Gavin McCrone: Do sums add up for IDS?

THE rising problem of financing government support must not be lost in the latest spat over the value of North Sea oil revenues, writes Gavin McCrone.

The recent spat between UK Work and Pensions Secretary Iain Duncan Smith and First Minister Alex Salmond over the financial viability of an independent Scotland must have left many people confused. When statistics are used to argue opposing points of view, it only serves to increase the public’s distrust of politicians as it would appear that one or other of them must be wrong. However, this is not so: there was a valid point in what both were saying, though it was presented in confrontational terms.

Government expenditure on welfare is the largest single item in the budget of the UK and also in Scotland, where it cost almost £21 billion in 2010-11, 39.5 per cent of all identifiable public expenditure, compared with £19bn for health and education combined (see table). But it is not a devolved subject, responsibility being reserved to Westminster, and rates of state pension and benefits are the same throughout the UK. Given the huge amounts involved, how this money is spent matters a great deal, especially when public expenditure throughout the UK is being cut.

It was Duncan Smith’s apparent linking of this to North Sea revenues that caused the furore. Actually, there is no reference to North Sea oil revenues in the text of his Glasgow speech. What he said about that must have been in his press briefing and, as Salmond said, it was not relevant and certainly unwise, as it deflected attention from the more important points he had to make.

Not having heard Duncan Smith, it is impossible to know if he was suggesting that, in an independent Scotland, welfare would be financed from these revenues. If so, that was clearly wrong and Salmond was right to say it was absurd.

I suspect that what he was trying to point out was simply that welfare expenditure is very large in both Scotland and the UK, and much larger than the revenue from North Sea oil.

The serious point is that welfare expenditure per head in Scotland is above the UK average – by 6 per cent according to Duncan Smith (I get 8 per cent using the figures in the latest edition of the Scottish Government’s publication Government Expenditure and Revenue Scotland 2010-11). The other point Duncan Smith made is that because the Scottish population is growing more slowly than that of the UK as a whole, the proportion of the population over 65 is growing faster, which would put greater pressure on expenditure on pensions, health and social care in future than for the UK. He then went on to advocate the benefit of the UK remaining united, arguing it would have a broader, more sustainable tax base to meet these challenges.

Salmond, on the other hand, argues that Scotland is in a better financial position than the UK as a whole and, therefore, is better placed to meet the requirements of public expenditure. This is true at present, but only if 90.5 per cent – its geographical share – of revenue from North Sea oil taxation is added to Scotland’s tax revenue. Moreover, even with this included, Scotland would still have a deficit of 
7.4 per cent of GDP, compared with 9.2 per cent for the UK, according to the Scottish Government’s own figures, and both of these figures are unsustainably high.

Without North Sea revenues, of course, the Scottish deficit would be much higher simply because total public expenditure (including a share of defence and interest on the national debt) is some 11 per cent higher for Scotland than comparable figures for the UK.

At present, the North Sea is treated as a separate region for statistical purposes and not part of either Scotland or England, though it is included in the UK. The precise share that would become part of Scotland would be a matter for the independence negotiations, along with the share of the national debt and other matters, although, under international rules, something around 90 per cent seems a likely outcome.

Because welfare is such a large part of the government’s total expenditure, there is an obvious need to restrain it and to make it as cost-effective as possible in a time of financial difficulty. Under present arrangements, there is not only a bewildering number of benefits but also a serious poverty trap, which results in those taking low-paid jobs losing as much or more in benefit as they gain from earnings.

This has been a problem for years and it can discourage those on benefit from taking jobs. Everyone has heard anecdotal evidence, whether reliable or not, suggesting that there are people on benefit who could be working. I have never been able to understand why some politicians have so strongly argued the case for incentives for the better off, such as businessmen and bankers, while at the same time ignoring the need for such incentives for poorer people.

For these reasons, there was a need for reform and Duncan Smith’s Universal Credit is intended to achieve this. But for such a reform to be acceptable, the gain must be clearly seen to outweigh the loss from the resulting upheaval. It would be much more easily done when the economy is buoyant than at a time when few jobs are available and the Treasury is determined to achieve savings, no matter with what resulting hardship.

So far, the indications are not good. People on disability living allowance have simply had their benefit stopped and been made to reapply, no matter how serious their disability. The result is to cause great distress, even if benefit is eventually restored, as was shown recently when a blind man with heart trouble and diabetes gave evidence to the Scottish Parliament. As Martin Sime, chief executive of the Scottish Council for Voluntary Organisations, wrote recently in this paper, the effect on many poorer people is likely to push them to despair.

Those who argue for increased devolution, such as devo-max, would presumably like to see the Scottish Government taking responsibility for welfare and social security. This would greatly increase the expenditure for which it was responsible. If Scotland is really a more caring society, then there may well be a case for this, but one has to ask whether it would be acceptable to have different standards of welfare provision and state pensions in different parts of the UK. If these differences were significant, there would be serious objections and cases of people trying to move where they could get the most generous treatment.

With independence, the Scottish Government and parliament would, of course, have this responsibility, like any other independent state. But the government would also have to be prepared for the problem identified by Duncan Smith, not only that welfare payments cost rather more in public expenditure per head than the UK average, but that the burden on the taxpayer is likely to increase at a faster rate because of Scotland’s population structure.

All advanced countries in varying degree face the problem of how to pay for an increasing number of people who are retired and of pensionable age. Thanks to medical science, people are living much longer than a generation ago, and the low rate of population growth means that there are not so many young people of working age to support them.

The only relevance of revenues from the North Sea to this is that they would presumably be a major source of tax revenue to Scotland. However, they are volatile, judging by past experience, and are also likely to decline as North Sea oil is now past peak output. No doubt all this can be handled, but it is a difficult prospect and likely to result in pressure to raise taxes or cut public expenditure, unless by some means the growth of economy and hence of tax revenue can be greatly improved.