Impact of UK Austerity on Scotland's 2017-18 Budget

When Finance Secretary Derek Mackay announced his party’s Budget last week, he came under pressure for many reasons, not least because buried in the detail was the fact that the SNP are imposing a £327m cut in central Government support to local government services¹.

Mr Mackay defended his budget by saying "Let me be clear, I will not pass the costs of UK austerity on to the household budgets of the lowest-income taxpayers"² and in the budget document itself stated “The UK Government’s approach to public spending is having a significant detrimental effect in Scotland”³.

The problem here is that - as so often with the SNP - the rhetoric is plainly at odds with the facts. I’ve taken the time to study the actual figures in some detail, and it’s clear that attempting to blame UK Government austerity for cuts in Scotland’s 2017-18 budget is nothing short of blatant deception.

All you need to understand to realise that Mr Mackay is trying to pull the wool over our eyes is this simple graph showing the Total Scottish Budget in real (inflation adjusted) terms over the last 10 years. [Note y-axis does not start at zero]

I expect a lot of people in Scotland will find this graph hard to believe. After all, we hear so much from the SNP about Tory austerity that few would expect the real-terms trend in Scotland’s budget to be upwards over the last four years – but that is the reality. In fact, if you look carefully at the graph, you’ll see that Scotland’s Budget is now (just) higher in real terms than it was in 2009-10 before austerity cuts started to bite.

How come this plain reality isn’t common knowledge? Well the simple fact is that the SNP have gone out of their way to hide this information. If you take the time to look up last week’s budget report, you’ll find the summary tables they include show data for 2010-11 but then just miss out the four intervening years to 2014-15⁵. That’s the first step they take to disguise the reality of the rising budget trend.

The second step they take is to bury this Total Budget information deep in an Appendix on page 169 of the report. They use the up-front summary tables to instead focus on a few sub-totals that exclude things like Annually Managed Expenditure (AME) which, for example, pays for NHS and teachers’ pensions⁴.

In some highlighted figures they even exclude Capital Borrowing⁴. This is a devolved power that enables Scotland to spend more by taking on further debt in addition to that we share with the rest of the UK. It’s a critical and growing source of funding for Scotland and it’s hugely misleading to focus on figures that omit it.

The third step they take is to distract from the budget year that’s actually being announced by providing a pretty meaningless longer term forecast. The longer term forecast they made last year has already been shown to be far too pessimistic⁶. To illustrate how flaky their latest forecast is, despite the clear commitment from the SNP to deliver a 50 per cent reduction in the “overall tax burden of APD” (Air Passenger Duty), their forecast makes no allowance for this £171m headline revenue loss⁴.

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As an aside, it’s also the case that by the end of their forecast period the Scottish Government will control roughly half of the revenue raising powers involved. So when they forecast a real terms decline in “Fiscal DEL” (a subset of the total budget that excludes among other things, AME and capital borrowing), the Scottish Government appears to be forecasting that their own economic strategy will fail.

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So by missing out intervening years, focusing on a measure which excludes very significant sources of revenue and stretching to an unrealistically pessimistic forecast year, the SNP are able to engineer a figure which appears to suggest “Westminster austerity” is causing the budget to decline. In fact, as the graph clearly shows, the opposite is true.

The reality of our fiscal framework agreement with the rest of the UK is such that the SNP is lucky enough to preside over a spending budget that’s rising in real terms.

The fact that the SNP are cutting Central Government funding to local government is their choice, not something that’s forced upon them - just as the fact that the SNP don’t use their income tax and benefits top-up powers to reduce tax for low-earners, redistribute wealth and address inequality is their choice.

Next time you hear UK austerity being blamed for specific Scottish budget cuts, remember this simple fact: over the four years from 2013-14 to 2017-18, the Total Scottish Budget has been increased in real terms by £1.9bn or 5.4% . 

It really is long past time the SNP stopped blaming Westminster for their own failings.

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Notes

1. Table 9.02: Local Government and Central Government Grants to Local Authorities

2. Row over cuts to councils as Scottish Budget Delivered

3. page 2 of Budget Report

4. I provide a full audit-trailed explanation of the various figures on an historical like-for-like basis here: this table shows the sources I needed to access to create it (it was hard work)

5. See Tables 1.01 and 1.02 pages 3 and 4

6. See Spinning the Scottish Budget: Part II

The McCrone Report

There is a point in any Scottish independence debate where - having pointed out the other factual or logical flaws in the pro-independence logic -  the McCrone report gets raised.  I recommend reading this independent newspaper article if you're not familiar with the story but do also scan the "report" itself.

This isn't really about Oil & Gas; it's a "reason why we can't trust Westminster"

Politicians choose not to leak a confidential memo that would play into the hands of their political opponents shock.

