By Jim and Margaret Cuthbert
Bella readers may remember, (our piece of 8th October), that we had written to the BBC to complain about Robert Peston’s statement that “The big question about the Prime Minister’s plan to hand more control over taxes, spending and welfare to the four nations is how far this would end the subsidy of Scotland, Wales and Northern Ireland by England, and especially by London and the South East.” This statement flew in the face of the fact that Scotland had subsidised the rest of the UK by £150 billion or more since the Barnett formula was introduced: (for the derivation of the £150 billion figure, see the links in our previous piece.)
Many people expressed interest in what the BBC’s reply would be. We now know: a copy of their reply is at B below, and it is a very revealing document. They are not yet admitting that they got it wrong: but in their attempt at self justification, they have cut away the ground beneath their own feet.
Our reply to the BBC’s response is at A below. But to summarise, we now know some of the fatal weaknesses in Peston’s logic which led him to get it so wrong: for example:
a) Incredibly, the way he did his calculations excluded Scotland’s North Sea oil revenues.
b) He used a logically fallacious argument for deciding when a country is being subsidised.
c) And last, but not least, he based his conclusions on a single year.
We await with great interest to see what the BBC’s next justification will be.
Why is it so important to pursue the BBC on this point? It is not just the matter of principle, that the BBC should not mislead.
Statements like Peston’s feed an almost general belief held down South that England has subsidised Scotland. Unfortunately, this belief is not confined to south of the Border. As an example, consider the following totally wrong statement in the Conservatives’ submission to the current Smith Commission: “Whilst we know that even at its height North Sea revenue did not even cover the Scottish Welfare Bill”.
A: Our response of 24th October 2014 to BBC
To BBC News website
Reference CAS- 2952961-7ZTS5R
Dear BBC Team
Thank you for your letter of 15th October 2014.
There are, as we explain below, what can only be described as schoolboy howlers in your attempted justification of Robert Peston’s statement about how far current fiscal changes would “end the subsidy of Scotland, Wales and Northern Ireland by England”. But before we explain why, can we draw attention to the gross discourtesy to one of us (Margaret Cuthbert), in that your reply to a letter signed by both of us was only addressed to one (Jim Cuthbert).
Looking at the individual points in your letter:
a) You say that there are many assumptions involved in the argument we put forward. Assumptions are indeed inherent in any analysis of this kind, whether ours or Robert Peston’s. In fact, our assumptions, for example on the period covered, are entirely reasonable. The period we covered was basically the period of operation of the Barnett formula- and this is a perfectly reasonable choice, since it was the Barnett formula that Robert Peston was talking about. On the other hand, as we now know from your latest letter, Robert Peston was basing his statement on a single year’s figures: even though, when he talked about the “end” of subsidy, the viewer could only interpret this as a statement about a process which had been going on for some time. It is therefore both misleading and wrong for him not to have considered at least several years’ data.
As regards the other assumption which you specifically mention in your letter, on how oil revenues might have been used, we made a perfectly justifiable and indeed conservative assumption: the assumption that Robert Peston made, which (as we will show below), is that Scotland effectively did not get any oil revenues, is totally unreasonable.
b) You justify Robert Peston’s position by an argument which looks at the ratio of public expenditure per head to Gross Value Added (GVA) per head for the constituent countries of the UK. But GVA is not the same as tax receipts, and variations in GVA are not obviously a reasonable proxy for variations in tax receipts: so it would have been more accurate if Robert Peston had looked at tax receipts.
c) But more than this, there is a critical flaw in Robert Peston’s use of GVA. If you go back to the ONS Statistical Bulletin to which you refer, you will see that the estimate of GVA quoted by Robert Peston has been calculated in such a way that the North Sea oil related GVA which cannot be allocated on income grounds, is allocated to extra regio, and hence is not allocated to any of the constituent countries of the UK. But taxable profits are within this element of North Sea GVA. The effect is that the proxy for tax receipts which Robert Peston has used actually omits from the Scottish figure Scottish North Sea oil revenues. This is a major and nonsensical error.
