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

*****

---

Notes:

---

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

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

---

Notes

---

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

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.

***************************************************

Notes

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

Latest GERS Figures: A Quick Summary

A quick dash through today's GERS figures - apologies if  not as finely crafted as I normally aspire to!

***

The latest Scottish Government GERS figures confirm what informed commentators have been saying for a long time now:

• Scotland increasingly spends more per capita on public services than the rest of the UK (because of the way the fiscal framework / Barnett Formula works in our favour)
• North Sea oil revenues have dropped to close to zero (£0.2bn last year)
• Scotland's onshore revenue generation per capita continues to slightly lag the UK average (although its worth noting it will be higher than many UK regions) - the trend is stable because the Scottish Government hasn't made use of the powers they have available to them to materially change Scotland's tax/spend balance 
• The deficit gap between Scotland and the rest of the UK has grown to over £10bn or £1,900 per capita

This represents the scale of the challenge facing anybody trying to make an economic case for separation: these are our economics within the UK, they need to show how if we were independent our tax/spend figures would change vs those in GERS. They need to show where they'd find £10bn pa of additional revenue or reduced spending (including reductions compared to currently per-capita-allocated costs like defence) to offset what we'd lose from UK-wide pooling and sharing.

When this exercise was attempted by the Independence White Paper they optimistically assumed £0.6bn of net cost savings and plugged the remaining gap with £6.8 - 7.9bn of oil revenues. Nobody's buying that any more.

Here's the data shown in simple graphical form to explain how the deficit gap arises

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. This has happened at least in part because of the way the current fiscal framework (under-pinned by the Barnett Formula) relatively favours Scotland. Needless to say this hard evidence that UK pooling and sharing has allowed a relative increase in Scottish spending in recent years is not something you’ll hear the SNP mention.

---

What we're seeing at work here is the Barnett Formula dynamic I illustrated here - at these low levels of absolute spending growth and with Scottish population growth lagging the rest of the UK, Barnett actually causes per capita spending to diverge and helps increase our relative spend/capita

---

The green line shows that Scotland’s onshore economy consistently generates about £350/person less than the rest of the UK average. The gap between the green and red lines represents the “Onshore Deficit Gap” – a gap which is large and growing.

The black line shows what happens when we add Scotland’s volatile oil revenues to the picture. In just two recent peak oil years (when the black line is above the red), oil revenues were enough to compensate for Scotland’s higher spending.

People familiar with this graph may have noticed that the historical data has been restated to look far worse  for Scotland than it used to, something which seems to be explained by improvements to the oil revenue allocation methodology.

Here's the same deficit gap graph showing the figures as they were reported last year as dashed lines.

This is more than a little ironic given some of the guff that has circulated on social media recently about RTS data presentation changes meaning we've "found" £15bn. In fact the historical figures have been shown to have been on the optimistic side, as many of us argued was always likely.

So the GERS report shows that - largely because of our higher spending - the starting point for discussion about the economics of independence is that it would make us over £10bn worse off. That’s £1,900 a year worse off for every man, woman and child in Scotland.

The SNP spin-machine is of course now in over-drive to try and prevent Scottish voters understanding what these GERS figures mean. But the SNP can’t escape what their own Independence White Paper correctly told us: “[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”.

What this starting point now tells us is that with North Sea oil revenues close to zero, an independent Scotland would need to dramatically cut the levels of public spending Scots are used to receiving. This is the discussion we should be having and the one the SNP is studiously trying to avoid.

The SNP could try and argue for superior onshore revenue growth as a result of independence. The problem they have there is that with unresolved issues around currency and the fact that we’d be leaving the UK-single market (which is four times more important to Scotland as an export market than the EU) there is far more likely to be downside rather than upside for our economic growth prospects. To be clear: nobody is saying that trade with the UK would stop – but if an independent Scotland were to end up on the wrong side of EU/UK trade barriers, it’s hard not to believe that trade would be damaged.

Even if the SNP do come up with a credible case for independence creating new economic growth, something they’ve conspicuously failed to do to so far, under any realistic assumptions it would take generations to close the Deficit Gap through revenue growth alone.

