Farage has a point, the UK should stop subsidising Scotland
It may have lost him the byelection, but Nigel Farage has a point about Scottish spending, writes Paul Ormerod
Last week, Nigel Farage created a bit of a storm north of the border when he suggested that the longstanding formula for calculating how much Scotland receives from the UK Treasury needed “looking at”.
Some commentators ascribed Reform’s failure to capture the Hamilton seat in the Scottish Parliament byelection held last Thursday, albeit narrowly, to his statement.
Regardless of the result in Hamilton, the way in which public expenditure is funded in Scotland is a matter of concern.
The Barnett formula: How Scotland public funding works
The latest year for which we have official data is 2023/24, a year in which the Scottish government spent 10.4 per cent more than Scotland generated in taxation. The deficit is funded courtesy of the taxpayers of England, and in particular those of London and the South East.
The comparable figure for the UK was 4.8 per cent, which in cash terms was £13bn. If the UK had run a similar deficit as Scotland, the figure would have been £284bn.
This is of course purely hypothetical because any British government attempting to run a deficit of this order would face another Liz Truss moment.
Scotland gets away with it because it is a small economy underwritten by the much larger economy of England.
The problem started during the 1974-79 Labour government. The Treasury minister Joel Barnett devised a formula which ensured that Scotland would have higher public spending than England.
It was a desperate short-term measure to fend off the then newly emerging threat from the SNP to Labour’s dominance in Scotland. The so-called Barnett formula is still in place today.
The effect is to permit the average amount of public spending per person to be £2,000 a year higher than it is in England.
We might reasonably wonder what the SNP does with the cash, looking at the catastrophic decline in educational standards, a worsening health service and hundreds of millions spent on ferries which still don’t work properly.
But even if the Scottish government was a model of efficiency, the distributional issue would still exist.
What about Wales?
The Welsh government is the beneficiary of even greater largesse courtesy of the English taxpayer. The fiscal deficit in Wales – the amount by which government spending exceeds government receipts from taxation – is over 20 per cent of GDP. If replicated across the UK as a whole, the deficit in 2023/24 would have been £550bn.
It is true that the English regions in the North, Midlands and the South West all receive more public spending than they generate in tax receipts.
But they, unlike Scotland and Wales, do not have their own separate Parliaments, with extensive, devolved powers.
One solution would of course be simply to withdraw the enormous subsidies which Scotland and Wales receive, particularly the latter relative to the size of its economy.
It would then be very easy to, for example, restore the winter fuel allowance to all pensioners. Their total cost, at some £2.2bn, is dwarfed by the cost of the handouts to the Scottish and Welsh. Indeed, if these had not existed, there would have been no need to abolish the fuel allowance in the first place.
A better option is to phase them out gradually, and at the same time extend the tax-raising powers of both the Scottish Parliament and the Welsh Assembly.
If their electorates wanted to sustain the current levels of public spending, they would have the satisfaction of knowing that they were paying for it themselves and not relying on handouts.
Of course, Labour has traditionally relied on Scotland and Wales to deliver a majority in the UK Parliament. But switching excess spending from them to things like the winter fuel allowance might prove to be a vote winner overall.
Paul Ormerod is an honorary professor at the Alliance Business School at the University of Manchester and an economist at Volterra Partners LLP