Jim Gallagher: A social union benefits all

Scotlands population is ageing faster than the rest of the UK, but we benefit from a shared welfare system. Picture: Neil Hanna

We heard different speeches from radically different politicians on successive days this week. Chancellor George Osborne argued that the Union promotes economic growth, while former prime minister Gordon Brown made a passionate case that it’s an engine of social justice. Can they both be right?

Osborne’s weighty Treasury macro-economic paper makes the same point I made in these pages last week that deep economic integration is good for trade and jobs. A single currency means an integrated fiscal system, too, as the eurozone is finding out. The Treasury’s analysis is thorough and compelling. Brown would agree, I’m sure, but he is pursuing its social consequences.

An economic union as deep as Britain’s, lasting more than 300 years, has profound social consequences. People develop family and other connections across the UK. More than 800,000 people born in Scotland live in England today; immeasurably more have relatives and friends there. As a result, people feel they belong together. We often remark on the strength of Scottish identity, but two-thirds of Scots also feel British.

An integrated fiscal system isn’t just about economic management. Pooling tax receipts to support public expenditure across the country means spending is determined by need, not by where the tax money comes from. So, rich parts of the country contribute to benefits and decent public services in poorer places. Need, not geography, has been the watchword of UK public spending for more than 100 years.

Ever since the poor laws were abolished, it’s been British fiscal policy that spending is not determined by local taxable capacity. Pensions, health and welfare services are supported by general taxation, levied across the country according to ability to pay, not by local resources like poor law ratepayers. This was a campaign of the Left. Trade unions argued for national unemployment assistance. The 1945 Labour government created a National Health Service, not local authority hospitals funded by ratepayers and patient fees. But spending according to need is now a principle widely accepted across the political spectrum. Sharing goes with belonging.

Benefits are any government’s largest single budget, and the clearest example of the principle. How much is spent in different places on pensions and benefits is determined solely by individual entitlements. So, not only do benefits help to stabilise economic activity across cycles, they are also the major geographical redistributor of resources across the UK. Money follows need. This can be seen in the table (left) showing regional expenditure on social protection.

Patterns of spending on services are, it turns out, quite closely correlated with benefits. We take this entirely for granted, but it does not happen everywhere. It contrasts markedly with the European Union. Despite a common citizenship, and a common eurozone currency, social solidarity is much more limited. German taxpayers do not pay Greek pensions, and northern European economies simply will not support public services in poorer southern countries. In the UK, such transfers are taken for granted; people are happy to share with those with whom they share a common social citizenship.

From Scotland’s perspective, there is a pragmatic argument for such a union. The full resources of the UK economy support benefits and public services, irrespective of Scotland’s fiscal position.

Scotland’s fiscal position is now much more widely understood. Scottish onshore tax revenues are just below the UK average; but spending is more than 10 per cent per head higher. Just now the difference could more or less be made up if Scotland were to spend, rather than save, all its geographical share of North Sea oil taxes. An independent Scotland would need an oil fund to spread them over a longer period. The Treasury’s analysis paper does the sums on that relentlessly. If we just spend all the oil money to maintain present levels of benefits, we will eventually fall over a fiscal cliff.

I hear the yells of complaint already, so let me be clear: Scotland is not just some poor dependent. Quite the opposite: Scotland contributes resources as well as benefiting; putting oil and other revenues to the common pool and drawing from that pool to support benefits and public services.

Over the years, Scotland has put a lot in. Within the UK, Scotland can continue to rely on those common resources. Being able to pool resources across a wider community for the long term makes good sense.

Brown’s point is that there is a principled case, too. This isn’t just practicality; it’s about what’s right. People in need should benefit wherever they are in the UK because they share citizenship. So, we have a single system of unemployment assistance, a single old-age pension across the United Kingdom, and so on. We share with those with whom we belong.

Nationalists make a contrary argument: social solidarity should be confined to Scotland, and only Scotland’s poor people should have a claim on Scottish resources for support. This fails the pragmatic test of long-term sustainability, but it is also weak on moral grounds: do we turn our backs on poor people just because they live in England or Wales?

A social union pools risks as well as resources. National insurance contributions make this explicit. In insurance, the wider the risk pool, the more secure the benefits. UK national insurance is the biggest insurance scheme of all. Being in a bigger insurance scheme matters. Take old-age pensions. The good news that we are all likely to live longer creates pressures on the payment of pensions. As the second table shows, Scotland is getting older quicker than the rest of the UK, so the pressure here will be even greater. In UK national insurance, as resources are pooled, risks like this are shared, too.

So, we can see the connections between the different aspects of union – and the Brown and Osborne arguments. Political union creates the conditions for an integrated economy, with shared tax and public spending. Together, over time, these allow a common social citizenship, and the mutual solidarity of a welfare state.

The union of 1707 was political and economic. It was the 20th century that built a shared social citizenship on to an integrated economy; creating social solidarity so that the risks of everyday life are pooled, and managed from a common pot of shared resources. Having not just a market but also a social market will be equally important in the 21st century.

Independence would break the political base of this economic and social union. Brown’s intriguing suggestion was that, instead, it should be strengthened by making the social solidarity of pooling resources and risks not just what the UK has always done, but also a constitutional requirement, a kind of social justice between nations.

Which takes us into what political union means, how it has developed, and how it might change. That’s a whole other article.

• Jim Gallagher was director-general for devolution in the UK government, senior adviser to the prime minister on devolution strategy (2007-10) and secretary of the Calman Commission