Sunday, 12 November 2017

Where Are You From?

Last weekend I took a trip "home" to Islay, the Inner Hebridean island where I spent my formative years. My mum - with whom I have an at best strained relationship - now lives in a care home on the neighbouring island of Jura.

It was an emotional few days, during which I thought a great deal about identity and sense of self.

SCENE 1: Care Home, Jura

An old woman sits in a chair, a rug across her lap. On the table beside her sits a radio, permanently tuned to radio 4. Beside the radio sits a large-buttoned phone, a glass of water, a glass of milk and a bowl of Smarties. The chair is backed against the wall, angled towards the room’s single window.

Sitting facing her on straight-backed chairs are two people: her son and his wife

The old woman’s face contorts as she toothlessly sucks on a Smartie. Behind the gurning, her expression is one of sad resignation. Her rheumy eyes stare into the middle distance as she shakily reaches for another sweet, her hand sweeping until it hits the side of the bowl. It’s clear she’s practically blind.

There’s a lengthy silence. After two hours of talking – with the old woman offering very few words in return - the couple have run out of things to say.

Eventually the younger woman speaks;

- do you ever speak with the other residents?

- [dismissively] no

- I’m sure they’ve all got interesting stories to tell

- [scoffs]

Another long pause. The old woman’s right hand sweeps and fumbles for another Smartie. The couple catch each other’s eyes. He shrugs. Hiding her exasperation well, but not quite fully, she tries again;

- that chap in the wheelchair seems nice, he was cheery when we walked in

- him? He tried to talk to me once … but, well, I couldn’t talk to him

- why not?

- well … [a dismissive half-laugh] … it’s just pointless … he asked me “where are you from?” what sort of a question is that?

- but ... it’s a normal question to ask, it’s just a way of starting a conversation

- but what am I meant to say? I was born in London, lived in Norfolk, moved to Islay, moved to France, moved back to Islay … you can’t just answer a question like that

- but that’s why it would be an interesting conversation?

- [scoffing] well I can’t be bothered with it all


SCENE 2: an RSPB bird hide, Loch Gruinart, Islay

The same couple are sitting on a wooden bench, binoculars trained through the open observation window in front of them. On a bench bedside them, similarly focused on the wildlife outside, are two middle-aged men. The background noise is the unmistakable gaggling of geese.

At this time of year, over 40 thousand barnacle geese arrive from Greenland to over-winter on Islay – several thousand of them are in the shallows in front of the hide.

It’s cold – a sharp wind whistles through the open observation windows

One of the men nudges the other - they speak in broad Glaswegian accents;

- look, there

- where?

- where I'm looking ... past the second cluster of geese

- what're you seeing - the duck?

- aye, it's a gadwell - see the black tail

- you sure?

- aye, gadwell, nailed on - add it to the list

The second man puts down his binoculars and writes in his note book. The hide falls quiet, they all return to scanning the birds in front of them. The second man speaks;

- so these geese have just arrived from Greenland, aye?

- aye

- some journey they’ll have had, eh?

- aye


- curlews man, I love curlews - they’re my favourite

- aye

- do they stay here all year?

- aye


- it’s funny when you start thinking where birds come from

- how?

- well … we say the barnacle geese some from Greenland, but do the people in Greenland say the barnacle geese come from here?

- it’s where they breed but - so they come from Greenland


- what about the cuckoo?

- eh?

- well the cuckoo’s a British bird, isn’t it?

- aye, they breed here

- but they’re only here for, like, three months… they spend most of the year in Africa

- so?

- well, if they spend most of their time in Africa, isn’t that where they come from?


The man sitting with his wife glances over

- maybe it’s meaningless to try and apply our concept of nationality to birds?

- huh?

His wife, without breaking her gaze through the window, kicks his foot

- Sorry - nothing - ignore me


Where am I from? I was moulded, forged and occasionally beaten into the person I am now mainly on Islay. So I'm from Islay, I'm an Ileach.

It was farm labouring on Islay - during holidays and briefly when I dropped out of school - that I learnt what a work ethic is, what hard work means. I tied fertiliser sacks round my legs and crawled on my hands and knees for days, hand-thinning turnips. I enjoyed the back-breaking satisfaction of manually cutting and stacking peat. I worked long hours in all weathers, experienced the relentless, unforgiving treadmill of dairy farming in the winter - 6am and 6pm milking times, 7 days a week.

My life now couldn't be much more removed from that of the island farmer, but that experience has stayed with me, is an important part of who I am.

Which is why a highlight of last weekend's trip was visiting the farming family who I worked with all those years ago. The father is now 88 years old, retired but full of life. The mother is as warm and welcoming as she was 35 years ago, as she was when she looked after me when I needed looking after. Their son, my friend, still farms - although the dairy herd has sadly long since gone, a victim of the inevitable economic disadvantage that island farmers face selling milk to the mainland.

I enjoyed my trip; sometimes it's worth pausing to think about where you're from.

Saturday, 11 November 2017

These Islands

It's a while since I've posted on here - my day job sometimes has to be allowed to take over my life. One extracurricular thing I have found time to work on - very much in the spirit of this blog - is a forum called These Islands. I have agreed to Chair the organisation and we launched in London and Edinburgh a couple of weeks ago. For those interested the full text of the speech I gave at the launch events is up on the These Islands website and copied below.


These Islands came about because a group of us were drawn together, first by a shared sense of frustration, but then by a shared sense of opportunity.

Through both the Scottish Independence and EU referendums we were frustrated with the poor quality of political debate and – particularly during the Scottish Independence referendum – we were disappointed with the lack of a well-articulated positive case for the United Kingdom. One of our Advisory Council members, Professor Nigel Biggar, sums this up rather well when he refers to the “faltering inarticulacy” of those trying to explain what the United Kingdom is good for.

But we recognised that this was at least in part because the white heat of a referendum campaign isn’t the time to start making what are often subtle, emotional and nuanced arguments – arguments that take time to develop, rehearse and share, and that need to be allowed to sink in to the wider public consciousness.

That’s when we stopped asking why others weren’t doing a better job of leading this debate, and started asking ourselves why we shouldn’t do it. That’s when our frustration turned to a sense of opportunity, when the idea for These Islands was born.

As an entrepreneurial businessman I’ve learnt to try and surround myself with people smarter than I am. By working with co-founders Tom Holland and Professor Ali Ansari, I had achieved that on day one – and together we set out to recruit an Advisory Council to help us.

We wanted to bring together a group who would represent all four nations of the UK and bring a wide variety of perspectives – including from outside the UK. We were overwhelmed with the response we received. As you can now see on our website, our advisory council of 33 members features not just some of the finest academic minds in the UK, but leading business people, representatives of multicultural Britain, great communicators, and passionate campaigners.

What you might notice missing from our advisory council is serving politicians. This was an explicit decision – the three peers we have on our Advisory Council are cross-bench peers. We made this choice because we believe we have to be above party politics, that this is a cause that needs to think beyond electoral cycles. The subject we’re dealing with here – the very future of the United Kingdom – is frankly too important to be left to politicians alone.

So how do we intend to harness the power of this group, what are our ambitions?

To capture this in a phrase: These Islands is a forum for debate which stands unabashedly for the view that more unites the people of the United Kingdom than divides them. In practice this means we want to stimulate and steer a positive national debate, something we aim to do initially through publishing a series of Briefings and Papers.

Briefings will be short, factual pieces, aimed at ensuring that any debate is well-informed. If you like, these will be our attempt to fight the tide of “fake news” and misinformation.

Papers will be more substantial and – critically – contributed to and peer reviewed by our advisory council. I’ve had the privilege of chairing three advisory council meetings to date and I can assure you: that process works.