I find the Yes campaign's position on this slightly bewildering. Apart from anything else the "report" was a confidential memo speculating about the future; it's subsequently gained a mythical status which has given it a somewhat over-blown significance.

Update 16/07/2014: In fact at the Royal Society of Edinburgh in a public discussion on 29 January 2014 Professor McCrone was questioned about the suppression of his "report"; his response is enlightening: (Emphasis is mine)

• "Professor McCrone pointed out that this report was a briefing paper written when he was a civil servant.  Briefing papers by civil servants, especially those prepared in advance of a possible change of government, are never published. The paper had not been suppressed"

I strongly recommend you watch this > The McCrone Report: In his own words

 

It was one man's view and in fact offers a far more balanced and nuanced perspective than many seem to think .  But putting that aside I still get that something bad happened, I get that it's something we as a nation can be rightly pissed off about; but I don't get how the politically expedient suppression of a report (or more accurately maintaining the confidentiality of a memo) 39  years ago leads to the conclusion that we should vote for Independence now.

I've talked elsewhere on this blog about the concepts of inherited responsibility and guilt.  Are we really arguing that an entire political structure can no longer be trusted because of what happened in 1975? Are we expected to believe that some evil miasma seeps from the Palace of Westminster's limestone walls, infecting any who enter there with an uncontrollable desire to screw over the people of Scotland?

Sorry.  I'm capable of bearing a grudge as much as the next man but I can't extrapolate from the failings of some politicians 39 years ago to the conclusion that we can't trust an entire political system now because of where it's housed.  A Scottish parliament will still be populated by the same political class; politicians won't stop being politicians just because there are less of them.  Unless you believe that there's something intrinsically different about Scottish politicians?

But even if you don't share my emotional reaction on this, there's a more fundamental reason why to vote Yes "because of McCrone" is a bewildering thing to do.  As argued extensively on this blog, separating Scotland from the Union today sacrifices many tangible benefits of union - and for what? A desire to punish the rest of the UK, to ensure they inherit the guilt of those historical political failings? Even if you think that is a reasonable position (I certainly don't) it's still perverse to vote Yes; because it's a vote to "cut off the nose to spite the face", because the loss of benefits of union punishes us, the Scots most.

Did you scan the original document?  Because funnily enough if you actually read the McCrone report there's plenty in there about the downside of independence. for example;

"This is partly a question of the scale of the Scottish economy, but more of the extent to which it has become integrated with that of the rest of the UK [...] such measures would risk retaliation from England which, given Scotland's close trade ties with England, could cause damage far in excess of any benefit that may be hoped for. Such policies would also be incompatible with continued membership of EEC and withdrawal [...] would clearly have very damaging consequences [...]
But the Scottish labour market is so closely linked with that of the rest of the UK that it is hard to see how real earnings could be adjusted downwards without giving rise to the most serious difficulties. 
For such a small country heavily dependent on international trade, devaluation would, of course, have serious inflationary consequences since all imports would rise in price".
McCrone Report, 1975

Oil & Gas (Part I): For Richer, For Poorer

Context
I explain my bona fides elsewhere on this blog. If you've read them you will understand why I've been so keen to speak up with reference to Independence & Scotland's Trade with rUK and Independent Scotland and the EU.  They are topics that directly impact the businesses I'm involved in and by extension the people I employ, topics where I have direct experience and understanding of the issues which I felt compelled to share in an effort to stimulate reasoned debate on the issues.

Inevitably - having started to speak out on these topics - I have been drawn into debates around other issues and you'll see these expanding on my links list on the right.  This post joins a growing list which could be classified as "responses to pro-independence arguments" which already include

• "Who Says we're too wee, too poor & too stupid to be independent?"
• "Surely we should decide who governs us?"
• "Look at our GDP/Capita, look at Ireland"

The Oil & Gas Questions

I engaged in extensive debate on this topic as an uniformed observer, trying simply to understand the arguments and form my own view. Here's what I found.

Two common themes relate to the past (which conditions so many attitudes coming in to the debate)

• They took our oil: Its ours and they took it, we've never had our fair share of the benefit, we've been net contributors to the Union, its simply not fair
• The Reserves were mismanaged: We should have created an oil fund like Norway's "Petroleum Fund"; the reserves were not exploited appropriately

Two relate to a possible Independent future (which is all our vote can actually change)

• Oil reserves will be better managed by an Independent Scottish government
• If we are given our geographic share of the oil reserves, our economic future is assured

1. They Took Our Oil

This is a hugely emotive subject which goes to the very core of the debate about what Union means.

