Tuesday, 3 May 2016

Follow the fiscal flows

Of all the graphics I've produced for the book and for blogs, the diagram you see below received the most attention, being much re-tweeted on twitter and shared on other social media. For this reason, and to help me get my head around Scotland's complex fiscal flows, I've now produced an interactive version.

This diagram, from Chapter 5 of the book, gives a high level summary of Scotland's fiscal flows over its three levels of government.

Frankly, the diagram is rather involved and off-putting if you're not already acquainted with Scotland's fiscal intricacies. So I've produced this interactive version which is simplified in appearance but still captures all the main flows. Have a play with the sliders then click the Help tab at the top and read the Quick Start bit, and, if you wish, read the rest of Help page for gorey detail and a full list of sources.

In addition to the numbers shown on the diagram, the simulation calculates deficits for each level of government (spending less tax) and estimates of the extra interest payments they would add in future years.

Here's a brief FAQ to help demystify some parts of it.

Why does the UK government get £47.5 billion or 90% of Scotland's taxes? 

This is collected by HMRC on behalf of the UK and Scottish governments. Although £47.5 of Scottish taxes does go into the UK government, the total coming back to Scotland is £25+30+4+2.5=£61.5 billion.

But does the UK government control 90% of Scotland's taxes?

No. For 2015-16, the Scottish Government controlled (as in was able to set tax rates for) about 17% of tax. Once the Scotland Act 2016 (Smith) powers come into force in the next few years, this will rise to 40%, included assigned VAT. Just over 60% of all spending in Scotland is controlled by the Scottish and Local governments, and the NHS and education are completely devolved. The UK's spending in Scotland is almost entirely on pensions, benefits and defence. See this post for more detail.

Total spending in Scotland is £68 billion but total tax raised is £53 billion. What makes up the difference?

The £15 billion difference is Scotland's notional deficit. The only major government publication where you will find this number is the GERS report (in which it is referred to as the Net Fiscal Balance including a geographical North Sea share). It is not in the Scottish budget, nor Scotland's nor the UK's national accounts. The £15 billion is part of the UK's total deficit and so is covered by UK government borrowing. If Scotland had become independent in March 2016 as a result of a Yes vote carrying in the 2014 referendum, then such a deficit would have to be covered by Scottish Government borrowing, tax rises or spending cuts.

What's NDR?

Non-Domestic Rates. These are business rates that are collected from businesses in each council region, then given to the Scottish Government which then redistributes them back to the councils (included in the £11 billion block grant figure). The redistribution to individual councils is of course not visible on this high level diagram.

What's AME?

Annual Managed Expenditure. This is money that the government(s) must pay out but that cannot be planned for in advanced and so is handled on an annual basis. The most well known fiscal transfer from the UK government is the block grant calculated according to the Barnett formula, but there are others, with the two largest being shown on the above diagram. £4 billion of AME goes to the Scottish government for welfare payments, such as pensions, and the UK's Department of Work and Pensions (DWP) transfers about £2.5 billion to councils to pay housing benefit.

Where do all those figures on the diagram come from?

They are all based on reports published by the Scottish Government in the last year or so. Go to the simulation and click on the Help tab at the top left and scroll to the bottom for a full list of references. If you've got better figures, feel free to alter the default values I've put into the simulation.

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