Apples and Pears: GERS

The Scottish Government's economists yesterday published their latest Government Expenditure & Revenue Scotland (GERS) figures. I'll publish a more complete analysis on this blog soon, but the bottom line is they just confirm what we already know:

• Mainly because of Scotland's spending per head being 12% higher than the UK average, Scotland has a far higher deficit/GDP than the UK as a whole
• The scale of Scotland's notional GERS deficit (8.6% of GDP) is such that it would be unsustainable were Scotland to be independent or fiscally autonomous within the EU
• The net effect of UK-wide pooling and sharing remains a fiscal transfer in Scotland's favour of £10.7bn a year or roughly £2,000 for every man, woman and child in Scotland

I wrote a brief summary of what this means for the Daily Record - it's the same old story.

But there is a piece of detail in the GERS report I want to draw attention to, because it illustrates the danger of the £2,000 per head number becoming a totemic figure in debates about Scottish separation. The table I'm referring to is on page 38 and details both Scotland and the UK's net contributions to the EU budget:

Let's get the Leave campaign's "£350m on the side of a bus" lie sorted first: you'll see the last row of the table show's the UK's net contribution to the EU was around £10bn pa, so in fact just under £200m per week. Of course the genius of the Leave campaign was to quote a false number so that we all kept talking about it - who honestly thinks the man in the street cares whether it's £200m or £350m? Either way its a big number and a big net cost. 

The true £10bn pa net cost to the UK is (coincidently) very similar to the net transfer that Scotland receives from the rest of the UK. Perhaps more relevantly, it's the equivalent of about £150 per head for every person in the UK.

Scotland's figure is a roughly £0.5bn pa net contribution to the EU every year, or about £100 per head (although without the UK abatement it would be nearly double that).

Here's the problem.  When people hear the "£2,000 per head fiscal transfer from rUK" number, common responses include "so what: leaving the EU is economically damaging and it didn't stop us" or "but the cost of leaving the EU is far greater". 

This is the danger when complex economic debates become reduced to a couple of headline-grabbing figures - people intuitively response by grabbing hold of the headline numbers (or arguments) they can remember ... and often end up making false "apples-for-pears" comparisons in the process. 

Let me explain.

Putting aside the EU exit charge, the annual impact of leaving the EU for the UK is a direct, day-one saving of c.£10bn pa or £150 per head. The comparable figure for Scotland leaving the UK is a direct day-one loss of  nearly £11bn pa or £2,000 per head.

So on a like-for-like "apples-for-apples" basis, the economic arguments are not even vaguely comparable. The UK leaving the EU prevents a £150/head transfer out from the UK, Scotland leaving the UK prevents a £2,000/head transfer in to Scotland.

The important point (both for Brexit and Scexit) is that this represents only the day-one fiscal tranfer impact before the impact of separation on our broader economic performance. It assumes nothing else changes - and the one thing that Scottish separatists and those of us who believe in UK-wide solidarity can agree on is that an awful lot would change (it's just the direction and scale of that change we disagree on).

The big headline "cost of Brexit" figures (e.g "£200 billion by the end of 2020") refer to this wider economic impact - normally an estimate of a cumulative GDP impact versus an alternative Remain scenario.

So what would the equivalent "cost of Scexit" figure be?

The first thing to note is the answer to that question is most definitely not the annual £10bn+, £2,000 per head figure that has become so totemic in this debate. If you've followed the logic up to here, you will realise that is a completely different additional cost that exists with Scexit, something which in Brexit terms was in fact a benefit.

Quantifying the long term economic cost of Scotland leaving the UK is of course not easy. Indeed Sottish separatists will argue that being freed from the contraints of Westminster will lead to a flourishing of the Scottish economy - but in doing so they echo the language of the Brexiteers and are falling into the same trap.

If we agree that Brexit will be a big net economic cost (I certainly do) then logically the equivalent economic cost for Scotland leaving the UK will be so much greater. 

The main driver of the Brexit downside is the risk of introducing trade friction with the EU. Scexit risks introducing trade friction between Scotland and rUK - and Scotland exports 3x more to rUK than we do to the EU (even after over 40 years of unfettered EU market access).

But Scexit introduces additional downsides: we share a currency, a welfare state and deeply integrated machinery of state within the UK. Leaving the EU will be a cake-walk in comparison - the economic cases are not even remotely comparable.