Since the early hours of 24th June there has been a mountain of comment and analysis on the causes of the Leave victory and the polarised attitudes which the EU referendum revealed. However, one issue has so far attracted little attention: the relationship between Brexit sentiments and the UK’s fiscal geography. Fabian Society analysis shows that those regions and nations which have been ‘winners’ when it comes to public spending were also the most pro-remain. The allocation of government expenditure may therefore help explain what happened in June, and suggest answers to where politics goes next and how the left should respond to the ‘English Question’.
Figure 1 maps the relationship between public spending and Brexit voting patterns. The y-axis reflects the degree of support for remain in each nation or region, and the x-axis is a measure of regional public spending per capita, weighted to take account of economic output. On this measure the East Midlands does badly because it is below the national average for both spending and economic performance; while London does (very) well because it is significantly above for both. The strong correlation between parsimonious public spending and support for leave is striking. And the result for the one outlier, London, is still consistent with the overall pattern (the straight-line relationship breaks down, because the capital’s economic output per head is so much greater than every other region’s).
Figure 1: Support for ‘remain’ in the EU referendum compared to public spending per head, adjusted for economic output (2014)
Importantly, the relationship is a good deal stronger than the one linking voting differences and economic performance, which is not statistically significant at regional level (even though many commentators have identified geographic variation in prosperity as an explanation for Brexit attitudes). The relationship is also stronger than that which links EU sentiment with public spending levels before adjusting for economic output (here the correlation is statistically significant). It is the interaction of expenditure and economic success which seems to matter – ie the extent to which a region’s spending is higher or lower than what might be considered ‘fair’ given its prosperity.
Of course, correlation is not causation, and data is not available to assess whether the same relationship exists at a local level. Thinking conceptually, any chain of explanation linking geographic variations in public spending with attitudes to the EU must be fairly indirect. Indeed, some other unobserved variable might be driving both factors independently. Nevertheless, we can speculate that many years of ‘unreasonably’ low expenditure might help to explain why communities and regions came to be and to feel left behind and under pressure; and that this in turn drove political disaffection and amenability to Brexit.
If there is any substance to this hypothesis, politicians may need to think a lot harder about the geographic allocation of public resources than they have traditionally. Egalitarians have always cared about the spatial distribution of expenditure as a technocratic question of fairness, and have supported efforts to make spending allocations more rational. But they have never cared enough to introduce reforms that would stir the passions of the ‘losers’. As a result, historical spending patterns have tended to trump empirical evidence of need.
But now, the evidence from the Brexit vote suggests that the price of our failure to allocate resources fairly may be high, in terms of political psychology as well as material demands. The way we allocate public expenditure seems to be a more foundational, visceral issue than we previously thought – one that gradually influences political solidarities, identities and culture. After all, having enough money helps households feel confident about the future and open to change; perhaps the same is true when it comes to places and public resources.
Public awareness of fiscal geography is starting to increase, especially when it comes to the financial relationship between England and Scotland. English nationalist voices are seeking to stoke up a new ‘fiscal populism’ with respect to the Barnett formula, the convention which regulates much of the allocation of spending between the four nations of the UK. The formula is a good example of ‘path dependency’ trumping empiricism, because it is only used to distribute annual changes in expenditure and does not assess the suitability of the initial baseline. Since 1978 the system has remained untouched for fear of Scottish nationalism, despite everything else that has changed in the relationship between Scotland and the rest of the union.
In 2014 Lord Barnett, the architect of the formula, called it a ‘terrible mistake’. Nevertheless its legitimacy has not been the subject of significant political debate until recently – and there is even less public disquiet over the allocation of spending within England. This means that any link between fiscal geography and political disaffection cannot be explained only as a product of the politics of grievance. It must be the underlying effects of spending allocations – as well as discourse about them – which are driving attitudes. In other words, the left needs to take the fairness of spending allocations seriously as a substantive issue, and not just worry about the debate about spending. In the face of fiscal populists, just ‘changing the subject’ without addressing the underlying reality, is not an answer.
However this is not a narrow issue of ‘England verses Scotland’. The x-axis of Figure 1 shows that Scotland does better than the UK average, and Wales worse, when looking at spending weighted for economic performance (note, that the data includes social security as well as ‘Barnett formula’ spending). But, on the basis of this measure, England as a whole is not the victim of injustice: its prosperity-weighted spending per head matches the UK average. The real issue is the equity of allocations within England. People in the East Midlands are entitled to feel resentful about how little public money they receive, but it is London not Scotland that should arguably be their target. In the sphere of finance, the ‘English question’ is as much about the institutional arrangements within England, as the relationships between the four nations.
