Let's Talk About Growth

Watching the latest round of SNP politicians' media interviews (and hearing the echoes on social media) it's clear they're working off a crib-sheet that reads something like this;

If Scotland was able to run its own affairs - if we had control over the levers of growth - then we would grow our way out of the £8bn black-hole that we keep being told about. It might be true that Full Fiscal Autonomy now would be "tantamount to economic suicide" (SNP MP George Kerevan) - would be "a disaster" (SNP MP Tommy Sheppard) - but it's still a sensible medium term aim.

Saying we'd have an £8bn deficit as if that's something we'd have to get rid of overnight when all countries (including the UK) run deficits is simply scaremongering. Anyway these figures are all hugely uncertain and based on assumptions that the SNP don't necessarily agree with ... and who would argue that Scots wouldn't be better at running our own affairs than Westminster Tories?

If I could be bothered I could find plenty of direct quotes (from the likes of Stewart Hosie and Pete Wishart) to back me up on this - but I think most will agree this fairly paraphrases the SNP line at the moment.

So let's unpick it.


"We would grow our way out of the £8bn black-hole if we had full powers"

Putting aside the obvious point that the SNP have yet to make any concrete policy proposals that would lead us to believe that they would somehow achieve this superior growth, let's just concentrate on the magnitude of the challenge.

The numbers are easy: Scotland generates £50bn of onshore tax revenue, so to increase that by £8bn means growing it by 16%.  If we're to make this additional tax revenue through economic growth (as opposed to through increasing tax rates) then we'd need to grow GDP by 16%.  [For those who care about such things, Scottish onshore tax generation consistently runs at about 37% of GDP].

It's important to understand that this growth needs to be growth relative to the rest of the UK because that £8bn figure is the deficit gap (on which more later). It's what we need to generate to be paying our way within the UK, for us to be making Full Fiscal Autonomy work. See my post Full Fiscal Autonomy for Dummies if you need convincing.

To get an indication of the scale of this challenge we need look no further than the Scottish Government's own White Paper: Scotland's Future: Your Guide to an Independent Scotland. As you might expect they had a go at scaling how much faster an independent Scotland might grow when no longer shackled to the UK. In fact they were so pleased with their analysis that they quoted it five times (pp 23, 43, 88, 375, 619). Here's the wording from page 23;

"Similar countries to Scotland have seen higher levels of economic growth over the past generation. That is because they have the bonus of being independent and are able to make the right choices for their nation and economy. If Scotland had matched the levels of growth of these other independent nations between 1977 and 2007, GDP per head in Scotland would now be 3.8 per cent higher"

I think we can safely assume that the countries and timescale used were selected to make the strongest possible case - after all, why stop at 2007 when more recent data was available? - and just in case you doubt if that is a cumulative 30 year figure, it's clarified on page 619:

"The average rate among small European countries was 2.61%, a gap of 0.12% each year. Over a 30 year period the compounded effect of this gap totals 3.8% of GDP"

So the Scottish Government's own attempt at scaling the economic growth benefits that "the bonus of being independent" might bring was 3.8% over 30 years. We're looking for 16.0% to grow our way out of the deficit gap. As one of my erstwhile American colleagues used to say: you do the math.

Frankly I could stop here. The assumptions required for the SNP's "levers of growth" argument to work are exposed as ludicrous by their own analysis.  But I'll carry on because this SNP Hydra has many heads ...


"The IFS say we'd have an £8bn deficit"

The £8bn (or £7.6bn) is consistently referred to by the SNP as the IFS forecast of Scotland's deficit. This is simply untrue.

I've blogged about this before and this simple table summarises the key figures

Scotland's deficit in 2013-14 per Scottish Government's own GERS analysis is £12.4bn and is forecast by the IFS to be £14.2bn in 2015-16. This is the net result of (largely know) oil revenue declines offsetting expected deficit reductions (as a result of UK-wide policies).

It shouldn't be beyond the wit of any half-decent politician to understand and remember these figures. If they're going to engage in this debate they really should know what Scotland's deficit is. If they're going to write a press release about it surely it would unforgivable to get this basic fact wrong?

Well here's the SNP's official press release (posted on Thursday 11/06 at 07:44) which includes these words:

"The IFS figures they cite suggest that Scotland would have a deficit of £7.6 billion in 2015-16. But over the five years to 2013-14, the UK’s cumulative deficit has been worth over £600 billion."

I (and many others I'm sure) jumped on this howler within minutes - the BBC picked up on it and contacted the SNP for a statement (see at 22:30 in this broadcast of BBC R4's More or Less) and yet still (13:50 on Saturday as I'm writing) the Press Release sits there uncorrected.

There are only two possible explanations for the SNP and their spokespeople making and repeating this error: either they don’t even know what our deficit is or they know full well but think they can get away with simply lying about it. I don’t know if they’re insulting our intelligence and actively trying to deceive the electorate or they’re just spectacularly incompetent. These are the people negotiating Scotland's economic future - god help us.

To compare this (wrong) annual figure with the cumulative 5 year UK figure really is so obviously ridiculous that I'll treat it as an aside.

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For fun let's work out the scale of this misrepresentation of data

1. Using the £7.6bn increase instead of the £14.2bn total is a 1.9-fold misrepresentation
2. Comparing a single year with a five year total figure is obviously a 5-fold misrepresentation
3. Comparing an absolute number spread across the whole of the UK with an absolute number shared across just 8.3% of the UK’s population is a 12-fold misrepresentation
4. Comparing UK figures from the past (when the deficit was worse) with a Scottish figure for the future (when the onshore deficit is forecast to decrease) is – as it happens -  a 1.6-fold misrepresentation

So that’s 1.9 x 5 x 12 x 1.6 = a 185-fold misrepresentation. Bravo!

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Of course the right comparison to make is that Scotland's deficit is forecast to be 8.6% of GDP compared to 4.0% for the UK: so more than twice as bad.


