David Mowat MP: The Scotland Bill should be amended to scrap the Barnett Formula, which remains manifestly unfair to the English taxpayer

David Mowat is Conservative MP for Warrington South and a member of the Scottish Affairs Select Committee.

Today the Government’s new Scotland Bill will receive its Second Reading in Parliament.  The Bill will bring into law a number of provisions which were recommended by the 2009 Calman Report on Devolution. Many of the provisions are sensible. Indeed the core proposal to reduce the block grant by a third but allow the Holyrood Government to levy income tax, at their discretion, to compensate, will increase accountability. It will also provide an overdue incentive for the Scottish Government to protect and grow its own tax base.

However, the proposal is structurally flawed. This is because the starting point is the existing unreformed block grant as computed by the Barnett formula. Roughly speaking, Scotland receives a settlement 20% higher than the English average. It is accepted that, were a more equitable needs-based analysis performed, the additional settlement would fall to nearer 5% extra. The difference is about £4.5 billion a year or £900 per head for every Scottish resident. This is a huge disparity and is manifestly unfair to England; in particular, the English regions, which if they received a “Barnett allocation” would be several hundreds of millions of pounds a year better off. There are parts of England where the failure of successive governments to reform the formula have and are causing real hardship.

This disparity has occurred because no attempt has been made to adjust the formula on the basis of changing need or changing population since it was first introduced over 30 years ago. Incredibly, Parliament has never been given the chance to vote on a mechanism of such monumental importance.

It is noteworthy that no coherent attempt has been made to defend the allocation mechanism. The last Government just claimed it was administratively easy whilst the SNP justify the calculation as some kind of “compensation” payment for their oil. Even the author of the formula, Lord Barnett, accepts that it is a very poor basis for continuing and needs to be urgently reformed.

Scotland is a nation with a proud heritage and rich culture. Its presence strengthens our Union immeasurably. As someone of Scottish ancestry, I agree with those who argue that Scotland deserves individual recognition within the Union, but that should take the form of greater recognition of Scotland’s right to make its own choices: it should not be about just giving them more money.

We need to understand how that affects ordinary people. Over the last 5 years, people living in the North West, such as my constituents in Warrington, have received £4,468 less in services per person than people living in Scotland according to the latest Treasury figures. Without reforms, over a lifetime, people living in Scotland would get over £70,000 more each than those living in the North West.

The Scottish Government then spends that money on a number of measures that cause resentment in other parts of the UK. Free prescriptions (£57 million) and tuition fees (£1 billion) are easily affordable whilst still leaving plenty of cash over to provide free social care for the elderly (£377 million). These are services from which people living in the North West would benefit, yet despite being unable to use these services, they are forced to pay higher taxes to subsidise them.

It would have been expected that a fiscally conservative coalition would have wanted to take a look at the anomaly. The “over payment” represents about £22 billion over the lifetime of the Government, which seems a very high price to pay to appease vested interests North of the border.

Sadly, however, in the last few months the Government has confirmed that this continuing inequity was not an area of policy interest:

1. In October, Parliament was informed that the formula would not be reviewed before the next general election in 2015. And indeed, the cuts announced in the CSR will fall less heavily on Scotland than England.
2. The new Bill will effectively enshrine the status quo forever. The starting point for all tax adjustments will be the 2011 Barnett calculation.

This is wrong and will rightly cause indignation in England. Many MPs are having to defend deeply unpopular cuts. We do so on the basis that there is no alternative and that the deficit must be brought down. This argument looks a bit limp when the coalition is able to casually fritter away £22billion to appease vested interests North of the border.

The remedy is simple. The Bill should be amended to make it clear that the current system must be ditched in favour of a system which looks more closely at relative need and deprivation levels. If the Holyrood Government then wishes to continue with measures such as free prescriptions and no tuition fees they remain perfectly entitled to do so. They would have the power to levy income tax in Scotland to raise the necessary revenue. However, it is estimated that to raise the cash equivalent to the Barnett overfunding would require a rise of 15p on the basic and higher rate for Scottish residents. Politics is about choices, or at least, it should be.