GERS: A Story Told Through Graphs

Today saw the publication of the Government Expenditure & Revenue Scotland (GERS) report for the fiscal year 2015-16.

Regular readers of chokkablog will be familiar with my predilection for helping us get our heads around large quantities of data by plotting some graphs. Well buckle in.

Let's start with the simple headline fact: Scotland's GERS deficit was £14.8bn last year. It has remained at similar levels for the last four years but has slightly deteriorated in the last two¹.

As a percentage of GDP our deficit is now 9.5%. 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 4.0% 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. In fact - due to decommissioning costs and tax credits - the latest forecast is for the North Sea to represent a net fiscal cost for the foreseeable future.

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 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).

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

The Independence White Paper assumed the same average level of North Sea oil income as generated on average between 2009 and 2012, implicitly in perpetuity. The recklessness of that assumption is glaringly apparent.

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.

There are arguments to be made for calculating this 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 translates into an effective fiscal transfer from the rest of the UK to Scotland of £9bn a year or £1,700 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 (black above red) to the UK's economy.

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 just over £10k per capita (so at the current rate of transfer we'd still be in credit for another 6 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. 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 17 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.

What strikes me is the fact that, despite the austerity rhetoric, our overall public spending has increased in the the last year by £650m or 1.0% in real terms (this compares to spending in the rest of the UK having risen by 0.8%)

If you strip out the reserved and per capita allocated (and highly contentious in terms of "value") categories of debt interest, defence & international services we still received £650m higher spending in real terms. 

Go a step further and strip out the world of pain that is accounting adjustments and the remaining categories have seen a spend increase of £1,420m or 2.5% (having been flat last year). We can debate how the pain has been spread, but the overall level of spending on key services has in fact risen as a result of the ongoing UK fiscal framework and the wonders of the Barnett Formula.

Remembering that the value of the fiscal transfer from the rest of the UK to Scotland is £9bn, it's worth noting that if you (ridiculously) assume no debt and no defence costs at all we'd still be missing £3bn a year if we were out of the UK and wanted to continue to spending these other sums.

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.

The only area where we spend less is "Accounting Adjustment" which needs a little explaining. In this graph this includes "EU transaction costs" which are broken out in GERS this year for the first time. Although EU membership is a net cost to Scotland (about £39 per capita) it's £85 lower than the cost for citizens in the rest of the UK. The other main source of difference is "English Housing Associations" which have been reclassified into the Public Sector in England and account for £132 per capita spend in England but zero in Scotland as they have not (yet?) been reclassified into public spending here⁶.

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). 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 £9bn. Suffice to say a £9bn reduction in spend would be an order of magnitude greater than any cuts we've seen under "Tory austerity"

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 whole⁴. The onshore revenue growth in the last year of £1.9bn is greater than the £1.8bn loss of North Sea revenue, so it's true that overall our revenue has grown. Of course we've already seen our spend has grown as well, which is why our deficit has very slightly deteriorated.

Now depending on the cut of your cloth 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 and gambling 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 rest of the UK.

I sense a grievance building, but as Nicola Sturgeon was at pains to point out today: "Scotland, in terms of economic output per head – and even excluding offshore revenues – remains the most prosperous part of the UK outside of London and South-east England"

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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 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 £9bn 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.

Well I have some thoughts. Obviously the way you grow public revenue is by growing the economy, creating jobs and paying people more (who then go out and spend more). That means creating an environment within which businesses can thrive.

The EU question is a thorny one and it's right that all options are explored to see how we can maintain our links with the EU whilst remaining within the UK. But any solution that proposes leaving the UK to join the EU has to address two major issues;

• Leaving the UK means leaving behind the £9bn pa fiscal transfer - the "black-hole" becomes very real and would have to be filled through tax rises, spending cuts, yet more borrowing or (hardly likely) the EU picking up the tab
• If the reason given for leaving the UK to join the EU is a fear that EU/UK trade will be hindered, that reason has a very simple logical flaw. If EU/UK trade is hindered as a result of Brexit, we lose far more being on the EU side of those borders than we do by being on the UK side (because we export four times as much to the rest of the UK than we do to the EU)

Investors don't like uncertainty. Continually threatening them with the disruption of yet another referendum and all of the contingent risks that entails (what currency, what tax regime, what trade barriers?) hinders investment and doesn't help our economy.