The current GERS figures show Scotland’s deficit running at 8.3% of GDP compared to the 2.4% deficit we currently share across the UK. Even if Scots were willing to be worse off in deficit terms, an independent Scotland would have to find budget savings of £8.5bn versus these GERS figures just to meet the EU’s “excessive deficit” threshold of 3.0%. £8.5bn is equivalent to over £1,500 for every man, woman and child in Scotland

The notoriously optimistic Independence White Paper could only find £0.6bn of net savings versus the GERS figures (equivalent to £110/capita) – a figure which of course includes the defence/Trident savings which are the most commonly used rhetorical ammunition in this debate.

It’s worth noting for those who attempt to deflect from this debate by saying GERS figures are estimates and allocations; that’s not true for the figures where per capita spend differences are shown – these are all based on known actual spending data.

We can easily illustrate the scale of what we’d have to do to get £1,500/person from the areas where we spend more on a per capita basis, because the figures are all in the GERS report if you know where to look and are able to manipulate a spreadhseet. Of course there may be good reasons why our spending levels are higher: demographics and population density being obvious factors - but they wouldn't go away if Scotland were independent.

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.

All that pain and we still wouldn’t have quite managed to close the deficit gap with the rest of the UK. Swingeing cuts to public spending which would make recent austerity look like a walk in the park, and an independent Scotland would still have a slightly worse per capita deficit than that we currently share with the rest of the UK.

It’s not surprising the SNP are spinning like crazy to try and avoid these GERS figures being rationally debated. The latest GERS figure proves beyond doubt that the economic case for Scottish Independence is dead in the water.

The Big Lie About Scotland's Oil

There was a time when the pro-independence movement at least made an effort to try and spin economic data to create the illusion that an economic case could be made for Scotland's separation from the UK. Judging by the latest contribution from the Sunday Herald and Business for Scotland, that time has passed. They can't even be bothered to try anymore.

As evidence, here's the front-page splash with which the Sunday Herald assaulted its readers - and insulted their intelligence - this week

I apologise for what follows. There's so much self-evident nonsense in this article that offering a structured debunking feels like writing literary criticism about a bowl of Alphabetti Spaghetti. With that in mind, I advise you take some simple precautions before reading further.

If possible, rest your elbows on the desk in front of you and use your finger tips to hold your head steady. As your brain tries to come to terms with the logical lunacy of what we're about to encounter, it may attempt to put itself out of its own misery by getting you to smash your head into something hard - by adopting the suggested safety position you should be able to resist this. When thwarted in its attempt to get you to knock yourself out, your brain is likely to attempt to save itself by making a bid for freedom - so the use of ear and nose plugs is also advised.

OK, you have been warned - we're going in (the full text  of the article is here).

***

It turns out the source for the headline "revelation" is "leading think tank" Business for Scotland (BfS). Regular readers of this blog will know that BfS have an impressive track-record of being a misleading think tank - but in the interest of fairness, we'll put that track-record to one side¹ and judge their latest contribution on its own merits.

The article refers to a report by BfS which used "detailed oil price research since the price crash" and "contrasted the North Sea tax regimes of the Norwegian and UK governments". Having seen the spectacular wrong-headedness of the conclusions, with the same combination of compulsion and guilt that you feel when you slow down to look at the scene of a car-crash, I sought out the report in question.

Unfortunately the article provides no links to the "detailed research", Business for Scotland's Twitter feed refers to their "in-depth analysis" but only links to the same Herald article and a search of the BfS website reveals only this: "Why is Norway still getting much more tax from oil" - a 940 word article by Gordon McIntyre-Kemp¹ which basically made the same nonsense arguments 5 months ago.

For the avoidance of doubt: this is not how leading think-tanks operate, they don't publicise the findings of a report without making the report itself available for scrutiny. Fortunately for us the finding are so blatantly daft that we don't need to see the "in-depth analysis" to explain why the headline conclusions are ridiculous.

So let's unpick what is actually said in the Sunday Herald piece. Now would be a good time to adopt the safety position and put those ear and nose plugs in.

