politicians call a Barnett consequential.

Aha! said Mr Murphy, the SNP have said the Barnett Formula will be abolished as part of their plans to gain full fiscal autonomy – control over most taxes (apart from, because of EU rules, VAT and alcohol duties) and collection of all revenues including North Sea revenue.

No Barnett Formula means no Barnett consequentials, and no extra “hundreds of millions” for on capital projects ergo, he claimed, the SNP have made a big gaffe. Indeed, if they were to get what they wanted, Scots would be losing public services worth £1,300 a head.

There is a problem here but sorry, Jim, it isn’t the one you have identified. In fact, there is so much wrong with your calculation and your political logic that you need to go back to the drawing board.

SNP leaders are not stupid. They know that the Smith Commission tax and welfare proposals, which fall a long way short of full fiscal autonomy, are the main game in town. Though they have denounced Smith as inadequate, they did sign up to it as the post-referendum deal.

They would like to get full fiscal autonomy but they also know that whatever extra tax powers, if any, come out of any post-election negotiations will not add up to complete autonomy. Therefore Barnett is more likely to survive in some form than not.

That makes it legitimate to demand Barnett consequentials, particularly in respect of capital spending. The capital sums involved, at least in theory, are financed from borrowing and not from tax revenues, which only pay the borrowing costs.

There are several issues here, not least of which is how much borrowing the Scottish Government will be able to do when it gains the substantial tax-raising powers proposed by Smith and thus the ability to finance its own borrowing costs. But since the tax powers are partial and not complete, the Scottish Government will not be able to do all the borrowing needed to build the new infrastructure the Scottish economy needs.

Therefore, a total borrowing-for-investment sum will need to be set, only some of which will be done by the Scottish Government. This total borrowing will need to be set by the UK government as a part of total planned borrowing by the UK government. The only way that can be done is by some form of a Barnett Formula which, arguably, should be defined on a GDP basis and not by population as with public service spending.

Inside this borrowing-for-investment envelope is another issue – what counts as investment in England and is therefore liable to generate consequential spending in all parts of the UK and what doesn’t.

The spending on infrastructure for the 2012 London Olympics, for example, was deemed to be UK investment, not regional to London which, the Scottish government complained, deprived Scotland of £165 million in capital spending.

These issues would still remain even if Scotland did achieve full fiscal autonomy. As it would still be part of the UK, it would have to abide by UK targets for fiscal stability and accept a limit on how much borrowing-financed capital spending Scotland could have. Again, that could only be done by some form of Barnett Formula.

This has got nothing to do with how much public spending on services there might be in a fully fiscally autonomous Scotland. Mr Murphy’s figure that there would be a missing £1,300 per head is spurious because he is comparing apples and aardvarks.

The figure comes from calculations by the House of Commons library that in 2012-13, the latest year for which data are available, public spending per head in Scotland was £10,152 compared to UK per head spending of £8,778, a difference of £1,374.

But to say that £1,374 per head (which multiplies to £7.3 billion) would disappear with full fiscal autonomy is a complete non-sequitur.

What Mr Murphy should have calculated is how much tax revenue would be raised in a fiscally autonomous Scotland, deduct how much would have to be given to the UK Treasury to pay for UK services such as defence, overseas aid, the diplomatic service, etc, and then add back in how much current spending could reasonably be financed by borrowing. Then a comparison could be made.

My bet is there would be less money to spend, but not as much as £1,374 per head.

So far as I know, nobody has done this sum in this way, and certainly not since the fall in the oil price which obviously depresses oil revenues.

And if we are to have a reasonable debate about the implications for Scotland of the big UK parties’ spending plans versus the SNP’s alternatives either under Smith or full fiscal autonomy, then we need the calculation done.

Until then, spare us the nonsense.

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