FOR THE GOOD OF SCOTLAND

Paying Our Fair Share - and More!

The first in a series of three papers published by the Scottish National Party to explain the economic case for Independence. Return to other papers

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Introduction

The debate about Scotland's constitutional future is inextricably linked to the arguments about her economic well-being. It is essential that the choices made by Scots at the next election are informed by a quality debate based on quality research and argument.

This autumn, the Scottish National Party are publishing a series of papers to outline our contribution to this fundamental debate. Entitled "For the Good of Scotland", these papers will explain the natural strength of the Scottish economy, and the advantages - economic and social - which will be delivered by Independence.

In the first of these papers: "Paying Our Fair Share - and More!", the SNP put to rest the myth that Scotland is somehow subsidised within the United Kingdom. Instead, in the current financial year (1995/96) the SNP establish - using the most comprehensive breakdown available of revenue and expenditure - that Scotland generates an estimated surplus of £200 million relative to the UK as a whole.

Interesting though this financial exercise is, it is not the nub of the economic argument about constitutional change. The real issues are what benefits would accrue to Scotland by a process of political Independence, and what could an economic programme devised for an independent Scotland realistically achieve. It is to these "dynamic" economic matters that the next two papers in this series will turn.

Contrary to the scaremongering of our political opponents, the SNP have set out a powerful case demonstrating that Independence is the key to generating a new prosperity for Scotland.

Alex Salmond MP National Convener Scottish National Party

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Summary Points

Despite the effect of discretionary public expenditure in favour of the south of England, Scotland's economy has still been able to generate a budget surplus relative to the UK as a whole.

Scotland more than pays her way within the United Kingdom. In 1995/96, the Scottish budget surplus is estimated to be £200 million:

					UK		Scotland

(£ billion)

Total Revenue				278.9		27.2	(9.8%)
Total Expenditure			302.0		29.0	(9.6%)

General government
 borrowing requirement			23.1		1.8	(7.8%)
Public corporations' market
 and overseas borrowing			1.6		0.1	(8.8%)
Public sector borrowing
 requirement [Nov 94 estimate]		21.5		1.7	(7.9%)
Scotland's pro-rata share
 of the UK's PSBR					1.9	(8.8%)
Scotland's budget surplus					+0.2

Public sector borrowing
 requirement (June 95 estimate]		23.6		1.9	(7.9%)
Scotland's pro-rata share
 of the UK's PSBR					2.1	(8.8%)
Scotland's budget surplus					+0.2
The SNP analysis is the only attempt to calculate the position of Scotland's public finances for the current financial year.

Other studies have failed to take into account the strengthened relative position of the Scottish economy in recent years. For example, the most recent official figures show Scotland contributing an 8.8 per cent pro-rata share of socialsecurity receipts, compared to 8.4 per cent in the previous year.

The statistical base for this analysis has been the Government's Red Book (Financial Statement and Budget Report, November 1994), and the House of Commons Library (Economic Policy and Statistics Section, ref: 95/3/89EP/RJT, 14 March 1995).

Recent studies at Edinburgh University have shown that Scotland's resource base is a vital strength in delivering material improvements in the standard of living in Scotland.

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PAYING OUR FAIR SHARE - AND MORE!
Scottish Budget Surplus Relative to the UK- 1995/96

This analysis represents the only attempt to calculate the position of Scotland's public sector finances for the current financial year, i.e. 1995/96. It cannot be compared directly, therefore, to other analyses which refer to other financial years.

The method adopted to determine the budgetary balance of the Scottish economy is to calculate the outturn figures for the most recent financial year for which figures are available, i.e. 1993/94. These detail the Scottish percentages of UK expenditure and income items.

In order to provide as up-to-date an analysis as possible, these percentages have been applied to the most recent financial year for which UK figures are available in the appropriate format. For the receipts side, this is available from the Government's Budget Red Book (Financial Statement and Budget Report, Treasury, November 1994). For the expenditure side, this has been provided by the House of Commons Library (Economic Policy and Statistics Section,ref: 95/3/89EP/RJT,14 March 1995).

For each item of income and expenditure, the most up-to-date sources have been employed, with appropriate explanatory notes.

In order to secure specific figures for "identifiable expenditure", "other identified expenditure", and "other expenditure" in 1995/96 at UK level, the Treasury figure for total spending was allocated according to percentage breakdowns which applied in previous years. The analysis shows that Scotland more than pays her way within the United Kingdom.

Our analysis shows that Scotland contributes more than her pro-rata share in terms of exchequer receipts. Interestingly, this is similar to a recent analysis conducted by the House of Commons Library. As well as oil revenues, Scotland contributes more than her fair share in business rates, in certain expenditure-based taxes - such as spirits and tobacco duties - and also within the local authority sector, which reflects the larger public sector in Scotland than in England.

