Saturday 11 April 2015

Explaining the £7.6bn "FFA Black-Hole"

Today (Sunday 12th April 2015) there's a piece in the Guardian by Kevin McKenna that quotes the IFS's £7.6bn Full Fiscal Autonomy "black-hole" figure and casually dismisses it. I'll go into the detail of McKenna's argument (and why it's completely flawed) later in this post but first we need to establish what that figure actually is.

The simple table below gives us all the information we need, sourced from GERS (actual 2013-14), OBR (March 2015 outlook) and the IFS (the quoted source for the £7.6bn "black hole");

Let's start with 2013-14 known actual data per Scottish Government's own GERS figures. 

I'll assume anybody reading this blog is familiar with GERS figures (if not see this post > GERS simple summary). Those figures show that in 2013-14 Scotland generated a deficit per capita £800 greater than the UK average - if you multiply that by our 5.3m Scottish Population you get a £4.4bn deficit gap. Because our GDP/capita is higher than UK average, if you use %GDP to pro-rate the figure it's £3.9bn.

So what are the forecast assumptions to get to £7.6bn?

Actually this is really simple.  The table above shows OBR assumptions on UK deficit; the IFS simply assume Scotland's figures follow the UK trend but adjust for the exceptional decline in North Sea Oil revenues.

The implication of the latest OBR North Sea oil forecast is that Scotland's tax revenue will decline by £3.6bn from 13-14  to 15-16. [Which is why we need to keep caveating 13-14 actuals with "this is before the impact of the oil crash"].

So take the £3.9bn actual 2013-14 deficit gap and add the additional £3.6bn caused by oil decline and you get £7.5bn.  I'm not going to bother digging to explain the other £0.1bn.

So What?

Well first of all let's clear up a common misconception; the £7.6bn is not Scotland's forecast deficit; the forecast deficit is £14.2bn (8.6% of GDP).  The £7.6bn is the amount we'd have to find (through tax rises or spending cuts) to match the expected deficit level of the rest of the UK (4.0% of GDP). That is what FFA would require us to do (give or take - we would likely have some limited borrowing powers but if we're sharing a currency we have to follow similar fiscal rules).

Secondly let's recognise that this is a forecast and therefore uncertain.  However we start with a £4bn known gap and the only assumption that drives Scotland to get worse than the UK is oil; most of that is already know so it's hardly a controversial forecast.

Thirdly what does £7.6bn mean?  The IFS figure implicitly assumes that part of the deficit decline caused by the oil decline is offset by planned "Westminster cuts" (you may have noticed in the table above that we lose £3.6bn of oil revenue but our deficit only increases by £1.8bn).  If you think "Westminster Cuts" of £30bn are scary then consider this; Scotland's share of those cuts would be about £3bn - this £7.6bn would be in addition to that.  We really would be talking about Austerity2

Finally - as ever - this is really all about oil.  For context the graph below shows actual North Sea Oil revenues over the last 34 years + 3 year OBR forecast.  The green line is the approximate level of North Sea Oil revenue required for Scotland to offset our higher spending versus the rest of the UK. Put simply: if oil is above that green line we are better off fiscally autonomous; when it's below it we're worse off.

The gap between the green line (£9.7bn) and the grey bars (actual North Sea revenues) is roughly the size of the "black-hole" caused by fiscal autonomy.

** 12/04/2015 Correction **

I'm grateful to @boatyjames for pointing out that by presenting the current deficit gap with historical nominal figures this graph is misleading.  He's right - I leave the graph above in here in the interest of openness.  I've now been able to find the time to adjust the historical nominal data into real terms (using the GDP deflator) and have added historical pre-oil deficit gap detail.

This is certainly a fairer representation of the scale of the 80's oil boom - but it doesn't change the conclusion that North Sea revenues need to return to c.£10bn if they are to close Scotland's deficit gap with rUK.

People who dislike the inevitable conclusions that result from my analyses tend to accuse me of being selective and biased - if I was I would simply have excluded the 1980's from that graph.  That said; unless somebody believes we have another 1980's style oil boom coming it does make sense to see the graph scaled from 1990

** Correction Ends **

So having established what the £7.6bn figure means, let's now look at the offending paragraph in this piece by Kevin McKenna in the Guardian;

  • "Of course the IFS figure doesn’t bear close scrutiny: it is using numbers gathered in one year to define Scotland’s economy in perpetuity. It also fails to take into account that by 2020 Scotland’s onshore revenues are predicted to grow by £15bn. It should also be taken into account that the UK’s deficit was £98bn last year and that over the five years to 2014 the UK’s cumulative deficit has been worth more than £600bn, yet in two of the past four years Scotland’s GDP percentage deficit has been less than the UK’s. Factor in the fact that, in each of the past 34 years, Scotland has paid more tax per person than the rest of the UK and a future without Barnett looks a lot less gloomy."