"Suggesting we'd have to get rid of the deficit overnight when all countries (including the UK) run deficits is simply scaremongering"

Under FFA we would still be sharing a currency and a national debt with the rest of the UK, so to be be paying our way we would simply need to be (over a sensible period of time) running a deficit at a similar rate to the rest of the UK. That's what the £8bn defines - the amount we'd need to find from more taxes or less spending to be holding our own within the UK.  If you like: it's the amount we'd need to find to get back to the position we're in now by pooling and sharing within the UK.

Nobody's saying that under FFA Scotland would have to eliminate its deficit.

As for "all countries run a deficit" - no they don't. To put it simply: those running deficits borrow their money from those running surpluses.   It's been pointed out this is an over-simplification which I'm happy to accept - suffice to say there are plenty of countries who run surpluses from time to time


As for "we'd have a deficit but so do lots of European countries" - it's rather silly to talk about having a deficit as if it's a binary thing (you either have one or you don't). Clearly the scale of the deficit matters, so let's put that forecast deficit of 8.6% in context.

The graph below shows European Commission data on net lending / (borrowing) by country as a percentage of GDP in 2015;

Stop drooling over Norway; it's unseemly.

I confess I'm not sure how Norway's sovereign wealth fund plays in these figures (although it's clear in 2014 Norway was running a considerable surplus) - but for other countries this is basically the same as surplus/(deficit).

Let's repeat the graph without Norway (just so it's easier to read) and add a line at -3% (which the European Commission's Stability & Growth Pact defines as the threshold for "excessive" deficits).

I don't think anybody can seriously argue that Scotland running a deficit of 8.6% of GDP would be "just like other European countries running deficits".  Our deficit would be considerably worse than any other European country, worse than Croatia, Serbia and Montenegro.

This would need to be addressed and it could only be addressed by yet more borrowing (if Scotland's borrowing capacity would allow it), higher taxes or lower spending.  To imagine how this would be playing out had we voted Yes and been renegotiating our position within the EU - while grappling with currency issues, transition costs and business flight - is quite terrifying.


"These figures are all hugely uncertain"

Actually they're not really. All the IFS assumptions do is extend the consistent long-term relative onshore tax and spend generation levels and factor in the known impact of oil revenue declines.

Of course these figures don't reflect what actions a Scottish Government would take if given FFA. That's precisely the point: maintaining the tax and spend status quo would be unsustainable under FFA. What we need to hear is how the SNP propose to close this gap. These analyses present the problem with FFA and - given they're the ones asking for it - it's right that the SNP should be asked to explain what their solution would be.

I think we've shown that just saying "we'll grow the economy" is not a good enough answer - so it becomes a question of which taxes will go up and which costs will be cut?  The SNP are very reluctant to answer this question.


"It's based on assumptions that the SNP don't necessarily agree with"

As we've seen the assumptions are hardly controversial and it is - as ever - really just all about oil. The latest OBR Fiscal Sustainability Report is very thorough on the topic. We can argue about future oil prices but two points are undeniable;

1. The profitability of North Sea production is in long term decline due to rising costs, not just falling oil prices.
2. The decline of North Sea production is not a surprise - it's been forecast for years, the only question has ever been one of timing

Unfortunately during the independence referendum it appears summit fever led the SNP to present hopelessly optimistic forecasts; they've not been too keen on producing forecasts since. But if they don't like the OBR and IFS forecasts, they really need to show us some of their own.


"Who would argue that Scots wouldn't be better at running our own affairs than Westminster Tories?"

This is always the payoff. When all else fails (and it does) accuse those who argue against FFA of talking down Scotland, of suggesting Scot's aren't capable.

It's true that the SNP seem hell-bent on demonstrating that they don't understand Scotland's economy, but let's not make the mistake of conflating the SNP's leaders with the Scots people.

The question is not one of competence or who happens to be in power in Westminster right now. It's about understanding and valuing the benefits of UK wide pooling and sharing. FFA means sacrificing that and for some of us that seems like a wildly reckless and self-destructive act.

Full Fiscal Autonomy in 700 Words

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This piece originally appeared in the Daily Record on 25/04/2015

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When the SNP campaigned for Independence they convinced many voters that a Yes vote would make us better off. Those voters should now be asking themselves why the SNP is backing away from the idea of Full Fiscal Autonomy (FFA) anytime soon.

Full Fiscal Autonomy is a very simple concept. It means Scotland keeping everything we raise from taxes and using that money to pay for our own public spending.  We’d need to pay the UK government for some shared costs (like defence and foreign affairs) but effectively it means we’d get to run our own economy, to stand on our own feet.

In fact FFA would give us many of the claimed benefits of independence without some of the big risks like currency.  We would keep our oil revenues and choose what taxes to raise and how to spend our money.

Under FFA we would still be sharing a currency and a national debt with the rest of the UK, so to be paying our way we would simply need to be running a deficit at a similar rate.

The Scottish Government's own figures (GERS) tell us where we would start from.  These are not Westminster's numbers; the Scottish Government's Chief Statistician takes responsibility for them.

The GERS figures simply show us how much we spend and how much we raise through taxes. The difference between the two is our deficit. By comparing to the rest of the UK on a per person basis we can see our relative deficit rate – how much better or worse off our stand-alone finances are than those we share as an integral part of the UK.

First let’s look at what we spend. Over the last 15 years (adjusted for inflation) we spent on average over £1,400 more per person than the rest of the UK.  This is largely due to the fact that our population density is 20% of the UK’s so it’s more expensive to provide the same level of public services in areas such as education, health, and transport. This higher spend is very consistent and is the equivalent of £7.8bn per year.