We therefore need a more strategic approach to the geography of funding across all the nations and regions of the UK. The current distribution of funding is the messy outcome of thousands of individual policies – grant formulas, investment decisions, social security rules – with history being the single most important factor informing our fiscal geography. Fragmented, bottom-up reform is unlikely to change much. Instead politicians should look through the other end of the telescope and ask if today’s allocations make sense, when viewed as a single public expenditure ‘pot’ for each nation, region, county or city.
This is not to say that spending should be allocated precisely in inverse proportion to economic success. There is a legitimate debate to have on the balance between flat-rate allocations, demographic-weighting and deprivation-weighting in fields like health and education. Meanwhile London does have high labour and land costs, and close to a million daytime commuters; services do cost more in rural Scotland; Northern Ireland does have special security needs. But none of these justifications are good enough to explain why five English regions (Yorkshire and Humber, East Midlands, West Midlands, East of England, South West) are below the UK average for both economic prosperity and public spending per head.
As things stand, outside of London, elected authorities do not even exist in England to ask these questions. As devolved administrations start to emerge from next year, regions, counties and conurbations will for the first time be able to behave as if there is a single public spending budget for their territory – and challenge national government if their allocation appears manifestly too small. To start with, new authorities might have to seek sweetheart deals, outside the existing funding formulas, but over time their goal should be to win the reform of the allocation rules as well.
Gradually, we could do away with the thousands of criteria for allocating money in England and move towards streamlined rules for distributing single public service budgets. For the logic of devolution is that cities and counties should have the freedom to decide for themselves how public resources are spent in their area. And a single pot does not need to be constructed from hundreds of subsidiary elements. In this context it would be possible to introduce a neutral institution to weigh the evidence, along the lines of Australia’s Commonwealth Grants Commission.
This would also create the context for an evidence-based settlement on the distribution of funding between the four nations. If a single calculation is to be used to work out the ‘pot’ for public services in Birmingham, Greater Manchester or London, why not for Scotland, Wales and Northern Ireland too? Scotland would no longer be able to present itself as standing up to the might of the combined UK/England government. Instead it would need to make its case to a host of English regions, cities and counties nearer to its own size, many of whom would be both poorer and less well funded than Holyrood.
Treating England as a series of fiscal communities, and Scotland as one territory among many, is the way to defuse fiscal populism and work towards fairer funding allocations. The trick would be to reimagine the public finances; to see each region as a territory with its own resources – the product of a horizontal distribution between peers not a seigneurial relationship with the centre. The question would become what money does the Westminster government still need for national functions like social security, against a presumption that money should be in local and regional budgets?
There is a complication, however. This roadmap towards horizontal fiscal solidarity presumes that revenue is raised on a UK basis and distributed according to need. But that strong presumption is starting to unravel, and perhaps it is the logic of English devolution that it will unravel further. London has already published proposals to keep the additional revenues it raises from property taxes in future. And Scotland now has responsibility for setting income tax. The danger for egalitarians is that nations and regions come to see revenue raised locally as ‘theirs’, with richer communities questioning the legitimacy of geographic redistribution.
Such a fully-fledged federalism could usher in a UK version of the Eurozone’s current fiscal impasse. So far this is not happening, because Scotland has had the chutzpah to argue for local tax raising powers and the continuation of a funding system which gives it more money than is warranted on the basis of either its needs or the revenue it raises. London fiscal populism would be a different story, however. We have already seen that London spends far more than would appear justified, on the basis of the relative prosperity of the different UK nations and regions. But despite this, there is a risk that the capital will grow resentful about raising more than it spends. This risk would be exacerbated if politicians attempted to introduce financial re-balancing without ensuring that budgets were still rising for everyone (we may be about to get a taste of this, as the Conservative government embarks on a fundamental reform of the spatial allocation of schools funding).
The cat is out of the bag, however, and there is no prospect of returning to the fiscal centralism of the mid-1990s. The answer is not to ignore the threat of fiscal populism but to address the causes. In particular, following the Brexit vote, we need to consider how to renew the bonds and affiliations tying London to the rest of England. Many parts of England are entitled to question the equity of the current fiscal settlement. But if the capital defines itself as a European or global city-state, in contrast to a more parochial inward-looking England, then tensions within England will grow. On fiscal questions, answering the ‘English question’ means addressing the ‘London question’ too.
National and regional differences: economic output, public spending, support for remain (UK = 100)