But I'd argue the cost of continual threats of indyref2 is more than just the effect on big business and investor confidence - it runs deeper than that.

Scotland is a country where our political leaders invest their energies into trying to break our Union rather than working to build our economy.  Our young people are bombarded with negative messages, provided with excuses not to succeed, hampered by reasons they can't instead of encouraged by reasons they can: it's Westminster's fault, its the UK's fault - we're cheated, hard done by, put upon - we can't succeed unless we break from the UK.

I can't think of a worse environment within which to try and encourage ambition, engender confidence, fuel entrepreneurial spirit and fill people with a sense of the possible - and yet that's surely what we need to do if we are to see our onshore economy out-grow the rest of the UK.

A parting thought. Consider how much of Scotland's population's time, energy and money has been expended fighting the UK and pursuing the dream of independence at any cost. Now imagine you could take just a fraction of that resource and invest it against positive, job creating, wealth building, economy boosting projects. Just think what we could achieve.

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Notes

1.As with every GERS release there have been some adjustments made to prior year figures. The most material of these for Scotland have been on the expenditure side - I haven't unpicked these
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 £76m of which Scotland's geographic share was £60m
4. per GERS page 3: "Non-North Sea revenue in Scotland grew by 3.7% in 2015-16, similar to that for the UK as a whole, 3.8%."
5. I produced this graph way back when 2013-14 were the most recent figures available - I think it stack up pretty well compared to the actuals

6. See GERS page 2: "The ONS reclassified English Housing Associations (HAs)1
 into the public sector on 30 October 2015. In 2015-16, this increased UK public sector revenue by £6.9 billion and UK expenditure by £10.8 billion, resulting in a £3.9 billion increase in the UK net fiscal deficit. A similar impact is seen in earlier years. Scotland is apportioned none of this additional revenue or expenditure in GERS. The ONS have not yet announced a decision on the classification of Scottish Housing Associations". I haven't yet understood the implications of this

Analysis of 2013-14 GERS

This is a quick and dirty blog post; I've written a pithy summary which should be in tomorrow's Daily Record so protocol dictates I should wait until that's published before sharing here.

What I can share quickly is the raw data analysis, graphs and headlines.

There are no surprises for anybody who has followed my previous blogs or simply been paying attention.

• As expected the Scottish deficit per capita continues to be worse than the rest of the UK to the tune of about £900 per head (or £4.75bn)
• In only one of the last 5 years has Scotland's deficit been lower than rUK's and then only marginally (£140) - that was of course the year on which the Independence White Paper case was founded
• Longer term average deficit per capita is higher for Scotland than rUK: by £260 over the last 10 years and by £440 over the last 5 years
• We already know that 2014-15 will be worse again due to known oil price collapse
• rUK have consistently reduced their deficit per capita over the last 5 years

Some points worth noting

1. I show figures versus "rest of UK" (rUK) i.e. UK excluding Scotland as I believe that's less confusing and more insightful than comparing us to the total UK which includes us.  [I still show total UK for comparison purposes in the table at the foot of this post because those figure are so widely quoted]
2. I think Per Capita comparison are appropriate when looking at our deficit versus rUK  - debt interest is allocated on a per capita basis and during the indyref the default assumption for debt allocation was to base it on population share.  If we are being apportioned debt on a population basis it makes sense to see what our per capita contribution to that debt (as a result of running a deficit) is. [I show % GDP numbers below]
3. There have been some major restatements (by HMRC and Scottish Government) for prior years (for reasons that are too tedious to document here) - so I have updated the historic figures appropriately
4. I've extended to a 10 year time series because it helps us understand longer term trends and volatility (and because the GERS data tables make this easier to do now!)

For those who like to see Deficit/GDP figures this trend is show below.

Even using the SNP's preferred deficit/GDP measure Scotland is running a materially higher deficit than rUK in recent years and has been doing over both a 5 year and 10 year average period.

[The headline impact of historical restatements (by Scot Govt and HMRC to match European System of Accounts) seems to have been to (relatively) boost rUK's GDP.  I haven't dug into this further yet]

Stepping back from the rUK comparisons and looking at the absolute figures for revenue generation in Scotland: the total stack is public money spent, up to the black line is from taxes, the balance in red is deficit;

The numbers may be hard to read - but basically increases in revenue raised through employment taxes and VAT have been offset by decline in oil & gas revenue.  Remember we already know next year's figures (to be published in March 2016) will show a further £2bn+ drop in oil & gas revenue.