There are so many flaws in this one paragraph of text that we'll have to take this step by step;

"Of course the IFS figure doesn’t bear close scrutiny" 
  • "Of course" -  presumably because the figure casts the SNP's economic policies in a bad light and that simply can't be right?
  • "close scrutiny" - he's setting himself up here by implying he's applied close scrutiny. Let's see shall we?
"it is using numbers gathered in one year..."
  • Using numbers gathered in one year?  There are 15 years' worth of GERS numbers and he's suggesting the IFS have only looked at the most recent year? That would be remarkably shoddy work from a highly respected think tank.
  • Actually what the IFS is doing is recognising that the underlying trend excluding oil & gas is remarkably consistent over the last 15 years.  To illustrate here's the GERS figures showing the difference between Scotland's deficit and the UK's expressed as a percentage of GDP but excluding Oil & Gas

  • Let's remember the deficit gap the IFS is forecasting for 2015-16 is 4.6% - given this is when the assumed Oil & Gas contribution to Scotland's finances is 0.4% of GDP (£600m) the underlying deficit gap the IFS are assuming (excluding  oil & gas) is 5.0%.  Look at the graph above again; assuming a 5% underlying deficit gap between Scotland and the UK is hardly "using numbers gathered in one year" is it?
" define Scotland’s economy in perpetuity"
  • The IFS are explicitly forecasting what the figure will be in 2015-16.  His "close scrutiny" has led him to think they are claiming this figure in perpetuity. Golly.
"It also fails to take into account that by 2020 Scotland’s onshore revenues are predicted to grow by £15bn"
  • Quite how a forecast for 2015-16 should take into account forecast revenue growth to 2020 is beyond me
  • Let's be generous and assume he's making a wider point that the IFS is "failing to take into account" forecast revenue growth. Well of course the IFS have taken this into account; the issue is onshore revenue performance relative to the rest of the UK.  The £7.6bn figure is a relative gap not an absolute deficit number  Growing in line with the rest of the UK (as the £15bn forecast to 2020 assumes) has no impact at all on the £7.6bn gap.
"It should also be taken into account that..."
  • I love this phrase - it's like raising a red flag and screaming "there's a non-sequitur on the way".
"... the UK’s deficit was £98bn last year and that over the five years to 2014 the UK’s cumulative deficit has been worth more than £600bn..."
  • And here's the non-sequitur - a UK wide absolute deficit figure and a 5 year cumulative total. Of course these numbers bear no relevance to the deficit gap being discussed; presumably he's just chucked these numbers in so that we see numbers that are far bigger than the £7.6bn.
  • For what it's worth; Scotland's deficit last year was £12.4bn and it's cumulative deficit over that five year period was £62bn.  Both figures are higher on a per capita or share of GDP basis than the UK (and that's in a period where oil was relatively booming).
"...yet in two of the past four years Scotland’s GDP percentage deficit has been less than the UK’s"
  • Yet?  There is no logical linkage here whatsoever - he moves from quoting some absolute UK figures to making a selective observation of Scotland's performance relative to the UK before oil & gas revenues declined.  Here's the 15 year chart - he could equally have said in 11 of the last 15 years Scotland's GDP percentage deficit has been greater than the UK's.  Of course anybody who's studied GERS understands the fluctuations are all about the oil.

"Factor in the fact that, in each of the past 34 years, Scotland has paid more tax per person than the rest of the UK ..."
  • It's already factored in for heaven's sake! It's in the IFS figures, they've looked at where that tax revenue comes from and adjusted for known decline in Oil & Gas.  
  • I think he's just put this in because it's part of the SNP play-book to mention this fact whenever the economy is discussed.  Surely anybody paying attention knows by now that over the last 15 years (the period GERS figures exist for) on average the relative higher public services expenditure in Scotland more than off-sets the higher tax generation.  The chart below shows figures on a relative per capita basis between Scotland and rUK - the black line is the "more tax per person" and the red line is the "more spend per person".  When the black line is below the red line we generate a higher deficit per person.  For reference, the blue line is the relative tax generation figure excluding oil & gas.

"...and a future without Barnett looks a lot less gloomy"
  • Say what now?  
  • As is surely blindingly obvious to anybody who applies "close scrutiny" to the figures, the only way a future without Barnett looks less gloomy is if North Sea Oil revenues return to about £10bn pa - let me repeat the earlier chart to put that in context.