The papers will be around three broad themes.

Firstly we aim to explore the Moral case. Many flinch at the use of the word “moral”, but we don’t think we should. Our first published paper – by Nigel Biggar, Regius Professor of Moral and Pastoral Theology at Christ Church, Oxford University – does an excellent job of confronting the moral question head on when it asks: What is the United Kingdom Good For? I urge you all to read it.

Secondly we want to discuss the Multicultural case. The United Kingdom has allowed four separate national identities not just to survive but to thrive within it. That is surely something to be celebrated. But beyond that, these islands have a proud history of welcoming immigration. Some of the strongest senses of British identity are to be found among the UK’s ethnic minorities. These plural or hyphenated identities – British-Asian, British-Muslim, British-Caribbean, British-European – stand testament to the fact that “Britishness” can be a truly multicultural form of identity. We think that’s a fact that’s worth recognising and celebrating.

Our third main theme is the Economic case. The order of these themes is not an accident. Too often the economic case is presented as somehow distinct from the moral and multicultural cases – as the rational case that stands apart from the emotional. The truth is that the economic case only exists because of the moral and multicultural cases. Our widely shared commitment to economic pooling and sharing is the practical manifestation of what might be termed an “implicit moral contract”: that wherever you live in the UK, wherever you come from, whatever your heritage, you should be entitled to certain standards of healthcare, of education, and of welfare. So while we will explore the economic practicalities of how our constitutional settlements work, we want to place this in a wider context, to make it about more than just “putting a pound sign in front of everything”.

There are other themes we’ll explore – how best to care for the wildlife of these islands, for example – but our three core themes will be moral, multicultural, and economic.

Finally, it’s worth adding that our approach is not one of uncritical cheerleaders for the United Kingdom, as defenders of the status quo. We recognise that the UK needs to continually evolve, that problems exist that need to be addressed, and that we have to react to the changing world around us.

So that is how we come to be here and broadly what we aim to achieve. But we will fail if we are not heard, if we don’t succeed in stimulating a quality debate. That is our challenge – and why we hope to engage the interest of opinion formers and thought leaders like many of you in this room.


Please visit These Islands to learn more

Thursday, 7 September 2017

Economic facts have become SNP's enemy

This piece originally appeared in the Daily Record on 07/09/2017

The reaction of the SNP and their pro-independence outriders to the latest Government Expenditure and Revenue Scotland (GERS) figures has laid bare the astonishing paucity of their economic arguments.

Unable to answer the obvious problems that the GERS figures highlight for those championing the break-up of the UK, they’ve resorted to trying to discredit their own figures. In case anybody’s forgotten: these are the figures on which they based their case for Independence, figures their own White Paper described as “a useful indication of the relative strength of Scotland’s public finances as part of the UK and a starting point for discussions of Scotland’s fiscal position following independence”. 

Now it seems the SNP want to deny this starting point.

Having once proudly boasted that they had Nobel Laureates championing their cause, the SNP now appear reduced to relying on the increasingly embarrassing contributions of accountant and tax specialist Professor Richard Murphy.

We should be more interested in what Murphy says than who he is, but given his penchant for self-aggrandisement it’s worth noting that he’s the man who was unceremoniously dumped as an advisor to Jeremy Corbyn’s Labour Party. John McDonnell publicly stated that Murphy “leaves a lot to be desired on macroeconomic policy”, to which he responded by suggesting that the Shadow Chancellor – a self-confessed fan of Karl Marx’s Das Kapital - was “all too willing to accept conventional neoliberal thinking”. Let’s be kind and just say that nobody can accuse Murphy of being guilty of conventional thinking.

Politically homeless, Murphy seems to have cast his eyes north and spotted a pro-independence movement bereft of ideas and desperate to find ways to distract from the simple facts shown in GERS.

GERS shows that the UK’s deficit is running at just 2.4% of GDP and, because Scotland voted No in 2014, that relatively healthy fiscal context determines Scotland’s ability to continue to sustain spending on vital public services.

By contrast, following the collapse in North Sea oil revenues, Scotland’s notional stand-alone deficit is 8.3%. The EU’s “excessive deficit” threshold is 3.0%, so even before considering the challenges of creating a currency and weathering the shock of separation from the UK single-market – a market objectively four times more important to Scotland than the EU - it’s clear that an independent Scotland wouldn’t be able to sustain the tax and spend levels described in GERS.

So economic facts have become the SNP’s enemy. Cue Professor Murphy, a man willing to say what desperate people want to hear if it gets him in the limelight. With the gay abandon of somebody unburdened by understanding, he’s set about casting aspersions on the Scottish Government Statisticians who compile the GERS figures and all those who use them.

He’s bumptiously asserted that the figures are “untrustworthy”, “rigged by Westminster”, “literally made up” and “nonsense”. Incredibly he’s even suggested that those using the GERS methodology are “risking the allegation of professional misconduct”. So that includes not only the Scottish Government’s Chief Economic Adviser’s team in St Andrews House and the ONS (who qualify the report as National Statistics), but presumably also those Nobel Laureats who relied on GERS when they sat on the SNP’s Fiscal Commission Working Group. Surely only the most desperate politician would lean on Professor Murphy’s transparently misguided proclamations for support?

Well it turns out there are quite a few desperate nationalist politicians. SNP MP Mhairi Black used a recent newspaper column to cite Professor Murphy as reason to dismiss her own government’s figures. A quick search of Twitter shows his blog rants have been promoted by SNP MSPs and MP’s including Joan McAlpine, Peter Grant, Chris Law, Gordon MacDonald, Christina McElvie and Richard Lyle1 .

If any of these politicians had bothered to dig past Murphy’s bluster, they’d see that his ill-informed opinions are based on a combination of technical misunderstandings, an inability to grasp the simple concept of materiality and his own failure to get his head around the figures.

There isn’t room here to indulge in the minutiae of Murphy’s technical points2.

Suffice to say he’s like somebody looking at a report into the Titanic disaster and complaining there isn’t enough information about the deck-chairs. We might not know precisely how the deck-chairs were arranged, but that’s just not a material issue.

Murphy’s wider argument is basically one of incredulity: he simply refuses to believe the GERS figures can be correct because he doesn’t understand them. He casually advertises his ignorance of how the figures are compiled by admitting to being continually bemused because he thinks the numbers are somehow “improbable”.

For those who’ve taken the time to study the GERS figures and the methodology behind them, there’s nothing bemusing or improbable about what they show. Scotland’s per capita deficit is much larger than the rest of the UK’s mainly because of higher spending.

Despite GERS-deniers’ determined attempts to obfuscate and misdirect, Scotland’s higher per capita spending has nothing to do with estimates or allocations. Nobody credibly disputes that we spend over £1,500 per person more on comparable public services in Scotland, a fact fully explained by the known actual figures in the table on this page3.

There isn’t necessarily anything inherently unfair about this either. Scotland has geographic, demographic and socio-economic characteristics which mean greater per capita spend is required to deliver equivalent services.

Whatever the likes of Murphy may claim, there’s nothing bemusing or improbable about the relative scale of Scotland’s deficit.

The pro-independence camp likes to suggest that the GERS figures show Scotland failing under the yoke of Westminster rule. In fact they show UK-wide sharing of resources allowing greater spending on public services in areas with greater economic need; only the most narrow-minded nationalist could see that as a failure.


1. Twitter promotion of Murphy by SNP MPs and MSPs

2. I've dealt with the latest technical points raised by Murphy here > Another Example of Murphy's Flaw

3. Past experience tells me that some people don't understand display rounding. Just for those people, here's the table displayed to 2 decimal places

Scotland's Deficit Figures Show that the UK Works

This article was orginally published in the Spectator Coffee House on 6th September 2017

Last week the Scottish Government published their annual Government Expenditure and Revenue Scotland (GERS) report.

