Professor Andrew Hughes Hallett explains why Scotland subsidises the UK, not the other way round

Professor Andrew Hughes Hallett  is a world class economist who divides his time between George Mason University in Virginia and St Andrews. He spoke to Newsweek Scotland today about the implications of the Comprehensive Spending Review. He carefully explained how Scotland is actually in surplus, how the calculations on UK spending misrepresent Scotland and why the bank bail out is not the disaster some would have us believe. Forget what you have been told. When the sums are done Scotland actually sents a small subsidy to England, not the other way around. 

You can hear him here on Newsweek Scotland. When I have more time I may transcribe his interview, it really is that good!

Comments

[Andydavies]

I think the people who want Scottish independence need to get real and represent their case honestly.

All the oil in the North Sea doesn't belong to Scotland as the border isn't at 90 degrees, it actually goes off at a NE angle.

The cost of bailing out the reckless Scottish banks would have to be met by the Scottish taxpayer not the rest of the UK.

How much does Scotland's separate legal system increase costs for those north of the border (it's completely non-sensicle in the modern world)

If Scotland wants to be independent then so be it but those for need to present an honest case and this isn't one.

Andy

(a welshman who believes in the UK, and actually thinks devolution is pretty stupid)

[Seamas Orr]

Some vitally important facts to be thrown in Labour's face in the lead up to May 2011...

Newsweek Scotland, Saturday 23rd October 2010
Presented by Derek Bateman. Some extracts

Interview with Andrew Hughes Hallett, Professor of Economics at the University of St. Andrews and George Mason University (Virginia).

Derek Bateman (DB): “...that brings us nicely to Mr. Swinney who says all these cuts are the cost of the union and we can no longer afford our membership of club Britania. The implication is that our natural resources are being bled to swell around the coffers of the Treasury and the firm bite of austerity can be avoided via independence. Is there an election looming? Well we thought we would test his treaties, not with politicians but with one of our foremost academics, Sir Andrew Hughes Hallett, who is a professor of economics at both the University of St. Andrews and George Mason University in Virginia. He’s a proponent of fiscal automony for Scotland, he went into our Washington Studio.”

Andrew Hughes Hallett (AHH): “It’s really not an issue of independence as such, as it’s the ability to use and spend your tax powers yourself. Which would make the difference, whether that’s in the context of independence or not is neither here nor there.”
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DB: “But would you not need to be an independent state in order to get those powers?”

AHH: “If you want to get into the nitty-gritty... the usual perception is that Scotland spends something like 20% more on public services per head than the UK average, now there is nothing wrong with that if you can raise the money. Those numbers are very misleading because the spending in that part is what is spent on behalf of Scotland but not necessarily in Scotland. The estimates of Scotland’s share, that’s contributions to defence is £2.8billion whereas roughly £2.0billion are actually paid out in Scotland. So THERE IS AN IMPLICIT SUBSIDY GOING SOUTH in that sense and you can think of plenty more examples, I don’t want to get into North Sea Oil – which is an obvious one. But things to do with the crown agents who take fees for electricity generation and give it to the treasury, there use to be a case of landing fees. The foreign exchange earnings are, the tax revenues are all accredited to the London Government and so on. And so when you get down to it, on the current account for the last five years at least, maybe longer, Scotland’s had a CURRENT ACCOUNT SURPLUS – which is currently, according to the National Accounts of Scotland is £1.3 BILLION.”
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DB: “Can you actually say that Scotland would definitely be better off or is there a lot of suspicion there?”

AHH: “No, you can DEFINATELY SAY THAT WE WOULD BE BETTER OFF in terms of revenue. It would depend on what they do with the revenue when they get it but that’s another issue of course.”
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DB: “Economically, not politically, does John Swinney have a case to make when he says that ‘Scotland can’t afford the union’?”

AHH: “Well, I would’ve thought he has a case. I mean you would probably think the same if it was your private income because at the moment on the current account there is a subsidy going to London.”
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DB: “We hear from critics , well obviously unionists, most of them in London about how that it goes the other way, Scotland is subsidised. If that was the case then, why would the treasury want to hang on to an area of the country that was being subsidised?”

