Saturday, 28 March 2015

How Scotland's Economy Contributes to the UK

The Government Expenditure and Revenue Scotland (GERS) figures continue to be widely misunderstood and misrepresented so I'm going to have another go at trying to explain what they mean, what they do (and don't) tell us and how understanding them might impact the way you choose to vote.

Firstly: these numbers are - within pretty limited certainty bands - a matter of historical fact. They are produced by and relied upon by the Scottish Government. If there is any natural assumption bias it is likely to be to flatter Scotland.  In fact we should take confidence from the fact that the Scottish Government and HMRC are in pretty close agreement; GERS assumes only 0.36% more tax revenue for Scotland than HMRC.

Secondly: of course these are figures which show how Scotland's economy looks while within the UK.  But they give us a clear view of the starting point from which any changes the Scottish Government makes (using increasingly devolved powers, Full Fiscal Autonomy or indeed if we become Independent) can be understood.  These figures show us what it costs to run Scotland based on the taxes we pay today and the public spending we benefit from today.  It means we can understand what the immediate impact of changing tax or spend policies  will be on Scottish people and our Natioanl accounts.  Of course the long term impact of those changes (will they boost or damage economic growth) are far more difficult to assess - that's where politico-economic judgement is required.

Thirdly: they are a snapshot (or more accurately 15 snap-shots) in time. The time-series nature of these stats is extremely useful as it allows us to understand how volatile or predictable the various revenue and expenditure streams are.  We can judge if the latest figures are "just a snapshot" or a reflection of long-term trends.

I've already shown the breakdown of the last 10 year's figures (in absolute terms) in my previous post Analysis of 2013-14 GERS.

In this post I focus on how Scotland's Economy compares to The rest of the UK's (rUK's)2 over time. All figures are taken directly from the GERS data tables; I've just calculated rUK (= UK minus Scotland), aggregated some rows of data for presentational clarity and worked out the figures on a per capita (per person) basis so we can easily compare the figures between the two regions.

Let's start with relative per capita Tax Revenue generation excluding Oil & gas;


This graph shows very clearly that (before oil & gas revenues are considered) Scotland consistently generates slightly less tax income per capita than the rest of the UK - the 15 year average is £260 less.

Now let's look at the relative differences between the main sources of tax revenue that make up this figure;


Working from the top of the graph down: the only areas where Scotland's per capita figures differ materially from rUK are "Gross Operating Surplus" (mainly profits generated by State owned Scottish Water) and the "Sin Taxes" generated because Scots smoke, drink and (to a very small extent) gamble more than people in the rest of the UK.  The impact of the council tax freeze is observable but a relatively small factor - I guess this shows how some policies with relatively marginal economic impact can generate a lot of attention.

The striking point of course is that Scottish Income & Wealth Taxes3 consistently generate £400 - £500 less per person than in the rest of the UK.  Given the tax regimes are currently the same this must simply be a reflection of the fact that on average Scots consistently earn less. This - as with so much of the economic debate - is more a "regions versus London" issue rather than one of Scotland versus rUK.  The graph below (Equality Trust from ONS data) illustrates the point



So before Oil & Gas (or the "bonus" of oil & gas as the Yes campaign liked to refer to it) how does our relative revenue generation compare with our relative levels of public expenditure? This is easy to see by adding our relative public expenditure on to the same graph (the red line); this line is a graphical representation of the wdiely quoted "we spend £1,200 more per capita in Scotland than the rest of the UK). Of course the gap between this and our tax income (the black line) is the difference between our pre-Oil & Gas deficit.and that of rest of the UK


It's worth noting that the expenditure per capita difference between Scotland and rUK has in fact increased in recent years - we'll come back to that later. But it's time we introduced oil & gas income.

Scotland (when given it's geographic share - getting to keep "oor oil") of course generates considerably more oil & gas tax revenue per capita than rUK. Typically about 90% of the UK's oil & gas revenues fall to Scotland (it's not 100% because there are gas fields in the "English" North Sea waters - let's put aside arguments about definitions of where Scottish Waters ends and English waters start and just run with these figures using the definition accepted by the Scottish Government).