The figures were good news for those Scots who believe in the value of pooling and sharing resources across the UK, bad news for those who believe Scotland should be independent (or for some reason needs to be fiscally autonomous).

The UK’s deficit is running at 2.4% of GDP and, because Scotland voted No in 2014, that fiscal context determines Scotland’s ability to continue to sustain spending on vital public services. By contrast, Scotland’s notional stand-alone deficit according to GERS is 8.4%. The EU’s “excessive deficit” threshold is 3.0%. Even before considering the challenges of creating a currency and weathering the shock of separation from the UK single-market – a market objectively four times more important to Scotland than the EU - it’s clear that an independent Scotland wouldn’t be able to sustain the tax and spend levels described in GERS.

The SNP’s Independence White Paper predicted that this year under current constitutional arrangements Scotland’s deficit would be 1.6 – 3.2% of GDP. This means that their starting point, the base on which they attempted to build their economic case, was out by £8.1 - £10.7 billion a year. The main reason for this shortfall is that the SNP famously used recklessly optimistic oil revenue forecasts of £6.8 – 7.9 billion for 2016-17. The actual figure has turned out to be just £200 million.

The reaction of the SNP and their pro-independence outriders to last week’s completely unsurprising figures laid bare the astonishing paucity of their economic arguments. The SNP once proudly proclaimed that they had Nobel Laureates championing their cause. Now they’re reduced to relying on the increasingly embarrassing contributions of accountant and tax specialist Professor Richard Murphy, the man who suggested that John McDonnell was “all too willing to accept conventional neoliberal thinking”.

Murphy’s argument is basically one of incredulity:  he simply refuses to believe the GERS figures can be correct because he doesn’t understand them. He casually advertises his ignorance of how the figures are compiled by admitting to being “continually bemused” because he thinks the numbers are somehow “improbable”.

The graph on this page illustrates the simple truth that the perpetually befuddled Professor Murphy seems unable to grasp.

The three lines show 19 years of relative spending and revenue per capita for Scotland versus the rest of the UK (rUK). The picture is clear: Scotland’s per capita deficit is much larger than the rest of the UK’s mainly because of higher spending. When oil was booming, Scotland’s revenues were sometimes enough to largely offset that higher spend, but as oil revenues have declined the underlying onshore deficit gap has been exposed.

Professor Murphy attempts to obfuscate and misdirect on this point, but the per capita spending difference shown by GERS has nothing to do with estimates or allocations, it is fully explained by known actual figures. Nobody disputes that more is spent per capita in Scotland then the rest of the UK on social protection, education, housing, health, transport and pretty much every other area of public spending. There isn’t anything inherently unfair about this either; Scotland has geographic, demographic and socio-economic characteristics which mean greater per capita spend is required to deliver equivalent services. So there’s really nothing bemusing or improbable about the relative scale of Scotland’s deficit. Surely only the most desperate politician would lean on rent-a-quote Professor Murphy’s transparently misguided proclamations for support?

Which brings us to SNP MP Mhairi Black. Not only did she use a recent newspaper column to cite Professor Murphy as reason to dismiss her own government’s figures but, in an incredible display either of ignorance or dishonesty, she claimed £15bn had been found “missing from Scotland’s oil revenues in the last few years”. The opposite is In fact the case. Scottish Government economists have accepted that their previous Scottish oil revenue assumptions were overly optimistic and have restated historic figures down by £7bn over the last decade.

It gets even worse. Ms Black joined SNP MSP Joanna Cherry QC in endorsing the suggestion that low oil revenues are Westminster’s fault for not taxing the North Sea oil industry heavily enough in the last few years. Have they really forgotten that the SNP sought to protect Scottish jobs by calling for tax cuts for the embattled North Sea oil industry, then celebrated those cuts as a victory for their party when they came?

The pro-independence camp likes to suggest that the GERS figures show Scotland failing under the yoke of Westminster rule. In fact they show UK-wide sharing of resources allowing greater spending on public services in areas with greater economic need; only the most narrow-minded nationalist could see that as a failure.

Wednesday, 6 September 2017

Another Example of Murphy's Flaw

A quick couple of observations on the specifics of Professor Richard Murphy's latest foray into the GERS debate.

Firstly, some context.

As covered in previous blogs (e.g. here), Murphy is on record as asserting that the GERS figures are “untrustworthy”, “rigged by Westminster”, “literally made up” and “nonsense”.  Incredibly in his latest foray (here) he’s even suggested that those using the GERS methodology are “risking the allegation of professional misconduct”. So that includes: the Scottish Government’s Chief Economic Adviser; The Scottish Government economists in St Andrews House; The Office for National Statistics (who judge the methodology to pass the standards required to qualify as National Statistics); presumably also those Nobel Laureats who relied on GERS when they sat on the SNP’s Fiscal Commission Working Group.

He's been shown to have made these allegations based on a fundamentally flawed understanding of the facts (e.g. here) and frankly the above should be enough to disqualify Murphy from any civil debate on this subject. But some seem determined to take him seriously, so let's attempt to ignore his previous form and focus on the specifics of his latest contribution (here).

The thrust of his latest argument is based on the (widely understood1) fact that money spent for Scotland (allocated to our spend in GERS) isn't always spent in Scotland. Murphy argues that because we don't allocate any of the tax revenue that may be indirectly generated by that spend back to Scotland, there's a flaw in the GERS methodology. He boldly concludes (without any supporting analysis or evidence) that this "flaw" means GERS "is very likely to seriously overstate the Scottish deficit as a result".

This blog will explain why he's simply wrong, again.

There are two big problems with this argument

1. He appears to still not understand what the GERS report actually is

GERS provides historical actual information - it describes what has actually happened under current constitutional arrangements. It's perfectly fine to ask the question "if some of the spend that's allocated to Scotland but not spent here was spent in Scotland, what might the impact on taxes raised be?" - but that's not the job of GERS.

For example, the Common Weal White Paper project assumes £50m additional tax revenue would be generated in Scotland as the net result of reducing the defence budget but spending more of it in Scotland, and that £719m of new taxes would come from "relocated government activity". This blog will show why those assumptions aren't realistic, but at this point let's simply observe that this is how this effect is factored in to the independence debate: by modeling alternative scenarios.

So to be clear: nobody suggests that the historical actual figures in GERS can or should represent an alternative hypothetical future - that's not what GERS is for. The SNP's own White Paper correctly described GERS as “a useful indication of the relative strength of Scotland’s public finances as part of the UK and a starting point for discussions of Scotland’s fiscal position following independence”.

Suggesting GERS is flawed for not showing what would happen if money that isn't spent in Scotland was (and vice versa) rather misses the point of what GERS is.

2. He fails to grasp the concept of materiality

We can embark on a thought experiment here, which shouldn't be mistaken for some kind of tacit acceptance that the GERS report is currently flawed. The GERS figures are precisely what they claim to be, no more and no less. But as a thought experiment, we could consider what would happen if we were to decide to change what GERS shows. We could say that instead of accounting for tax revenues based on where they're raised, when those tax revenues are somehow related to Government expenditure we could try and allocate those revenues on the same basis as the related expenditure has been allocated in GERS.

First of all, this would require some heroic assumptions.