Have the benefits of the "our" Oil been shared fairly?
This has been argued at length of course and there is much debate about how best to measure Scotland's net "contribution to" or "take from" the rest of the UK.  We can think of the spectrum of fairness as being between two points

1. Scotland gets to keep it's "geographic" share of oil tax receipts (as argued for in the White Paper). This is the equivalent of saying we don't share our oil revenues (i.e. as would be the case for an independent Scotland)
2. Oil tax receipts are shared across the UK on a "per capita" basis; this would be the most extreme "we're all in this together" view

I'll go out on limb here and say for me actually historically a per capita share is a reasonable way to look at this (as that's what being in a Union means to me); what should be considered fair as we split our assets for an independent future is a different question and there is wide (although not universal) agreement that the geographic basis will be the fairest way.  I'll come back to this; for now let's accept the "geographic share" argument for historical analysis.

To be clear: the "geographic share" argument is the one that is the equivalent of saying "Scotland get's to keep 'our' oil money".

So on that basis how do the numbers look?  I turn here to ICAS , one of my RIBs (Respected Industry Bodies) who provide this helpful analysis of the GERS figures

Hold on a minute; read those numbers again. Am I missing something here?  What this says (for these two years at least) is public spending per capita in Scotland was about 10% higher than in the UK as a whole; across these two years more public spending per capita was received by Scots than the Tax revenue per capita the Scots contribute even if you allocate the oil tax revenues to the Scots on a geographic share. 

To put it another way: in the last two years if Scotland had already been independent and was receiving its "geographic share" of oil revenue (the best case scenario) the country would be running a significant per capita spending deficit and a worse one than the UK as a whole.

I'm struggling here to reconcile the data with the Cybernat rhetoric: "Westminster takes our oil money and gives us pocket money in return" is a refrain I have heard a lot (it competes with "They say we're too wee too poor, too stupid to be independent" line to be the separatists'  most used rhetorical trope).

So how has this narrative slipped in to (some of) the public consciousness?

• As reported by STV
• The Scottish Government said: "the figures showed tax revenues north of the Border were £800 per head higher than the UK as a whole, when a geographic share of North Sea oil is taken into account"
• First Minister Alex Salmond said: “The figures show that tax revenues generated in 2012-13 were £800 higher per head in Scotland compared with the UK, meaning that now for every one of the last 33 years, tax receipts have been higher in Scotland than the UK.
• "Business for Scotland" said: "With 8.3% of the UK population, Scotland generated 9.5% of UK tax revenue in the five years to 2012/13, for 9.3% of UK spending.
• Maureen Watt (SNP MSP): “Westminster has downplayed the value of oil and squandered the revenues for more than 40 years"

A special mention must go to"Business for Scotland".  These are one of the noisier COGs registered with the electoral commission as a Yes campaigning body. There'll be more on them in another post; suffice it to say they represent a very particular profile of businesses that - how can I put this? - might have their own reasons for promoting the case for an independent Scotland. One of their spokesmen Gavin MacIntryre-Kemp said the following on Newsnight and Online;

• “Scotland is a wealthy nation but Scotland’s wealth is transferred to London and our economy is being held back.  Scotland generates 9.9% of the UK total tax take but gets only 9.3% of the UK total spending”.

28/05/14: the section below has been updated from the orginally published version to reflect the latest actual published GERS figures.

I've gone back to the source data (GERS), collated the numbers onto a spreadsheet, extended the analysis for a few years to give us a bit more context and reconciled the ICAS and BfS figures.

So what's going on here?

• Clearly if you use a geographic share basis to allocated oil tax receipts then yes, tax receipts are consistently higher per head in Scotland ...
• ... but Scotland gets that money back in increased public spending per head. 
• But how does that square with the "higher share of tax receipts but lower share of public expenditure" argument?
• Firstly the year chosen for the 9.8% vs. 9.3% quote was 2011-12 and we now have 2012-13 data available.  The five year data series helps put this volatility in context.
• Secondly it's simply misleading to present the data in that way "because maths"; the UK has been running a deficit, Public Expenditure is higher than Tax receipts; this means the 9.3% is of a bigger number than the 9.9%.  This is why ICAS (a Respected Industry Body, professionals at presenting numbers and with no political axe to grind) present the data the way they do.  It's why all the main economic forecasters and analysts focus on per capita figures.

So we can  make some simple statements (with caveats on time periods selected of course, but you can see the data above) that are completely consistent with (but far more meaningful than) the Yes campaign's single statements quoted above:

1. The Scottish people receive back in higher Public Expenditure per capita an amount equivalent to the higher Tax revenue per capita they could lay claim to contributing
2. In the last five years: If Scotland had been independent (with it's geographic share of oil revenue) and making the levels of Public Expenditure that have been made whilst part of the UK
1. Scotland would have been running a significant deficit (similar to the rest of the UK)
2. In recent years the scale of that deficit is greater for Scotland than the UK as a whole

Remember: these figure are run assuming geographic share  (84 - 95%) of oil revenues attributed to Scotland.  

