GERS, the Government Expenditure and Revenue Scotland published last week, has, as always become a political football. No surprise, it was designed to be such. When it was first published by the Conservative Government in 1992 GERS main role was to make the case against a Scottish Parliament. Oil revenues caused a problem – so they allocated oil revenues to a new area of the UK called the UK Continental Shelf and we ended up with two sets of Scottish accounts: one allocating North Sea revenues on a population share basis, and the other including all of Scotland’s oil.
I want to look at the key uses and the key flaws of GERS in the political debate, but first let’s look at what they said this year.
• Total Scottish Government revenue was £57.7 billion, an increase of 6.3% on the year before,
• Scotland’s share of UK expenditure is around 9.2% when we only have 8.2% of UK population,
• Revenue generated per person in Scotland was also £312 lower than the UK average,
• North Sea Revenue increased to £208m 2016-17 from £56m the year before,
• Scotland’s illustrative deficit was £13.2bn in 2016-17, equivalent to 8.3% of Scotland’s GDP an improvement on 9.3% reported the year before,
• GDP increased from £155.6bn (2015-16) to £159.3bn (2016-17).
The good news is that GERS shows that Scotland’s revenues have grown by 6.3% in the face of low oil prices. The last quarter GDP figures even show Scotland’s economy growing four times faster than that of the UK.
It should also be noted the UK Government has reduced key oil taxes to effectively zero and so the the drop in oil revenues is 50% due to oil price and 50% due to UK Government policy. Norway’s Government generated £11bn more in oil revenues than the UK.
GERS tells us what the finances of Scotland look like under the current constitutional arrangements. They do not tell us what they would look like under the full fiscal autonomy of Labour’s Federalism plan or the SNP’s independence plan.
On reliability, globally renowned political economist Richard Murphy has correctly claimed that GERS data is not reliable enough to make political decisions on how to use devolved powers. His rationale is that of the 26 income figures quoted in GERS, 25 are estimated and there are no Scottish specific income tax, corporation tax, or national insurance figures. Scotland (although technically a nation) operates as a region of the UK. We have no borders to the rest of the UK so we have severe difficulty collecting reliable data on things like exports, and costs are calculated on a UK basis and then applied to Scotland’s accounts – and that is still an estimate and open to debate. For example, should you apply a population share of the cost of defence to Scotland accounts or a geographical share? Well, as part of the UK it’s population share, but as an independent nation you could save approximately £1.5bn a year.
On the independence issue GERS indicates what Scotland’s share of surplus/deficit to GDP is as part of the UK, but does not show what that figure would be as an independent nation.
A key question for independence supporters is – why, when Scotland is a country with an embarrassment of economic advantages that any small to medium-sized independent country would give their left arm for, do we have a financial deficit greater than any other independent European nation of similar size? Why, if we really are Better Together and the basis of our economy is so strong are we not doing better than those we would benchmark against?
One example would be the fact that Scotland pays for a population share of London-based civil servants whose remit covers the whole of the UK. Although most of these roles would be recreated in Scotland, the cost of them is already included in GERS, and as wages are lower in Scotland than London, equivalent salary costs would be lower but their PAYE and NI contributions would add revenue to Scotland, thus increasing Scotland’s revenue whilst actually lowering expenditure. Add to that the fact that running costs of an office in Glasgow, for example, are 41 per cent lower than London and you see where independence would make savings, there are dozens of such examples.
So in conclusion, Scotland’s Government revenues increasing 6.3% at a time when a key sector is underperforming demonstrates that Scotland’s onshore economy is remarkably resilient. That’s a slap in the face for anyone who claimed Scotland’s economy was completely oil dependent. The deficit reduction is welcome, but given that Scotland’s economy has not been run independently, it’s clear that the key argument against independence is actually a deficit created by being part of the Union. The Scottish Government also lacks the policy powers to change Scotland’s fiscal balances beyond tinkering at the margins.
On independence the Scottish Government and indeed, if they are serious, the Labour Party on Federalism, must create a detailed and costed roadmap to prosperity with the powers of their preferred solution. Only then can we model how Scotland’s finances would fare under each system. Until then GERS will only show how the UK Government is doing at managing Scotland’s economy. Independence will require Scotland’s Government to make the case that it can do better.
This article was first published as an expert opinion editorial piece in the Sunday Herald on September 27th 2017.