To illustrate the general point with a specific example. Consider a Scottish pensioner taking a trip to London and spending some of their money in shops on Regent Street. They'll generate VAT in England and contribute revenues to businesses who employ people and pay taxes in England. To follow Murphy's logic we'd need to allocate a proportion of that VAT and other taxes back to Scotland because the money to generate those taxes was a cost to Scotland - if Scotland didn't pay the pension, that money wouldn't get spent in London. The absurdity of this argument is obvious - it's technically correct but it would be impossible to robustly calculate, it's an effect which happens in both directions anyway and - and this is the key point - it's most certainly not material to the figures we're dealing with.

Murphy is on record as suggesting that using statistically significant sample data to attribute some of the revenue lines in GERS (such as VAT, presented in GERS with explicit confidence intervals)  makes the report "nonsense". What would he call figures which made finger-in-the-air fiscal multiplier assumptions and had a go at guessing, for example, how much tax was generated from spending in Edinburgh during the festival where the money spent ultimately came from English social welfare spending and so shouldn't be allocated to Scotland?

OK so these second and third-order effects are amusingly daft examples, but they serve to illustrate the problems that arise if we head down this path. Let's carry on anyway and focus just on the directly identifiable examples in GERS and assess the materiality of the issue: how much expenditure is attributed to Scotland which generates taxes in rUK and how much is attributed to rUK which generates taxes in Scotland?

First we should consider what our materiality threshold should be. What is a significant issue in the context of figures explicitly stated as being accurate (with 95% confidence) to +/-£729m. Does this affect make a jot of difference when we're looking at a deficit of £13.3 billion, a deficit gap with rUK of over £10 billion?

I'd suggest we need to be talking about a change of £0.5bn or more and for that change to be systematically in one direction or another to become material in the context of the independence debate.

Assuming we ignore the "travelling consumer" argument above and focus on the possibly material issues, this isn't too difficult a scoping exercise. By digging about a bit - as the ever diligent Fraser Whyte has done in this excellent blog - we can find out roughly how much is allocated as spent "for" Scotland and then work out whether materially more or less than that is actually spent "in" Scotland.

Here are the figures which are allocated as spent for Scotland - about £10.5bn

With the help of both Fraser's blog and this blog from Fraser of Allander Institute, we can eliminate from that £10.5bn some figures which are irrelevant to this debate;
  • £3.2bn of Public Sector Debt Interest. The issues around what public sector debt interest an independent Scotland would be paying are complicated and fraught, but not relevant here
  • £1.7bn of Accounting Adjustments. These are basically technical accounting adjustments2 , so again irrelevant here
  • £0.8bn of International Services. This is mainly foreign economic aid and expenditure on embassies - money spent overseas, not in rUK
  • £0.5bn of Social Protection - mainly pensions paid to UK citizens resident overseas
So that leaves us with the following that may have material "fiscal multiplier" effects on UK tax revenues:
  • £3.1bn of defence expenditure
  • £1.2bn of "other", which includes
    • £409m of "public and common services" (central government administration, which will include the "spending on civil service in London" that Murphy uses as his example)
    • £294m of "recreation, culture & religion" (the BBC, museums & galleries etc)

Let's deal with defence first of all. The MoD provide information on their regional spend breakdown so we can do some quick back-of-the-envelope calculations to scale the difference between UK tax generating spend "on" and "for" Scotland: the figure is likely to be less than £150m3 more allocated to Scotland than spent in.

The pro-independence Common Weal White paper suggest a fiscal multiplier of 0.9 for defence spending which I presume they're defining as tax generated/spend made - so to be generous we could argue to transfer £135m of tax from rUK to Scotland in the GERS figures if we follow this methodology.

But of course most debates about independence start with an assumption that Scotland would not spend as much on defence as allocated in GERS. The SNP White Paper suggested saving £0.5bn, the current Common Weal "White Paper Project" suggests saving £1.1bn. So the common assumptions used for independence appear to be that we'd actually spend less in Scotland than is currently the case - so our tax revenues would be lower than that currently stated in GERS. Either way we can say with confidence that the fiscal multiplier effect on allocated defence spending is simply not a material issue.

So what about the £1.2bn of other?  Well we have some proxies we can use to see whether it's likely to be biased in one direction or another. As Fraser points out in his blog on this topic: 12.95% of HMRC employment is based in Scotland and 11.44% of Department of Work and Pensions staff are based in Scotland. So in these cases at least the spend "in" Scotland will likely be greater than the 8.2% of spend currently allocated "for" Scotland. Spend on the BBC will be the other way around: more is allocated to Scotland than spent in Scotland. Nuclear decommissioning costs are an example where Scotland will be favoured by the current methodology because, as Fraser Whyte rightly points out, 15.6% of total UK nuclear decommission spend take place in Scotland but we're only allocated our 8.2% per capita share. We could go on, but I'd suggest there's no evidence of a systematic bias in one direction or another in these other "non-identifiable spend areas" (or if there is, I haven't seen it).

That Common Weal paper assumes a fiscal multiplier of 0.6 for "relocated government activity" producing £719m of "new" revenue. They provide no audit-trail for that figure and I'm not surprised - the quick exercise above shows it's completely nonsensical. I suspect they've assumed a load of allocated cost moving in but no costs moving out, but without an audit-trail we can't be sure.

Again: in any debate about independence the question of whether the costs that would replace our share of the UK "scale" functions would be greater or less is a complex one. The White Paper suggested "transitional arrangements" where Scotland would pay rUK for some of these currently centralised administrative functions- so there wouldn't be an immediate shift from "for" to "in" anyway.

Enough. Let's remind ourselves that Professor Murphy asserted this issue is "very likely to seriously overstate the Scottish deficit as a result". It's yet another extraordinary and unsubstantiated assertion on his part. Not only has he not demonstrated the materiality of the issue, he hasn't even demonstrated the direction of the impact.

Yet again I find myself wondering why he is taken seriously in this debate when he makes headline-grabbing claims like "very likely to seriously overstate" with absolutely no analytically quantified foundation. In fact the simple exercise above is enough to show us that in the context of a £13.3bn deficit (+/-£0.7bn) the issue he highlight is not of material significance.

I'm not alone in this view - Fraser of Allander concluded
Changing assumptions about how much spending is allocated ‘for‘ Scotland or spent ‘in’ Scotland in GERS will change the net fiscal position. But any revisions are relatively small.
I'd suggest this blog supports that conclusion and would maybe go a few steps further
  • Any revisions would require assumptions that would make the figures less robust, not more so 
  • It is unclear if the net effect would be to increase or decrease Scotland's GERS deficit
  • Any adjustments would be highly unlikely to exceed £0.5bn in any one direction - hardly material in the context of a total £13.3 billion deficit and a deficit gap of over £10bn between Scotland and the rest of the UK



1. Widely known: Page 8 of GERS

2. Accounting Adjustments (page 8 of GERS)

3. "back-of-the-envelope" in vs for defence spending based on MoD breakdowns
  • Expenditure with Industry & Commerce: a difference of just £36m
    • £2,482m is spent outside the UK
    • £18,745m is spent in the UK - Scotland is allocated 8.23% of that in GERS = £1,543m
    • The amount actually spent in Scotland is £1,507m - so a shortfall of just £36m
  • UK expenditure not "spent with UK industry" = £37,000m - £2,482m -£18,745m = £15,773m, 7.6% of MoD personnel and UK regular forces are employed in Scotland (source here). The difference between 7.6% and 8.2% is 0.6% -- 0.6% of £15,773 = £95m

Saturday, 26 August 2017

Professor Murphy and Deckchairs

I see Professor Richard Murphy has been offering more of his ineffably obtuse observations on the Scottish Government's GERS figures. As sure as night follows day, we can expect to see a logic-mangling column in The National next week and the usual suspects seizing on his musings to proudly proclaim "see: we know nothing!".