The volatility of oil & gas revenue over the last 15 years is clear to see.  We should remember also that these figures predate the oil crash - we already know the 14-15 figure will be well below £500 and 15-16 is expected to be lower still.

So we let's now add this oil revenue (the black line below is the summation of the graph above and the first graph) and see how Scotland's finances compare with the rest of the UK when we include oil & gas.  The fact that black line is always in positive territory is a graphical illustration of the SNP's oft repeated mantra that "Sotland has contributed more tax per capita than the the rest of the UK for the last 15 years".




Of course when the black (tax income) line is above the red (public expenditure) line Scotland's deficit per capita is not as bad as rUK's - when it's below it it's worse. For greater clarity we can simply plot Scotland versus rUK's relative per capita deficit (the difference between these two lines). Bars above the line mean Scotland's deficit (with oil) is lower on a per capita basis than rUK's - bars below the line obviously mean our deficit is worse.




The boxed area of the graph shows the 5 year history that was generally quoted by the Yes campaign when they used historical average figures - a period that usefully included the clearly exceptional year of 2008-09.  It's also worth noting that the 12-13 numbers were published 6 months before the referendum but the Yes campaign (including not just Wings Over Scotland's "Wee Blue Book" but also MSP's like Stewart Stevenson) continued to quote the 11-12 numbers as if they were the most recent ones availabel - they simply ignored the 12-13 numbers.

Of course the 13-14 numbers were published after the referendum but anybody who pays attention to these things knew they would be similar to 12-13 because the oil situation was clear for all to see.  Of course to mention this was to be accused of accusing Scotland of being "Too We, Too Poor, Too Stupid" - a remarkable effective strategy when it came to hiding the economic realities from a large proportion of the electorate.

We still have one last set of figures to look at and understand: the detail behind the public expenditure that is so much higher (and growing slightly faster) in Scotland than rUK.  The following graph breaks that expenditure down into its constituent elements; as with all these graphs we are looking at the per capita difference between Scotland and rUK.  Above the line means we spend more in relative terms in Scotland.


There are a lot of lines on there but a couple of observation are still easy to make
  • We have a higher per capita spend in Scotland on pretty much everything
  • Social protection (benefits, pensions, tax credits and admin costs) and in recent years Transport are the biggest areas of higher relative spend
Some of these figures will be explained by demographic differences, some by the intrinsic higher cost-to-serve of a geographically dispersed population, some by Scottish Government policy.

International Services, Public Sector Debt Interest and Defence do not appear on this graph as they are costs allocated on a per capita basis (so by definition the per capita difference with rUK is zero). It's worth reiterating the point that if Scotland wants to remain in NATO the absolute level of defence spend is likely to remain at similar levels to those allocated in GERS (to achieve the accepted NATO target of defence spend equating to 2% of GDP).  Although talk of scrapping Trident is always accompanied by big numbers (the £100bn lifetime cost) the reality of course is that scrapping Trident doesn't save the economy that money - it allows it to be redirected into alternative defence spending.

The "Accounting Adjustment/Other" line is worth mentioning (given its the only one were we currently spend less per capita in Scotland than rUK) but if your stamina is flagging skip this paragraph as this is not easy to explain (or indeed understand).  It's primarily the difference between capital expenditure and depreciation (and of course we are looking at the relative difference in this difference).  I think in simple layman's terms it means Scotland is (very slightly and only in the latest year) at a point where it's rate of investment in capital programmes (compared to its historical average) is lower than rUKs. I think.

Slightly more interestingly there are two lines that I think are worth extracting from this graph as they tell us something about the SNP's relative priorities. I've observed before how education spending in Scotland has remained static in nominal terms over the last five years.  The graph below shows that  - while e.g. public order and safety expenditure has relatively increased - the relative premium spent on education in Scotland versus rUK has been eroded under SNP control.  



The Scottish Government itself points out in the GERS commentary that "lower population density in Scotland relative to the UK [..] increases the cost of providing the same level of public service activity, particularly in areas such as education, health and transport". The inescapable conclusion is that the SNP are relatively less committed to education spending than the previous administrations. For those of us who believe that social justice starts with the best possible quality of education for all this is a damning observation.

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So what?

