Wednesday, September 10, 2008

Time To Scrap Barnett

The Bloke's paper on the Barnett Formula is published today by the TPA.

As you will know, the Barnett Formula is HM Treasury's rule for divvying up taxpayers' cash between the major regions of the UK. When it was established 30 years ago, the idea was that it would gradually eliminate the historic spending advantage enjoyed by Scotland over England. But it has failed.

The current situation (2007-08) is that all three of the devolved territories continue to enjoy significant premia, of up to 30%, in terms of public spending per capita:

As can be seen, with the (entirely understandable) exception of N Ireland, these premia have remained broadly unchanged since HMT first published annual numbers (for 85-86). Indeed, a one-off HMT exercise in the pre-Barnett mid-70s showed the Scottish premium at 22%, exactly the same as 2007-08. No progress has been made, and it's no wonder Scotland continues to enjoy superior public services (no university fees, free care for the elderly, free bus passes at 60 etc etc).

So what's it cost British taxpayers? We estimate that the cumulative cost since 1985-6 has been around £200bn. That is, if the devolved territories had received the same per capita spending as England, our taxes would have been lower by a cumulative £200bn, or c£8 grand per household (and that takes no account of inflation - in today's money it would be much higher). The vast bulk of this has been paid by English taxpayers.

Can this gap be justified?

Scot Nats like to wheel out North Sea Oil - they argue that since it's Scotland's oil, the extra spending is funded by oil revenue. But that isn't true. For sure, when oil prices are up at recent levels, the sums just about work out. But in more normal times they don't.

We looked at the balance over the last 23 years (as far back as the data goes), and found that oil revenues would only have paid for the extra spending in five of those years:

Over the period as a whole, oil revenues fell short of the extra spending by around £26bn.

So what to do?

Enter our old friend, fiscal decentralisation. Scotland and the other devolved territories should be made responsible for raising much more of their own money. Not only would that be fairer to English taxpayers, but as OECD and other research has confirmed, it would likely result in a much more efficient use of public funds. When taxpayers know that their taxes are directly related to the services they see around them in their own locality, they are apt to be far more demanding.

As we've blogged many times, the UK has the most centralised taxation system of any of the G7. Only 4% of our taxes are set and raised locally, compared to an average of around 20%:

The Calman Commission is currently review the whole area. May we urge it to be bold.


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