I'm almost impressed by the lengths Murphy and his cheer-leaders will go to trying to avoid facing the simple truth that the GERS figures reveal. That simple truth is that Scotland's notional independent finances look weaker than the UK's in total because we spend far more per person on comparable services than the average of the rest of the UK.

That's it.

There's other stuff going on of course, but the simple explanation for Scotland's higher deficit per capita - the Deficit Gap between Scotland and the rest of the UK - is that we spend more per person in Scotland on public services.


Here's all you really need to know [regular readers please forgive the repetition, but this needs to be understood to explain why Murphy's aim is so far off target]:

This graph shows Scotland's relative per capita revenue generation and public spending versus the rest of the UK1. The green line shows that Scotland’s onshore economy (i.e. excluding oil) consistently generates about £350/person less than the rest of the UK average. The black line shows what happens when we add Scotland’s volatile oil revenues to the picture. When the black line is above the axis this means Scotland generates more tax per head than the rest of the UK (something used as a proud boast by the SNP during the independence referendum but - as the graph clearly shows - only ever the case because of oil revenues).

The red line shows Scotland’s relatively higher public spending, a figure which has risen in recent years to over £1,500/person more than the rest of UK. The Deficit Gap - the very existence of which Prof Murphy tells us bemuses him - is the difference between the red and black lines. This is how much bigger Scotland's deficit per capita is than the rest of the UK's. A small part of the reason is because we generate less revenue, but the vast majority of the reason is that we simply spend more.

It's not hard to understand is it? Any even half-competent analyst would look at this data and say "we have to understand why Scotland spends more per capita on public services, that's clearly the main reason why the deficit gap exists".

Which brings us to the less than half-competent GERS analyst that is Professor Richard Murphy. Earlier this week he offered the following nugget of an insight:
"what GERS still shows is the improbable likelihood that the (sic) Scotland is disproportionately responsible for the UK deficit"
The "improbable likelihood" -   Prof Murphy's position appears to be that he simply can't get his head round why this could be true, despite the fact that the reason is staring him in the face: we spend much more per capita than the rest of the UK.  This isn't about estimates or allocations: this is known expenditure data and it isn't surprising

Let me reiterate each of these points.

1. It's not about allocations. As we'll come on to see, Murphy appears to have only just noticed the concept of non-identifiable expenditure (that is "expenditure that cannot be identified as benefiting a particular country or region of the UK but is instead incurred on behalf of the UK as a whole"). The point here - and I can't emphasise this enough - is that the vast majority (near as dammit all2) non-identifiable expenditure is allocated to Scotland on a population basis. Scotland's spend per capita on these non-identifiable costs (that are allocated on a per capita basis) is, by definition, exactly the same as the per capita spend for the rest of the UK. So when we're looking at per capita spend differences, this has absolutely nothing to do with population-allocated costs.

2. It's known expenditure data. These aren't estimates or survey based allocations (as is sometimes necessarily the case on the revenue side) - when we're looking at the differences in per capita spend we are dealing with known, actual, undisputed data.

Maybe it needs laying out more clearly. Below is a simple table I've derived from the data provided as support to the latest GERS figures. It compares 2016-17 GERS reported spend per capita in Scotland with spend/capita in the rest of the UK.

[As an aside: you can use this table to find ways of closing the £1,500 per capita spending gap, including making assumptions about what an independent Scotland might replace those population-allocated costs with. So if we spend *nothing* on defence, we'd save £565/capita vs our GERS expenditure; if we cut our Social protection budget (including pensions) by 9%, we'd be back to the UK average and have saved £408/capita.  Have a play - £1,566 per capita is an awful lot of money]

3. It isn't Surprising. Look at the table above: the big spend/capita differences are no surprise to anybody familiar with Scotland's lower population density and the characteristics of Scotland's population. As the Fraser of Allandar Institute recently said
We know that Scotland spends more per head than the UK both because of how much is spent on things like health, education, economic development etc. but also our slightly higher number of people entitled to benefits associated with issues such as long-term ill health etc. There are also some minor technical issues, like the fact that Scottish Water is a public asset in Scotland but not elsewhere.

So faced with this frankly rather clear and easy to understand picture, what does Professor Murphy do? Does he start to look at the higher per capita spend areas and understand why we spend more money, whether that is indeed justified by need, whether we could find savings there if we needed to?

Of course not.

Like an accident investigator looking at the Titanic disaster and saying "I'm frankly bemused by why that ship sank - I want to hear more about the way the deck-chairs were arranged, I think that might explain it" he disappears off down a rabbit hole questioning accounting treatments he clearly hasn't understood or thought through - don't look at the iceberg folks!

Here's what Murphy's latest epistle from the planet bonkers actually says:
"I have been continually bemused by the fact that GERS – Government Expenditure and Revenue Scotland – and its equivalent data for Wales and Northern Ireland – says that Scotland runs a deficit so  much larger in proportionate terms than that for the UK as a whole"
[Comment: look at the graph above. If Murphy is still bemused as to why that deficit gap exists, he surely just needs to understand where and why we spend more per capita on public services? That's clearly the main explanatory variable here.] 
"What follows is speculation at present: think of it as an idea put out for peer review right now and not a final argument"
[Translation: I know I can't defend any of this, I just need to feed those wanting to dismiss the GERS figures and this is the best I can muster.]
"Until 2013 Scotland collected more per head than the rest of the UK, Now it collects less: this is an obvious reason why the scale of its deficit appears to be growing"
[Comment: Yes Richard, the black line approaches the green line - there's no mystery here, those of us paying attention saw this coming]
"Much, but not all of my criticism of GERS has focussed on the fact that almost all the significant revenue figures are estimates based on either data extrapolation of the whole of the UK or on relatively small samples for Scotland meaning that I think that there is doubt about whether all the major tax revenues are fairly stated"

This is a side-show to the main-event, but it's worth pausing here. Given Murphy's overall position of being bemused by the deficit gap, I think we can safely say he's implying his doubt about whether the figures are fairly stated suggests he thinks they may be understated. That's certainly how his pro-independence cheer-leaders interpret this proclamation.

In fact - as I and many others have argued - any assumption bias that exists is a/ not material to the debate and b/ likely to favour Scotland (because of obvious political pressure to do so).

So when the Scottish Government Statisticians chose different assumptions to HMRC for Scotland's share of corporation tax, they were assumptions that were more favourable to Scotland. Similarly when it came to how we calculate Scotland's geographic share of oil revenues, Scottish Government statisticians chose a methodology which favoured Scotland. In both cases, following consultation and reflection, the Scottish Government's statisticians have accepted that HMRC assumptions are now more accurate and have revised past figures appropriately3.

Sure enough if we look at the empirical data, the effect of subsequent revisions to past figures in GERS has nearly always been to make the initially reported figures appear to have been optimistic, as the graph below rather neatly demonstrates:

I've chosen to go back to 2007-08 data and 2011-12 GERS reporting as those figures (yellow on the chart above) were the ones relied on by the Independence White Paper and the "last five year" figures quoted therein. The red figures are the latest numbers released this week. So if one were to correct the White Paper's text (p.599) with what we now know to be more accurate figures:
Since 2007/08, Scotland has run an average net fiscal deficit of £8.3 billion £10.0 billion (5.9 per cent 6.8 percent of GDP). [..] In 2011/12, the latest year for which data is available, Scotland is estimated have run a net fiscal deficit equivalent to 5.0 per cent 7.0 percent of GDP. In the same year the UK is estimated to have had a deficit of 7.9 per cent  7.1 percent of GDP. 
Or maybe we could restate it with the latest five year's figures instead:
Since 2007/08 2012/13, Scotland has run an average net fiscal deficit of £8.3 billion £14.0 billion (5.9 per cent 9.0 percent of GDP). [..] In 2011/12 2016-17, the latest year for which data is available, Scotland is estimated have run a net fiscal deficit equivalent to 5.0 per cent 8.3 percent of GDP. In the same year the UK is estimated to have had a deficit of 7.9 per cent  2.4 percent of GDP. 
The big downward revisions in this year's report are mainly the impact of accepting that the past methodology used for reporting Scotland's geographic share of oil income was overly generous to Scotland (see note 3 for details).