Next let’s look at the taxes we raise before oil is included. Again there is a remarkably consistent trend. We generate similar but slightly less tax per person than the UK average. Over the last 15 years (adjusted for inflation) the average difference is £250 per person or £1.3bn per year

During the referendum we were told by the SNP that oil revenues were just a bonus.  Yet before we take into account oil revenues, these figures show Scotland has consistently run a £9.1bn per year higher deficit than the rest of the UK for the last 15 years.

Some people react to this by suggesting it shows that Westminster is somehow letting Scotland down. But our economy does pretty well at generating revenue. It seems harsh to blame Westminster because they allowing us to spend more.

So does keeping “our oil” overcome this deficit gap? It has done in only three of the last 15 years, the most recent of which was 2011-12 (the base year used for the Independence White Paper).  Since then oil revenues have plummeted and as they decline we are seeing more and more of the underlying £9.1bn deficit gap exposed. This is what is often referred to as the “black-hole” in the SNP’s plans.

But we’ve just looked at the past, what of the future?

Oil is extremely unlikely to come to our rescue.  Tax revenues are generated by oil industry profits and the North Sea oil industry’s profitability has been in long term decline. The oil price crash just makes it worse.

Some pin their hopes on Scotland achieving unheard of economic growth. This is of course what any country’s government wants. Achieving it is another matter and the SNP haven’t suggested any radical policies that might actually make it happen.

So the most likely solution would be to pile on additional austerity measures (on top of those the rest of the UK choose) and/or to take on even more debt.

No wonder the SNP aren’t that keen on FFA anymore.  They might even be secretly relieved we didn’t vote Yes.

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For those who are visually minded the following graph represents the data described above.

The solid red line is actual higher Scottish public spending per capita; the solid blue line is Scotland's lower onshore tax revenues per capita; the solid black line is Scotland’s actual higher tax generation per capita when “our” oil is included.  

The gap between the blue and black lines is oil & gas tax revenues.  The gap between the red and black lines is Scotland’s higher deficit (when black below red) or lower deficit (when black above red).

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For a more complete explanations see;

> Full Fiscal Autonomy for Dummies
> Oil Price & Scottish Tax Generation

Oil Price and Scottish Tax Generation

It's highly frustrating when the debate on Scotland's economy is reduced to a simplistic "when the oil price recovers we'll be fine".

Take this example from Gordon McIntyre-Kemp of "Business for Scotland" (who have given up any pretence of being anything other than SNP cheerleaders as evidenced in detail here);

Labour are feverishly promoting the £7.6bn black hole scare-story to put people off FFA but it’s a myth; firstly because it assumes oil prices won’t ever recover, and even a moderate increase to $70/80 would wipe out any additional deficit.

This is nonsense.

First of all let's look at recent history.  In 2014 the average oil price was $99 and Scotland generated £2.6bn of North Sea tax revenue.  That's £2bn more than the £0.6bn assumed in the IFS forecast that leads to their £7.6bn "black-hole".  So based on recent history a $99 oil price fills about a only quarter of the back hole, leaves us still with over £5.6bn to find.

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As an aside: if you doubt the existence of the black-hole I suggest you read Full Fiscal Autonomy for Dummies which explains that the black-hole is a long-term structural deficit difference that is simply revealed by falling oil revenues

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Secondly let's consider whether there might be more to our North Sea tax revenue generation than just the oil price.  Of course there is;  it's profit that gets taxed which means tax revenue generation is a function of  [production volume] x [profitability] x [tax rates].

First let's look at (inflation adjusted) North Sea oil tax revenues and oil price on the same chart

Notice how there's a clear relationship but particularly in recent years the revenue line declined even when the oil price held up?

Take a few seconds to think about the following graph because it tells us an awful lot. I've plotted the ratio between the two lines; the ratio of N Sea oil revenue generated (£m) to the average $ oil price in that year. So what we're able to observe here is the real terms relationship over time between $ oil price and actual Scottish tax revenue generated - it's a measure of North Sea oil's tax generation productivity

Is it just me or can you see a trend emerging here?

We shouldn't be surprised by this. As the most economically attractive reserves become depleted production moves to less economically attractive ones - profit per barrel reduces even if the $ oil price doesn't move. Combine that with production volume declines and reductions in tax rates to protect the viability of North Sea activity (and jobs) and you'd expect to see exactly what we can empirically observe; we get less bang for the oil price buck over time.

To quote Oil & Gas UK

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

This might be forcing the data a little -  but based on the trend line above it would seem reasonable to suggest £40m/$ is an optimistic forward assumption (the last three years have been 44, 26 and 13 respectively).  To get the £8.2bn oil revenue we'd need (the £0.6bn the IFS already forecast + the £7.6bn "black-hole") we'd need an oil price of 8,200/40 = $205.

This is clearly an extremely crude (ahem) analysis but I think my point is made; to suggest all will be well for an FFA Scotland if the oil price just recovers to $70/80 is just ridiculous.

In case you're thinking "what about exchange rates" or "is this maybe a function of absolute oil price" here's that same productivity graph with UK GDP inflation adjusted average oil price on it

As you can see the productivity decline has happened independent of whether the exchange rate adjusted oil price has been rising or falling - absolute oil price and exchange rate are not the tax productivity drivers.


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I suppose I'd better address the other points that Gordon McIntyre-Kemp raises in that article. This won't take long.

Secondly FFA will give the Scottish Government powers to balance income and expenditure [...] FFA is the key to rapid economic growth and prosperity for Scotland. Here are five key ways Scottish FFA can balance the books, cut the deficit, raise revenues and create jobs

Sounds great doesn't it?  Gordon's found the silver-bullets that will fix our economic woes.

1. "Refocusing the Economy on SMEs"
Sounds reasonable. But don't all government's want a successful SME sector? What's Gordon's innovative idea? "Targeted tax incentives". Fair enough, tax cuts for SMEs might work - it's hardly ground-breaking but we've got another four ideas to go

2. "Targeted Tax Incentives"
Within this idea he goes on to explain that "SMEs hold the key to rapid economic growth".  So this is the same as number one really - tax cuts for SMEs. Maybe he was rushing when he wrote these.