Looking at where the money was spent: the black line represents what was raised in taxes, anything above that is deficit

What strikes me about this graph is that education spending has decreased in cash terms over a period in which (for example) health and social protection have increased by 10%.  The Capex vs Depreciation figure declined last year suggesting a slowing of the capital investment program. Clearly these are just superficial observations at his stage.

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Here are the underlying figures for the deficit graphs for those who like to dispute them

Yes or No: Makes no Difference

One of the unfortunate legacies of the Independence Referendum is that all subsequent attempts to constructively debate Scottish politics - and the economic choices we face - are rapidly hijacked by those who believe the only question that counts is: should we be independent: Yes or No?

That's unfortunate because one of the major positives of the Referendum should be that as well as being more politically engaged, many of us are also far more economically informed.

Why don't we capitalise on this improved understanding of our economic challenges and move the debate forward beyond simplistic Yes/No questions?

Why can't we make ourselves better voters by actually thinking about the difficult choices our elected representatives face without getting bogged down with worrying about whether they sit in Westminster or Holyrood?

Context

Hopefully we can frame the discussion with some uncontroversial statements that most rational observers agree with.

Firstly two observations that are as true for Scotland as they are for the whole UK

• The level of deficit we currently run is unsustainable
• There are social inequalities that need to be addressed

Secondly some observations taken directly from GERS (detailed analysis here) about challenges Scotland would face if we were a fiscally autonomous region within the UK

• Consistently higher levels of government expenditure in Scotland are offset by higher tax revenues only because of oil - at least from a deficit per capita  perspective we can't consider oil to be "only a bonus"
• With oil revenues as they were in 2012-13, the deficit per capita was worse in Scotland than the the rest of the UK by £500/capita or about £2.7bn
• The subsequently decline in oil prices means that by 2014-15 Scotland is likely to be facing a deficit gap to the rest of the UK of about £1,100/cap or nearer £6.0bn
• It is quite possible that oil revenue will rebound
• The worst case is that we are experiencing the beginning of a long-term decline in oil revenues 
• The best case for Scotland is that we are currently just witnessing the impact oil price volatility has on our economy

Thirdly: there will be those who seize on any positive arguments made for the future of the Scottish economy with "well then we should have voted Yes" - so let's remind ourselves that as result of the No vote (whether you agree with it or not) there are additional questions which we don't need to concern ourselves with now

• Currency
• What currency would we have used and with what fiscal strings attached?  
• Would we have needed our own currency and if so what would it have costed us to establish it?
   
• Trade and employment
• To what extent would our hugely important trading relationship with the rest of the UK have been damaged by independence and what would the implications for employment in Scotland have been?
• Would our relationship with the EU have been jeopardised/weakened or actually saved/strengthened by independence?

Finally let me suggest we park to the side some of the other arguments which might distract us from positively looking at the challenges we face

• The Oil Fund
• If we're only interested in looking forwards, arguing what we should have done in the 1980's is pointless
• We'd need to be running a surplus to contribute to an oil fund; so let's focus on working out how we might actually achieve a surplus (whether independently, with Full Fiscal Autonomy or as an integral part of the UK)
• Competence
• "Westminster has fucked it all up; surely we can do a better job ourselves" is - I hope we can agree - at best an incomplete thesis
• Surely a more positive approach is to focus on what we think competent leaders could or should actually do and use that to inform who we vote for (and/or - if you insist - what level of devolution we might choose to fight for)

The Significance of Oil

Whether your objective is to make a better economic case for independence (or maybe full fiscal autonomy) or simply to strengthen Scotland's contribution to the UK, our reliance on oil revenue has to be addressed.

It's obvious that we should maximise the value our economy generates from this natural resource so we need to strike a careful balance between the tax burden we place on North Sea operators and the relief we offer them when the global oil price slumps.  In this regard the UK and Scottish objectives are of course completely aligned - it should "simply" be about finding the right balance between taxing and supporting the industry.

