Economics of Independence

Breaking News: 9.3 is a smaller number than 9.9 #indyref

BBC News24When I was interviewed by Newsnight’s Gavin Essler on BBC News Channel. I started off by pointing out that “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”.

My opponent was the failed former Tory Westminster candidate Amanda Harvey.  We got the usual tired old unionist scaremongering that “there will be barriers to trade and Scotland’s largest export market was England” etc.  What they always fail to mention is that Scotland is the rest of the UK’s most important export market. The £4bn worth of goods a month that rUK sells to Scotland would be in danger if Westminster legislators imposed trade barriers on their own companies.  That wouldn’t exactly be a wise political move for David Cameron and certainly not in rUK’s economic interests. It would be illegal under EU law anyway.

Amanda then repeated the most misleading and economically incompetent argument of the No Campaign.  She said, “Scotland receives more from the Treasury than it raises in taxes” and she finished of with the statement “that is a FACT”.  I have heard Scottish Labour Leader Johann Lamont claim the same thing, but it is a completely inaccurate argument. Let me explain why:

From the Data

We have established by looking at the 2011/12 independent Government Expenditure and Revenue Scotland report that Scotland generated 9.9% of UK tax revenue but received in return only 9.3% of UK spending. If we had received 9.9% of the spend we would have been £4.4bn better off last year alone. The London-focussed No Campaign’s argument is that when Scotland runs a financial deficit the 9.3% of spend is a larger absolute sum of money than the 9.9% of revenue.

Deficits don’t make you richer

However, when Scotland runs a deficit the UK treasury does not send the extra money we need wrapped up in a pink ribbon with a card saying ‘Dear Scotland, here is a gift.’  Its is a loan with interest that needs to be repaid by Scotland.  What the Treasury does is borrow from the international money markets on behalf of the whole of the UK (which needs relatively more borrowing than Scotland) and then guess what – Scotland gets 9.3% of that borrowing but has to contribute 9.9% of the tax revenues to pay the debt back which now has roughly 3% compound interest!   Scotland as part of the UK has to pay more to borrow, than the rest of the UK.  So once again Scotland gets a raw deal.

Having someone borrow money in your name, spend more than their fair share of it and then force you to pay back a higher percentage of the loan than you were allowed to spend DOES NOT mean you are being subsidised!  Applying the No Campaign’s logic in personal credit terms would mean a person who borrows £1,000.00 from Wonga is classed as £1,000.00 richer – end of story. Except the reality is of course quite different. That person would in fact have to pay back the £1,000.00 plus the interest on the loan which they have to pay back.

So in a year where Scotland is in deficit we have to pay back a higher percentage of the debt than we get to spend and plus approximately 3% interest.  This means we subsidise the UK more generously in deficit years than in years when we operate a surplus and that is a FACT.

Conclusion

Scotland, despite years of underinvestment by Westminster governments of all colours, has a resilient economy with strengths across many sectors including food and drink, tourism, education, biotechnology, renewables, oil and gas, financial services and many others.  We subsidise the rest of the UK, but shadowy creative accounting techniques have hidden Scotland’s true wealth and restricted our economic potential.  If Scotland votes Yes our business will thrive, our economy will grow with billions more per year to invest in growing our economy and with all the appropriate economic powers and levers it is a mathematical certainty that we will do better than as part of the UK.

However, if voters fall for the No Campaign’s weapon of choice – misleading and disingenuous selectivity of facts and figures – then Scotland will miss the opportunity of a lifetime and be far poorer as a nation.

Fortunately, I believe Scots are much smarter than the No Campaign.

Now Join the Business for Scotland Co-operative – Read More

About the author

Gordon MacIntyre-Kemp

Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before becoming CEO of Business for Scotland he ran a small social media and sales & marketing consultancy.

With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).

Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and The Huffington Post.

30 Comments

  • […] Scotland has assets and debts. We raise a certain amount of money, it goes to the Treasury, and it (not enough of it or more of it, depending on who you read) comes back to Scotland to spend under the Barnett […]

  • It took me a while to figure this out, so lets see if I got it right:

    The Treasury borrows from the international money markets on behalf of the whole of the UK and then gives Scotland 9.3% (£64.5b from a UK total of around £693.5b in 2011/12) of that borrowing. However, Scotland contributes 9.9% (£56.9b from a UK total of around £574.7b) of the tax revenues to pay the debt back including around 3% compound interest. So Scotland (as part of the UK) has to pay relatively more to borrow than the rest of the UK (9.9% being a higher figure than 9.3%). Therefore, Scotland subsidised the UK (in 2011/12) to the tune of around £4.1b (9.9% of £693.5b=£68.6b).