***

The first sentence:

WESTMINSTER'S "mismanagement" of oil since the price slump two years ago has cost Scotland tens of billions of pounds and is being falsely used to attack independence

So Westminster's actions "since the price slump two years ago" have "cost Scotland tens of billions of pounds". I feel dizzy just typing this out.

It appears McIntyre-Kemp has given himself (been given?) the challenge of defending the economic case that was used to try and persuade Scots to vote Yes in 2014. He knows that even the most fervent nationalists don't believe a Yes vote would have allowed us to create a time-machine, so arguing "we should have had an oil fund 30 years ago" is pointless².

This means that to defend the economic case presented by the SNP - and championed by Business for Scotland with credibility-destroying disregard for economic sense - he has to defend the oil revenue forecasts used in the independence White Paper.  He has to argue that had we voted Yes we'd have generated this revenue despite the oil price crash.

Let's remind ourselves: insofar as any economic case was presented in the White Paper, it assumed £6.8bn - £7.9bn of annual oil revenues. None of the cheer-leaders for independence should ever be allowed to forget this fact.

So how can anybody argue that the current reality of effectively zero North Sea tax income could instead have been nearer £8bn if we'd voted Yes? Well, the article continues:

Scotland would be an economic powerhouse if UK ministers had not mishandled North Sea wealth since the start of the oil crisis [...] since the crash in oil prices in 2015 when the price of a barrel more than halved, Norway has made nearly £29.33bn in oil and gas revenues, while the UK lost almost £22.8m

The mind-numbingly simplistic argument here appears to be "Norway produced loads of tax revenues, so we should have been able to as well". To try and discern how the author thinks this could have been achieved, we need to give the Alphabetti Spaghetti a bit of a stir;

the UK government's mismanagement of oil and gas taxation removes billions in revenues from Scotland’s national accounts [...] Oil giant Shell was made to pay taxes in each of the 24 countries where it extracts oil and gas - apart from the UK [...] the UK also gave Shell £179m in tax rebates, while the multinational paid Norway £4.6bn [...] a further £342m was handed out in tax rebates to BP during the same period [...] [the UK Government have] protected big corporations' profits and their shareholders' dividends [...] [Norway is] not bailing out large oil companies.

So the argument being put forward here is that the UK government has not been taxing the UK oil industry heavily enough in the last two years - apparently that's why our tax revenues have crashed!

Now then. Maybe you remember the words of John Swinney following the oil price crash

[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.

Possibly you recall the words of the SNP's 2017 manifesto which stated:

Only after pressure from SNP MPs did the Tory Chancellor abolish the petroleum revenue tax and halve the supplementary charge to 10 per cent.

Maybe you read the Independence White Paper and remember that even before the oil price crash the Yes campaign wasn't arguing for more aggressive taxation of the oil industry:

"We have no plans to increase the overall tax burden on the industry on independence [...] Post-independence decommissioning relief will be provided in the manner and at the rate currently provided through the current fiscal regime" - p304

Surely BfS can't be arguing that cutting tax for an embattled oil industry to help protect Scottish jobs was a bad thing, they can't be saying the SNP was wrong to argue to maintain tax relief for decommissioning projects, to call for and celebrate tax cuts in response to the oil price crash? Well hold on to your hats, because I'm afraid that's precisely what they are doing. Here's another direct quote from the Herald piece:

BFS also claimed Westminster had squandered resources on tax advantages for oil corporations [...] 

The article goes on to say:

BFS claimed that Westminster gave tax rebates to large oil companies to decommission rigs and to explore for new oil fields.

---

As an aside: Claimed? An observation of widely known and well documented fact described as a "claim"? Presumably this is to make it seem like some shocking revelation to the casual reader - it's truly feeble stuff

---

I have to apologise for failing to maintain a clear logical through-line here (the "critiquing Alphabetti Spaghetti" problem) but there's a line in the article that doesn't fit any logical flow but explains why this piece has been pushed now: there's bad news coming and a distraction - however desperate - is needed

The GERS figures will on Wednesday probably show Scotland as part of the UK running a bigger deficit that the rest of the UK

---

As another aside: Probably? The figures are published tomorrow and anybody with even a passing understanding of Scotland's economy within the UK knows that Scotland will definitely be shown to be running a bigger deficit that the rest of the UK. Look at this graph of historical actual data:

We know oil & gas income is effectively zero now, we know spending in Scotland hasn't been dramatically cut relative to the rest of the UK and that there hasn't been a history-making jump in Scotland's onshore economy ... so the GERS report will definitely show Scotland running a deficit (on a per capita or percentage GDP basis) far larger than the rest of the UK. The deficit gap that some of us warned about in 2014 is very much a reality.

