It’s that time of year again – when the mainstream media and unionist commentators universally ask the wrong question.
GERS is out today. That’s the report that explains how the Government Expenditure and Revenue for Scotland shows us underperforming European nations because we are part of the UK.
The figures in the report suggest Scotland’s public spending ”deficit” more than doubled to £36.3bn last year. Spending increased and revenues fell because of the Covid pandemic. But the report suggests that the Scottish ‘’deficit’’ equates to 22.4% of the country’s GDP, compared to a UK deficit equating to 14.2% of GDP over the same period.
Scotland is a country with more natural wealth and economic resources per head than any European nation. At a time when global attention is focused on the devastating effects of climate change Scotland is uniquely placed to lead efforts to respond to what a historic UN scientific report last week described as a ‘’code red for humanity’’.
This country has 25% of Europe’s entire offshore wind power resources, 25% of Europe’s tidal energy resources and 10% of its wave energy potential. In 2018 it accounted for 24% of the UK’s renewable energy generation.
Last year 97.4% of Scotland’s electricity was generated from renewable technologies. We are in the top three renewable generators across Europe. We have been and we remain an oil rich country but the essential transition from fossil fuel sources to renewables will benefit rather than damage our economy.
So why does a country with all these advantages have a set of accounts that suggest that its finances are weak? That is a trick question – it doesn’t
Renewables and oil, of course, are not the only advantages our economy enjoys. Tourism, whisky, video game expertise … we have so much on which to build our success in the modern world.
So why does a country with all these advantages have a set of accounts that suggest that its finances are weak? That is a trick question – it doesn’t.
In fact, there is no set of accounts that tells us how an independent Scotland’s economy would fare, nor what its finances would look like. Not yet anyway. Business for Scotland has been calling on the Scottish government to produce such a set of accounts both in regular meetings with Ministers and in our breakthrough economics book, Scotland the Brief.
The fact that GERS is a set of accounts for Scotland as a region of the UK, and not a separate nation, impacts on how the GERS figures are compiled. This is important to know for four key reasons:
- It means that multiple UK-wide costs are applied to Scotland’s expenditure in GERS which are not controlled by the Scottish government. Many of the major expenditures reported in GERS are actually under the control of the UK government.
- Those costs are nominally applied to the GERS report as a population percentage of the UK’s expenditure. This happens regardless of where the expenditure was applied, which government spent the money and without any reference to where the economic benefit of any expenditure is accrued.
- This is particularly true of Scotland’s ‘’share’’ of debts run up by the UK government. The Public Sector Debt Interest (PSDI) expenditure line in GERS is the fifth-largest attributed to the Scottish government. Every year since records began, Scotland has been paying interest on a population share of the UK’s debts. In 2019-20, PSDI added £4.5bn to the cost of running Scotland. While the UK’s debt was being built up, Scotland’s economy was either in surplus or had a lower deficit than the UK, so Scotland did not contribute to the creation of the debt. Yet we ended up paying billions of pounds in interest on debt every year. The UK’s debt is allocated to Scotland’s accounts on a population percentage basis, regardless of where the borrowed money was spent.
- Several of the key revenues such as oil and gas taxation, corporation tax and VAT are controlled by the UK government, which can make decisions that significantly lower or raise Scotland’s income without any reference to the Scottish government. Take oil as an example. While we are in this transitional period from fossil fuels to renewables, oil’s contribution to Scotland’s economy remains significant. The reason that contribution is not properly reflected in GERS is that Westminster has cut the tax take from oil extraction to make sure it underestimates the benefits.
When discussing oil it’s important to remember the example of Norway, which used the income from its oil to set up a hugely successful oil fund to benefit the country’s residents. The UK government, in contrast, made no such provision.
Norway generated £17.684 billion from oil and gas in 2015 but the UK government only generated £222 million in 2016/2017. But the biggest fall in Scotland’s revenues came not from the oil price but through the tax breaks that the UK government offered the industry.
Every year GERS contains clear evidence of mechanisms for removing wealth from Scotland’s accounts to create a phoney deficit.
Every UK government in your lifetime has knowingly diverted tens of billions of pounds of Scottish revenues to Westminster. The result? Lower investment in Scotland, higher unemployment, lower economic growth, lower standards of living, economic migration and growing inequality and poverty.