On the spending side, the focus of attention tends to be identifiable expenditure, while defence and other unidentified spending - where Scotland gets less than her fair share - are not properly evaluated. The main reason why identified expenditure is higher in Scotland is a simple geographical one - Scotland contains 8.8 per cent of the UK's population, but accounts for one-third of the land mass. In other words, among the more sparse Scottish population, there are fewer economies of scale to be made in the provision of health, housing and education services.

Where governments can exercise political choice in the allocation of resources - instead of simply building the geography of the UK into spending patterns - it is clear that British governments have exercised their choice in favour of London and the south of England. Defence expenditure, the disposition of the civil service, transport subsidies, etc, all show enormous bias towards the south of England.

It is a tribute to the resilience of the Scottish economy that - even with the effect of discretionary public expenditure in favour of the south of England, and the application of inappropriate economic policies by successive London governments - Scotland is still able to generate a budget surplus relative to the UK as a whole.

The normal experience of "regional" economies - as Scotland is reduced to within the UK - is to be in a relatively weak fiscal position, due to the effect of discretionary expenditure being focused on the "metropolis". For example, the concentration of defence procurement expenditure, the Foreign Office and other civil service functions in London the south of England has a considerable economic impact there, which Scotland loses out on because of our "regional" status. Often, the largest impact lies not in the public sector decisions themselves, but in the process of public sector decisions affecting private sector location.

However, the Scottish economy has proved robust. For example, Scotland weathered the recent recession better than the UK as a whole, unemployment is now marginally lower than the UK average, and average wages are among the highest outside the south of England. Indeed, a recent report by the Institute of Management and the consultancy Remuneration Economics found that company directors in Scotland are the highest paid in the UK, and that the salaries of managers in Scotland are exceeded only in inner London.

North Sea revenues are also rising steadily, from £1.2billion in 1993/94, to £2.2billion in 1995/96, and estimated to remain at £2.7billion per annum from 1996/97 towards the end of the century.

The SNP do not regard Scotland's budgetary balance as being the main issue in the debate over the economics of Independence. It is a fast-moving - if important - detail for any economy, including that of the UK as a whole. For example, the UK had a surplus of £14.5 billion in 1988/89, deteriorating to a deficit of nearly £50billion in 1993/94, with a projected balance forecast towards the end of the century.

Of far greater importance is the performance of any economy - for that is what determines the static budgetary position - and here the prospects for an independent Scotland are exceptionally bright.

For example, the first report published by Edinburgh University's Centre for Human Ecology - Scotland's Political Options - concluded that an independent Scotland would offer, "the potential for a higher material standard of living and more jobs. " And their second report - Searching for a Sustainable Scotland - concluded that Scottish manufacturing output could grow by 50 per cent more than if Scotland remained in the UK, and the material standard of living would be significantly higher by 2019 than in a UK scenario (Rich prospects await nationhood, Scotland on Sunday, 23 April 1995).

It is towards this "dynamic" aspect of the economics of Independence - i.e. what the economy can achieve, rather than where it is in budgetary terms at any particular point in time - that the Party will be publishing information on in due course.

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Receipts (£ billion)
					UK		Scotland

Inland Revenue				
Income tax				70.1		6.2	(8.8%)
Oil & gas revenues			2.2		2.0	(90.0%)
Non-oil corporation tax			25.4		2.2	(8.8%)
Capital gains tax			0.8		0.1	(8.8%)
Inheritance tax				1.5		0.1	(8.8%)
Stamp duties				2.0		0.2	(8.8%)

Customs and Excise
VAT					49.0		4.2	(8.6%)
Hydrocarbon oil duties			15.6		1.4	(8.8%)
Tobacco duties				7.0		0.8	(12.0%)
Spirits duties				1.7		0.3	(16.5%)
Other alcohol duties			3.8		0.3	(7.3%)
Betting & gaming duties			1.2		0.1	(8.9%)
Customs duties & agric. levies		2.3		0.2	(8.8%)
Air passenger duty &
Insurance premium tax			1.0		0.1	(8.8%)

Vehicle excise duties			4.0		0.3	(7.6%)
Business rates				13.8		1.3	(9.4%)
Other taxes and royalties		5.8		0.5	(8.7%)

Social security receipts		44.5 		3.9	(8.8%)
Council tax				9.2		0.8	(8.8%)
Interest & dividends			4.6		0.4	(8.8%)
LA housing rents			5.7		0.6	(10.9%)
Other receipts				7.6		1.2	(15.8%)

Total					278.9		27.2	(9.8%)
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Expenditure (£ billion)