It is equally obvious that the Scottish economy would be more robust if we were less reliant on this source of tax revenue.  For some this statement is considered heretical as if it in some way implies oil is not an asset; of course that's a nonsensical response to what is an economically rational observation. It would be naive in the extreme not to at least consider the possibility that the OBR oil revenue forecasts could be correct and may represent a long-term structural trend. The graph below shows actual figures in grey, 2012-13 (most recent GERS) in dark grey, OBR forecast in light grey and Scottish Government White Paper scenarios in red

In essence the challenge is simple: the only way we can reduce our reliance on oil is to generate more tax revenues from elsewhere or to spend less public money.  The alternative is to hope that oil "does it for us" which - to me at least - doesn't sound like a particularly robust economic strategy.


Revenue Side

Let me reintroduce my 2012-13 GERS revenue & cost flow chart (detailed workings here > Scotland's Economy); hopefully this can help us at least get our heads around the main dynamics we have to consider, the economic levers we have to play with.  Revenues generated in Scotland  are shown in Green, Scottish public expenditure made in red.

The net effect is that in 2012-13 we generated a £12.1bn deficit (i.e. £12.1bn more was spent* in Scotland than generated* in Scotland).  If you doubt this figure comes directly from Scottish Government GERS or if you have concerns about the nature of the GERS methodology I refer you to the footnotes at the bottom of this post.

* I'm aware that some of these costs and some of these taxes are allocated or estimated - we will come to that when we consider how they might be varied

We know things will have got >£3bn worse since these figures were produced due to the oil price crash - so in 2014-15 we are likely looking at a deficit of  >£15bn (or >£2,800 per capita).

In the spirit of this post I would argue that whether you believe we should be independent or not you should have a view as to how that deficit can be eliminated (or at least materially reduced).  Let's not distract ourselves at this stage with who holds the levers - let's think about what (from a Scottish perspective) we might want done with them.

So how can we raise more tax revenue or where should we reduce expenditure to find the £15bn pa. or so we need for Scotland (either independently or contributing as part of the UK) to be running a surplus (i.e. for us to be able to start reducing our debt burden)?  We need to grow the green bubbles and/or shrink the red ones - let's consider how.

The intention of the rest of this blog is to stimulate thought and debate, to share some thinking out loud; it is not intended to be in any way "the answer" but rather to help us understand the orders of magnitude we are dealing with here


Employment Tax Revenues

By far and away the biggest source of government revenues are employment taxes at £19.4bn: this in turn is obviously a function of how many people are employed, how much they are paid and the tax regime in place.

• The electorate is highly attuned to tax rates: they affect us directly and we can easily work out whether a tax rate or threshold change would impact us personally.  Years of campaigning and polling have taught political parties to be wary of explicitly suggesting personal tax increases. It's worth noting the ICAS Report which observed that for Scotland "even if there are no behavioural changes [...] another 10% on the top rate of tax might raise maybe £240m". The implication is clear: to have a material impact on the deficit though income taxation requires addressing tax rates of those on middle incomes.  As a scaling factor here: if we all paid 5% more tax (and NI) this would generate about £1bn.
• It's kind of obvious that reducing unemployment not only reduces the welfare burden on the state but also increases the tax revenues generated through employment taxes.  Without getting bogged down in definitions of employment and unemployment (e.g impacts of part-time work and those not actively seeking work) we can observe the headline unemployment rate in Scotland is 5.7% (very similar to rUK).  A halving of the unemployment rate would therefore add roughly 2.35% to the current employment rate of 73.2% = 2.35/73.2 = a 3.2% increase in working population.  If we take the highly (ludicrously?) optimistic assumption that these jobs would be at average wage levels this would increase employment tax generation by £0.6bn (3.2% of £19.4bn).  Of course this should remove some people from welfare which we need to consider when we look at the cost side of the equation.
• If companies simply pay people more this of course directly generates more employment tax revenues (with a smaller negative off-set of corporation tax assuming all cost increase aren't passed on through price inflation).  These increases are of course at higher marginal tax rates. You can see why Osborne & Cameron are so keen to suggest companies give pay rises - from a government perspective it generates money for no political pain
• Of course the National Minimum Wage is the only way the government can currently force companies to pay (some) people more.  In Scotland there are 100k people on the NMW (4.3% of the workforce) which allows us to work out a very simple scaling figure here: increasing the NMW from £6.50 to £7.00 for a full-time employee increases their annual income by about £1,000 and their employment tax contribution (tax at 20%,employees NI at 12%, employers NI at 13.8% = 45.8%) by  about £460.  So for these 100k people in Scotland this translates into only £46m (a 0.2% overall impact on employment tax revenues).  This is of course the minimum number of people who would be affected by an increase in the NMW as people just above the NMW are likely to swept up by any increase and there is the domino effect through businesses as other pay levels need to increase to maintain a sensible salary architecture.  That said I find it hard to imagine how even a 10% increase in the NMW could have a ripple effect of more than 1% on overall wages - so we can probably safely scale this as at best <£0.2bn impact on Scottish employment tax revenues.  This is a topic worthy of a blog post all on it's own (I'll get to it) because there are complex dynamics at play: e.g. reduction of welfare burden where households of those currently on minimum wage receive benefits; possible impacts on employment rates, pricing of goods, regional and global competitiveness etc.  If you're keen to know more now right now I suggest having a scan of the latest Report of the Low Wage Commission