    Is that correct?

  • Gordon please help me understand this.

    The whole £4.4 billion “better off” thing is bugging me as I have a friend, and avid No supporter, proclaiming that this £4.4 billion number is a lie and the figures provided within the report are lies, apparently nowhere does anything equate to £4.4 billion. Until I fully understand it, we are at a stand off.

    So, this is what is confusing me. 9.9% of UK tax was generated by Scotland. Scotland received 9.3% of UK spending.

    The hypothesis of “if” we had received 9.9% of UK spending as opposed to 9.3% then we would be “£4.4 billion better off”. Please could you show me the maths, as if I was a 5 year old child, as to where the £4.4 billion comes from. Is it the difference between the (hypothetical) 9.9% and the (real) 9.3% we receive in UK spending, meaning that 9.9 – 9.3 = 0.4 and that 0.4 = £4.4 billion. Im pretty sure any assumption I have regarding maths is incorrect and I need to understand it as fully as possible. Where, how and why does this £4.4 billion better off come from?

    I know ive said the same thing 50 times in as many lines so hopefully you can help.

    Thanks in advance

    • Hi Jamie you have just about nailed it in your question. The 4.4bn is the difference between what 9.9% of expenditure would amount to less what the actual 9.3% does amount to. Those figures are the amounts in the last GERS report for 2011/12.

      When the UK is in supplies that 4.4bn is cash that Scotland could have spent but when as now the UK is in deficit the choice is to spend it and have the same amount of debt as the rest of the UK or not spend it and have less debt.

      i have explained it a little better here Breaking News: 9.3 is a smaller number than 9.9 #indyref http://www.businessforscotland.co.uk/breaking-news-9-3-is-a-smaller-number-than-9-9-indyref/

      The counter argument is that when the UK is in deficit the actual cash spend is more than the tax raised and that is true but we still have to pay back 9.9% of the debt + interest!

      There is also another cost to the Union and that amounted to £64bn over the last 32 years £4.1bn last year and predicted to be about £5.1bn next year and rising and that is the subsidy Scotland pays to the UK’s massive debt mountain none of which was generate by SCotland – that is explained here.

      Revealed: The ACCOUNTING TRICK that Hides Scotland’s Wealth. http://www.businessforscotland.co.uk/revealed-the-accounting-trick-that-hides-scotlands-wealth/

      Hope that helps – although it is better to talk these concept through with the undecided rather than people who are willing to say factual data is a lie, years after independence these people will be telling everyone that they also voted Yes, when they didn’t.

  • Do we have do go through this same routine every time these figures are quoted?

    Scotland generated 9.9% of tax revenue but received ‘only’ 9.3% of revenue.

    From the same GERS report,
    – 9.3% of spending is £64.4 billion
    – 9.9% of tax revenue is £56.8 billion

    We get more in spending than we do in tax.

    Check your figures, Gordon.

  • The comments on Statoil are interesting.
    Part nationalised companies are indeed a huge part of Norway’s success.

    I think the possibility of starting a Scottish national oil and energy company would be better than investing in an oil fund at this stage.

    Obviously you don’t want to scare off investment, but a sensible balance can struck, and we could start small at first.
    Many countries have rules that the state has the rights to buy say a 10-20% stake in any new oil finds.

    Many oil fields are run in partnership with other companies, so there isn’t much difference.

    Plus there is huge green energy potential offshore too.

    I really think the SNP should be coming out with some vote winning plans. Instead, they always seem to be on the defensive.

    This seems like something most people would agree with.

    A small country with lots of natural resources really should be keeping more of these benefits at home.

  • So let me get this right; the rUK gets 90.7% of spending, but only raises 90.1% of revenue.

    Scroungers!

    • I like your sarcasm Andrew the difference is off course as you must know, is £4,400 million last year or £824 per person in Scotland – small percentages add up to big numbers when you talk GDP. I think that was your point No?

      Scroungers na thats what we are told Scots are – yet the facts as you rightly point out state the opposite.