3. "Increasing Research & Development". 
Sounds like a great idea. I mean there are plenty of incentives for this already like R&D tax credits and patent boxing but maybe Gordon's got a new idea. Guess what? It's "targeted tax incentives". This is getting a little silly

4. "Abolishing Air Passenger Duty"
This is a targeted tax incentive - reducing a guaranteed tax take in the hope of a net gain from boosting tourism. It might work - but of course the Smith Commission recommended that this tax be devolved anyway so we'll find out soon enough; no need for FFA.

5. "Reducing VAT on Tourism"
Well this a targeted tax incentive too. We lose a guaranteed tax take through VAT on tourism in the hope that the economy net gains from the boost in tourism that could result.

I'm afraid that's it.  It's basically one idea; reduce taxes in the hope the net effect will be beneficial to the economy.

Now I'm not saying that isn't a chance that some business and consumer tax reductions could result in net economic improvement. They might be beneficial or they might be detrimental, it's a tough call. Not for our Gordon though. He concludes - with the spectacular confidence that comes from knowing you'll never be held to account -

If Scotland had FFA we would have the power to do all of the above and grow our economy at unprecedented rates, thus demonstrating conclusively that Scotland would be better off as an independent partner to the other countries of these isles but worse off by remaining a devo-lite region without fiscal autonomy. 

Gosh.

Would grow our economy at "unprecedented" rates - so by definition at rate that have never been known before.  Just by reducing some taxes.  There will be finance ministers all over Europe kicking themselves that they hadn't thought of this. "Thus demonstrating conclusively" - he's hypothesised an outcome which he admits would be unprecedented and continues as if he's proven something. Extraordinary.

There's more

Just the few policies highlighted above would make 5% growth attainable for Scotland 

Well he plucked that number out of his nether regions didn't he?

You'll forgive me if I don't waste more of my time on this - if you believe that some tax reductions will deliver 5% growth because Gordon says so then I'm afraid you're beyond my reach.

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?

"...to 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.

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

How Scotland's Economy Contributes to the UK

The Government Expenditure and Revenue Scotland (GERS) figures continue to be widely misunderstood and misrepresented so I'm going to have another go at trying to explain what they mean, what they do (and don't) tell us and how understanding them might impact the way you choose to vote.

Firstly: these numbers are - within pretty limited certainty bands - a matter of historical fact. They are produced by and relied upon by the Scottish Government. If there is any natural assumption bias it is likely to be to flatter Scotland.  In fact we should take confidence from the fact that the Scottish Government and HMRC are in pretty close agreement; GERS assumes only 0.36% more tax revenue for Scotland than HMRC.

Secondly: of course these are figures which show how Scotland's economy looks while within the UK.  But they give us a clear view of the starting point from which any changes the Scottish Government makes (using increasingly devolved powers, Full Fiscal Autonomy or indeed if we become Independent) can be understood.  These figures show us what it costs to run Scotland based on the taxes we pay today and the public spending we benefit from today.  It means we can understand what the immediate impact of changing tax or spend policies  will be on Scottish people and our Natioanl accounts.  Of course the long term impact of those changes (will they boost or damage economic growth) are far more difficult to assess - that's where politico-economic judgement is required.

Thirdly: they are a snapshot (or more accurately 15 snap-shots) in time. The time-series nature of these stats is extremely useful as it allows us to understand how volatile or predictable the various revenue and expenditure streams are.  We can judge if the latest figures are "just a snapshot" or a reflection of long-term trends.

I've already shown the breakdown of the last 10 year's figures (in absolute terms) in my previous post Analysis of 2013-14 GERS.

In this post I focus on how Scotland's Economy compares to The rest of the UK's (rUK's)² over time. All figures are taken directly from the GERS data tables; I've just calculated rUK (= UK minus Scotland), aggregated some rows of data for presentational clarity and worked out the figures on a per capita (per person) basis so we can easily compare the figures between the two regions.

Let's start with relative per capita Tax Revenue generation excluding Oil & gas;

This graph shows very clearly that (before oil & gas revenues are considered) Scotland consistently generates slightly less tax income per capita than the rest of the UK - the 15 year average is £260 less.

Now let's look at the relative differences between the main sources of tax revenue that make up this figure;

Working from the top of the graph down: the only areas where Scotland's per capita figures differ materially from rUK are "Gross Operating Surplus" (mainly profits generated by State owned Scottish Water) and the "Sin Taxes" generated because Scots smoke, drink and (to a very small extent) gamble more than people in the rest of the UK.  The impact of the council tax freeze is observable but a relatively small factor - I guess this shows how some policies with relatively marginal economic impact can generate a lot of attention.

The striking point of course is that Scottish Income & Wealth Taxes³ consistently generate £400 - £500 less per person than in the rest of the UK.  Given the tax regimes are currently the same this must simply be a reflection of the fact that on average Scots consistently earn less. This - as with so much of the economic debate - is more a "regions versus London" issue rather than one of Scotland versus rUK.  The graph below (Equality Trust from ONS data) illustrates the point

So before Oil & Gas (or the "bonus" of oil & gas as the Yes campaign liked to refer to it) how does our relative revenue generation compare with our relative levels of public expenditure? This is easy to see by adding our relative public expenditure on to the same graph (the red line); this line is a graphical representation of the wdiely quoted "we spend £1,200 more per capita in Scotland than the rest of the UK). Of course the gap between this and our tax income (the black line) is the difference between our pre-Oil & Gas deficit.and that of rest of the UK

It's worth noting that the expenditure per capita difference between Scotland and rUK has in fact increased in recent years - we'll come back to that later. But it's time we introduced oil & gas income.