A future without Barnett looks pretty gloomy to me.

***** ADDENDUM *****

I should for balance have added that of course one way out of this gap is by growing our economy in Scotland faster than the rest of the UK.

I have yet to hear a compelling argument as to why this should happen under FFA - if Westminster parties believed relaxing spending cuts would be self-funding through improved economic growth they'd be all over it - but it's certainly an arguable case.

The numbers are simple: Scotland's onshore tax revenue (2013-14) was £50bn so 15% growth would generate the additional £7.5bn pa..  Of course that needs to be growth over and above that the rest of the UK achieves.

If we grew 1% faster than the rest of the UK it would take us 14 years (compound growth) to get there.  The average deficit gap during that period would be £3.8bn (7.6/2) so over 14  years we would have to find an additional £53bn.  Let's assume this could be funded with debt - that's £10,000 for every man, woman and child in Scotland.

But actually even this is overly optimistic because the basis of the £7.6bn is to assume we follow rUK spending cuts - in fact there would be additional deficit incurred in early years before this hoped for growth kicks in because the SNP assumption is that growth is driven by modest increase to spending instead of cuts.

So even on these highly optimistic assumptions - a pretty gloomy prospect.



Martin said...


Excellent post as ever. Without trying to go too far off-topic, I've been noticing a new variation on the "GERS methodology is wrong anyway" argument from the pro-FFA side.

I know you've already addressed VAT and Whiskey revenue being correctly apportioned in the GERS methodology, despite company headquarters being in London. However, the argument I'm seeing is slightly different and isn't addressed directly in the methodology (but I think I know why).

Have a look at this from our friends at BfS:

BFS Case For Indy Nov 13

It says:

There are other ways in which Scottish revenues are invisible in GERS. Much of the alcohol duty paid by the whisky industry
is not counted as revenue from Scotland. Alcohol produced in the UK which is exported abroad becomes subject to UK
alcohol duty at the point of export, and a large proportion of Scotland’s multibillion whisky exports gets shipped out from
ports in England. The UK Treasury counts the duty levied on this whisky as income from the tax region in which the port is

Sounds reasonable, right? But the thing I don't understand is that duty in my experience is never levied on export. It's levied on import. You can buy as many bottles of whiskey duty-free as you like when you leave a country, your problem starts when you try to import them somewhere else.

Is there such a thing as export duty? If there is, is it a significant amount of revenue not accounted for? I'm suspicious, so I figured I'd ask an expert :-)

Jason Hoffman said...

Personally I think the FFA is a red herring.

There's no way a Labour minority govt is going to give the SNP this one-step-away-from-indepedence concession.

It won't happen. Move along now. Nothing to see here.

Let's focus instead on where the UK's economy is going please, and less of the relentless focus on what isn't going to happen, as in-depth as the analysis is.

And just why are the Conservatives and Labour are so unpopular in the UK that neither party will form majority governments?

Anonymous said...

Could you also explain where the frequently-quoted (by the SNP) figure of the extra £15 billion in onshore revenues by 2020 comes from? It seems such a massive amount, about 30% over and above current onshore revenues, and yet I cannot find a reference for the origin of this figure anywhere - and you seem a good person to ask! Thank you, and thanks also for your blogs.

Kevin Hague said...

Martin - I've covered this before - there is no such thing as export duty (in fact you get export duty credits) - duty is a consumption tax - see footnotes in this post > Yes or Now Makes No Difference

Unknown said...

I now wonder whether the pain that would come from FFA is in fact the goal of the Nats. They have convinced themselves that "fear" was what stopped a win for Yes. What was the basis of this fear in their eyes? It was the loss of revenue from Barnett, in its simplest sense (ignoring the downsides to business which they do not accept anyway). With FFA, you have already lost that Barnett spending in a bout of mass austerity, and you would be in a position where the fear from going alone is removed. As Janis Joplin once sang, "Freedon's just another word for nothing left to lose".

My worry is that the SNP tactic will goad the Tories into a form of FFA. Why spend your efforts trying to cut £12 billion from welfare (as planned by Osborne), when you can go more than half way to those cuts and focus the pain entirely in Scotland where you have no MPs anyway?

Ron Sturrock said...

The £15bn extra onshore revenues is a mystery to myself as well.
The FAS say from 2015/16 to 2019/20 onshore revenue will increase by £11.2bn. So what criteria, eg base year, have the SNP used?
The current onshore fiscal balance for the same period is currently -£16.1bn reducing to -£8.8bn by 2019/20 due to deficit cuts effect.
It is worth recalling the SNP anti-austerity stance, does this imply a circa a -£16bn rolling onshore deficit.