By pooling and sharing with the UK Scotland effectively carries a per capita share of the UK's debt; we are allocated a per capita share of National debt interest in GERS and the default assumption used for sharing the debt in the indyref was that it would be on a per capita basis.

This matters because if - on a per capita basis - Scotland makes a higher contribution to that deficit (and associated debt) then we are being subsidised by rUK. Conversely when Scotland runs a lower deficit per capita than the rest of the UK we are net contributing. In the recent past we have sometimes more than paid our way (look at the bar chart); but given current and forecast oil revenue levels we can expect the Barnett Formula to mean we are subsidised for the foreseeable future.  That shouldn't be a source of shame or embarrassment - there will always be some regions that contribute less than others and we have more than paid our way in the recent past (just look back to the North Sea oil boom of the 1980s).  It's what pooling and sharing is all about; it's why the Barnett Formula exists.

There are alternatives of course. Nicola Sturgeon has stated “I want full fiscal autonomy for the Scottish government. I want us to be responsible for raising our own revenues and deciding how those revenues are spent".  A laudable objective; but to stand on our own feet fiscally within the UK means not continually running a higher deficit than the rest of the UK (given we would still be sharing a currency and our National debt).  Now look at the graphs above and it's surely obvious that we can only achieve that with either another oil boom or by dramatically increasing our tax take and/or reducing our public expenditure. Of course every government wants economic growth to increase tax revenue without having to change tax rates but there is no magic wand that makes that happen.  The truth is that the only way Full Fiscal Autonomy could be achieved for Scotland would be by pursuing policies of even greater austerity than the rest of the UK; we would be starting off £800 worse off for every man woman and child in Scotland.  That's the head-start we'd be giving the rest of the UK on day one.  This can't be dismissed as just a snap-shot historical view. Look at the graphs - we consistently, structurally spend more and raise less unless there is an oil boom. It's all about the oil.

To say the challenge would be tougher still were we to pursue independence is surely now self-evident.  We'd have to sort out a currency and somehow seek to counteract the adverse impacts on our tax take and welfare spend that would result from increased unemployment as at least some businesses relocate South of the border.

If you believe that further devolution or full separation is worth it anyway then fair play.  But have your eyes open and be honest enough to admit to the hardship that will result; hardship which will - as it always does - impact the least well-off most.  Don't kid yourself (or others) that separation will somehow deliver "social justice" when the figures are strikingly clear - we'd all be worse off on day one.

It's at this point in the economic argument that - defeated by the numbers - some say "well if we're not net contributing to the UK why are they so keen to keep us?"  There are two answers to this;

  1. Much as some Nationalists struggle to comprehend, there are people who believe in the long-term economic, social and moral merits of pooling and sharing - not everybody looks at the numbers and decides we should cut loose those who don't "pay their way" in a short-term economic sense
  2. They might be becoming rather less keen to keep us.  If you shout and scream at a point in time when you are a net contributor ("it's oor oil"; "we give more to Westminster than we get back") then you might come to regret framing the debate in terms of narrow economic self-interest ("we'd have been £8bn better off"; "we'd all be £500pa. better off") when the numbers swing against you.

As for the party politics of this, be in no doubt: a vote for the SNP is a vote for full fiscal autonomy - and that's a vote for immediate hardship.  It's also a vote for independence because that is the SNP's constitutionally defined over-arching objective.  If you think the hardship and immediate economic disadvantage is worth it for that end then fair enough; but if you think voting SNP is a tactically astute way to ensure Westminster focuses on Scotland's selfish interests you might want to seriously consider thinking again.

