Wednesday, 23 August 2017

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.


Anonymous said...

Hopefully you will get a chance to mention in your papers articles the second BfS attempt to trash the reasons Scotland has had no Oil Revenues these last few years

How such a charlatan gets away with this sort of fantasy is beyond belief.

John Silver said...

perhaps it would be good to include in your "essential messages" the one the BBC website chose to lead with " Scotland's public spending deficit has been cut to £13.3bn over the past year, according to official Scottish government statistics"

Can you also confirm for how many years Scotland's onshore deficit has been falling now?
I'm sure we can all agree that the onshore deficit is the one that matters.

Anonymous said...

Too small; too wee; too stupid. Right?

Anonymous said...

It is notable that the SNP's scripted response went on about Brexit. Nothing like parading a grievance instead of grappling honestly with a genuine issue. And over on The Nat Onal, the independence supporters are having a contest to see who can use the word "estimates" the highest number of times, because apparently estimates are not used by REAL statisticians and economists.

Anonymous said...

"Too small; too wee; too stupid" is only ever said by separatists and whenever they do wheel it out you know that they have encountered a set of facts they can't deal with. It is used as a magic incantation intended to make discussion of those facts go away.