AHH: “...that’s not what the numbers show, that just the perception. If you actually look at the numbers, I quoted them for defence earlier , the distinction is what is said to be spent on Scotland’s behalf but is not actually spent in Scotland.”
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DB: “Is another way of putting this is that the treasury knows when it is on to a good thing?”

AHH: “Well indeed, yes. I would’ve thought that if was in the Treasury I wouldn't want to be surrendering this subsidy. It’s not huge from a UK’s perspective .... but I wouldn’t want to be surrendering it because it is helping [the Treasury].”
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DB: "Is there a big spanner in the works though. As the previous secretary of state Jim Murphy was keen to point out; the bail out of the banks would have crippled the scottish budget."

AHH: "Those numbers I was quoting have a calculation of what Scotland's share of the bail out of the banks is, and that's incorporated in that number; the surplus of £1.3 billion. You can have an argument as to whether the Treasury's got those numbers right...It would appear that Scotland could survive that [the bail-out]. One of the reasons of course is bailing out the banks, and of course two of the biggest banks here were scottish banks, but they had substantial acivities in England as well as elsewhere and therefore the burden of bailing them out would have had to have been shared in any case. There are plenty of precedencts for that. The Dutch/French banks and the Belgian/French banks had to be bailed out jointly by the responsible authorities.

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DB: “Mr Swinney is making this case about the union, would something like the Calman proposals go anywhere near providing what you are outlining there?”

AHH: “They would make a VERY SMALL START. We can have a very long discussion on this but the Calman proposals are actually UNWORKABLE because they assume you have got information which you don’t have, so you have to forecast into the future what tax revenues would be to make it work and secondly, and this is actually an important point, they are crucially sensitive to changes in the, lets call it for the sake of discussion, the english tax system. That's to say if you make a change, as they are doing at the moment, in the thresholds of what tax has to be paid and you raise them .. this would lower revenues going to scotland. in the rest of the uk, they'd be compensated for that loss of revenue by raisingtax rates on national insurance and capital gains but Scotland can't raise that so can't compensate, so scotland would lose out on that regime so that resime [Calman] has to be changed.... The Treasury has agreed that the proposals have to be modified, they don't work as they stand. If you made them work it would just be a very small step in that direction. The other very big problem is that income tax revenues as we've discovered only too painfully in the last fe years are very variable. Of course at the UK level when tax levels go down they borrow. But if Scotland was doing it they can't borrow. So there would be a great deal of 'dislocation' if you operated the system [Calman] as it stands at the moment.

[Manny]

I live in Luxembourg and what he says about the banks is something I've said all along (and I'm not sure why the Scottish Government didn't point it out).
Dexia and Fortis are high street banks in Benelux and France and when they had problems, it did not fall upon one particular country to bail them out but instead each of the countries bailed out the operations in their own country.
In the case of HBOS and RBS, they actually have more branches in England than in Scotland and the biggest share of the bailout would have fell to the English Government if each of the UK countries were independent.
Like I say, I don't know why the Scottish Government didn't point this out at the time but that's certainly how it worked over here.

[el el]

Discrimination can easily distort intention.

[Tearlach]

I just loved the offhand way he conducted the interview, hey of course Scotland's in surplus in its current account, and yea we would have manged to bail out our portions of RBS and HBoS without any real long term impact, and of course we are subsiding the UK current account....

But of course your blog is the first one that I find that mentions the interview, despite Newsweek Scotland being the only half decent political review program left on Radio Scotland (don't get me started on Shareen on Sunday)

The fact I thought most interesting (as someone who lives not far from Kinloss and Lossie, at least as the crow flies) was his assertion that Scotland pays about £8B into the UK defense budget, and only gets about £2B back in "regional" expenditure.

Makes you think a little when people like Fraser Nelson in the Spectator blog that the folk of Moray are getting punished for voting SNP.

[el el]

Every Scot should hear this.