Economics Economics of Independence

The Croydon Principle – How Westminster secretly sends Scotland’s budget south

There is a little known Westminster spending policy that places a charge on Scotland’s public sector accounts, but the economic benefit of it is felt outside of Scotland. In short, Scotland does not benefit from all of the spending that the UK Government claims it spends on Scotland’s behalf.

I call this ‘The Croydon Principle.’ It’s the idea that Scotland benefits from spending its budget outside of Scotland. Boris Johnson, the UK PM, summed up the Principle best when he stated that: 

“A pound spent in Croydon is of far more value to the country than a pound spent in Strathclyde. You will generate jobs in Strathclyde far more effectively if you invest in parts of London.”372

In other words, the Prime Minister seems to believe that spending Scotland’s budget in London helps Scotland’s economy. There are two parts to the Croydon Principle:

  1. Infrastructure and capital spending outside Scotland, which is then charged to Scotland’s accounts on a per head basis.
  2. The impact of public sector employees whose wages are paid for out of the Scottish budget but who are not located in Scotland.   

The first part of the principle will be discussed in a future publication. So, let us investigate a few examples of the latter.

The UK Government manages and pays the wages of civil servants, who do work on Scotland’s behalf but are not based in Scotland. It also employs civil servants, who are based in Scotland but work in non-devolved areas. For example, in the Department for Work and Pensions (DWP) and the staff of job centres.

In terms of the costs of work done outside of Scotland, the Scottish Government has a population percentage share of the costs applied in GERS. It must be emphasised that GERS is the UK Government’s accounts for Scotland and not the Scottish Government’s accounts.  The Scottish Government receives a block grant from the UK Government to pay for the devolved services it delivers.  It is required to run a balanced budget and only gained very limited borrowing powers in 2017 to cover forecast and income variations.

Some people worry about the cost of the new civil servants that an independent Scotland would need. However, this should not be seen as an issue since most of them work in Scotland, for the UK Government, already. This means that GERS already includes the cost of their wages. Those that do not live in Scotland, however, have their National Insurance and tax contributions applied to the accounts of the regions where they live and not to Scotland, whose national accounts contain the wage costs. So, Scotland pays the bill but does not benefit economically from the spending as it would do if those civil servants were physically located in Scotland.

There are dozens of examples, but one you will probably be familiar with is the Driver and Vehicle Licensing Agency (DVLA). Located in Swansea, it is one of the largest employers in south Wales, with roughly 6,000 staff, and handles driver and vehicle licensing for the whole of the UK. 373  Assuming that an independent Scotland wanted to set up its own Scottish DVLA, it would need to employ roughly the same number of staff currently working in the Swansea DVLA on Scotland’s behalf.

That would create 498 374 new jobs in Scotland at a median civil servant salary of £26,610 375 or a total salary cost of £13.3m a year. 376 That would not be an additional or new cost to Scotland. Scotland already pays for their wages and the cost is deducted from its budget.

Now, it must be noted that the contribution of these civil servants to the Scottish economy would be roughly £4.4m per year in tax and NICs. This is if the current Scottish tax rates were to be applied to the £26,610 median salary.

Additionally, these 498 Scottish Government employees, now located in Scotland, would all have to buy cars, food, clothes and houses. This would add roughly £12.7m in purchasing power to Scotland’s economy. 377  That spending would then generate VAT, contribute to economic growth and generate approximately another £2.5m in annual tax revenue for the Scottish Government. 378

The impact of basing/relocating civil servants in Scotland would mean the cost remains the same but the Scottish Government gains £6.9m in additional revenues. Sure, there would be a transition cost. For example, offices to set up and rent. However, office costs in Scotland are not that high, and up to 31% cheaper than those based in London (another saving). 379

To be clear, every time a civil servant, working on Scotland’s behalf in the rest of the UK, moves to Scotland, the Scottish Government makes a net saving of £12,710.

The most common unionist claim, in terms of how many additional civil servants Scotland would require to run a fully independent government, is between 24,000 and 25,000. This number does not make sense. It seems to be driven by the fact that the UK Government employs 24,900 civil servants on Scotland’s behalf. The cost of those civil servants is already added as a cost to GERS, so it doesn’t make sense to assume that there would be any extra cost, as they are already paid for from the Scottish Government’s budget.

It is also the case that many of those civil servants are already based in Scotland, but working for the UK Government in non-devolved departments such as the DWP or the Ministry of Defence. So, some of the UK Government’s spending does happen in Scotland, just not all of it. Work done by the London School of Economics identified that in total, 6,640 public sector jobs would need to be created in, or transferred to, Scotland, to support the governance infrastructure of Scotland as an independent nation. 380

That 6,640 new civil servants added to the 42,300 currently working in Scotland (17,400 on devolved areas and 24,900 on non-devolved areas), comes to 48,940. The UK Government currently charges Scotland a population share of the UK civil service for 51,794 people. In effect, Scotland currently pays for 2,854 civil servants it might not need. That would be another saving, not a cost, of independence.

As a result, most of the expenditure figures in GERS are entirely contestable in terms of where they should be applied and in some areas, such as defence, most of the spending does not directly benefit Scotland economically.

GERS, therefore, contains the inflated expenditure figures. It does not contain though the corresponding tax and NI income, and the income that would accrue from the economic benefits of the jobs being based in Scotland. The Scottish accounts of an independent Scotland would contain all of that and that would boost the spending and the taxation revenue side of the accounts.

Conclusions

Thousands of highly paid and skilled jobs that Scotland’s Government pays for are located outside of Scotland. So, the tax and NIC’s, and economic benefits of their wages go to the rest of the UK and not to Scotland. This means, tens of millions of savings and the same in additional new Scottish revenues would be gained in the event of independence. The costs of independence are short term and insignificant, whereas the costs of maintaining the union appear to be ongoing and significant.

 

The research findings referred to in this article are contained in our book. You can purchase your copy of Scotland the Brief here.

 

About the author

Gordon MacIntyre-Kemp

Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before becoming CEO of Business for Scotland he ran a small social media and sales & marketing consultancy.

With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).

Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and The Huffington Post.

4 Comments

  • It can’t be repeated often enough that GERS emanates from UK government , not the Scottish Government in Holyrood . They are framed to support the proposition that Scotland is an economic basket case .The sooner we have a credible alternative to GERS the better . Scotland the Brief is an indispensable antidote to the distortions of GERS.

    • That’s wrong Brian, so emphasise it all you want but it won’t make it true.

      GERS is produced at the discretion and budget of the Scottish Government, not Westminster.

      • GERS was started by a Unionist Secretary of State and then the responsibility for its production transferred to the Scottish Government – each Government since has followed the tradition and it would be politically unacceptable for any government to stop publishing the report now. However, you are right the Scottish Government does have discretion and that discretion includes the ability to publish accounts in a different way and even to publish a projected set of accounts for the economy if it were managed under the policies they would implement if they had the full powers of independence.

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