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Footnotes
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1. Accuracy of GERS figures

The GERS figures are created by the Scottish Government and underpinned the economic case for Independence - so it is fair to assume that if there is any bias it would be to skew the picture in Scotland's favour. HMRC produce their own figures (Table 4 in this HMRC Document shows methodological differences between HMRC and the Scottish Government)  and pages 38 and 39 of GERS show that the differences between HMRC and GERS estimates are are in fact very small. GERS estimate Scottish Tax revenues in 2013-14 to be 0.36%(£181m) higher than HMRC.
    The likes of Business for Scotland and Wings Over Scotland have made startlingly misinformed statements about VAT and Alcohol Duty that have led some people to doubt the validity of these figures.  If BfS and Wings were right it would be a terrifying indictment of the Scottish Government and the official Yes campaign's competence - but of course they are not right; the figures are sound.  References to VAT being "paid at companies' headquarters" and Scotland not getting attributed "Alcohol Duty at point of export" demonstrate a fundamental misunderstanding of how these taxes work and how they are attributed in GERS.  These are consumption taxes and GERS estimates Scotland's share of these based on consumption data.  There is no such thing as "Export Duty" on whisky (in fact you get Export Duty Relief); for the same reason we get to keep tobacco Duty despite not producing cigarettes.  A 2 minute search of the official GERS Method Statement is enough to dispel these myths.

    The main area of uncertainty in GERS figures is how Corporation Tax would split between Scotland and rUK.  Businesses are not currently required to report profit split between Scotland and rUK. so nobody knows how profits (and therefore taxes) would actually fall.

    There seems to be a bizarre amount of confusion out there around what GERS actually tells us.  I've covered the detail of what GERS means elsewhere (here and here); basically it tells us how Scotland's accounts would compare to the UK if we were fully fiscally autonomous based on continuing with the same tax and spend policies.

    This is useful if we look at the long term trends as it helps us understand what we have become used to in terms of tax and spend levels in Scotland (and by implication we can start to think how dramatic the tax rises or cost cuts would need to be to cover the deficit gap we have versus rUK).

    2. Scotland versus rUK

    In all these analysis I compare Scotland to rUK (where rUK = UK - Scotland).  I find this preferable to comparing Scotland to the UK as a whole. I've seen the fact that the UK as whole includes Scotland causes remarkable confusion in debates (with people e.g. arguing that the UK shouldn't be getting the oil revenues).  By comparing to rUK I hope to avoid this confusion.

    3. Income & Wealth Taxes

    The is an aggregation of the following GERS items; Income Tax, National Insurance Contributions, Capital Gains Tax, Stamp Duties, Inheritance Tax and "Other Taxes on Income & Wealth"

    6 comments:

    Fraser Whyte said...

    Excellent Kevin. I do hope this hits home with those for whom a Yes / SNP vote is not about nationalism.

    I'd make two additional points, one of post-FFA / independence finances and one on why rUK would want us to stay.

    First of all, the typical SNP response to the GERS is that they can be discounted as they only provide the data for Scotland within the UK and that, self evidently, this situation would change post-independence. Of course, this argument carries with it the assumption that the situation will improve with no other justification given than "because Scotland".

    As Peter Jones pointed out (http://www.scotsman.com/news/peter-jones-dump-fiscal-autonomy-it-s-insanity-1-3726676) even with the SNP's own figures for economic growth (0.1% per annum productivity increases for example), the deficit is only improved by £3.5bn over 10 years. TEN YEARS.

    And that fails to take into account the possible (likely) negative impacts of FFA and/or independence - for one, the inevitable increase in interest rates for public borrowing in a fiscally independent Scotland mean our expenditure on interest alone would skyrocket before you've even considered the SNP's plans to increase public spending even further.

    The "everything else being equal" defence just doesn't stack up.

    Secondly, on why rUK would want us to stay - well as you say, maybe they don't and this is clearly the SNP's current mode of attack. But politically there are good reasons for rUK to keep the union intact.

    The "status" of the UK would come under even greater attack were the union to break up. While some might see this as a good thing, clearly none of the "establishment" would think so.

    Also, with commitments to green energy becoming more and more difficult to meet, Scotland's potential in providing a carbon-free source of energy to the UK could be vital in years to come. Just a thought.

    Anyway, fantastic blog as always.

    Ron Sturrock said...

    FFA is exactly what it says on the tin, you stand on your own two feet without external financial input benefits expressly agreed.
    So, on this basis Barnett goes.
    Have you seen the Treaury briefing re FFA for the next 5 years, not pretty reading
    What oil price will SG increase offshore tax rates, if at all.

    From Scottish revenues, MOD, FCO & Debt along with any other shared service costs still have to be paid.
    Monetary policy will remain reserved.
    If SG need to borrow, this borrowing as I understand, will be solely to Scotland's account.
    So how much borrowing and at what rate will the market support?