Martin said...


Many thanks for your reply. Yes you did cover it; I missed that you covered it in a couple of words, but (a) that's my fault and (b) it's not as if you should have to completely deconstruct every lie from BfS, Stuart Campbell or indeed Kevin McKenna. Life is too short!

I think you do an excellent job of pointing out the woolly thinking prevalent on the pro-Indy/FFA side. I am willing to give Kevin McKenna and even some politicians some benefit of the doubt that they don't understand the hard data and thus make false conclusions.

But I do want to reiterate that the BfS lie I quoted is something else. Being charitable, it was written by someone who has no idea how duty works (and thus has never traveled abroad), and approved by an equally ignorant leadership of the organisation to be printed. No one at any time said "wait a minute, this is completely wrong", and they've never made the time to correct the mistake. This would be an organisation of such incompetence that their very name would be an ironic joke.

Being less charitable, it is a deliberate lie with no basis in reality, solely designed to reassure the uncertain, or embolden the true believer.

I think it's possible both assessments are true.

Anyway, the fact that canards like this are still being quoted by nationalists today says something really bad about the lack of critical thinking skills in a lot of people, and sadly how much of an up hill effort your work is.

But thanks anyway!

Anonymous said...

Great article.

Can you explain what would the difference be between FFA and a currency union?

Surely the UK government would have difficult issuing debt if it had a part of the economy that was autonomous and continually having to borrow to balance the books?

Anonymous said...

According to the OBR in its March 2015 Economic forecast, UK GDP falls by £5.5 billion in 2015 due to lower oil price trade.

"Based on these assumptions, trade in oil subtracts 0.3 percentage points from GDP growth in 2015."

According to SNP government produced figures, in 2013/14
£137 billion GDP onshore
£153 billion GDP Including offshore

table x1

To reach a GDP figure of £165 billion by 2015/16 , GDP in Scotland would need to rise by £8.5 billion each of the next 2 years.

Anonymous said...

The depressing thing about Kevin McKenna's article is that was received so enthusiastically by so many of those who commented b.t.l.
The percentage of Scottish voters unwilling to accept that FFA
or Independence would not lead to economic nirvana is worryingly high.

Florian Albert

Ron Sturrock said...

Today the FM said growth to cover the £7.6bn is required.
Problem is, according to HMT the reduction on spending for the 5 year period commencing 2015/6 amounts to £39.6bn.
Given the average onshore revenue/ GDP ratio an increase of GDP circa £105bn is needed tp plug this £39.6bn gap.
Highly unlikely that this can be achieved even pulling those famous magical economic levers, that no other country has tried or considered before.
I cannot see how it can be realised without, raising taxes, expenditure cuts or borrowing or a combination of any of them.
What borrowing limit will be imposed by the market, 3% of GDP?

Commencement year of 2015/16 will not happen any change will take effect from year 2016/17 at the earliest and it will probably take 1 to 2 years to see any benefit of policy.
Therein lies the dilemna, what do you do in the period before policy takes effect?

The duty is now on the SNP to publish full costings of FFA ahead of the GE, and I do not mean at the last minute.
If they don't, the charge that they are being scared of telling the voters will have a strong whiff of the truth.

Gary Ether said...

Kevin, I must confess ignorance on GERS and the £7.6 Bln black hole. Thanks for this article on the black hole and other articles on this site on GERS. It has helped my understanding greatly. I'm intending voting SNP but have been concerned about FFA and the black hole(even more so now!). I hope the FM announces detailed plans on how she intends to balance the books on FFA soon (and certainly before the election. Thanks again.

calgacus said...

From that graph the average annual relative deficit in the 15 financial years it covers is only about 1.25% greater for Scotland than for the UK as a whole, which does not seem like a big difference. Also on what basis do you assume that oil prices will remain permanently low? They've always fluctuated in the short term, but gone steadily up over the long term. There's no reason to think that won't also be the case for the next several decades, especially as globally the remaining oil reserves are harder to get at (deeper sea, tar sands etc) and more expensive to extract both in money and energy, while the demand is likely to continue to increase as more countries industrialise.

calgacus said...

Oil prices are over $50 a barrel. That's only considered low because they had gone up to $80 or $100 a barrel previously. Before the Iraq war $50 a barrel was considered a high price. The oil price in 2002, adjusted for inflation since then, was just under $30 a barrel.

calgacus said...