d) In addition, there is a grossly fallacious argument in the second quotation from Robert Peston which you give in your letter. The argument in that quotation implies that if one area has a lower ratio of public expenditure to income (as measured by GVA) than the other areas, then this means there is an income transfer from the first area to the others. In other words, the first area is subsidising the others. To see why this argument is fallacious, consider the following very simplified counter-example. Suppose we have five areas, each with GVA=300. Suppose that tax is 1/3 of GVA, so each area pays 100 in tax. Suppose, however, that public expenditure in areas A, B, C, D, and E is equal to respectively, 80, 90, 100, 110, and 120: so overall, the same amount is raised in tax (500) as is spent by means of public expenditure (500), and the national budget is therefore balanced. Then the situation is as in the following table:
|Country surplus(+) or deficit (-)||20||10||0||-10||-20|
|Public expenditure as % of GVA||27||30||33||37||40|
On the basis of Robert Peston’s logic, given the above figures, area A would be regarded as subsidising all the other areas. But in fact, both areas A and B are in surplus, (and therefore transferring resources to other areas, given there is a balanced budget in this case). Area C is in balance, (and therefore neither subsidising nor being subsidised), and only areas D and E could be regarded as being subsidised. What this example illustrates is that you just cannot use the kind of logic in Robert Peston’s quote to determine whether an area is subsidising or being subsidised, even in the artificially simple case when the overall national budget is in exact balance.
Of course, the situation is even more complex when there is an overall national surplus, or as is more common, an overall national deficit. In these circumstances, one has to use something like the approach adopted in our calculations to work out whether an area is being subsidised or not. The application of the Peston approach in these circumstances is potentially even more misleading.
We note that you have not repeated the quotation from Robert Peston which we gave in our original letter, and which was the basis of our complaint. You have in no way justified the blatant error made in that original quotation: in fact your attempted justification compounds the situation with further errors, and shows that Scottish North Sea revenues are actually excluded from the data on which Robert Peston based his statements.
Finally, we note that you also refer us to Stephanie Flanders’ discussion of related issues in her 2012 piece. We do not propose to give a full critique of that piece here, other than to note that her analysis is also deficient in several respects. For example, she again only looks at a single year. She mistakenly equates “deficit” with “subsidy”. And in her treatment of Scottish oil revenues, she mistakenly gives equivalence to Scotland receiving a population share of North Sea revenues, and Scotland receiving a geographic share. In fact, there is no equivalence between these scenarios. The former has no legal status: whereas the latter is implied by the Geneva Convention, and was widely accepted by almost all parties in the run up to the referendum.
Given the deficiencies in Robert Peston’s piece, we think there should be a public clarification and apology for the serious errors the BBC has made on this issue. If you are not willing to do this, we will be grateful if you would indicate to us to whom we should refer this matter to be taken further. We assume that the BBC has some arrangement whereby serious issues as regards professional standards can be referred to a higher authority.
Dr J R and Mrs M Cuthbert.
B: Reply from BBC to our original letter:-
15 October 2014
Dear Dr Cuthbert
Thank you for getting in touch about Robert Peston’s blog post on the financial implications of devolution.
There are many assumptions put forward in your argument, including the period covered and how oil revenue might have been used.
Mr Peston uses two sources of data in his blog.
“Well, spending on public-sector services per head is highest in Northern Ireland, £10,900 and it is lowest in England, at £8,500. The figure for Scotland – beneficiary of the famous or notorious Barnett Formula, which formalises an income transfer from England to Scotland – is £10,200.”
The source for these figures can be found here:
He has then coupled that with the gross value added figures (http://www.ons.gov.uk/ons/dcp171778_345191.pdf) to show the ratio of public service spending per annum to income generated.
“English gross value added per head is highest, at just under £22,000, and it is lowest in Wales at £15,400. The English enjoy public-service spending per annum equivalent to under 40% of the income they generate, whereas annual outlays on public services in Wales are equivalent to more than 60% of nationally generated income per head. The ratios for Scotland and Northern Ireland are just over 50% and not far off 70% respectively.”
The piece is not intended to examine hypothetical scenarios based on historical assessments, but is an attempt to look at the problems that are likely to arise from an attempt to disentangle the current funding arrangements.
Robert Peston’s predecessor, Stephanie Flanders, did some analysis on this issue a couple of years ago, which might be of interest. She also touched on the issue of oil revenues:
We hope this addresses your concerns.
BBC News website