Identifiable expenditure		224.2		23.1	(10.3%)
Defence					21.7		1.7	(8.0%)
Other unidentified expenditure		23.6		1.2	(5.0%)
LA debt interest other than to
 central government			0.7		0.2	(34.5%)
Central government debt interest	24.5		2.2	(8.8%)
Other expenditure			10.3		0.9	(8.8%)
Privatisation receipts			-3.0		-0.3	(8.8%)

Total					302.0		29.0	(9.6%)



					UK		Scotland

General government
borrowing requirement			23.1		1.8	(7.8%)
In order to secure a figure for the public sector borrowing requirement, it is necessary to subtract a sum for public corporations' market and overseas borrowing. At UK level, this is equivalent to £1.6 billion in 1995/ 96, of which a pro-rata Scottish share is £140 million. This gives PSBR figures for the UK and Scotland as follows:

Public sector
borrowing requirement			21.5		1.7	(7.9%)

Scotland's pro-rata share
of the UK's PSBR					1.9	(8.8%)

Scotland's budget surplus				+0.2
The above statistics are based on the public sector borrowing requirement forecast at the time of last November's Budget, when the most extensive statistical information was available. Since then, the Treasury's Summer Economic Forecast - published on 28 June - increased the expected UK PSBR from £21.5billion to £23.6billion.

In order to bring the Scottish analysis into line with this deterioration in the UK's position, the above conclusion can be applied to the new UK figures:

Public sector
borrowing requirement			23.6		1.9	(7.9%)

Scotland's pro-rata share
of the UK's PSBR					2.1	(8.8%)

Scotland's budget surplus				+0.2
As the above analysis shows, the Scottish economy more than pays its way within the United Kingdom. Scotland is carrying a smaller share of the UK's PSBR than our pro-rata position. In other words, relative to the United Kingdom as a whole, Scotland has a budget surplus of around £200 million in 1995/96.

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NOTES

RECEIPTS

Income Tax

The basis for allocation of Income Tax represents the proportion of UK Income Tax payers in Scotland (8.9 per cent in the Inland Revenue Statistics 1994), adjusted for average incomes using 99.1 per cent for Scotland relative to the UK for total personal incomes, indicated in the 1994 Regional Trends. This gives Scotland 8.8 per cent of the UK Income Tax yield, which equals a Scottish yield of £6.17 billion.

In addition to this total, it is necessary to add the subsidy element on specific tax reliefs which Scotland makes to the UK as a whole. Still important in this regard is Mortgage Interest Relief. In 1995/ 96, MIRAS will be worth £2.8 billion, of which Scotland's share is 6.5 per cent - £182 million. On the basis that Scotland should receive £246 million, i.e. our pro-rata share, Scotland subsidises the rest of the UK by £64 million in 1995/96.

The total estimated tax take is thus £6.23 billion.

In the most recent Inland Revenue statistics, Scotland is allocated 7.9 per cent of Income Tax receipts for 1992/93, which with the effect of MIRAS is increased to 8.0 per cent. However, the SNP's figures refer to 1995/96, and there is no doubt that Scotland's share of Income Tax will have risen further over the past few years, due to the differential effects of the recession.

Historic Inland Revenue figures themselves show this. For example, for 1991/92, Scotland is allocated just 7.5 per cent of Income Tax receipts, a figure which increased significantly within the space of a single financial year to 7.9 per cent (which itself was three years ago).

A further difficulty with the Inland Revenue figures is that they are based upon a sample, as opposed to the above method which incorporates the total number of Income Tax payers.

Oil & Gas Revenues

90 per cent of the UK figure is allocated to Scotland, based upon the 1968 Continental Shelf (Jurisdictional) Order, which places the northern and central basins of the North Sea under the jurisdiction of Scots Law.

Non-oil Corporation Tax

Corporation Tax is levied on the basis of the location of companies' headquarters, which are disproportionately found in London. In an attempt to measure the tax related to profits accruing in Scotland, Scotland's share of non-North Sea profits as estimated in the 1993 Regional Accounts has been used.

Capital Gains Tax

Share of personal income in 1993; Economic Trends, May 1995. Inheritance Tax Share of personal income in 1993; Economic Trends, May 1995.

Stamp Duties

Pro-rata share.

VAT

Share of appropriate expenditure in 1993; Regional Accounts dataset. Pro-rata share. Scotland's share of traffic on major roads in 1994 was 8.6 per cent, but this would be an inappropriate measurement to take for Scotland's tax contribution. Such roads exist in southern England to a greater extent than in Scotland. Since Scotland's road network covers one-third of the land mass of Great Britain, a pro-rata share of hydrocarbon oil duties is a conservative estimate [Road Traffic Statistics: Great Britain, Department of Transport, 1995; Transport Statistics: Northern Ireland, Department of Environment, 1993].

Tobacco Duties

Share of appropriate expenditure in 1993; Regional Accounts dataset.