Anonymous - the UK is constantly borrowing to balance the books. And wastes a fortune on PFI/PPP contracts for schools and hospitals to subsidise PFI consortia at the expense of increased costs and cuts in beds and fully trained staff, giant aircraft carriers that won't even have any planes available for them when they're built to subsidise BAE Systems, and Arms Export Credit Guarantees which prinicpally subsidise arms firms and dictatorships that don't pay for the arms the UK government has let them buy from them. Then there are taxpayer subsidies to the privatised train companies bigger than British Rail got when adjusted for inflation, while they increase fares well above inflation and keep all the profits. If an independent Scotland stopped subsidising the banks, arms companies and big multinationals at everyone else's expense, the deficit could be eliminated pretty easily. And when the UK government issues new money through quantitative easing it hands it all to banks, hedge funds and pension funds, not disabled or unemployed people or small or medium businesses, who all get their government support cut, because the big parties are run for the benefit mostly of donors to party funds, not voters.

Gary Ether said...

Kevin, You say: "Scotland's onshore tax revenue (2013-14) was £50bn so 15% growth would generate the additional £7.5bn pa.. Of course that needs to be growth over and above that the rest of the UK achieves." I don't understand why the last sentence applies i.e. if Scotland are 15% better off on tax revenue then why can't they use that to offset the £7.6 Bln? Sorry if I'm being thick but I don't understand that.

Kevin Hague said...

Gary: because the £7.6bn is relative to rUK - if rUK grows at same rate the gap isn't narrowed - to close the *gap* we have to grow faster

calgacus said...

While i think the assumption that oil and gas prices are likely to remain at the same level or fall in future is probably wrong given the trend over many years and decades of them steadily rising overall despite short term falls; and while I'm not sure that either UK or Scottish government figures can be trusted to be unbiased (and even the IFS is relying on them to make its estimates), this is a well written, clear, and well sourced post with well made graphs to illustrate it and i'm impressed by the quality of it even if i don't agree with all the assumptions made or all the conclusions.

Anonymous said...

Calgacus: You say that there are decades of oil and gas prices "steadily rising". I can't find any evidence for this. Could you post your sources?

The data provided here - - would not appear to support your view. Rather, it shows periods of low prices and periods of high prices. I cannot detect the trend you describe.

ian said...

Lots of info to digest great effort congrats
I am guilty of fuzzy thinking I am sure
Would FFS mean that Scotland would get 100% of the Oil revenue or only the 5% (I think) it currently receives
Would the same apply to the taxes applied to annual 2.4 billion pound whisky industry for which Scotland's share currently is around 220,000 pounds annually
When we talk FFS we seem to only be hearing how rUK want to interpret it

Kevin Hague said...

Oh blimey Ian.

1. its the full 90% geographic share as per Scot Gov's preferred definition

2. There is no missing whisky revenue - duty is a consumption tax - for same reason we don;t send tobacco duty back to cigarette manufacturers - see footnote not 1 here

These are Scot Gov own numbers - they create GERS to paint best possible picture of Scottish finances - they based the White Paper on them!

Anonymous said...

Interesting to note that GERs claims a geographical share of oil & gas, on other items it claims a population share to boost revenues.

For example Crown estates revenue in Scotland is less than £10m geographically, but more than £20m based on population.

A FoI request confirms the dubious accounting trick.

Crown Estates Scotland accounts

Anonymous said...

God almighty I started reading your blog had to stop I have never read such trash in my life. It is obvious that you are absolutely and utterly obsessed with trashing the SNP. I mean psychotically obsessed.

Listen simpleton the people of Scotland voted in 56 SNP mps we want them get over the will of the people your inane rants mean nothing. I'm away to take a headache pill

Anonymous said...

@craigie1 - thank you for redefining the definition of the word 'Idiot' for the world to see. I rarely insult people on comments but I will make a special exception for you since I don't think you would understand my reply otherwise.

I have but one question - How is the democratic vote of last September less valid than the democratic vote this month, when more people voted in the former than the latter?

At some point you, other members of 'the 45' and the SNP have to concede that in order to respect democracy they will have to honour it. Please let me know when this time comes and we can start having some serious discussions about the future of this wonderful country.

Anonymous said...

Scottish economic growth (when you exclude any blips from oil) continues to trail behind the rest of the UK, which is overly reliant on the South East / London. The same is probably true for the other regions and Wales.

It has always been this way as long as i remember. Therefore under the current governance the black hole will surely continue to rise unless either there is more focus centrally on equalising the areas outwith London (through infrastructure etc) or more economic powers are devolved to regions / Scotland. As neither of the above are likely to happen in any meaningful way (APD anyone!). Then you have either have a job for life updating the defecit gap or a chance perhaps to promote ways to shrink it.