Do English taxpayers subsidise Scotland? Here's how it really works

The Institute of Fiscal Studies (IFS) claims that tax revenues from the rest of the UK are “transferred” to Scotland. This is followed by claims from Unionist groups such as These Islands and Scotland in Union that the Scottish economy is subsidised by taxpayers from the rest of the UK. Thus, without taxpayers from the rest of the UK, an independent Scotland would need to implement both austerity and high taxes.

Modern Money Scotland specialises in the economics of monetarily sovereign countries, and we can categorically say that this claim from the IFS and wider Unionist groups is wrong.

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To better understand why this is the case we can break down the accounting model of the UK exchequer to explain how the monetary system really works. We won’t shy from the complex details because readers deserve the truth.

Government spending starts off in Westminster, where our politicians debate the allocating of money between each government department. Every government department holds their own account called a “Resource Account” with the Government Banking Service (GBS), where they receive their allocation of “Exchequer credits”. These credits represent how much each department can spend, so are neither commercial bank money nor central bank reserves. Exchequer credits are simply a ledger balance internal to HM Government.

After parliament has legislated its spending plans, HM Treasury is subsequently authorized to requisition sums of money from the Comptroller and Auditor General (C&AG). The C&AG will scrutinize HM Treasury’s requisitions and then contact the Bank of England to credit government departments – writing off the exchequer credits.

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The Bankers' Automated Clearing System (BACS) are then contacted by the GBS to provide banking transmission services. The government department’s Resource Account acts just like a normal bank account. The government department will present its payment requirements to its GBS bank, which are then submitted into the BACS system 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 upon, as instead it goes overdrawn as the Bank of England extends intra-day credit. This credit is Bank of England money - public money.

When settlement is required for payments, the GBS Supply Account feeds sums of Bank of England money into the GBS Drawing Account. Therefore, the GBS Drawing Accounting has a money balance to settle any required payments. After three days from the BACS submission, the clearing and settlement of the government payments occurs by both the GBS Resource Accounts of the government departments whilst the GBS Drawing Account is marked down. At the same time, Reserve Accounts at commercial banks held at the Bank of England and commercial bank deposit accounts of customers are marked up.

Where does Scotland fit into all of this?

The Scottish Government has its own Consolidated Fund Account within the GBS. Spending mechanisms for the Scottish Government’s account is like that of other government departments, except its allocation of credit is determined by the Barnett Formula.

The key take-away is that the money in these accounts is not taxpayer’s money from other parts of the UK, but rather credit that is transferred from the UK Consolidated Fund to devolved accounts - as long as parliament has authorised it.

Scotland is not subsidised by other regions of the UK – this is an indisputable accounting fact. On the other hand, Scotland does not subsidise the rest of the UK either. The flow of credit 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 progressive policy that is desperately needed. However, as long as Scotland is stuck with devolution, Holyrood will continue to be treated like a government department within the monetary system.

Independence or not, there is no excuse for ideologically driven austerity. It is all our responsibility to ensure that any government budget is one that redistributes and fully utilizes our resources in the interests of the people.