So what do we conclude on Employment Taxes?   As context: over the last 5 years the nominal increase in Scottish employment tax revenues has been 4.6% - over that same period the Consumer Price Index increased by over 14%. I'd suggest that you'd have to be pretty optimistic about employment rates and wage inflation (even fuelled by a NMW increase) to generate more than £0.5bn of extra revenue (in real terms) before you have to simply start taxing middle earners more.  Of course economic growth (such that tax revenues increase faster than public spending) is the other way out of this trap - hold that thought.

Consumption Tax Revenues: VAT & Duties

If you look at the size of the consumption taxes (VAT £9.3bn and Duties at £5.9bn) it's obvious why these are to "go to" place for politicians seeking a quick fix.  Assuming (simplistically of course) that consumption patterns wouldn't change a drop of VAT from 20% to 15% would lose us £2.3bn or of course an increase of the basic VAT rate to 25% would gain us £2.3bn. Of course as with any tax increase the fear is that it leads to a reduction in consumption and potentially slows or stalls economic growth.  You can't get something for nothing.  Similar arguments of course apply to duties with Fuel, Tobacco and Alcohol being the biggies.

Other Taxes

If you look at the chart you can see that after Oil & Gas, Employment, VAT and Duties we're down into smaller numbers so it becomes even harder to have a material impact on the deficit by tweaking these.  Let's take them in turn

• Business Taxes of £5.1bn are made up of corporation tax £2.9bn and Non-Domestic rates of £2.0bn.  It's worth noting that corporation tax is one of the most uncertain GERS figures because nobody knows how much profit companies would report in Scotland as opposed to rUK - in fact HMRC estimate this number as nearer £2.5bn in 12-13.  There has been much talk about tax avoidance (about which more below) but I haven't heard many arguing for a higher corporation tax burden.  It's worth highlighting that retained (post tax) corporation tax profits are what pay dividends; dividends (in the long run) drive share prices; dividends and share appreciation is how investors make returns; pension funds are the largest investors ... so controlling corporation tax is not just about incentivising business investment, employment and economic growth it's also about protecting the value of pensions.
• Tax Avoidance is a hot topic right now but to scale the issue it's worth noting the Scottish Government Independence White Paper "targeted" a revenue gain of £250m through (unspecified) reductions in tax avoidance - so for the sake of this exercise let's give ourselves £0.2bn through reduced tax avoidance
• Gross Operating Surplus (GOS) is largely the state owned Scottish Water
• Council Tax of £2.0bn has of course been frozen in Scotland; a 10% increase would bring in £0.2bn
• Wealth Taxes of £1.4bn are mainly taxes on interest & dividends (£0.6bn), the balance being capital gains, inheritance tax and other.  Clearly as interest rates increase and if corporate profits (hence dividend payments) grow we will see some up-tick in this figure but in terms of policy changes even (as an illustration) a doubling in inheritance tax take would only give you £0.2bn

Economic Growth

So before factoring in real economic growth, on the revenue side (the green bubbles) you really struggle to anything close to £1bn of improvement without some fairly radical employment or consumption tax (e.g. VAT) increases

Which is of course why economic growth is the key - so let's scale this.

Non-Oil revenues for Scotland were £47.5bn in 2012-13 so to close our £15bn (post oil crash) deficit we need 15/47.5 = 31% real revenue growth (that is growth in tax income above growth in public expenditure).

If we look at historic UK real annual GDP growth rates (using e.g World Bank data) we can see that the best average annual rate we've achieved over a 5 period in the last 20 years was 1.9% pa in the period 1990-1995.  14 years of that would get us there.