    It would be implausible to believe the regeneration policies proposed by the SNP have not been proposed or actioned by other countries, unless someone can kindly correct me.

    For Green energy, see the EU energy plan for proposing a substantial connector network. The connector from Norway is reckoned to be complete in a few years time.

    Of course we know that FFA is perhaps a few years off, if at all. Based on the current financial climate Turkey's dont vote for Christmas.

    finarne said...

    You've done another excellent piece of work in trying to present an as balanced as possible analysis of the figures.

    What I'm finding more and more however is that it's now impossible to even enter into any sort of dialogue with the yeserati on economics.

    My observations of their attitude to the GERS figures changes depending on how the wind is blowing. If you read the comments on this (from the GERS report for the 2011-2012 figures):

    http://wingsoverscotland.com/gers-
    between-the-lines/

    This is met with glee, the comments all herald the figures as "the argument for independence".

    Fast forward to (from the GERS report for the 2013-2014 figures):

    http://wingsoverscotland.com/gers-201314-for-dummies/

    And...it's an entirely different story. Now the figures are "dodgy".

    (and I know that Wings tends to attract the more fanatical end of the spectrum but it's usually those that shout loudest that are heard)

    I've taken the executive summary from the 2013-2014 GERS report and pasted it into several comment threads on various articles, typical responses I've had are:

    There is doubt about the "veracity" of the figures

    The politically biased GERS report

    To me the biggest issue with the upcoming GE is that there is virtually no information presented via the national press/TV (and I mean the UK wide press/TV) on the fact that the SNP's desire for FFA is not fit for purpose.

    It does make me think that if surely the rest of the UK's population were made fully aware of the deficit Scotland "enjoys" that there would be a clamour for Barnett being scrapped, and maybe even a "reverse referendum" of "let's get rid of Scotland".

    The other question that gets posed most often in response to GERS is of course (as you cover) the notion of "if Scotland is such a drag on resources why do the rUK want us to stay".

    To me this is the most curious question for the Tories in particular. Labour have always been able to rely on a huge number of MPs from Scotland and so you can understand their desire for the union (which might now change of course).

    But I do wonder why the Tories have for the recent past stuck to the desire to maintain the union. Of course there's the argument that it would be political suicide for them to abandon their unionist stance - but I really do wonder why it would.

    Political suicide implies that their base support would not like them to alter their stance on the union - but you really have to ask why their base support would care one iota.

    Would all the tories based in England care that the "higher spending Scots" were cast aside? Could they not be easily sold on the notion that the rUK "could save a lot of money" by breaking away?

    All the other arguments about the UK being diminished in the eyes of the rest of the world come up, but the rest of the world don't vote in UK elections, and that to me is the biggest issue with the Tories stance on the union.

    From a straight forward politically strategic decision, the Tories could remove a block of votes that they are never going to get (regardless of the votes being SNP or back to Labour).

    They would not have to deal with the 59 MPs voting against them at Westminster, and that totally changes the electoral math (sorry, been watching too much The West Wing recently).

    But... maybe I'm looking at this as too much from a political view, maybe
    (maybe) the politicians aren't as obsessed with just winning elections. Maybe the politicians do have an innate sense of "nationhood" that they don't want changed with breaking off part of the UK.

    Anonymous said...

    Let's not forget who funds the Tory party... for business (both in England and Scotland) a break-up of the UK will be bad news for a variety of reasons.

    ddee said...

    where is the table that includes borrowing? and the table that calculates scotlands contribution to military , large government projects like hs2 etc?

    Kevin Hague said...

    as explained in the text, defence, debt (and international affairs) are alloctated in GERS on a per capita basis so would be a line along the origin on the relative spend graphs.

    As mentioned elsewhere in this blog, GERS only takes 2% of HS2 costs (being the scot Gov assessment of Scotland's share of benefit) and other costs are allocated on in-market/share of value basis (so *nothing* for olympics, London Sewers, cross-rail etc.)

    Of reserved costs allocated in GERS, the White Paper (hugely optimistically) assumed c.£0.6bn annual saving potential