Scotland (when given it's geographic share - getting to keep "oor oil") of course generates considerably more oil & gas tax revenue per capita than rUK. Typically about 90% of the UK's oil & gas revenues fall to Scotland (it's not 100% because there are gas fields in the "English" North Sea waters - let's put aside arguments about definitions of where Scottish Waters ends and English waters start and just run with these figures using the definition accepted by the Scottish Government).

The volatility of oil & gas revenue over the last 15 years is clear to see.  We should remember also that these figures predate the oil crash - we already know the 14-15 figure will be well below £500 and 15-16 is expected to be lower still.

So we let's now add this oil revenue (the black line below is the summation of the graph above and the first graph) and see how Scotland's finances compare with the rest of the UK when we include oil & gas.  The fact that black line is always in positive territory is a graphical illustration of the SNP's oft repeated mantra that "Sotland has contributed more tax per capita than the the rest of the UK for the last 15 years".

Of course when the black (tax income) line is above the red (public expenditure) line Scotland's deficit per capita is not as bad as rUK's - when it's below it it's worse. For greater clarity we can simply plot Scotland versus rUK's relative per capita deficit (the difference between these two lines). Bars above the line mean Scotland's deficit (with oil) is lower on a per capita basis than rUK's - bars below the line obviously mean our deficit is worse.

The boxed area of the graph shows the 5 year history that was generally quoted by the Yes campaign when they used historical average figures - a period that usefully included the clearly exceptional year of 2008-09.  It's also worth noting that the 12-13 numbers were published 6 months before the referendum but the Yes campaign (including not just Wings Over Scotland's "Wee Blue Book" but also MSP's like Stewart Stevenson) continued to quote the 11-12 numbers as if they were the most recent ones availabel - they simply ignored the 12-13 numbers.

Of course the 13-14 numbers were published after the referendum but anybody who pays attention to these things knew they would be similar to 12-13 because the oil situation was clear for all to see.  Of course to mention this was to be accused of accusing Scotland of being "Too We, Too Poor, Too Stupid" - a remarkable effective strategy when it came to hiding the economic realities from a large proportion of the electorate.

We still have one last set of figures to look at and understand: the detail behind the public expenditure that is so much higher (and growing slightly faster) in Scotland than rUK.  The following graph breaks that expenditure down into its constituent elements; as with all these graphs we are looking at the per capita difference between Scotland and rUK.  Above the line means we spend more in relative terms in Scotland.

There are a lot of lines on there but a couple of observation are still easy to make

• We have a higher per capita spend in Scotland on pretty much everything
• Social protection (benefits, pensions, tax credits and admin costs) and in recent years Transport are the biggest areas of higher relative spend

Some of these figures will be explained by demographic differences, some by the intrinsic higher cost-to-serve of a geographically dispersed population, some by Scottish Government policy.

International Services, Public Sector Debt Interest and Defence do not appear on this graph as they are costs allocated on a per capita basis (so by definition the per capita difference with rUK is zero). It's worth reiterating the point that if Scotland wants to remain in NATO the absolute level of defence spend is likely to remain at similar levels to those allocated in GERS (to achieve the accepted NATO target of defence spend equating to 2% of GDP).  Although talk of scrapping Trident is always accompanied by big numbers (the £100bn lifetime cost) the reality of course is that scrapping Trident doesn't save the economy that money - it allows it to be redirected into alternative defence spending.

The "Accounting Adjustment/Other" line is worth mentioning (given its the only one were we currently spend less per capita in Scotland than rUK) but if your stamina is flagging skip this paragraph as this is not easy to explain (or indeed understand).  It's primarily the difference between capital expenditure and depreciation (and of course we are looking at the relative difference in this difference).  I think in simple layman's terms it means Scotland is (very slightly and only in the latest year) at a point where it's rate of investment in capital programmes (compared to its historical average) is lower than rUKs. I think.

Slightly more interestingly there are two lines that I think are worth extracting from this graph as they tell us something about the SNP's relative priorities. I've observed before how education spending in Scotland has remained static in nominal terms over the last five years.  The graph below shows that  - while e.g. public order and safety expenditure has relatively increased - the relative premium spent on education in Scotland versus rUK has been eroded under SNP control.  

The Scottish Government itself points out in the GERS commentary that "lower population density in Scotland relative to the UK [..] increases the cost of providing the same level of public service activity, particularly in areas such as education, health and transport". The inescapable conclusion is that the SNP are relatively less committed to education spending than the previous administrations. For those of us who believe that social justice starts with the best possible quality of education for all this is a damning observation.

***

So what?

By pooling and sharing with the UK Scotland effectively carries a per capita share of the UK's debt; we are allocated a per capita share of National debt interest in GERS and the default assumption used for sharing the debt in the indyref was that it would be on a per capita basis.

This matters because if - on a per capita basis - Scotland makes a higher contribution to that deficit (and associated debt) then we are being subsidised by rUK. Conversely when Scotland runs a lower deficit per capita than the rest of the UK we are net contributing. In the recent past we have sometimes more than paid our way (look at the bar chart); but given current and forecast oil revenue levels we can expect the Barnett Formula to mean we are subsidised for the foreseeable future.  That shouldn't be a source of shame or embarrassment - there will always be some regions that contribute less than others and we have more than paid our way in the recent past (just look back to the North Sea oil boom of the 1980s).  It's what pooling and sharing is all about; it's why the Barnett Formula exists.

There are alternatives of course. Nicola Sturgeon has stated “I want full fiscal autonomy for the Scottish government. I want us to be responsible for raising our own revenues and deciding how those revenues are spent".  A laudable objective; but to stand on our own feet fiscally within the UK means not continually running a higher deficit than the rest of the UK (given we would still be sharing a currency and our National debt).  Now look at the graphs above and it's surely obvious that we can only achieve that with either another oil boom or by dramatically increasing our tax take and/or reducing our public expenditure. Of course every government wants economic growth to increase tax revenue without having to change tax rates but there is no magic wand that makes that happen.  The truth is that the only way Full Fiscal Autonomy could be achieved for Scotland would be by pursuing policies of even greater austerity than the rest of the UK; we would be starting off £800 worse off for every man woman and child in Scotland.  That's the head-start we'd be giving the rest of the UK on day one.  This can't be dismissed as just a snap-shot historical view. Look at the graphs - we consistently, structurally spend more and raise less unless there is an oil boom. It's all about the oil.