As you can clearly see, the net effect of this correction is to adjust down the revenues allocated to Scotland by nearly £7bn over the last 10 years, to adjust the revenues down in each of the last five years. 

So having understood all of that, now read how "Professor of Practice in International Political Economy at City, University of London" Richard Murphy describes these adjustments 
"Some changes, e.g. on oil revenues, have taken place, with modest up-ratings in Scottish revenues as a result"
And we're meant to take this guy's comments seriously?

OK, back to the main event and Murphy's blog:
It is however said that the real problem is in spending [...] here things look really awry
You'd think he'd now actually look to see where and why this is the case, wouldn't you? No such luck. What follows is a painfully convoluted attempt to argue that the accounting approach used in GERS is flawed and that we're unfairly allocated some costs and/or not allocated the tax income associated with those costs because of a failure to appropriately "match" in an accounting sense.

This is basically our accident investigator saying "but those deck-chairs: are we sure they weren't rearranged in a such a way that caused uneven weight distribution and thereby contributed to the otherwise inexplicable sinking of the ship?"

I have been through what he's written on the accounting technicalities, I really have. Suffice to say there's nothing of material significance in the points he makes and nothing which hasn't been discussed before (albeit in the more esoteric backwaters of the debate, because the issues don't pass any reasonable materiality threshold in the context of the constitutional debate).

I could elaborate more, I really could - but I don't see why I should have to spend time explaining why the way the deck-chairs were positioned really doesn't matter - after all: it's Saturday, the sun is almost shining, and I want to go and ride my bike.

*** Addendum ***
If you aren't convinced that Murphy is wrong in his latest stumbling foray into the technicalities of GERS, the ever-diligent Fraser Whyte has written a thorough debunking of his "argument" here


1. All the figures I quote here are Scotland versus the rest of the UK (rUK) where rUK = [UK - Scotland]. Some confusion may arise because most commentary you'll read is based on Scotland vs UK (as a whole, including Scotland). The latter is easier to do (because that's how the GERS report shows the data) and perfectly valid if we're considering our choice to either "share with UK" or "go it alone". I think comparing to rUK is more informative for the ongoing debate about fiscal transfers - if you like it's consistent with the SNP's "us" vs "them" approach as opposed to the indyref question which was  "us alone" vs "us with them". To be honest this subtlety doesn't make a jot of a difference to the overall conclusions.

3. Allocation of non-identifiable expenditure is almost all done on a population (per capita) basis. [The biggest numbers are of course those related to defence and debt interest]

3. Some details on revisions to GERS:

Corporation Tax: GERS used to use a methodology that differed from HMRC and favoured Scotland. Following consultation, in the 2014-15 GERS the Scottish Government's statisticians agreed that the HMRC's assumptions were more appropriate and so figures were revised down (compared to those used during the Independence Referendum)

Oil Revenues: As explained within the GERS report itself and the GERS consultation document

Friday, 25 August 2017

GERS: An Inconvenient Truth

With the Scottish Government GERS figures published on Wednesday, the pro-independence spin-machine has been in over-drive trying to prevent people understanding what they show us.

The SNP’s own Independence White Paper clearly stated that GERS “provides a useful indication of the relative strength of Scotland’s public finances as part of the UK and a starting point for discussions of Scotland’s fiscal position following independence”. So let’s cut through the spin and discuss what this starting point now tells us.

The latest GERS figures show Scotland’s deficit is £1,900/person higher than the rest of the UK. This is the Deficit Gap - the amount effectively transferred to Scotland through UK-wide pooling & sharing – and it’s worth over £10 billion a year.

The graph on this page explains how that Deficit Gap arises.

The green line shows that Scotland’s onshore economy consistently generates about £350 per person less tax income than the rest of the UK. The black line shows what happens when you add on to that Scotland’s North Sea oil revenues. When the black line has been above the axis, Scotland has generated relatively higher tax that the rest of the UK - that has only ever been because of North Sea oil. With oil revenues now close to zero, Scotland would be reliant on its lower than UK average onshore revenues to fund its public spending.

The rest of the deficit gap – the large majority of it – is explained by Scotland’s now over £1,500/person higher spending, shown by the red line on the graph. The fiscal framework (underpinned by the Barnett Formula) ensures that Scotland can maintain these higher spending levels despite the loss of oil revenues. That’s what pooling & sharing means, that’s the safety net we would have lost had we voted Yes in 2014.

When the black line is higher than the red line, GERS figures demonstrate Scotland having stronger public sector finances than the rest of the UK. That’s only been materially true once in the last 17 years, when oil peaked in 2008-091.

That’s why the SNP’s independence White Paper assumed North Sea revenues of £6.8 - £7.9 billion a year – it was the only way they could make their economic case add up. Many of us observed at the time that those forecasts were recklessly optimistic. Now the actual figure turns out to be close to zero, we’ve been proven right.

So how do the SNP deal with this inconvenient truth?

They hint that we can’t trust the data because estimates are involved – neglecting to mention that these qualify as National Statistics and that the main differences they highlight relate to spending, where actual figures not estimates are used.

They talk in non-quantified terms about “different spending choices”, nearly always using Trident as their example - neglecting to mention that our share of Trident costs account for maybe £0.2bn of our allocated defence spending. In fact the SNP’s notoriously optimistic independence White Paper could only find net savings of £0.6bn through “different spending choices”.

No amount of SNP obfuscation can hide the fact that their economic case relied on nearly £8bn of oil revenues and they’ve yet to offer a credible answer as to how an independent Scotland would manage now those oil revenues have gone (and the fiscal gap is in fact now over £10bn).

So in what looks like a frankly desperate move, last week-end’s pro-independence press ran headlines blaming “Westminster mismanagement” for the decline in our oil tax revenues.

The support offered for this was a report from the unashamedly pro-SNP and notoriously flaky “Business for Scotland”. The report itself did little more than observe that Norway has generated lots of tax revenue from oil in the last few years and suggest that it would therefore “not be unreasonable to add Norway’s £11bn revenues” to Scotland’s fiscal balance2.

I mean seriously? They might just as well argue that it wouldn’t be unreasonable to add the taxes generated by Norway’s forest and timber industry to Scotland’s fiscal balance, seeing as how we both grow trees.

To be clear: North Sea revenues are generated by taxing production profits. While it’s true that both the Norwegian and UK industries are exposed to the same oil market prices, our costs of production are much higher, our production volumes are lower and with more mature reserves we’re incurring greater decommissioning costs. This means the UK offshore industry simply doesn't produce production profits like Norway’s does – and without profit there is no tax.

The Business for Scotland report even argues – incredibly - that Westminster has failed to tax the North Sea oil industry heavily enough since the oil price crash in 2015. Do they think voters have memories like goldfish?

In 2015 the SNP’s then Finance Minister John Swinney called for tax cuts for the North Sea industry3. The SNP’s 2017 election manifesto then proclaimed “only after pressure from SNP MPs did the Tory Chancellor abolish the petroleum revenue tax and halve the supplementary charge to 10 per cent.”

