╨╧рб▒с>■  ■                                                                                                                                                                                                                                                                                                                                                                                                                                                   ▄еhcр eА╬] ┐───────╪╪╪╪╪ ф ю ╪1°№EXЭ└─ ──°──0BVщ╟╟╪╪────A New Twist to an Old Scandal: How Recent Changes in Government Accounting for European Structural Funds Mean that Scotland Will Lose Out. Jim Cuthbert Margaret Cuthbert July 2007 One of the main benefits which Scotland should experience from the UKТs membership of the EU is access to the European structural funds: these are one of the primary European regional development initiatives, designed to help areas which are lagging in economic progress, by providing, for example, grants to industry and training support. However, as we point out in an article just published, recent changes introduced by the Treasury in the way in which structural fund receipts are accounted for mean that Scotland will lose out in the longer term. Because of these changes, it is likely that Scotland will end up around г50 million per annum worse off, in perpetuity, than if EU structural funds had never existed. This is the final, and bizarre, twist in a long standing scandal, where, in the past, Scotland failed to benefit to anything like the extent it should have from structural fund allocations. To understand what has gone wrong, we need to dip our toes a little way into the arcane and muddy waters of public expenditure control in the UK. The system up until 2006 was as follows: when Scotland was allocated European structural funding, it had to get approval for particular projects - and then spend the money. But that was not the end of the story: when the money was spent, it also counted against ScotlandТs expenditure cash limit - its departmental expenditure limit, or DEL. So unless there was additional provision added to the DEL to cover ScotlandТs structural fund allocations, then spending EU money would be at the expense of diverting cash from other priorities within the DEL. As far as Scotland goes, there was a huge problem with this arrangement, in that ScotlandТs DEL was adjusted not in respect of ScotlandТs own structural fund allocations, but in respect of the Barnett consequences of structural fund allocations to England. Since Scotland, as a relatively deprived and depressed area, initially received structural fund allocations which were proportionately larger than England, this meant that the additional provision added to ScotlandТs DEL through Barnett was less than ScotlandТs actual structural fund allocations. The effect was that Scotland had to fund a significant part of its structural fund projects out of its own resources, by displacing other priorities within the DEL. This was the old scandal referred to in our title: the effects were large - we estimate that this cost Scotland some г810 million over the period 1995 to 2005 alone: (and on top of this, there was a requirement to find matched funding, most often of 50%, also from within the DEL). Before 1995, there is substantial evidence to suggest that the loss was even greater. Since the previous Executive were careful to throw a smoke screen of confusion and denial over this area, the effects, while recognised, were never quantified, and never attracted the public indignation they merited. In 2006/07, the Treasury then changed the rules for accounting for structural fund receipts within the UK, so that, effectively, structural fund allocations ceased to count against a departmentТs DEL. Departmental DELs were adjusted downwards, by the extent of structural fund allocations, as a result. The change was meant to be a purely technical matter with neutral expenditure consequences, and indeed, it is neutral in the sense that gross spending, (that is, spending funded from the DEL or EU receipts), is unchanged. But for Scotland, the accounting change has altered the way in which gross spending is affected by future changes in structural fund allocations: in effect, gross spending in Scotland has now moved on to a different trajectory. In the past, our gross spending did not rise to the full amount of structural fund allocations because of Barnett: but in the future, as ScotlandТs structural fund allocations are reduced, these reductions will impact on gross spending in full. This means that the Treasury accounting change will not be neutral for Scotland in the longer term. In our paper, published in the most recent edition of the Fraser of Allander Economic Quarterly, we calculate that, as a result, by 2013, structural funds will channel only a marginal amount of net additional resources to Scotland: and if ScotlandТs structural fund allocation were eventually reduced to zero, then at that time (and ever after), ScotlandТs DEL would be г54 million less than it otherwise would have been. The estimates in our paper are avowedly approximate, since we have had to base them on the available published information: but they are the best currently available. What needs to be done now, now that the problem has been identified, is for the Executive and the Treasury to produce their own estimates of the effects identified in our paper. This will provide the added bonus of settling, once and for all, the vexed question of how much of its past structural fund projects Scotland had to fund by diverting resources from elsewhere in its DEL. Once these estimates are agreed, then the Treasury and the Executive should negotiate an appropriate compensation package for Scotland, covering both the effects of the recent accounting change, and the past failure to adjust ScotlandТs DEL fully for structural fund allocations. In the light of our paper, MEP Alyn Smith has written to the Chancellor demanding answers: we await developments. 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