To say the challenge would be tougher still were we to pursue independence is surely now self-evident.  We'd have to sort out a currency and somehow seek to counteract the adverse impacts on our tax take and welfare spend that would result from increased unemployment as at least some businesses relocate South of the border.

If you believe that further devolution or full separation is worth it anyway then fair play.  But have your eyes open and be honest enough to admit to the hardship that will result; hardship which will - as it always does - impact the least well-off most.  Don't kid yourself (or others) that separation will somehow deliver "social justice" when the figures are strikingly clear - we'd all be worse off on day one.

It's at this point in the economic argument that - defeated by the numbers - some say "well if we're not net contributing to the UK why are they so keen to keep us?"  There are two answers to this;

1. Much as some Nationalists struggle to comprehend, there are people who believe in the long-term economic, social and moral merits of pooling and sharing - not everybody looks at the numbers and decides we should cut loose those who don't "pay their way" in a short-term economic sense
2. They might be becoming rather less keen to keep us.  If you shout and scream at a point in time when you are a net contributor ("it's oor oil"; "we give more to Westminster than we get back") then you might come to regret framing the debate in terms of narrow economic self-interest ("we'd have been £8bn better off"; "we'd all be £500pa. better off") when the numbers swing against you.

As for the party politics of this, be in no doubt: a vote for the SNP is a vote for full fiscal autonomy - and that's a vote for immediate hardship.  It's also a vote for independence because that is the SNP's constitutionally defined over-arching objective.  If you think the hardship and immediate economic disadvantage is worth it for that end then fair enough; but if you think voting SNP is a tactically astute way to ensure Westminster focuses on Scotland's selfish interests you might want to seriously consider thinking again.

*********
Footnotes
*********

1. Accuracy of GERS figures

The GERS figures are created by the Scottish Government and underpinned the economic case for Independence - so it is fair to assume that if there is any bias it would be to skew the picture in Scotland's favour. HMRC produce their own figures (Table 4 in this HMRC Document shows methodological differences between HMRC and the Scottish Government)  and pages 38 and 39 of GERS show that the differences between HMRC and GERS estimates are are in fact very small. GERS estimate Scottish Tax revenues in 2013-14 to be 0.36%(£181m) higher than HMRC.

The likes of Business for Scotland and Wings Over Scotland have made startlingly misinformed statements about VAT and Alcohol Duty that have led some people to doubt the validity of these figures.  If BfS and Wings were right it would be a terrifying indictment of the Scottish Government and the official Yes campaign's competence - but of course they are not right; the figures are sound.  References to VAT being "paid at companies' headquarters" and Scotland not getting attributed "Alcohol Duty at point of export" demonstrate a fundamental misunderstanding of how these taxes work and how they are attributed in GERS.  These are consumption taxes and GERS estimates Scotland's share of these based on consumption data.  There is no such thing as "Export Duty" on whisky (in fact you get Export Duty Relief); for the same reason we get to keep tobacco Duty despite not producing cigarettes.  A 2 minute search of the official GERS Method Statement is enough to dispel these myths.

The main area of uncertainty in GERS figures is how Corporation Tax would split between Scotland and rUK.  Businesses are not currently required to report profit split between Scotland and rUK. so nobody knows how profits (and therefore taxes) would actually fall.

There seems to be a bizarre amount of confusion out there around what GERS actually tells us.  I've covered the detail of what GERS means elsewhere (here and here); basically it tells us how Scotland's accounts would compare to the UK if we were fully fiscally autonomous based on continuing with the same tax and spend policies.

This is useful if we look at the long term trends as it helps us understand what we have become used to in terms of tax and spend levels in Scotland (and by implication we can start to think how dramatic the tax rises or cost cuts would need to be to cover the deficit gap we have versus rUK).

2. Scotland versus rUK

In all these analysis I compare Scotland to rUK (where rUK = UK - Scotland).  I find this preferable to comparing Scotland to the UK as a whole. I've seen the fact that the UK as whole includes Scotland causes remarkable confusion in debates (with people e.g. arguing that the UK shouldn't be getting the oil revenues).  By comparing to rUK I hope to avoid this confusion.

3. Income & Wealth Taxes

The is an aggregation of the following GERS items; Income Tax, National Insurance Contributions, Capital Gains Tax, Stamp Duties, Inheritance Tax and "Other Taxes on Income & Wealth"

Scotland's Economy

The SNP appear hell bent on pushing for Full Fiscal Autonomy (FFA) for Scotland and with possible Westminster coalition deals to be done this may be closer to reality than many think.

So here's a quick summary of the realities of Scotland's finances as presented in the Government Expenditure & Revenue Scotland (GERS) figures.  These figures are produced by the Scottish Government and I show the numbers here assuming we Scots get to keep "our" oil & gas revenue.

I'm not trying to make any political point and will try to avoid revisiting old independence referendum arguments.  My intention is merely to inform the debate, help the intellectually curious consider the implications of Full Fiscal Autonomy and - perhaps more constructively - help us all think about how our national economy works and what choices our elected representatives face.


Public Sector Revenue

All the figures here are most recent (2012-13) GERS figures quoted on a per cap (i.e. per person) basis.  I often see Scottish figures compared to UK (including Scotland) which can lead to confusion - so the comparisons I use here are between the Scottish figures and the "Rest of the UK" (rUK) where rUK = UK - Scotland (which I think is less confusing).

So let's look at where public sector revenue is generated in Scotland

Revenues from employment taxes (i.e. income tax and National Insurance contributions) are  -£335/cap or 8% lower in Scotland.  Given unemployment rates are almost identical, this simply reflects Scotland's lower average salary levels.

