Have we paid £8bn more in than we've had out?

When I initially made this post I wrote: "No.  The First Minister lied."  Since then I have received two helpful clarifications (see comments at the foot of this post) and am happy to apologise and retract the accusation of lying.

I think however that you'll agree - if you wade through the following logic - that the First Minister's statement was intentionally misleading.  While appearing to say we paid £8bn more to the UK than we got back over the last five years he was effectively suggesting that over the last five years Scotland should have been running an even higher deficit than we were to the tune of £8bn. Remarkable.

[A briefer summary o this logic can be found here > £8.3bn better off?]

To elaborate:  there was a statement made by Alex Salmond in the STV debate that bugged me; I managed to source the exact wording and Mr Salmond is quoted as saying

• "In each one of the last 33 years, Scotland has paid more in tax per person than the average of the UK. Over the last five years we have [paid] 8 billion pounds more into the Treasury than we have had out of it, in relative terms. That is 1,500 pounds a head for every man, woman and child in Scotland."

Now I think I known the GERS numbers pretty well by now and I simply couldn't see how on earth that statement could be justified.

Taking first of all what most people watching will have thought he was referring to: in fact

• In the last 5 years public expenditure in Scotland (what we've "had out of" the Treasury) exceeded our tax receipts (What we have "put in" to the Treasury) by £51.3bn¹ .. or over £9,000² a head for every man woman and child in Scotland.

These figures of course assume we keep "our" geographic share of oil using the Scottish Government's most favourable definition of geographic share.  We run a deficit.  The UK runs a deficit. Of course we get more back from the Treasury than we put in.

Of course the subtlety in our First Minster's statement comes in the use of the phrase "in relative terms".  The BBC suggested this explanation:

• "Alex Salmond said Scotland had contributed £8bn to UK finances. According to Scottish government figures, Scotland has contributed more to the Treasury per head than the UK average, if you assume a geographic share of North Sea revenues. In 2011-12, it was £1,500 more per head (the figure Mr Salmond quoted) and, if you multiply that by the Scottish population, you come to £8bn"

With apologies to the BBC: whilst that explanation fits the numbers unfortunately it bears no relation to the First Minister's words.

• The figure quoted is for 2011-12 - not the last five years
• The figure represents tax contribution (what's "put in") and takes no account of the public expenditure received (what's "taken out") - the First Minister said the figure represents an amount "more into the Treasury than we have had out of it"

So I turned to the raw data.  I chose to go back 7 years (there is normally a reason why a figure is quoted over a particular time period so I wanted to check the sensitivity to longer as well as shorter periods). As well as comparing Scotland to UK total (as GERS and IFS do) I compare to rUK (the rest of the UK excluding Scotland) which would seem to me a more helfpul comparison.  I show the full table of data below for those who (like me) prefer to see an audit-trail of the figures.

Before I received the steers as to how the figure was arrived at I applied the implied BBC methodology (grossing per capita differences to full year figures by multiplying by the Scottish Population).

To correctly describe the figures the BBC use to explain the First Minister's statement (highlighted in yellow in data table);

• In 2011-12 (the year before last): assuming a full geographic share of oil (and using the Scottish Government's definition of geographic share) Scots contributed £1,500 more per capita to the treasury than the the UK average (before taking account of how much more we received back in the form of public expenditure).  In absolute terms that is equivalent to £8bn

To fill in the figures for the statement our First Minister made as I would interpret them (highlighted in light green)

• "Over the last five years we have [paid] £1.4bn pounds more into the Treasury than we have had out of it, in relative terms. That is £270* a head for every man, woman and child in Scotland."

* Using 5 year average and multiplying by 5

To make what I might humbly suggest is a more fairly representative statement (figures in green)

• In recent years Scotland gets more back from the Treasury than we put in, even applying the most favourable assumptions around keeping "our" geographic share of oil revenue.
• If you want to be precise in the numbers; looking at this on an average annual per capita basis relative to rUK;
• Over the last 7 years on average we've paid £2(!) pa. more in than we've had out
• Over the last 5 years on average we've paid £54 pa. more in than we've had out
• Over the last 4 years on average we've received £156 pa. more out than we've put in
• Last year we received  £512 more out than we put in to the Treasury

So we can see why the 5 year time period was chosen; take a longer or shorter time period and the picture changes dramatically.  I have neither the time nor the inclination to go back even further than 7 years - we should really be discussing the future after all.

But hold on; we still haven't explained the £8bn figure.  It was at this point that I initially concluded our First Minister and his script writers must have simply lied - I accept now that I was wrong and am happy to put the record straight.  I'm indebted to Ivan McKee of Business for Scotland (and another Anonymous contributor) for giving me a steer on this.

The figure can be arrived at if you assume over the 5 year time period Scotland should have received the same share of expenditure as its share of tax contribution.  Sure enough you can get to the £8bn figure on that basis (highlighted in blue).  There is a massive and - once you've thought it through - fairly obvious problem with this approach; it would mean our share of the deficit would become the same as our share of tax contribution - we would be disproportionately responsible for the deficit and the debt associated with it.

Let me offer a narrative interpretation of the figures (figures not already quoted above are highlighted in the table in orange.)

Assuming Scotland keep "our" oil money on a geographic share basis (and taking the Scottish Government's most favourable definition of geographic share);

• The higher levels of public spending we currently receive mean we run a very similar per capita deficit to the rest of the UK (although in recent years Scotland has been running a significantly higher per capita deficit)
• Over the last 7 years £2(!) per capita per annum lower
• Over the last 5 years £54 per capita per annum lower
• Over the last 4 years £156 per capita per annum higher
• Last year £512 per capita higher
• If our share of expenditure was the same as our share of tax contribution (the First Minister's hypothesised case) we would run a higher deficit (as our share of deficit would become the same as our share of tax contribution).  
• Over the last 5 years Scotland's share of deficit generated (8.2%) is very similar to our population share (8.4%); over the last 7 years its identical (8.4%) and over the last 4 years its higher (8.9%)
• Under the hypothesised case we would have spent an extra £8.3bn; of course that means our deficit would also have been £8.3bn greater
• Under the hypothesised case Scotland's 8.4% of the UK population would have been responsible for 9.5% of the deficit (i.e. debt requirement) - that's an additional £1,332 of debt for every man woman and child in Scotland

So what can we conclude from all of this number crunching?  Funnily enough the same as when I looked at these figures nearly 3 months ago here > Oil & Gas Part I: For Richer for Poorer;

• Scotland receives back in higher expenditure about the same amount as we contribute in higher tax if you assume we get to keep "our" oil and gas
• On this basis Scotland historically runs a similar deficit/capita as the rest of the UK (although last year it was £470/capita higher)
• A corollary of this would be that we are (at least over the period I've analysed here) responsible for our per capita share of debt even if we are allowed to retrospectively  keep "our" historical oil & gas revenues

To account for the First Minister's statement we can add;

• If we decided that Scotland should have produced a higher per capita deficit than rUK because we contributed a higher share of tax (assuming we keep "our" oil) then we would indeed  have needed to receive an extra c.£8bn over the last five years ... and our deficit (and hence implicit share of debt) would be £1,332 per capita higher than our per capita share

1. 5 year average deficit of £10.3bn x 5
2. 5 year average per capita deficit of £1,949 x 5