So here's a quick summary of the realities of Scotland's finances as presented in the Government Expenditure & Revenue Scotland (GERS) figures. These figures are produced by the Scottish Government and I show the numbers here assuming we Scots get to keep "our" oil & gas revenue.
I'm not trying to make any political point and will try to avoid revisiting old independence referendum arguments. My intention is merely to inform the debate, help the intellectually curious consider the implications of Full Fiscal Autonomy and - perhaps more constructively - help us all think about how our national economy works and what choices our elected representatives face.
Public Sector Revenue
All the figures here are most recent (2012-13) GERS figures quoted on a per cap (i.e. per person) basis. I often see Scottish figures compared to UK (including Scotland) which can lead to confusion - so the comparisons I use here are between the Scottish figures and the "Rest of the UK" (rUK) where rUK = UK - Scotland (which I think is less confusing).
So let's look at where public sector revenue is generated in Scotland
Revenues from consumption & transaction taxes (i.e. VAT and duties) are
+£36/cap or 1% higher in Scotland
+£36/cap or 1% higher in Scotland
- VAT revenues/cap are almost identical
- Stamp duties (i.e. property transaction taxes) are -£59/cap or 40% lower in Scotland
- Alcohol (+£28/cap, +18%) and Tobacco (+£67/cap, +47%) duties alone raise +£95/cap more in Scotland
Council Tax revenues are -£38/cap or 9% lower in Scotland (where we have of course had a council tax freeze).
Revenues from other wealth taxes (Capital Gains, Interest and Dividends) are only -£11/cap or 4% lower in Scotland.
Profits generated by publicly owned assets appear in National accounts as Gross Operating Surplus (G.O.S.). Mainly because Scottish Water remains in public ownership, G.O.S is +£194 or 47% higher in Scotland.
The sum of all the above largely explains why (before North Sea revenues are considered) Scotland raised -£163/cap or 2% less revenue than rUK in 2012-13.
Attribution of North Sea Revenues is clearly a controversial topic, but assuming we allocate the North Sea revenues to Scotland on a geographic share basis (as the Scottish Government prefers) in 2012-13 Scotland generates an additional
+£1.032/cap more than rUK.
The net effect is that Scotland can be shown to have generated +£869/cap or 10% more revenue than rUK in 2012-13
+£1.032/cap more than rUK.
The net effect is that Scotland can be shown to have generated +£869/cap or 10% more revenue than rUK in 2012-13
The relative significance of North Sea revenue to Scotland's finances is clear. In 2012-13 these revenues represented 10.5% of Scotland's Public Sector Revenue (1.1% of the UK's). In 2008-09 North Sea revenue was 20.9% of Scotland's Public Sector Revenue (2.4% of the UK's).
To put this 2012-13 figure into context let's look at North Sea Revenues over time. The figures below are total North Sea revenues (of which Scotland's geographic share ranges from 95% to 84% over the last 4 years). The dark grey bar is 2012-13; 2013-14 is now known (although full GERS accounts are yet to be published) and the OBR forecast for 2014-15 can be expected to be pretty accurate given we are now in Feb 2015. The dark red bar is the - ahem - "low" scenario used in the Independence White Paper (the lighter red the "high" scenario).
In absolute terms Scotland's North Sea revenues in 2012-13 were £5.6bn (£1.3bn below the White Paper figures) and we now know that by 2014-15 they will be around £2.4bn (£4.7bn below the White Paper low scenario).
We therefore already know that on oil & gas alone Scotland will be about £3.2bn worse off in 2014-15 than we were in 2012-13 (that's about £600/cap).
It's worth noting that of course some level of oil recovery is possible - but there are complicating factors that rarely seem to be considered
Of course with the figure above this still means we'll be generating more public sector revenue per capita than the rest of the UK to the tune of about £250/cap in 2014-15.
I guess that's what the SNP mean when they refer to oil & gas as merely a bonus. As long as we don't spend considerably more than the rest of the UK we shouldn't be any worse off as a fiscally autonomous country - so let's look at the spending side of the equation.
Public Sector Expenditure
Using the same methodology as for Revenue;
Expenditure on Welfare and Unemployment benefits are +£296/cap or 8% higher in Scotland than rUK. Given unemployment rates are almost identical this is presumably largely a function of greater levels of in-work-poverty in Scotland. This topic (in particular with respect to the National Minimum Wage level) is one I hope to return to.
Health expenditure is +£190/cap or 10% higher in Scotland than rUK. I haven't investigated this further but factors here will include the fact that the Scottish NHS is fully devolved, free prescriptions are given and (I think) the Scots are simply on average less healthy than those in rUK. The significantly higher alcohol and tobacco consumption implied by the duty figures above must be a factor here.
Education spend is +£75/cap or 5% higher - presumably largely due to the abolition of tuition fees in Scotland. Wiser heads than mind are grappling with the question of whether or not the Scottish education system is delivering a better education to all as a result of this.
Transport spend is +£240/cap or 85% higher as a result of lower population density and remote Scottish communities. This factor is rarely acknowledged when people complain about high profile transportation infrastructure investments in the rest of the UK.
Public Order & Safety (i.e. Police) spending is -£19/cap or 4% lower in Scotland than rUK.
Other areas which can be broadly defined as "social expenditure" are all materially higher than rUK. Across Public & Common Services, Environment Protection, Housing & Community Amenities and Recreation, Culture and Religion Scotland spends +£396 or 57% more than rUK. I must confess this figure intrigues me.
