The SNP and reality

May 19, 2015

Having eclipsed Labour north of the border the SNP is presenting itself as a radical, anti-austerity party of the left. SNP won control of the Scottish parliament in 2007 and have held power continuously in Scotland for the last seven years. What is their actual record in office?

The primary achievement of the SNP has been to sound left and radical, while actually delivering a mix of centrism, centralisation and corporatism, and all the while projecting a very strong and powerful image of outward competence. In power the SNP has come across as substantial, competent and on message, and so look attractive, in contrast to the previous fractious Labour-led government. This ability of the SNP to appear much more cohesive and competent than Labour is partly a true reflection of the state of the two parties but is also a result of the SNP being solely based within the Scottish polity and not beholden too, and therefore fractured by, a much larger UK party machine. The much smaller geographical focus of the SNP has allowed it to operate in a more consensual way compared to the Westminster system. SNP advisers say that for most policy areas they can to bring together the key Scottish decision makers in one room, and they all know each other already. Unlike the leadership of the Scottish Labour Party which was rife with factionalism the core of the SNP team has known each other and worked together for at least two decades. There has been only one major reshuffle in the SNP administration in Edinburgh, to replace a failing minister, in eight years. SNP backbenchers are loyal and parliamentary committees are less combative than at Westminster. The sudden influx of new MPs at Westminster may be about to change that.

Looking at the SNP’s actual track record it is hard to see that is has delivered anything other than a vaguely centrist and moderately social democratic agenda. The SNP has managed to maintain higher levels of public spending than in England and this had allowed it to present it itself as an anti-austerity party but its track record on public spending, as we shall see, is quite mixed. Estimates from the Institute for Fiscal Studies (IFS) suggest the budget for devolved public services has been cut by around four percentage points less in Scotland than in England in the past five years. The smaller Scottish cuts program is largely the effect of the generosity of the Barnett formula which enables transfers of wealth from the UK to Scotland (see the final section of this article for more on this topic). How has the SNP spent that money?

The SNP has played up rhetoric about “keeping Labour honest” and toning down austerity and as part of that narrative Nicola Sturgeon has tried to position the SNP as the strongest supporter of the National Health Service. But her government’s record suggests it gives health no special treatment. Health is already a devolved matter – that is health policy and funding is the responsibility of the Scottish Government. This means the Scottish NHS does not have to make more use of private sector providers just because the English NHS is (and indeed, it hasn’t been). And the Scottish government decides how much money to allocate to the Scottish NHS from the overall block grant it receives from Westminster. To a significant extent then, the Scottish NHS has been Scottish hands for quite some time. How has it fared?

Between 2009-10 and 2015-16 spending on the NHS in England will, on currently announced plans, have risen by about 4% in real terms despite an overall fall of 13% in English general public spending. Over the same period the vagaries of the Barnett formula meant that Scotland have had to cut overall public service spending by less – by about 8% rather than the English level of 13%. But the Scottish government has chosen not to protect the NHS in Scotland in the same way it has been been protected in England. Spending on the NHS in Scotland since 2009 has fallen by 1%. So the NHS has done better under the Tory led coalition in England than under the SNP in Scotland.

Its a similar story in education, spending on schools in Scotland fell by 5 per cent in real terms from 2010 to 2013, according to Audit Scotland, the spending watchdog. Meanwhile the IFS says that spending on schools in England rose in real terms between 2010 and 2015.

As a share of its budget, Scotland now spends less than England on the NHS and education.

The impact of all this is mixed. A 2014 study led by Gwyn Bevan of the London School of Economics found that the NHS in Scotland and England performed similarly on waiting times but that preventable early deaths had fallen faster in the north east of England than in Scotland over the past 15 years. Results in Pisa international education tests are nearly identical in England and Scotland. But the attainment gap between poor and rich pupils is narrower in England, according to Sheila Riddell, a professor at the University of Edinburgh.

The biggest percentage increases in Scottish spending have come not in hospitals and schools, but in areas such as culture, transport, economic development, housing, free care for the elderly and higher education.

The abolition of the graduate endowment fee for Scottish undergraduates in 2008 has become the totemic policy of the SNP but it has not been universally praised. The abolition of tuition fees has had no discernible impact on poor Scots’ access to universities, the share of poor students at Scottish universities is effectively unchanged since tuition fees were abolished. At the same time, the number of further education colleges has fallen from 37 in 2011-12 to 20 in 2014-15.

All systems of student finance rely on a mixture of means-tested grants and/or loans to meet living costs and, where relevant, fees. But in Scotland attention has heavily focused on the headline grabbing tuition fees policy and much less focus has been placed on the overall picture. What is clear is that the Scottish system is relatively very generous for the most affluent students, especially those who live at home and/or receive parental help. In paper entitled “The Fairest Of Them All? The Support For Scottish Students In Full-Time Higher Education In 2014-15” Lucy Hunter Blackburn writes : “For young students in full-time higher education in Scotland, the net effect of policy decisions over the decade to 2015-16 will be a resource transfer from low-income to high income households.” This transfer from the poor students to the richer students is because the abolition of tuition fees has been accompanied by reductions in student grants.