Quite how protecting Scottish jobs by reducing the tax burden on the North Sea oil industry – as called for and celebrated by the SNP – is “mismanagement” is anybody’s guess. In fact the decline in profitability of our oil industry has been so dramatic that even if tax rates hadn’t been cut, the revenue generated would have dwindled to close to zero anyway, but that’s by the by.

To put the cherry on the cake, SNP MP Joanna Cherry QC took to Twitter to promote the Business for Scotland report, saying “Serious questions raised by this excellent research”4.

When their cheer-leaders in the press and one of their high-profile MP’s promote a misleading think tank making transparently ludicrous arguments, you know the SNP’s economic strategy is in tatters.

This Article Appeared in the Daily Record on August 25th 2017


1. In fact as explained within the GERS report itself and the GERS consultation document, past oil revenue assumptions used have been very significantly down-graded
The impact is material: the graph below shows the figure pre-revisions as dotted lines (note there have been some cost & onshore revenue revisions too, as is normally the case)

Because of the revisions to prior years that have since been made (most notably, but not only, the change to oil revenue assumptions) I thought it would be interesting to correct what the White Paper stated at the time:
Since 2007/08, Scotland has run an average net fiscal deficit of £8.3 billion £10.0 billion (5.9 per cent 6.8 percent of GDP). [..] In 2011/12, the latest year for which data is available, Scotland is estimated have run a net fiscal deficit equivalent to 5.0 per cent 7.0 percent of GDP. In the same year the UK is estimated to have had a deficit of 7.9 per cent  7.1 percent of GDP. 
2. For a full evisceration of that report, read The Big Oil Lie

3. Swinney calls for further North Sea tax relief

[Swinney] called for tax cuts for the North Sea, and additional moves to encourage exploration in the basin. Swinney also wants the government to make it easier for companies to access tax relief for decommissioning projects, and consider non-fiscal support such as government loan guarantees.

4. Joanna Cherry MP QC on Twitter

Wednesday, 23 August 2017

GERS 2016-17: A Journey in Graphs

Today saw the publication of the Government Expenditure & Revenue Scotland (GERS) report for the fiscal year 2016-17. Regular readers of chokkablog will know what's coming next: I've churned the handle of my GERS Spreadsheet and here come the graphs ...

Let's start with the simple headline fact: Scotland's GERS deficit was £13.3bn last year, a slight improvement on the previous year1.

As a percentage of GDP our deficit is now 8.3%. An improvement on last year but, to place this figure in context, the EU's "excessive deficit threshold" is defined as 3.0%2

Of course we're not an independent country, we voted No. This means that the deficit that really matters to us is the UK's, because that's the one which we share. The UK's deficit, on the same basis, is 2.4% and improving steadily.

At this point somebody normally pipes up that this proves the UK's economic strategy is failing Scotland because the UK as a whole is improving but Scotland isn't. This is of course a rather daft observation. It's daft because it doesn't allow for the impact of North Sea oil revenue declining due to the global oil price crash and maturing North Sea reserves.

North Sea oil revenues are now effectively zero3, as the OBR and many of us predicted some time ago. This of course contrasts rather dramatically with the £6.8 - 7.9bn annual North Sea income that the Independence White Paper recklessly predicted.

We can easily exclude the impact of this North Sea decline by looking at Scotland's onshore economy only (the green line below).

This shows that our onshore economy has in fact been improving broadly in line with the trend for the UK as a whole4.

"But hold on Kev" I hear you ask, "if it's all about the loss of oil revenues, surely that's a problem for the UK as a whole as well?". The answer to this is simply that the North Sea is proportionately way less important to the economy of the UK than it is to Scotland. Here's that same graph on a total UK basis  -  makes the point pretty clearly I think.

So the apparent lack of progress on Scotland's deficit is really just due to the fact that we used to have oil and now we pretty much don't. The improvement in our onshore economy's performance is masked by the decline in our offshore revenues. But now oil's gone, why in relative terms is our deficit so much worse than the UK average?

This is easily explained by looking at Scotland's revenue generation and expenditure (on a per capita basis) versus the rest of the UK. Regular readers will be familiar with this graph5. The figures below are all in real terms (i.e. adjusted by the UK GDP deflator).

As an aside, this set of GERS figures includes some significant revisions to previous years' figures - the previous year's published figures are shown dotted on the graph below

The most notable difference relate to oil revenues which have been revised down in recognition of the fact that the ONS accruals and estimation methodology is considered more appropriate than the previous methodology used6. I can only imaging the fury that would be unleashed from the pro-independence camp had a similar admission of historical revenue under reporting had been made.

This graph shows us:
  • Red line: we consistently receive about £1,300 higher expenditure per capita than the rest of the UK
  • Green Line: we consistently generate about £400 per capita less onshore revenue than the rest of the UK
  • Black line: when you include oil revenue, we've historically generated considerably more revenue than the rest of the UK, sometimes (most recently 2011-12) enough that our higher revenue more than compensates for our higher spend.
The difference between the red and the black lines is our per capita deficit gap, the amount by which our per capita deficit exceeds (or not) that of the rest of the UK.

Here's an updated plot of this gap - the trend is clear.

When the SNP's Independence White Paper was written, the most recent available GERS figures were for 2011-12 and references were made to "the last five years" of GERS figures which I've highlighted in yellow. Because of the revisions to prior years that have since been made (most notably, but not only, the change to oil revenue assumptions) I thought it would be interesting to correct what the White Paper stated at the time:
Since 2007/08, Scotland has run an average net fiscal deficit of £8.3 billion £10.0 billion (5.9 per cent 6.8 percent of GDP). [..] In 2011/12, the latest year for which data is available, Scotland is estimated have run a net fiscal deficit equivalent to 5.0 per cent 7.0 percent of GDP. In the same year the UK is estimated to have had a deficit of 7.9 per cent  7.1 percent of GDP. 
If the shoe was on the other foot I think I can safely say the nationalists would  be up in arms about this. For what it's worth, I and others who paid attention had always argued that it was reasonable to assume the figures would if anything err on the side of generosity to Scotland - and I believe those compiling the data at the time acted in good faith. So if you're expecting a rant about these revisions, I'm sorry to disappoint.

What these graphs tell us - and what this blog has frequently argued - is that there's long been an onshore deficit gap of about £9.0bn between Scotland and the rest of the UK. This was simply masked by surges in oil revenue. When the oil revenue goes (as it has now), that deficit is exposed. The idea that oil was ever just "a bonus" for the independence case is risible.

What I personally hadn't appreciated until recently was that the Barnett Formula (which still underpins the Block Grant and largely determines Scotland's devolved budget) is currently actually acting to help increase Scotland's relative spend per capita. Although it was designed to reduce higher per capita spending in the devolved nations over time, the combination of relatively low absolute budget increases and slower population growth relative to England means the current impact is in fact the opposite. We see this empirically in the figures above, and in my recent blog on this subject I modeled how and explained why this happens

There are arguments to be made for calculating the deficit gap either on a per capita or percent GDP basis and versus either the UK as a whole (including Scotland) or versus rUK (the rest of the UK). If you really care, you can read the arguments here (> FFA For Dummies; Methodology) but all you really need to know is it makes little difference. The graph below shows the size of this onshore deficit gap over time, calculated in both ways

We can safely say that, for the last decade and more, there's consistently been an £8 - 10bn onshore deficit gap between Scotland and the rest of the UK and there's currently no sign of it going away. This is the "black-hole" that some of us keep banging on about.

Let's clear a common point of confusion: the "black-hole" doesn't mean the deficit. It means the amount bigger our deficit would be than that we now share with the UK ... if we were independent and still raising and spending public funds at the rate shown in GERS.

