Every year a report is published called Government Expenditure and Revenue Scotland (GERS). It is important for people to understand that GERS is published by the Scottish Government as part of a set of UK regional accounts and uses the accounting assumptions set by the UK Government. It does not therefore indicate, in any way, what the finances of an independent Scotland would look like, but rather what Scotland’s finances look like within the UK.
This is because there are significant additional costs applied to Scotland’s expenditure, as a population percentage share of UK Government expenditure, that an independent Scotland would not be required to bear. Look at those costs as a UK membership fee that Scotland has to pay, a bit like the EU membership fee – except that the UK costs are hidden and create the wrongful impression that Scotland’s economy, were it independent, would run a deficit.
GERS is a set of regional accounts for Scotland as part of the UK and not a set of accounts for Scotland as a separate nation. That impacts on how the GERS figures are compiled and so is important to know for two reasons: 1) It means that several UK-wide costs are applied to Scotland’s expenditure in GERS which are not controlled in Scotland or by the Scottish Government and therefore many of the major Government expenditures reported in GERS are actually under control of the UK Government. 2) Those costs are nominally applied to Scotland’s GERS report as a population percentage of the UK’s expenditure, regardless of where the expenditure was generated, which Government generated the cost, or where the benefit of any such expenditure accrues.
To explain this in simple terms let’s look at just one of those UK costs applied to GERS and how it single handedly created the entire illustrative Scottish deficit. I use the term “illustrative deficit” rather than an actual deficit because the deficit figure and past surpluses in GERS are illustrative of Scotland’s finances as part of the UK and not in any way indicative of what they would be if Scotland were independent. Nor even if Scotland had full fiscal autonomy through a federal system like the one Labour occasionally pretend to be interested in.
So how does an oil-rich nation with a strong and resilient onshore economy, booming exports, a highly educated and skilled population and strong key economic sectors such as tourism, food and drink, finance, world class universities, low unemployment, and strongly emerging industries such as biotech and renewable energy end up with a set of accounts that suggest it’s a failing economy?
Well, there is an expenditure line in GERS called “Public Sector Debt Interest” and analysis of historical GERS reports demonstrate that every year since records began Scotland has been paying interest on a population share of the UK’s debts.
That in itself is interesting because the Scottish Government has only recently been granted some highly limited borrowing powers. So how does a nation without the ability to borrow end up paying interest on massive amounts of debt? This is because the allocation of that debt is not related to what UK region or nation that generated the debt nor where the money was spent, it is simply the UK’s debt allocated to Scotland.
If we look at Scotland finances over the 38 years we have reliable records for, Scotland’s share of UK debt interest amounted to a staggering £89bn. However, analysing those figures also demonstrates that had Scotland been an independent country, its borrowing requirement over those 38 years would have been zero.
So Scotland’s government has had to pay £89bn (eighty-nine thousand million pounds) of interest on debts that Scotland did not generate, nor benefit from, simply because it is not an independent nation and had to chip in to service the rest of the UK’s rising debts and without that £89bn Scotland would be in surplus.
If we look back as far as reliable historical figures for Scotland’s revenues and expenditure go we can see that in 1980/81, before the UK debt started to spiral, that Scotland was charged £845m to service the UK debt, but despite that managed to record an illustrative surplus of just over £1bn.
Indeed, Scotland’s finances showed a surplus till 1990, when the cumulative surplus amounted to £36bn (even with UK annual debt charges).
Let’s explore three alternative scenarios for how an independent Scotland could have managed its finances. I call these scenarios:
- What actually happened.
- What’s the dumbest thing Scotland could have done?
- What would Norway do?
Scenario one – “What actually happened” – Scotland was part of the UK and so Scottish surpluses went to the UK Treasury, and no-one in the UK Government (elected in Scotland or otherwise) made any acknowledgement that Scotland was actually subsidising the UK. Resultantly, over time the burden of the UK debt payments on Scotland’s economy started to weigh it down and this meant that the surpluses declined during the 1990s and the cumulative surpluses were eaten up by UK debt related deficits, and now as a result the GERS reports show a cumulative illustrative deficit of £162.5bn.
Now Unionist politicians claim that if you simply deduct the UK debt interest, that Scotland’s accounts would still show a deficit, but that is a massive disconnect from reality and requires a massively incompetent miscalculation as it is a fact that as an independent nation Scotland would have possessed those cumulative surpluses of £36bn to re-invest in Scotland’s economy. Scotland would also have retained the £89bn of debt interest charges as it wouldn’t have needed any debt of its own, and adding those surpluses back in and also deducting the debt charges would have changed everything.
So the deficit figures stated by Unionists politicians clearly represents Scotland’s fiscal performance as part of the UK, but ask yourself; how could an oil-rich nation with a highly developed onshore economy be in that much in debt? The simple answer is that it isn’t. Those deficit claims assume that the surpluses disappeared into thin air, but it’s a fact that the surpluses would either have been invested to grow Scotland’s economy, or maybe put into an oil fund like Norway’s.
Scenario two – “What’s the dumbest thing Scotland could have done?” That is to say, what is the lowest rate of return Scotland could have received on those 1980’s surpluses? As an independent nation, what if Scotland’s Government was so totally incompetent that it could not figure how to invest those massive surpluses and so it did nothing with them but stuff them in a bank, let them gain interest at the market rate, and then made all the same bad economic decisions and mistakes as Westminster did, so that revenues didn’t rise – what would have happened?
Well, those cumulative surpluses, plus standard bank rates of interest, would have topped out at £198.8bn in 2009/10 and then started to fall till we had £115.5bn in the bank today. Yes, that’s right, the very dumbest thing Scotland could have done as an independent nation would have left Scotland £278bn better off today than GERS currently indicates we are.
Finally, scenario three: “What would Norway do?” Let’s assume Scotland’s Government just banked the early surpluses until they noticed Norway was starting an oil fund and decided to copy them. Applying the same annual rates of return that Norway received on its investments and not a penny more, since 1998/99 Scotland’s national oil/pension fund would now be worth £385bn.
Remember that Norway is a small to medium sized independent Northern European nation with roughly the same population size as Scotland and has produced 3% less oil than Scotland. Norway’s sovereign wealth fund value today is worth £804 billion – that’s a lot more than I am saying Scotland would be worth because I have used the low revenues that the UK’s mismanagement of Scottish Oil and gas resources generated not the much higher Norwegian ones. For example, Norway expects £21 billion from oil and gas revenues in 2018, whilst the UK Government forecasts a mere £0.9 billion in 2018-19.
If an independent Scotland had done the dumbest thing it could have done with its 1980’s surpluses then as a nation Scotland would be £277 thousand million pounds richer than it is according to GERS as part of the UK today.
It’s fair to say that in 2014 many people just didn’t believe BfS when we explained that Westminster was completely economically incompetent. That Westminster truly didn’t care about the impact of it’s policies on Scotland and was deliberately acting against Scotland’s best interests. Now, however, Brexit is making that thinking more mainstream, and slowly but surely, as Brexit unravels more and more people will begin to see that Scotland can not afford to subsidise this failing, disinterested and dysfunctional Union.
The evidence is clear – the UK Government has created a situation where Scotland’s finances show a false deficit, one that is not related to the economic performance of Scotland. Then Unionist politicians and the highly biased mainstream media point to that false deficit and say that it is proof that Scotland can’t afford independence.
This will continue until the SNP Government becomes more assertive and gets better at explaining what GERS actually measures to Scottish voters.