Research by Lucy Hunter Blackburn shows the SNP halved spending on student grants in real terms, meaning that many poorer students are worse off under its system. “Scotland is the only part of the UK where borrowing is highest among students from poorer backgrounds”, the former senior civil servant says. Some of her findings include:

  • Scotland now has the lowest rate of grants in western Europe
  • Since the SNP took office in 2007, spending on income-related student grants in Scotland has almost halved in real terms
  • Scotland is the only part of the UK where borrowing is highest among students from poorer backgrounds

 

Another interesting aspect of actual SNP rule is that although obviously it supports devolution and decentralisation at the national UK level within Scotland the SNP is strongly committed to centralising powers to the Scottish parliament. Scottish local authorities have had their council tax rates frozen since 2007, heavily restricting local authorities ability to spend or develop local initiatives.

The clearest example of centralisation is in policing. In an effort to save money, in 2013, Scotland’s eight local police forces were replaced by a single force: Police Scotland which led by Chief Constable Sir Stephen House, the former chief constable of Strathclyde police leading to what has been described as the The “Strathclydisation” of Scotland’s police force. This has resulted in a significant increase in the deployment of armed police officers outside of Strathclyde as well the spread of “stop and search” policies pioneered by Strathclyde. Rates of stop and search are four times as high in Scotland as in England and Wales and most are “without reasonable suspicion or legal authority”. An independent review has been launched.

The financial realities of a fiscally independent Scotland

The SNP wants independence or, if that is not immediately possible, “full fiscal independence”, which means full control of taxes north of the border and full control of Scottish government spending. By implication that means the end of financial transfers under the Barnet formulae from the rest of the UK to Scotland. The SNP claims Scotland will be better off.

Although the SNP will strongly deny it the data is quite clear; the government of an independent Scotland would, based on current spend, run a significantly bigger deficit that the UK currently does. Taking 2013-14 as a base year Scotland’s overall budget deficit of 8.1% of GDP during 2013–14 was significantly higher than the UK wide deficit of 5.6% of GDP.

If the figures are projected forward to 2015–16, over which period expected revenues from the North Sea will have fallen further as production levels are declining continuously, the Office for Budget Responsibility (OBR)’s December 2014 forecasts a Scottish deficit in 2014–15 and 2015–16 of 8.6% of GDP and 8.0% of GDP, respectively, compared to 5.0% and 4.0% for the UK as a whole. The gap would likely be even larger if oil prices remained at current levels – which are significantly below those used in the OBR’s December forecasts – but could be smaller if oil prices or production rebound. In order to finance that large deficit the new fiscally independent Scotland would have to raise money by borrowing on the open market, by issuing Scottish government bonds. How well the financial markets receive those new Scottish bonds and the rate of interest the Scottish government will have offer in order to attract buyers is not yet known but its hard to believe that the Scottish bonds will be seen as low risk and thus interest rates (and the cost of borrowing) is likely to be very high. This means that deficit financing a fiscally independent Scotland to any significant degree and for any protracted period of time will almost certainly prove impossible. So the only alternative would be higher taxes or lower spending or a mixture of both.

This table shows how Scotland and the UK’s net fiscal balance – which is the difference between government revenues and government spending (including investment spending) – evolved between 2009–10 and 2013–14. Figures are reported both excluding and including North Sea oil and gas revenues.

Net fiscal balance (% of GDP), UK and Scotland, 2009–10 to 2013–14
Net fiscal balance2009–102010–112011–122012–132013–14
Scotland
Excluding North Sea revenues-16.8%-16.0%-14.5%-15.1%-12.2%
Including geographic share-10.4%-8.4%-5.9%-9.7%-8.1%
UK
Excluding North Sea revenues-10.8%-9.2%-7.7%-7.7%-6.0%
Including North Sea revenues-10.2%-8.5%-6.9%-7.2%
-5.6%

Excluding North Sea revenues, Scotland’s net fiscal balance was in deficit to the tune of 12.2% of GDP (or £16.4bn) in 2013–14. This represents a fairly sizeable reduction in the onshore (i.e excluding oil revenues) fiscal deficit compared to the previous year, driven by government expenditure falling by 4.2% in real-terms.

Scotland’s onshore deficit is estimated to have fallen by more than that of the UK during 2013–14. This is despite the growth in non-oil revenues being slower in Scotland than the UK as a whole, instead it reflects the fact the fall in government spending is estimated to have been larger in Scotland than in the rest of the UK. So the Scottish (non-oil) deficit has fallen because the Scottish government is spending less – so much for no austerity. Even with that reduction the level of the onshore (non-oil) deficit in Scotland remains around double that for the UK as a whole (6.0% of GDP) because government spending per person is much higher than the UK average, while onshore revenues are a little lower than the UK average.