Unionists arguing against independence suggest an independent Scotland would have to pay the rest of the UK a population share of the UK’s historical debt. In fact the reverse is true
The situation has been made even worse by Westminster’s self-inflicted wound of Brexit, which has had a disproportionate negative impact on Scottish industries such as fishing and agriculture, despite the fact that Scotland voted to remain in Europe.
Unionists arguing against independence suggest an independent Scotland would have to pay the rest of the UK a population share of the UK’s historical debt. In fact the reverse is true. There is a strong case for Scotland to be compensated for having already paid more than its fair share of the UK’s debt, while being hoodwinked into believing the opposite by consecutive Westminster governments.
Scottish Finance Secretary Kate Forbes said the figures in today’s GERS report showed the need to give the Scottish parliament further borrowing powers. She said the pandemic had ‘’clearly demonstrated the need for fiscal reform and that the Scottish government’s financial powers are insufficient to deal with the new economic reality’’.
The research findings referred to in this article are contained in our book. You can purchase your copy of Scotland the Brief here.
I am no economist; so can’t argue figures either way. What confuses me is that figures produced showing deficit etc are, I understand, published by the Scottish Government. If there is such a strong argument about the way these figures are compiled why doesn’t the Scottish Government and/or the SNP not challenge the figures publicly?
The figures for all the UK regions are compiled to an agreed methodology that the Scottish Government must stick to. That methodology adds costs onto Scotland’s books that deliver no benefit to Scotland and so increase the appearance of a deficit – however, GERS states repeatedly over and over again that it doesn’t provide any indication of what the finances for an independent Scotland would be.
You state “Business for Scotland has been calling on the Scottish government to produce such a set of accounts both in regular meetings with Ministers and in our breakthrough economics book, Scotland the Brief”, but this can never happen until Scot Gov has a Statistics function that can collect accurate, Scotland-specific source data to enable accurate economic reporting.
A simple example: VAT is wholly devolved to Scotland, but management of it still lies with HMRC, not Revenue Scotland. At present, there are no Scotland-specific VAT Registration numbers for businesses trading in Scotland, so all of Scotland’s VAT data is estimated from UK data. This will result in retrospective adjustments, which themselves will be estimates and inevitably distort trends and complicate government budgeting. A simple solution is available: Scot Gov, with VAT already devolved to it, should insist on enforcing separate VAT Registration numbers for all businesses operating within Scotland. This would immediately result in firm VAT data for Scotland and would not inconvenience businesses which operate here or in rUK: their accounting systems can cope with multiple VAT references (how else can they operate in the EU or elsewhere?).
Another issue worth clarifying is that GERS contains a charge for our share of UK National Debt. However the base figure of National Debt used for this allocation contains all the Quantitative Easing (QE) created by the UK Treasury and its wholly-owned subsidiary, the Bank of England. This is money created at the time of the 2008 Financial Crash and the Covid Pandemic and is currently sloshing about in the Private Sector of the UK’s economy, mainly in the Reserve Accounts of the commercial banks at the Bank of England. This money is owed to nobody other than the UK Treasury, i.e itself, and will never be repaid (if they “repaid” it, it would be to themselves and it would effectively reduce the Private Sector liquidity causing austerity: not good news anytime, especially when the wider economy is trying to recover from Covid). They must think we’re totally stupid if they show us owing servicing costs on UK Debt which was created cost-free and is owed to nobody.
You state “…we ended up paying billions of pounds in interest on debt every year”, but did we actually pay anything and, if so, from what source? GERS is surely a stand-alone statement (largely fictional) of Scotland’s recent historic economic performance? As such, no money should ever change hands, although no doubt our mounting fictional debt is recorded as a memorandum item somewhere in the Treasury, to be tried out in any future negotiations over an independence settlement. I’m hoping nobody in Scot Gov is stupid enough to fall for that!
What they have done with oil is being repeated with Renewables, National Grid privatised and connection charges grossly overcharged to Scottish renewable companies but subsidised for South East ones who get paid for electricity they supply. In addition the connection charges exceed by many times what companies in Europe pay in similar circumstances.
I have never fathomed out why the Scottish Govt sit back and allow the GERS figures to dominate the argument. It is as if they are happy that it keeps independence at bay