Revenues from consumption & transaction taxes (i.e. VAT and duties) are
+£36/cap or 1% higher in Scotland

• VAT revenues/cap are almost identical
• Stamp duties (i.e. property transaction taxes) are -£59/cap  or 40% lower in Scotland 
• Alcohol (+£28/cap, +18%) and Tobacco (+£67/cap, +47%) duties alone raise +£95/cap more in Scotland

Revenues from non-North Sea business taxes (corporation tax, business rates and other levies but excluding employer NIC's, VAT, fuel duty etc. already included above) are only -£13/cap or 1% lower in Scotland.

Council Tax revenues are -£38/cap or 9% lower in Scotland (where we have of course had a council tax freeze).

Revenues from other wealth taxes (Capital Gains, Interest and Dividends) are only -£11/cap or 4% lower in Scotland.

Profits generated by publicly owned assets appear in National accounts as Gross Operating Surplus (G.O.S.).  Mainly because Scottish Water remains in public ownership, G.O.S is +£194 or 47% higher in Scotland.

The sum  of all the above largely explains why (before North Sea revenues are considered) Scotland raised -£163/cap or 2% less revenue than rUK in 2012-13.  

Attribution of North Sea Revenues is clearly a controversial topic, but assuming we allocate the North Sea revenues to Scotland on a geographic share basis (as the Scottish Government prefers) in 2012-13 Scotland generates an additional
+£1.032/cap more than rUK.

The net effect is that Scotland can be shown to have generated +£869/cap or 10% more revenue than rUK in 2012-13

The relative significance of North Sea revenue to Scotland's finances is clear.  In 2012-13 these revenues represented 10.5% of Scotland's Public Sector Revenue (1.1% of the UK's).  In 2008-09 North Sea revenue was 20.9% of Scotland's Public Sector Revenue (2.4% of the UK's).

To put this 2012-13 figure into context let's look at North Sea Revenues over time. The figures below are total North Sea revenues (of which Scotland's geographic share ranges from 95% to 84% over the last 4 years). The dark grey bar is 2012-13;  2013-14 is now known (although full GERS accounts are yet to be published) and the OBR forecast for 2014-15 can be expected to be pretty accurate given we are now in Feb 2015.  The dark red bar is the - ahem - "low" scenario used in the Independence White Paper (the lighter red the "high" scenario).

In absolute terms Scotland's North Sea revenues in 2012-13 were £5.6bn (£1.3bn below the White Paper figures) and we now know that by 2014-15 they will be around £2.4bn (£4.7bn below the White Paper low scenario).

We therefore already know that on oil & gas alone Scotland will be about £3.2bn worse off in 2014-15 than we were in 2012-13 (that's about £600/cap).

It's worth noting that of course some level of oil recovery is possible - but there are complicating factors that rarely seem to be considered

• 86% of the 2012-13 North Sea revenues came from corporation tax - that is taxation on profit. A halving of the oil price is likely to lead to far more than a halving of profits available to be taxed.  This is what I mean when I say there is a non-linear relationship between the oil prices and North Sea tax revenues
• There is (sensible) talk of reducing the taxation burden on North Sea companies in response to the oil price slump.  This may help save jobs - but again the North Sea tax revenue generated per barrel will of course be lower. 

Of course with the figure above this still means we'll be generating more public sector revenue per capita than the rest of the UK to the tune of about £250/cap in 2014-15.

I guess that's what the SNP mean when they refer to oil & gas as merely a bonus.  As long as we don't spend considerably more than the rest of the UK we shouldn't be any worse off as a fiscally autonomous country - so let's look at the spending side of the equation.

Public Sector Expenditure

Using the same methodology as for Revenue;

Expenditure on Welfare and Unemployment benefits are +£296/cap or 8% higher in Scotland than rUK.  Given unemployment rates are almost identical this is presumably largely a function of greater levels of in-work-poverty in Scotland.  This topic (in particular with respect to the National Minimum Wage level) is one I hope to return to.

Health expenditure is +£190/cap or 10% higher in Scotland than rUK.  I haven't investigated this further but factors here will include the fact that the Scottish NHS is fully devolved, free prescriptions are given and (I think) the Scots are simply on average less healthy than those in rUK.  The significantly higher alcohol and tobacco consumption implied by the duty figures above must be a factor here.

Education spend is +£75/cap or 5% higher - presumably largely due to the abolition of tuition fees in Scotland.  Wiser heads than mind are grappling with the question of whether or not the Scottish education system is delivering a better education to all as a result of this.

Transport spend is +£240/cap or 85% higher as a result of lower population density and remote Scottish communities.  This factor is rarely acknowledged when people complain about high profile transportation infrastructure investments in the rest of the UK.

Public Order & Safety (i.e. Police) spending is -£19/cap or 4% lower in Scotland than rUK.

Other areas which can be broadly defined as "social expenditure" are all materially higher than rUK.  Across Public & Common Services, Environment Protection, Housing & Community Amenities and Recreation, Culture and Religion Scotland spends +£396  or 57% more than rUK.  I must confess this figure intrigues me.

Expenditure on Enterprise and Economic Development is +£125/cap  or nearly three times that in rUK.  Agriculture, Forestry and Fisheries expenditure is +97/cap or more than double that of rUK.

International Services and Defence are allocated on a per capita basis already (and Full Fiscal Autonomy is normal interpreted as everything except foreign relations and defence - so the GERS figure are consistent with that principle).

