Estimating Scotland’s spending needs

This blog describes recent research which estimates Scotland’s relative spending need for devolved public services to be about 6% higher than for the UK as a whole.

It has long been recognised that Scotland spends more per capita on devolved public services than is spent in the UK as a whole on equivalent services. The latest IFS report indicates that spending per person in Scotland was around 17% higher on these services than in the UK as a whole. But these figures give no sense of what Scotland needs to spend relative to rUK in order to attain a similar level and quality of public services. Instead, Scotland’s spending is a function of its Barnett-formula determined grant allocation, which bears no relation to spending need.

Can we estimate Scotland’s spending need for public services? It is not possible to estimate spending needs in ‘absolute’ terms; this is a political decision about which services should be publically funded and to what degree. But it is possible to estimate relative spending needs, in other words how much Scotland would need to spend to provide a similar level of a public service as in the UK as a whole, given Scotland’s specific demographic, socio-economic and physical (e.g. rurality) characteristics.

Governments regularly make judgements about the relative spending needs of different areas (local authorities, health boards etc.). The Scottish Government uses a spending needs formula to allocate resources to the 14 Scottish Health Boards. This formula allocates resources to Health Boards based on their demographic structure, levels of deprivation and illness among their population, and the additional costs associated with rurality and population sparsity. The Scottish Government also uses a formula to allocate education resources to local authorities. This formula assesses spending need based on the number of pupils in each LA, the proportion of pupils with special educational needs, and factors that influence the costs of education in different areas (such as diseconomies of scale in rural areas, or higher property costs in urban areas).

Similarly, the Westminster Government uses a spending needs formula to allocate resources to Primary Care Trusts in England, and a formula to allocate education resources to LAs. The English formulae are broadly similar to the Scottish formulae in structure, but use a different set of specific indicators and weights.

With colleague David King, (Emeritus Professor of Economics at Stirling), I have used these existing needs formulae to estimate Scotland’s spending needs for health and education, relative to those of the UK as a whole.

  • First, we applied the English health and education needs assessment formulae to Scotland. The results can be interpreted as giving a UK government perspective on Scotland’s spending needs, relative to the UK as a whole.
  • Second, we applied the Scottish needs assessment formulae to the rest of the UK. This second stage is important, as the Scottish formulae use a different set of indicators and weights to assess spending needs, and thus the Scottish Government perspective on Scotland’s spending needs relative to the UK as a whole may differ from the UK Government estimate.

The results are shown in Table 1. For health spending, the English formula estimates Scotland’s per capita spending need to be 7% higher per capita than the UK as a whole; the Scottish formula estimates Scotland’s per capita spending need to be 11% higher than the UK. Thus both formulae agree that Scotland has higher health spending needs than the UK as a whole, partly because it has a slightly older population, and more particularly because the health of Scots is relatively poor. The Scottish formula estimates Scotland’s spending needs to be higher than the English formula because it places more weight on factors for which Scotland scores particularly badly, such as mortality rates (as a measure of morbidity) and the costs associated with population sparsity.

For education spending, both formulae estimate that Scotland’s spending needs per capita are slightly less than those of the UK as a whole. (Both formulae estimate that Scotland’s spending needs per pupil are about the same as the UK, but Scotland has lower spending per capita needs because it has relatively fewer school-age pupils in its population.)

In 2009/10, health spending accounted for around 33% of Scotland’s total devolved spending, with spending on schools accounting for a further 17%. Taking the average of the English and Scottish needs formula suggests a combined spending need (for health and education) of 6% higher than the UK as a whole.

Table 1: Estimates of Scotland’s per capita spending needs for health and education (UK=100)

English formula

Scottish formula

Average

Health

107

111

109

Education

97

99

98

Health and education

104

107

106

Without formal analysis, we can only speculate about Scotland’s relative spending needs for the remaining 50% of devolved spending (which include FE/HE, roads and transport, housing, economic development, environmental protection, police and justice, and culture). In the absence of an alternative, one approach is to assume that Scotland’s spending need for remaining devolved services follows the same pattern as for health and education, i.e. 6% higher than the UK as a whole. This may be a reasonable assumption – Gerry Holtham estimated Scotland’s spending needs to be 5-6% above England’s, while in previous work, David King and colleagues estimated Scotland’s spending needs for various services (including social protection, environmental protection, education, and police and fire) to be 6% above England’s.

If we accept the 6% estimate, then in 2013 prices, the difference between Scotland’s 17% actual spending gap and its 6% spending needs gap is equivalent to £3.2 billion in aggregate. Does this mean that an independent Scotland would be in a better fiscal position than is sometimes implied by studies which compare actual spending levels in Scotland and the UK? Maybe, but there are some important caveats:

  • First, Scotland’s spending needs relative to the UK as a whole might be higher than 6%. The Scottish Government’s needs assessment formulae for health and education suggest that Scotland has higher spending needs than the Westminster Government’s equivalent formulae. If we take the Scottish figure (rather than the average of the English and Scottish), then the difference between Scotland’s actual devolved spending and its need is £2.7 billion.
  • Second, this analysis assumes that Scotland’s and the UK’s public services are delivered equally as efficiently. This may or may not be the case.
  • Third, even if Scotland’s relative spending needs are fairly close to the UK’s, an independent Scotland would have to cut spending substantially from its existing levels to reach its needs based figure. Achieving such a magnitude of cuts will be difficult politically.
  • Finally, and most importantly, these figures are estimates of relative spending need, i.e. they show the level of spending required by an independent Scotland to deliver an equivalent level of public services as is available in the UK as a whole. An independent Scotland may decide that it wants a higher level of public services than is available in rUK (e.g. through greater availability of universal benefits such as fully funded university tuition fees), in which case its spending requirements will be greater, relative to rUK, than is implied through the spending needs coefficients alone.

As is often the case, these figures will no doubt be used by supporters of both sides of the debate to further their cause. Supporters of the Union will argue that the figures demonstrate how Scotland benefits from the Union through a favourable grant settlement; supporters of independence will argue that, given Scottish tax revenues per person (including a geographical share of North Sea revenues) are around 19% higher than those of the UK as a whole, an independent Scotland could afford to have better public services than are available in rUK, even considering its higher relative spending needs.

Regardless of the argument, the analysis here shows that it costs more per person to deliver an equivalent level of health services in Scotland relative to the UK as a whole, and slightly less to deliver an equivalent level of education services.

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