This is of course why amid all the talk of austerity there is a clear understanding from all parties that economic growth is the golden key here - austerity that damages long-run growth is counter-productive .


Cost Side

Of course all of the above has looked only at the revenue side.  What choices do we face on the cost side (the red bubbles)?  Our total expenditure was £65.2bn in 2012-13 so to get our £15bn through cost-cutting we need to reduce all expenditure by 23%.  Tricky.

It's a big topic so forgive me if I skate through the main issues rather quickly;

Defence

Scotland's defence "bill" in 2012-13 was £3.0bn.  The NATO member state target spend level on defence is 2% of GDP.  In Scotland's case in 2012-13 that would imply a spend of £2.9bn.

Some of the numbers that are loosely thrown around as savings from dumping Trident are extremely misleading (e.g. lifetime investment costs as opposed to Scotland's share of the annual cost).  There's an interesting debate to be had about spending on Trident or alternatives (as the Centre Forum cover here) - but people who think scrapping Trident is an economic fix are - assuming we are serious about remaining in NATO - wide of the mark.

Having said that it appears many NATO members spend nearer 1% of GDP (including Germany - see here) so I guess you could realistically argue for halving our defence expenditure and saving £1.5bn. That would clearly be a pretty controversial position to adopt - it's perhaps more realistic to note the Scottish Government Independence White Paper suggested a defence spend of £2.5bn or a £0.5bn saving


Health

Let me declare an interest: the NHS saved my life when I had cancer and my wife works for the NHS. Perhaps its not surprising then that for me - as for so many - our health service is somewhat of a sacred cow when it comes to cost-cutting conversations.

Of course in Scotland we have free prescriptions for all and we are a relatively unhealthy lot (we generate £95 more tobacco and alcohol duty per capita than the rest of the UK) - this may in part explain why we spend £190/capita more on health than the rest of the UK.  If we closed that health spend gap with the rest of the UK it would save us 10% of our health budget or £1bn. Good luck to the political party who propose that.

Welfare & Unemployment

At £22.5bn this is clearly the dominant contributor to public spend.

From inspecting the UK accounts (p.71 here) more than half of this figure comes from old age (pensions) sickness & disability expenditure.  Unemployment benefits are only about 2.5% of this figure - the other main areas are housing, social services, benefits and income support

Unemployment is clearly a factor here but not the main driver. The chart below (from Prof Brian Ashcroft's Economy Watch) shows that unemployment rates are not high by historical standards and are falling (with Scotland very closely mirroring the UK as a whole).

The issue of in-work-poverty would appear to be a bigger concern - the Joseph Rowntree Foundation estimate that 21% of UK households live in poverty   There are clearly a significant number of people in low paid employment whose households are recipients of benefits. This is a huge and complex topic I won't attempt to cover here - but suffice to say the topic of National Minimum Wage must be one of the factors to consider in this debate.

Others

Frankly when you look at the other cost areas and you consider how we might find £bn's of cost savings it gets pretty tricky.  I'm running out of steam for now so I'll leave it for you to look at the remaining red bubbles and think about it!

So What?

I guess the overall conclusion once you've ploughed through all of this is not surprising - we can find maybe a billion or two by tweaking our tax and spend policies but the deficit will not be closed without either eye-wateringly severe austerity measures (hammering the masses with taxes and or slashing health & welfare expenditure) or a return to sustained long-term real economic growth.

But whilst it's easy to say austerity measures that threaten growth are to be avoided, I'd suggest it's equally important to observe that simply loosening our belts in the hope that economic growth will naturally follow is not a good enough strategy.

So what are the specific actions we can take to stimulate sustainable economic growth? Feels to me like a subject for a future blog post.


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Footnotes

For those who sometimes doubt the figures I use are the same as GERS

• The data tables I uses are all downloaded from the Scottish Government GERS website here
• The GERS methodology statement can be found here
• The GER report itself is here
• The table below shows the deficit of £12.1bn in 2013-14 that my figures reconcile back to

A common complaint raised when discussing GERS figure comes from those who followed some of the less reliable commentators during the referendum debate. These commentators sowed doubt and confusion by failing to understand how the GERS figures are compiled.  Take this statement from Wings Over Scotland (sourced here)

Or this from Business for Scotland (sourced here)

If they bothered to read the GERS Method Statement they would know that VAT and Duty are (correctly) estimated based on consumption and that corporation tax is estimated based on location of economic activity (not head office)