This matters in part because we could continue our trajectory of onshore revenue growth and slower spending growth and eventually we would eliminate (or at least reduce to manageable levels) our deficit - but we wouldn't close the gap with the rest of the UK unless we raise revenues faster or increase spending more slowly than them. As long as we perform on the same track that gap remains - a gap that now translates into an effective fiscal transfer from the rest of the UK to Scotland of £10bn a year or £1,900 for every man, woman and child in Scotland.

Is it fair that we should receive that money? Well there are two ways of answering that.

Firstly you could argue that the principle of union is that we receive equal levels of service from the state (not equal levels of spending) and so if an area is high "cost-to-serve" it should receive more public funds. Think Scottish islands and rural areas being subsidised by Scottish cities. Scotland is high cost-to-serve relative to the rest of the UK because of low population density and dispersed communities, but also because we have health and demographic challenges (see Two Types of People). 

Secondly you could argue that it's the quid pro quo for the fact that when we have a windfall like North Sea oil, we share it. We definitely did share it of course - if you start the clock in 1980 (the most favourable point to do so from Scotland's perspective) we can see clearly that for a long time Scotland was a massive net contributor to the UK's economy (when black line is above red - excuse my scruffy shading) .

For what it's worth, if you sum up the total real terms net contribution by Scotland to the UK over this time period we are still "in credit" by about £7k per capita (so at the current rate of transfer we'd still be in credit for another 3 years). Nobody in Scotland needs feel embarrassed by the fiscal transfer - we are pooling and sharing over time as well as geographically. Of course we could try and run this calculation from 1707, but that way madness lies.

Nobody is arguing that an independent Scotland wouldn't want to and indeed have to do things differently - but GERS does show us the starting point, the run-rate, the pro-forma accounts on which an independence case needs to be built.

As the SNP's Independence White Paper itself stated:
"The analysis in GERS is based on the current constitutional framework. However, it provides a useful indication of the relative strength of Scotland’s public finances as part of the UK and a starting point for discussions of Scotland’s fiscal position following independence" - White Paper p.596
Those who champion independence have to make a credible for case for how and why and by how much we'd change the GERS figures by being independent. Just saying "the GERS figures tell us nothing" simply doesn't wash - they tell us what happens if we were to keep taxing and spending at these levels (and why we can't).

So let's look at where we spend the money today: here's our total managed expenditure in real terms over the last 18 years

Of course some of that money is controlled by Westminster. In the cases of debt interest and defence these cost are allocated to us on a per capita basis. The other main reserved expenditure is elements of social security, most notably pensions, which are allocated on an actual spend basis.

Remembering that the value of the fiscal transfer from the rest of the UK to Scotland is £10bn, it's worth noting that if you (ridiculously) assume no debt and no defence costs at all we'd still be looking for £4bn a year if we were out of the UK and wanted to continue to spending these other sums (without running a greater deficit than that we share with the UK).

You're probably wondering in what areas are we spending more than the rest of the UK on a per capita basis? Well we have a graph for that

The simple answer is basically "everywhere". We used to spend less per capita on 
Public order & Safety, but the centralisation of Police Scotland appears to have put paid to that. There has been a long overdue - but to be applauded - marked increase in Education and Training spend. Social Protection appears to have (relatively) increased dramatically - I'm not sure what's driving that.

Last year when looking at this figures I said "So we can see where we spend more and this adds up in total to £1,300 per capita (presumaby it will be more if ONS decide Scottish Housing Associations should also be classified as public expenditure)".  Sure enough that's exactly what has happened (again: GERS previously erred on the side of generosity to Scotland) so the revised figure for 2015-16 if £1,419 and this year the figure is £1,566 per capita higher public spending in Scotland.

If we're to close the deficit gap - to reduce our dependence on Barnett - we could of course simply spend less. The figures above give you a starting point to try and find £10bn. Suffice to say a £10bn reduction in spend would be an order of magnitude greater than any cuts we've seen under "Tory austerity".

For "fun" I went through the following exercise to illustrate how hard it would be to reduce Scottish public spending by £10bn (or 14%). Starting with the spending category where Scotland’s spending premium is highest in per capita terms, the following list shows what Scotland’s higher per capita spending amount was in 2016/17 and what percentage budget cut would be required to take that to zero, to be at the same level as the rest of the UK average:
  • Social Protection (including pensions): £408/capita, equivalent to a 9% spending cut
  • Education & Training: £199/capita (13%)
  • Housing & Community Amenities: £164/capita (53%)
  • Health: £156/capita (7%)
  • Transport: £146/capita (25%)
  • Agriculture, Forestry and Fisheries: £120/capita (63%)
  • Enterprise & Economic Development: £113/capita (59%)
  • Public & Common Service: £87/capita (31%)
  • Recreation, Culture & Religion: £84/capita (33%)
  • Public Order & Safety: £54/capita (11%)
If we cut all of those budgets by these amounts we’d save £1,531/capita. Add that to the White Paper’s optimistic £111/capita saving (mainly from the allocated defence budget) and you’ve got a £1,642/capita or £8.9bn saving versus the 2016-17 GERS figures. So still doesn't quite get us there!

So let's look at the other side of the equation, our onshore revenue generation

This shows a very encouraging real-terms growth trend which is in-line with the UK as a whole.

Now you either see this as showing that Westminster's economic policies work for Scotland as well as they do for the rest of the UK or (if you aren't too busy arguing that GERS numbers show us nothing of value) that they show what a super job the SNP are doing. Given the SNP have refused to use our hard-fought-for tax raising powers to any meaningful degree, I find it hard to conclude that this is anything other than the UK's economic strategy working for Scotland's onshore economy.

Now I imagine you'll be wanting to know why we consistently generate less revenue per capita than the rest of the UK, so let me throw one last graph at you:

As noted before on this blog, we depressingly raise more per capita in sin taxes (tobacco & alcohol duties) and the corporation tax assumption is the one big "punt" in GERS: companies don't report profits split between Scotland and rUK so it's frankly a guess. The key point is that this guess is not a material factor in explaining the lower revenue generation we see - that's clearly down to lower income and wealth taxes. Basically, on average Scots are paid less and we are less wealthy than the average of the rest of the UK (but certainly not more than all other UK regions, to be clear).


So I think we've understood the GERS figures through these graphs and they produce no surprises. If we'd have voted Yes the oil decline would still have happened and the gap that is being filled by fiscal transfers from the rest of the UK would have to have been filled from elsewhere - some combination of spending reductions, tax rise or even higher borrowing. That's before we even start to consider the immediate cost of independence, currency issues, business flight etc. We can safely conclude that those of us who voted No helped us dodge a bullet.

Even Yes voters can't deny that we now receive an effective £10bn fiscal transfer from the rest of the UK, that pooling and sharing works massively in our favour.

The question remains: how do we improve the economy of Scotland, how do we deliver not only onshore revenue growth in-line with the rest of the UK but revenue growth that's superior to the rest of the UK? Only by answering this question can we reduce the fiscal transfer without drastically cutting our public spending.



1.As with every GERS release there have been some adjustments made to prior year figures
2. The EU uses a slighty different deficit definition than that in GERS, but it's not significant in this context
3. Actual North Sea revenues were £208m for Scotland and £(124)m for rUK (presumably due to decommissioning tax relief)
4. per GERS page 3: "Non-North Sea revenue in Scotland grew by 6.1% in 2016-17, similar to that for the UK
as a whole, 6.2%"
5. I produced this graph way back when 2013-14 were the most recent figures available - I think it stacks up pretty well compared to how things have panned out

6. As explained within the GERS report itself and the GERS consultation document