---

But back to the core argument being put forward by BfS and that Sunday Herald front-page splash.

At this point you're probably thinking "not even BfS could just look at the tax revenue generated by one country's highly profitable oil industry and suggest a country whose oil industry is on its knees should be expected to generate the same level of tax"? Well tighten the grip on your head:

[BfS said] It would not be unreasonable to add Norway’s £11bn revenues and state that would have been possible as an independent nation.

Yep, you read that right. The article explicitly states that it would "not be unreasonable" to add the tax revenues generated by another country's oil industry to Scotland's fiscal balance.

I fear I'm insulting my own readers' intelligence by explaining why that is not only an unreasonable thing to do, it's frankly a bat-shit crazy sentence to commit to print. To be clear:

• North Sea revenues are generated by taxing production profits
• While it's true that both Norway and the UK are exposed to the same oil market prices, the costs of production are very different, as are the production volumes³
• This means that the Norwegian oil industry generates a lot of profit, which in turn generates tax (and dividend) income.
• Compared to Norway, the UK industry has higher extraction-cost reserves and is now incurring decommissioning costs - there simply isn't the same profit there to tax

It's really not very complicated.

There's more. The article offers this incredible statement as part of their "Business for Scotland concludes" quote:

UK Government policy has deliberately removed one of Scotland's key revenue streams

If your brain is still able to function after trying to follow BfS "logic", I encourage you to think long and hard about this statement. This isn't an argument about revenue allocation: the suggestion is that the UK Government could have generated billions for the UK economy in the last few years if they'd wanted to - could have lessened the need for UK-wide austerity - but instead they deliberately chose not to so as to make Scotland look bad. I'm genuinely lost for words.

***

Now look back at that Herald front page and the words used to describe the report within the article. There is nothing "revealed", there is no "big oil lie", the oil price isn't being "falsely used to attack the case for independence", there is no evidence based on "detailed oil price research", nobody has "contrasted the tax regimes" (they've merely observed the different tax revenues and leapt to a fantastical conclusion), there is no "in-depth analysis".

If your stomach can cope with the mixed metaphor, here's the cherry on the cake (of Alphabetti Spaghetti - I'm sorry)

This - this - is what a high profile SNP MP judges to be "excellent research"?

I just can't ...

I'm done.

***

---

Notes

---

1.  For evidence of BfS's track-record as a misleading think tank (aka Gordon Macintyre-Kemp's track-record of writing economically illiterate nonsense), see "Who do Business for Scotland Represent"; "Business for Scotland and the SNP",  "£8.3bn Better Off?", "Response to Independence & The Economy - The Facts", "Stop Getting GERS Wrong", etc.

2. Even if we did have a time machine, creating an oil fund would have required us not to spend the money when we did and instead adopt tax and spend policies more like those in Norway where - for example - healthcare is not free at point of use. I don't see the SNP championing that policy

3. In broad terms the cost (hence profit, hence government tax income) differences are are explained by geology (size and accessibility) and maturity of reserves

Here's Oil & Gas UK’s chief executive, Malcolm Webb (quoted in 2015)

After more than a decade of spiralling costs, over-taxation and weak regulation, the UK offshore oil and gas industry is now bottom of the league in terms of the cost of producing a barrel of oil and gas.  The UK’s difficulties have been greatly exacerbated by the sudden drop in oil price but it would be a grave mistake to believe that the price fall is the cause of the problem.  A recovery in the price, even to $100 per barrel, would not resolve matters

Or if you like see this thread by Fraser White or this thread by the University of Strathclyde's Stuart McIntyre. .. or just google he question, there's swathes of stuff out there on this topic