How do oil revenues change the situation? Allocating a geographic share of North Sea revenues to Scotland unsurprisingly improves its fiscal position, although a large deficit of 8.1% of GDP remains. But these revenues did not help as much in 2013–14 as in earlier years, as declines in oil and gas production took their toll. In the two years between 2011–12 and 2013–14, Scotland’s North Sea revenues fell by more than half from £9.7bn to £4.0bn. This decline in oil revenues has driven Scotland’s overall net fiscal deficit up from 5.9% of GDP in 2011–12 to 8.1% of GDP in deficit in 2013–14.

In contrast, the UK’s overall net fiscal deficit shrank from 6.9% to 5.6% of GDP over the same two-year period. Of course, the decline in North Sea revenues was not helpful to the UK public finances either. But, because most North Sea revenues are estimated to come from the Scottish portion of the North Sea (84% in 2013–14), and because the onshore economy and tax-base of Scotland is much smaller than that of the UK as a whole, a fall in this revenue stream has a much larger impact on Scotland’s fiscal position. Even with a protracted period of low oil prices it is inevitable that oil revenues will continue to decline as the actual level of oil production in the North Sea declines. The recent big drop in global oil prices has not just killed all future investment in North Sea oil production but actually rendered significant proportion of the existing extraction operation uneconomic. North Sea oil and its revenues is in unstoppable decline.

Based on OBR forecasts published in December 2014 Scotland’s onshore (non-oil) budget deficit will continue to decline, from 12.2% of GDP to 10.3% of GDP in 2015–16, driven by growth in the economy and ongoing public spending cuts. However, under this projection, Scotland’s North Sea revenues would fall from around £4.0 billion in 2013–14 to around £1.8 billion in 2015–16. Such a decline in North Sea revenues would offset the projected improvement in the onshore fiscal balance, leaving Scotland’s overall fiscal deficit virtually the same in 2015–16 as in 2013–14 at 8.0% of GDP. In contrast, the UK’s overall fiscal deficit is forecast to decline from 5.6% of GDP to 4.0% of GDP during the same period. In cash terms, Scotland’s fiscal deficit in 2015–16 would be more than twice as high per person (around £2,600) as that in the UK as a whole (around £1,200).

The figures described above represent Scotland’s notional fiscal position if it had to raise or borrow the money needed to pay for government spending undertaken in, or for the benefit of, Scotland. This is not the case at the moment though. Instead, most tax paid in Scotland goes to the UK government, which is responsible for defence, foreign affairs and for paying benefits and state pensions to those in Scotland. It also gives money as a block grant to the Scottish Government to pay for devolved services – like health and education. The size of this grant does not depend on how much tax revenue is raised in Scotland but is based on historic spending in Scotland, adjusted each year using the Barnett formula so that changes in spending broadly match changes in government spending in England. Scotland is therefore insulated from the fiscal implications of volatile North Sea revenues.

All that would change under a system of full fiscal autonomy where all taxes and the vast majority of spending would be devolved to Scotland. Under such a system there would not only not be any transfer from the rest of the UK to Scotland but the Scottish Government would have to make transfers to the UK government to cover things like defence, foreign affairs, and Scotland’s share of the UK’s debt interest payments. In that case the Scottish Government would have to borrow if its spending were greater than its revenues. It would also have to bear the risk of volatile North Sea and other tax revenues.

The projections based on the OBR data suggest that if Scotland were fiscally autonomous in 2015–16, its budget deficit would be around 4.0% of GDP higher than that of the UK as a whole. In cash terms, this is equivalent to a difference of around £6.6 billion. To put this in context, government spending in Scotland to be £68.8 billion in 2015–16, and onshore tax revenues to be £53.7 billion.

The SNP narrative is that full fiscal autonomy would allow the Scottish Government to implement policies that would boost the growth rate of the Scottish economy, thereby improving its fiscal balance. That may be the case although its hard to see how, given the financial uncertainties that full fiscal autonomy would create, Scotland could attract the level of inward investment that would be required to substantially and quickly boost Scottish GDP to such an extent that the gap between revenues and spend could be bridged.


 

The notion of a socialist republic of Scotland led by the SNP resisting the English Tories is superficially attractive for many of those on the left in England despairing at the triumph of the Tories. The problem with the story of a socialist utopia north of the border is that the SNP in government has not in reality delivered a government program that is all that more progressive than in the rest of the UK, and in some areas it is more regressive. Even more challenging is the fact that the SNP’s core political identity is bound up with breaking free from the UK (mostly from England) which if implemented would end the very financial transfers from the UK which funds current public spending in Scotland. The SNP always seek, often very cleverly and effectively, to avoid the simple basic truth which is that a fiscally independent Scotland would be a poorer place with a smaller public sector and much reduced public services.

If I was Cameron I would give the SNP what it is asking for – full fiscal autonomy – and then just stand back and watch what happens.

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