[There is a different argument sometimes put forward around these figures that goes something like "but if we hadn't had to pay our share of the UK debt interest burden then we'd have been far better off". That sounds like a patently ridiculous argument to me, but I will return to it in another post if need be.]


Were we (are we) honour bound to share the benefits of "Scottish" Oil?
Its important to remember that the above analysis is based on geographic share of oil tax revenues; it's saying "what would the numbers have looked like if we hadn't shared the oil tax revenues".  It's informative to run "what if we had been independent" analyses; but its logically flawed to then say that if the historical analysis were to show we would have been better off without sharing then that mean we've been unfairly treated as part of the Union. I think this point gets missed because the Independence case falls at the first hurdle: there is no compelling evidence that an Independent Scotland would have been better off if it had got to "keep" its oil revenues.  But why do we even accept that premise for historical purposes?

The marriage analogy gets over used but in this context I think it's a genuinely helpful one.  People enter into a Union "for richer, for poorer", the underlying principle of a Union must surely be that we pool our assets and resources, we share risks, we share pain, we share good fortune.

Much has been written about nations' "inherited guilt" (about e.g. slavery or the holocaust); a quick Google search tells me "inherited responsibility" is less discussed, but it's surely a concept that applies here.  Nobody alive today signed up to the Union with England Act; its something we inherit.

[Out of curiosity I read the Union with England Act 1707.  Couldn't find anything in their that helped, it just depressed me to be honest -- Clause XXV is a doozy. To quote Stephen Fry (talking about Culloden): "Catholic versus Protestant, essentially. It's that kind of fight. And it goes on to this day. Will we never learn? Who knows? Religion. Shit it."]

Let's try a few thought experiments

• Would we apply the argument "We'd have never entered the Union if we'd known we were going to find oil off our coast"?  Surely that's like saying I'd never have married you if I'd known I'd already got a winning lottery ticket in my pocket?  Some may think that's a reasonable attitude; I'm not one of those people.
• If the discovery of a valuable resource is in itself a good enough reason to "split" from your previous partners, doesn't that set a dangerous precedent?  
• What about Shetland's claim to the Oil revenues, why should they be sharing the fruits of that windfall with the rest of Scotland, let alone the rest of the UK?  Remember too that as a LibDem stronghold they would also be able to apply the (flawed) "we don't get to choose who governs us" argument as well
• If today's "news" headline Billions of Barrels of Oil have been found in the ground beneath the South of England were taken at face value, would "we" expect "them" to say "its ours, the wider UK shouldn't benefit"?

So as I've mentioned above; for me actually historically a per capita share is a reasonable way to look at this (as that's what being in a Union means to me); what should be considered fair as we split our assets for an independent future is a different question.

This may help illustrate my point.  When analysing the benefit to Scotland of the UK Governments Financial Sector Interventions the GERS argues

• "There are various methods that can be applied to apportion a share of such non-identifiable expenditure to Scotland. The method used in this edition of GERS assigns a population share to Scotland of the total UK expenditure, on the basis that all areas of the UK have benefited equally from the resulting stabilisation of the UK financial system."

So it seems that sometimes the Scottish Government believes that being part of the Union does mean "we're all in this together" after all.

So what would the historical numbers look like if we took the per capita approach?

I've left the %age share of spend numbers in there for comparison purposes and it's worth noting that if we shared oil assets equally equally we'd be getting a higher share of public spend that our share of tax receipts generated; but hopefully we can agree now that is a silly way to look at the figures.  

So if we had been sharing oil money equally (per capita) then net expenditure in Scotland would have been - consistently  - well over £1,000 per capita higher than the UK average.

Am I alone in looking at these figures and thinking; "You know what, the Union has treated us pretty fairly when it comes to reinvesting oil proceeds into the Scottish economy through Public Expenditure"?

Actually it turns out I'm not alone. As I was finalising this post and sourcing links I found this rather excellent article by Professor Brian Ashcroft. The graph below is extracted from that article and provides a helpful

longer term perspective on the same question; his conclusion appears to be the same as mine.

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Its worth highlighting that all of the analysis above takes a narrow view of the benefits received by Scotland from being part of the Union (i.e. Public Expenditure received).  It's a topic that deserves a separate post.

OK, that's it for Part I (I've got a plane to catch).  I will return in Part II to cover the following arguments

• The Reserves were mismanaged: We should have created an oil fund like Norway's "Petroleum Fund"; the reserves were not exploited appropriately
• Oil reserves will be better managed by an Independent Scottish government

• If we are given our geographic share of the oil reserves, our economic future is assured

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