It is worth noting that Public Sector Debt Interest is already allocated on a per capita basis in the GERS figures.  This is consistent with Scotland having a per capita responsibility for the UK debt (which was widely accepted as the fair basis for allocation during Independence discussions).  This should be remembered when the likes of Ms Sturgeon make wild statements about Scotland "putting in more than we get back" from the the UK.  This statement is normally justified with dodgy comparisons of percent of tax raised with percent of spending received.  The main flaw in this logic is that if you gave Scotland the same share of UK expenditure as it's share of UK revenue, Scotland would be responsible for its revenue share (not population share) of debt.  It's also worth noting that even on this flawed basis of comparison, in fact in 2012-13 Scotland was responsible for 9.16% of revenue raised and received 9.29% of expenditure.

So when you add all of that up we actually spend +£1,382/cap or 13% more than rUK.  Of course this higher spend more than offsets the higher Revenue we generate due to North Sea Oil such that the Scottish deficit is +£512/cap worse than rUK in 2012-13.  In absolute terms that means we need to find about £2.7bn simply to be no worse off than the rest of the UK.

The higher Scottish spend/cap figure has been remarkably consistent over the last five years (ranging between £1,225 and £1,438).

Now may be a good time to remind ourselves that in 2014-15 we are likely to have a Revenue advantage over rUK of only maybe £250/cap - so we can expect to see a deficit difference to rUK of nearly +£1,100/cap. 

Let's pause and think about that for a moment.  If we tax and spend as we do today the accounts for a fully fiscally autonomous Scotland are likely to show that - for every man, woman and child in Scotland - we would be £1,100 a year worse off than if we continue to pool our lot with the UK.

Something would have to be done.  Tax take would need to go up or public expenditure would need to be reduced.  These are the economic realities from which we can't hide.  Of course economic growth would help but it's hard to imagine how or why a fiscally independent Scotland would miraculously create growth (or how long it would take before it materially affected the deficit).  We already spend a relatively high amount on Enterprise and Economic Development as well as Agriculture, Forestry and Fisheries - and it's worth remembering that EU rules constrain the level of government support that can be given to industry.

Now whether or not Scotland is fully fiscally autonomous (or indeed independent) the economic challenges we face are clear (and largely shared with rUK).  To put absolute numbers against this - the GERS deficit for Scotland in 2012-13 was £12.1bn and the Oil & Gas revenues in 2014-15 are likely to be another £3.2bn lower giving us roughly a £15.3bn deficit problem to address.

The graphic below (a work in progress) attempts to put the sources of revenue (in Green) and areas of Expenditure (in Red) is some kind of relative context.  All you have to do (given we know the oil & gas number is now much lower)  is work out how you might find £15.3bn through higher taxes or lower expenditure to eliminate the deficit.

If that defeats you - on the basis that we appear set on devolving away Barnett benefits and driving to full fiscal autonomy - try and find £6.0bn or so to make us at least no worse off than being within the UK.

Please drop me a line when you've worked it out.

Addendum

Here is how the absolute Scottish figures have shifted over the last five years, which may be helpful in considering what it takes to move these numbers by £6.4bn (to be no worse off than the UK is now) or £15bn+ to eliminate our likely deficit right now.

Taking sources of funding first:

If you follow the chart up from the bottom you can see;

• Frozen Council tax
• (Surprisingly?) Stable Business Taxes - although it's worth noting the GERS figure is a guess as no-one how business would report profits and hence pay taxes between Scotland and rUK. (HMRC estimate this figure would be almost £1bn lower)
• Duties fairly stable - creeping up slightly
• "Wealth taxes and other" have declined since 2008-09 due to reduced Capital Gains Tax and lower dividend & interest taxes (presumably because of lower dividend & interest payments)
• Employment (Income Tax and NI) is of course the biggest contributor and has increased by nearly £1bn over this period
• VAT has grown by nearly £2bn due to the VAT rate increase to 20% in 2011
• Gross Operating Surplus (GOS) is mainly Scottish Water profits - reasonably stable
• Oil & Gas is of course the volatile element
• The balance of funding required not met by theses taxes raised is of course deficit - the required increase in debt each year

Looking now at where that money is spent:

Again if you follow the chart up from the bottom you can see;

• The biggest chunk of spend is Social Protection (welfare and unemployment) and this has increased by £4bn over the period
• Other Social (Housing & community amenities, public & common services, recreation, culture & religion, environment protection) is reasonably stable
• Health spend has increased by £1bn
• Education, Transportation and Public Order & Safety (Police) expenditures are fairly flat
• It is worth noting at this point we are already roughly spending about what we generate in public sector revenue (the black line)
• Other Commercial (Enterprise & Economic Development, Agriculture, Forestry & Fisheries, Science, Tech & Employment Policies) have declined a little
• The unhelpfully titled (in GERS) Accounting Adjustment is (I think) mainly cash versus reported cost accounting differences (e.g. when capex exceeds depreciation).  GERS is a little opaque on this - comments welcome
• All we have to do now is pay our share of Defence (fairly stable) and Debt Interest (which of course grows with debt and varies with interest rates)

Take time to ponder these numbers - its what our politicians are (or should be) doing ...

Addendum II

The initial response to this post on social media was interesting with some suggesting this data presentation was some sort of "spin" applied by me to the numbers or me in some way applying my "model".  In fact all I have done is summarise the data all of which (with the exception of oil forecasts) are taken directly from the Scottish Government's own GERS data tables available here

There are also a surprising number of commentators who appear to get very confused about percentages and some - I'm looking at you "Wings over Scotland" - who don't seem to realise that we ran a large deficit in 2012-13 and that it was worse than the rest of the UK on any measure ... and that this was true before  we factor in the known £3bn+ subsequent loss of North Sea oil revenues.

Others have highlighted how these figures compare to OECD international comparisons - I think this is because those figures are current account balances (i.e. before capital investment or consumption).

To save time in debates and on Twitter I have created the following table which I believe comprehensively summarises all of the different deficit figures over the last five years for Scotland, UK (and by implication) "rest of UK".

Finally - as I have aggregated GERS categories into my own sub-totals to make it easier to digest - here are the tables mapping most detailed GERS figures onto my categories;

Done.