Why Barnett Formula may soon be coming to the end of its time
12 Sep 2006
This article by Bill Jamieson appeared in The Scotsman on 12th September 2006
Here is a puzzle, as much for business as for the political class: Can Scotland’s public spending keep growing at the phenomenal rate of recent years?
Last week, the Executive projected public spending at ?31.3 billion in 2007/8. This total is almost double the ?15.9bn figure of the first year of devolution (1999/2000) and marks an astonishing rate of increase. It should open up truly searching questions in the coming Holyrood election.
Where has all the money gone? Is the public seeing a commensurate improvement in the scope and quality of public services?
For the business community, this explosion in spending has been a double edged sword. It would be foolish to argue that nothing has changed for the better. At the macro level, the splurge has helped to sustain the growth of numbers in work in Scotland and in household incomes – a key driver of consumer spending and house prices (feeding into higher consumption)
But it has brought no discernible lift in the market sector and, in particular, new business formation. This remains the Achilles Heel of Scotland’s economy.
Part of the rationale of the Barnett Formula – Scots now receive 22 per cent, or ?1,500 per head, more than the English in terms of identifiable public spending – was that this extra money would help to finance a structural catch-up. But while there have been recent signs of progress, our average annual GDP growth between 2000 and 2005 trails that of the UK and is truly dwarfed by the runaway economic success of Ireland.
At the UK level there is growing questioning of why Scotland should receive so much more money (?200 a head more in the case of NHS spending) when several English regions have lower household income. Here in Scotland the figures may prove an object lesson in how dramatic (and quite asymmetric) growth in public expenditure does not guarantee political popularity. Indeed, if recent polls are to be believed, the Scottish National Party is running neck and neck with Labour.
There is another irony here. While a general consensus now prevails that devolution has been “a good thing”, there is little evidence that it has passed two key tests: has devolution and the surge in public spending brought an equivalent improvement in the quality and quantity of public services? And has it brought about a sustained improvement in Scotland’s economic performance?
These are questions that need debating. According to the economists Sir Donald Mackay and David Bell in an analysis in the Sunday Times this summer (The Political Economy of Devolution, soon to be published on the Policy Institute web site), the biggest growth industry in post-devolution Scotland may have been government itself. The parliamentary costs have been well publicised, as has the near doubling of staff and accommodation costs from a forecast of between ?20m - ?30m to ?66m; MSPs salaries have risen 52 per cent, their expenses by 22 per cent and the cost of parliamentary staff by 96 per cent.
A total of ?600m has been spent on Holyrood pay packets, expenses and the expansion of the Executive. Local government has seen its workforce expand by 24,300 while employment in non-departmental public bodies (quangos) has grown 40 per cent to reach 12,200. All told, almost one in four Scots now works for the public sector.
Compared with this, the problem of Scotland’s relatively small business base has gone unaddressed. The number of VAT-registered businesses per 10,000 inhabitants is some 15 per cent below the UK average and remains much lower that that for other UK regions of a similar income per head and economic structure. A study for the CBI by the accountants Grant Thornton found that between 1994 and 2004 the stock of VAT registered businesses in Scotland rose by only half the UK rate, her relative position deteriorating more quickly in the post devolution period. Against this backcloth, the CBI policy document last week is a model of fairness and restraint.
That politeness should not disguise the worry of the business community that the promise of lower business rates buzzing around Holyrood will not survive the current spending squeeze. For the record, Gordon Brown’s Spring Budget projected that (after inflation) public spending growth will slow, from an average of 5 per cent year on year in the past four years to 2.9 per cent y-o-y in 2006-7 and 2007-8 and to about 2 per cent thereafter.
This suggests that Brown (or any Blair successor) will face a painful squeeze on public sector jobs and pay if they are to avoid tax increases.
Michael Saunders, UK economist at Citigroup, adds an explosive element into this cocktail by suggesting in a paper this week that Brown, to drain criticism of being a Scottish PM, may do another “Bank of England” coup and announce a reform of the Barnett Formula that so favours Scotland.
Such is the turning tide of opinion in England that Barnett does look to be on borrowed time. In the resulting uproar here, those loose promises of ‘more support for enterprise’ and lower rates for business would come to look most vulnerable.
Bill Jamieson is Executive Editor of The Scotsman and Director of the Policy Institute