    • Saudi has the second highest proven oil reserves in the world, about 100 times the UK’s, and their oil production vastly outweighs their consumption – so they’re a huge exporter.
      I’m not sure how much Scotland consumes, but I do know that it doesn’t produce enough for the whole UK, which has been importing in the last few years. Hard to judge on that point due to lack of solid figures.
      Point of perspective: The Gwahar field, the largest oil field in the world, is in Saudi. Past and future recovery estimates place it at around 70-80 billion barrels of oil recovered+recoverable. This is a single field.
      The UK has produced ~40 billion barrels in the past 40 years, and is estimated to have 15-25 more. We do not match Saudi at all for scale.

      Another key point is that Saudi’s oil production is by a state-owned company, so they have more of a controlling grip on their fields. ‘Our’ oil is produced by private companies, not quite the same.

      The final point I have to say is that UK oil production is in a steep decline from what it used to be. Not something to hang an economy on.

      Hope this was informative to your question.

      • Norway is a beter case study although oil and gas is actually a higher percentage of their GDP than it would be in an independent Scotland.

        • Norway a better example… but is it? They have a nationalised oil company and all profits on the drilling goes directly into state coffers. And therefore they don’t just make money on the drilling rights/taxes. Have you seen this video on YouTube comparing Ireland – who sold all their oil rights – to Norway? http://www.youtube.com/watch?v=76VOnzXQMsU I really want Scotland to be an independent nation but it terrifies me that our government might make the same horrible, short-sighted errors that previous UK governments have (i.e. selling BNOC in 1982). Where can Scotland go with this? I would really love it, Gordon, if you could share any thoughts?

          • Yes I believe Norway is a beter example and has followed a model that would have worked for Scotland. Are you suggesting that having a state owned oil company in Statoil and all the profits going into state coffers is a problem? Later in your comment you suggest that selling BNOC was a mistake and that could have possibly been a vehicle to secure pensions in the long term and deal with volatility in bot oil and financial markets.

            For example the state coffers of Norway….

            >>As of March 31st 2013 the total value of the Norwegian State Pension Fund is NOK 4.397 trillion[1] ($729.2 billion), holding one percent of global equity markets. With 1.78 percent of European stocks, it is said to be the largest stock owner in Europe.

            The purpose of the petroleum fund is to invest parts of the large surplus generated by the Norwegian petroleum sector, generated mainly from taxes of companies, but also payment for license to explore as well as the State’s Direct Financial Interest and dividends from partly state-owned Statoil. Current revenue from the petroleum sector is estimated to be at its peak period and to decline over the next decades. The Petroleum Fund was established in 1990 after a decision by the country’s legislature to counter the effects of the forthcoming decline in income and to smooth out the disruptive effects of highly fluctuating oil prices.<< Volatility only exists as the UK government was incompetent and didn't start a State owned oil fund to deal with it and we only have a pensions time bomb (witch independence deals with) because we are part of the UK as a separate nation Scotland would probably have fully funded pensions and no debt. We are where we are and cant go back but we can look to invest for a time when oil will run out of vote no and keep subsidising the rUK till it runs out and then hope that they support us when the shoe is on the other foot in 60 years time.

      • My understanding it that the oil is produced by a natural process over millions of years, and is then extracted by private companies under licences from the government. This being the case, the oil itself does actually belong to the people, but obviously the infrastructure for getting it belongs to private companies.
        Yes, production is on a downward trend, although from what I’ve read in the near future it is predicted to rise from 1.5 million to around 2 million barrels per day. Of course there could be a number of factors which could affect this, not least of all oil price, which has been relatively stable for 2-3 years at around $110/barrel rather than the $87/barrel predicted by the OBR.
        As a finite resource, of course, one day it will become unviable to continue extraction. The point is that the indicators point to us entering a period of high revenues. Used in conjunction with other potential savings and by managing our economy for the benefit of ourselves this could ease the transition into independence, kick start economic growth, invest in an energy sources which by definition are not finite, and if possible start to build the sovereign fund that we should already have.
        My fear is that there will never be a better time to do this than now, and if we dont we really will be looking back in 5, 10, 20 years time and see the biggest mistake in our history.

  • Excellent piece. Disappointing to hear Amanda Harvey making this argument again. Amanda was one of the founding trustees of Reform Scotland, as I was, and signed up to Reform Scotland’s “fiscal powers” papers which of course form the basis for the “devo plus” proposal. Graeme Blackett of Reform Scotland has also done a lot of good work on this issue and agrees with what you say above. No credible commentator on this issue fails to mention both the relevant figure for the amount of tax generated and government spending together.