Spirit Duties

Share of appropriate expenditure in 1993; Regional Accounts dataset.

Other Alcohol Duties

Share of appropriate expenditure in 1993; Regional Accounts dataset.

Betting and Gaming Duties

Share of appropriate expenditure in 1993; Regional Accounts dataset.

Customs Duties and Agricultural Levies

Pro-rata share. While many goods destined for the Scottish market may arrive via ports located in England, this does not alter the fact that they are imports into the Scottish economy, and they should be treated as such in exchequer terms.

Air Passenger Duty

Pro-rata share.

Insurance Premium Tax

Pro-rata share.

Vehicle Excise Duties

Actual share in 1993/94, as published.

Business Rates

Actual share in 1993/94, as published.

Other Taxes and Royalties

Share of GDP in 1993, excluding the continental shelf; Economic Trends, December 1994.

Social Security Receipts

Share from 1993 Regional Accounts dataset.

Council Tax

Actual share in 1993/94, as published.

Interest & Dividends

Pro-rata share.

Local Authority Housing Rents

Council rents in the national accounts are recorded as the surplus on the housing revenue account before providing for interest and depreciation. The actual figure for Scotland shown in the table is based upon the Scottish percentage of the UK figure for 1993/94.

Other Receipts

Pro-rata share, except for loan charges paid to the Public Works Loan Board. House of Commons Library figures show that local authorities in Scotland carry higher levels of loan charges than their counterparts in England and Wales do. This is partly due to the different structures, including the fact that water and sewerage are in the Scottish public sector, while they are private services in England and Wales.

Since higher local authority debt interest to the private sector in Scotland is taken into account on the expenditure side, it is necessary to allow for the public sector position in the receipts side.

In 1993/94, loan charges per head of population was approximately £96 in England, £100 in Wales, and £234 in Scotland. Thus loan charges were some £125 per head higher in Scotland than the English/Welsh/Scottish average, which equals £640 million in Scotland as a whole. Some 85 per cent of these charges are paid to the PWLB, which means that an additional £540 million should be added to the receipts side for Scotland (House of Commons Library, Social and General Statistics Section, 10 February 1995, 3 March 1995, 6 March 1995).

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EXPENDITURE

Identifiable Expenditure

Actual share in 1993/94, as published.

Defence

Scotland contributes far more money to the UK's defence budget than is actually spent in Scotland. House of Commons Library figures suggest that less than 8 per cent of the UK's defence budget in spent in Scotland, which equals expenditure of £1.7 billion (House of Commons Library, Social and General Statistics Section, 21 July 1994).

Other Unidentified Expenditure

For 1995/96, nearly £24 billion is accounted for by non-defence unidentified expenditure. Over one-third of this is described as "miscellaneous", and includes activities required for the general maintenance of government such as tax collection, registration of the population and contributions to the European Communities. In effect, this means that the cash is swallowed up by the Customs and Excise, the Board of the Inland Revenue, and the Office of Population Censuses and Surveys, most of whose operations are located in the south east of England.

Another £3.5 billion goes towards the budget of the Foreign Office, which is almost exclusively headquartered in London and the south east of England. £2 billion is spent on roads and transport, which again is skewed in favour of projects in the south of England.

Allowing for the above, it is estimated that only some 5.0 per cent of unidentified expenditure is actually spent in Scotland. It is sometimes argued that, because an independent Scotland would have to replicate this unidentified expenditure, a pro-rata share of it should be included in a static budget analysis. But this is to miss the point entirely, and confuses static and dynamic budget analyses.

If Scotland actually received a fair share of defence and other unidentified expenditure within the Union, then this would have an economic impact in terms of the receipts side of the balance sheet. For example, the fact that the top 50,000 civil servants in the UK are based in and around London boosts the London economy, and has a certain impact in terms of taxation, both income and expenditure based.

The same would happen in Scotland if this element of public expenditure was increased in Scotland post-Independence, i.e. in terms of a dynamic budget programme. However, for a static budget analysis, it is valid to take into account only the actual expenditure made and the economic impact of that.

Local Authority Debt Interest Other than to Central Government Based upon information provided by the Scottish Office, giving a figure of £155 million for 1993/94.

Central Government Debt Interest

Pro-rata share.

Other Expenditure

This heading includes a sum necessary to reconcile the territorial analysis with the published totals for general government expenditure on services. The sum allocated to Scotland is based on population share. When the Scottish Office attempted to estimate public expenditure in Scotland, they analysed the components of other expenditure. In only one case - capital consumption - did Scotland's share diverge significantly from the population share. However, since an equivalent amount of capital consumption is included in other receipts (and hence nets out) a separate figure has not been incorporated.

Privatisation Receipts

Pro-rata share.

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