Do English taxpayers subsidize Scotland? Here’s how it really works

The past few weeks have seen heated media coverage of the Scottish independence economy. While it is good for our democracy that activists and political commentators take a strong interest in economics, it comes with dangerous misinformation.

The Institute of Fiscal Studies (IFS) says tax revenue from the rest of the UK is ‘transferred’ to Scotland. Next come claims from unionist groups such as These Islands and Scotland in Union that the Scottish economy is subsidized by taxpayers from the rest of the UK. So, without taxpayers from the rest of the UK, an independent Scotland would have to implement both austerity and high taxes.

Modern Money Scotland specializes in the economy of monetary sovereign countries, and we can categorically say that this claim by the IFS and wider unionist groups is false.

READ MORE: Clearing up the confusion around Modern Monetary Theory and independence

To better understand why this is the case, we can break down the UK Treasury accounting model to explain how the monetary system actually works. We won’t shy away from going into intricate detail because readers deserve the truth.

Government spending begins in Westminster, where our politicians debate how money is allocated to each government department. Each government department maintains its own account called a “resource account” with the government banking service (GBS), where it receives its allocation of “treasury appropriations”. These credits represent what each department can spend, as well as the currency of the commercial banks nor the reserves of the central bank. Appropriations from the Consolidated Revenue Fund are simply an internal ledger balance of Her Majesty’s Government.

Once parliament has legislated its spending plans, HM Treasury is then authorized to requisition sums of money from the Comptroller and Auditor General (C&AG). The C&AG will review UK Treasury requisitions and then approach the Bank of England to credit government departments – canceling Treasury credits.

READ MORE: The reality of pensions in a Scotland that voted for independence

The Banks Automated Clearing System (BACS) is then contacted by the GBS to provide bank transmission services. The ministry resource account acts like a normal bank account. The Ministry will submit its payment requirements to its GBS bank, which are then submitted to BACS for clearing and settlement.

The Bank of England then issues funds from the Consolidated Fund to credit the GBS Supply Account. Importantly, the Consolidated Fund begins each business day with a zero balance. No funds are drawn, as instead they are overdrawn when the Bank of England extends intraday credit. This credit is Bank of England money – public money.

When settlement is required for payments, the GBS Funding Account funds sums of money from the Bank of England into the GBS Drawing Account. Therefore, GBS drawing accounting has a monetary balance to settle the required payments. Three days after submission of the BACS, the clearing and settlement of government payments are made by the two GBS resource accounts of the ministries while the GBS drawdown account is unmarked. At the same time, commercial bank reserve accounts held at the Bank of England and deposit accounts of commercial bank customers are increased.

Where is Scotland in all of this?

The Scottish Government has its own consolidated fund account within the GBS. The spending mechanisms on behalf of the Scottish Government are similar to those of other departments, except that its appropriation allocation is determined by the Barnett formula.

The key thing to remember is that the money in these accounts is not taxpayers’ money from other parts of the UK, but rather a credit that is transferred from the UK Consolidated Fund to devolved accounts – as long as the Parliament authorized it.

Scotland is not subsidized by other parts of the UK – this is an indisputable accounting fact. On the other hand, Scotland does not subsidize the rest of the UK either. Credit flow in the UK comes from the Bank of England.

So where would the net flow of credit come from if Scotland became an independent country?

It would be replaced by conditions and mechanisms created from a Scottish central bank. An independent Scotland would not be financially constrained to develop desperately needed progressive politics. However, as long as Scotland is locked in by devolution, Holyrood will continue to be treated as a government department within the monetary system.

Independence or not, there is no excuse for ideological austerity. It is our responsibility to ensure that any government budget fully redistributes and utilizes our resources for the benefit of the people.

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