  • That’s not a very good explanation, Gordon. Scotland’s total tax take, according to GERS, is something like £54bn, which is around 9.9% of total UK tax take which was £542.9bn, whilst the spend is around £64bn, which is around 9.3% of total UK spending, which was £687bn. The UK is currently spending more than it is making in tax revenue, hence the deficit. This is why the 9.3% figure is the bigger number.

    I do appreciate, though, that the GERS figures don’t include a realistic figure for Scotland’s corp tax and a lot of income tax take and are also forced to include the £34bn that Scotland apparently receives on top of the £30bn that Barnett attributes, which will contain spending that an independent Scotland would not need to make.

    If the people you are arguing with truly believe that Scotland is being subsidised because it runs a deficit, just ask them who subsidises England with the larger deficit that it runs. I find that soon shuts them up.

    • Deficit equals more money borrowed.
      So those figures mean the UK borrowed another £145.1bn and handed £10bn of it to Scotland to spend, keeping the other £135.1bn for the rest of the UK to spend.
      But that debt has to be repaid.
      Scotland doesn’t get to repay just the £10bn though.
      9.9% of £135.1bn is £13.3bn, so if we continue to produce 9.9% of the tax take, we will end up paying back £13.3bn plus the interest on £13.3bn.

      If Scotland splits from the UK and inherits a population share of that debt, that will still be 8.3% which is £11.2bn which Scotland would need to borrow in the same way that other countries do.

      If Scotland were independent at the time this deficit was being run up, she would need to borrow £10bn, not £11.2bn or £13.3bn.

      It’s a bit like a marriage where the husband and wife both earn money, but they manage to spend it all and run up a £10,000 overdraft on their joint account.
      The wife spends all she earns on herself and the husband spends all he earns on himself. But the husband controls the bank account and hands his wife 10% of the overdraft money to spend on herself whilst spending the remaining £9,000 on himself telling her he is subsidising her lifestyle to the tune of £1,000 a year.
      After 10 years of this, the overdraft is running at £100,000.

      Imagine her shock when she discovers that half of the overdraft is hers, even if she now gets a divorce.

  • If the UK makes money out of Scotland, a good thing, we’re all here to help, then Westminster would be batshit crazy not to promote the positive aspects and help us do more of the same.What we are seeing here is politicians entrenched in their party dogma, blind to a positive way forward.

    • Although many readers of the blog would disagree that we are here to help if helping disproportionately harms Scotland. the major flaw in your argument is that there is no positive case for the union – if there were then they would have deployed it by now. When you have no argument all you can do is go negative on the positive vision of the opponent.

      David feel free to list the positive aspects of the union.

  • I live in England at the moment, but i’m a proud and patriotic Scot, if Scotland is such a burden that the NO campaign keep telling us we are, then answer me this, Why does the UK government want to keep us? . If this scenario was put into business, where one of your branches was costing the rest of the branches money, you would offload it or close it down. the opportunity has come for Scotland to stand up and change direction, we can be more successful on our own. Scotland per head of population would be one of the top ten wealthiest countries in the world. I for one will be voting YES, TIME FOR CHANGE, DON’T WASTE THIS OPPORTUNITY AND VOTE YES

  • My understanding is that the GERS figures are all we have to go on, that the Scottish Government do not have access to actual UK Treasury accounts.

    I hope at some point, perhaps in the forthcoming white paper, that it is spelt out precisely how much of the public spending ‘on behalf of Scotland’ is spent outwith Scotland.

    And, more to the point, how much of an effect there would be on our economy if all (or as much as possible) of our expenditure was actually spent here.

    Once this is done comparisons with UK wide tax and spending can take a back seat and we can start looking at realistic projections concentrating exclusively on future Scottish revenue and expenditure.

  • What I don’t quite understand is why many commentators on our side including the Scottish government, present as fact that we had a deficit in the last accounting year.

    I don’t think we did and neither does Craig Murray the former British Ambassador to Uzbekistan.

    http://www.craigmurray.org.uk/archives/2013/03/propaganda-against-scotland/

    “On a realistic maritime boundary, which an independent Scotland would undoubtedly win from the International Court of Justice, Scotland would actually have a budget surplus of £1.9 billion.”

    .

    • If you look at the GERS accounts you will see that £4.1 billion of our deficit (60%) was debt interest on the UK debt. You can also remove about a billion for defence costs once you lose nuclear weapons and the costs of illegal wars etc you can remove almost all of the deficit. I didn’t think the sea boundary made that much difference as the fields that were included in the grab started running out of oil soon afterwards will look into it.

Leave a Comment