Expenditure on Enterprise and Economic Development is +£125/cap or nearly three times that in rUK. Agriculture, Forestry and Fisheries expenditure is +97/cap or more than double that of rUK.
International Services and Defence are allocated on a per capita basis already (and Full Fiscal Autonomy is normal interpreted as everything except foreign relations and defence - so the GERS figure are consistent with that principle).
It is worth noting that Public Sector Debt Interest is already allocated on a per capita basis in the GERS figures. This is consistent with Scotland having a per capita responsibility for the UK debt (which was widely accepted as the fair basis for allocation during Independence discussions). This should be remembered when the likes of Ms Sturgeon make wild statements about Scotland "putting in more than we get back" from the the UK. This statement is normally justified with dodgy comparisons of percent of tax raised with percent of spending received. The main flaw in this logic is that if you gave Scotland the same share of UK expenditure as it's share of UK revenue, Scotland would be responsible for its revenue share (not population share) of debt. It's also worth noting that even on this flawed basis of comparison, in fact in 2012-13 Scotland was responsible for 9.16% of revenue raised and received 9.29% of expenditure.
So when you add all of that up we actually spend +£1,382/cap or 13% more than rUK. Of course this higher spend more than offsets the higher Revenue we generate due to North Sea Oil such that the Scottish deficit is +£512/cap worse than rUK in 2012-13. In absolute terms that means we need to find about £2.7bn simply to be no worse off than the rest of the UK.
The higher Scottish spend/cap figure has been remarkably consistent over the last five years (ranging between £1,225 and £1,438).
Now may be a good time to remind ourselves that in 2014-15 we are likely to have a Revenue advantage over rUK of only maybe £250/cap - so we can expect to see a deficit difference to rUK of nearly +£1,100/cap.
Let's pause and think about that for a moment. If we tax and spend as we do today the accounts for a fully fiscally autonomous Scotland are likely to show that - for every man, woman and child in Scotland - we would be £1,100 a year worse off than if we continue to pool our lot with the UK.
Something would have to be done. Tax take would need to go up or public expenditure would need to be reduced. These are the economic realities from which we can't hide. Of course economic growth would help but it's hard to imagine how or why a fiscally independent Scotland would miraculously create growth (or how long it would take before it materially affected the deficit). We already spend a relatively high amount on Enterprise and Economic Development as well as Agriculture, Forestry and Fisheries - and it's worth remembering that EU rules constrain the level of government support that can be given to industry.
Now whether or not Scotland is fully fiscally autonomous (or indeed independent) the economic challenges we face are clear (and largely shared with rUK). To put absolute numbers against this - the GERS deficit for Scotland in 2012-13 was £12.1bn and the Oil & Gas revenues in 2014-15 are likely to be another £3.2bn lower giving us roughly a £15.3bn deficit problem to address.
The graphic below (a work in progress) attempts to put the sources of revenue (in Green) and areas of Expenditure (in Red) is some kind of relative context. All you have to do (given we know the oil & gas number is now much lower) is work out how you might find £15.3bn through higher taxes or lower expenditure to eliminate the deficit.
If that defeats you - on the basis that we appear set on devolving away Barnett benefits and driving to full fiscal autonomy - try and find £6.0bn or so to make us at least no worse off than being within the UK.
Please drop me a line when you've worked it out.
Addendum
Here is how the absolute Scottish figures have shifted over the last five years, which may be helpful in considering what it takes to move these numbers by £6.4bn (to be no worse off than the UK is now) or £15bn+ to eliminate our likely deficit right now.
Taking sources of funding first:
To put this 2012-13 figure into context let's look at North Sea Revenues over time. The figures below are total North Sea revenues (of which Scotland's geographic share ranges from 95% to 84% over the last 4 years). The dark grey bar is 2012-13; 2013-14 is now known (although full GERS accounts are yet to be published) and the OBR forecast for 2014-15 can be expected to be pretty accurate given we are now in Feb 2015. The dark red bar is the - ahem - "low" scenario used in the Independence White Paper (the lighter red the "high" scenario).
In absolute terms Scotland's North Sea revenues in 2012-13 were £5.6bn (£1.3bn below the White Paper figures) and we now know that by 2014-15 they will be around £2.4bn (£4.7bn below the White Paper low scenario).
We therefore already know that on oil & gas alone Scotland will be about £3.2bn worse off in 2014-15 than we were in 2012-13 (that's about £600/cap).
It's worth noting that of course some level of oil recovery is possible - but there are complicating factors that rarely seem to be considered
- 86% of the 2012-13 North Sea revenues came from corporation tax - that is taxation on profit. A halving of the oil price is likely to lead to far more than a halving of profits available to be taxed. This is what I mean when I say there is a non-linear relationship between the oil prices and North Sea tax revenues
- There is (sensible) talk of reducing the taxation burden on North Sea companies in response to the oil price slump. This may help save jobs - but again the North Sea tax revenue generated per barrel will of course be lower.
Of course with the figure above this still means we'll be generating more public sector revenue per capita than the rest of the UK to the tune of about £250/cap in 2014-15.
I guess that's what the SNP mean when they refer to oil & gas as merely a bonus. As long as we don't spend considerably more than the rest of the UK we shouldn't be any worse off as a fiscally autonomous country - so let's look at the spending side of the equation.
Public Sector Expenditure
Using the same methodology as for Revenue;
Expenditure on Welfare and Unemployment benefits are +£296/cap or 8% higher in Scotland than rUK. Given unemployment rates are almost identical this is presumably largely a function of greater levels of in-work-poverty in Scotland. This topic (in particular with respect to the National Minimum Wage level) is one I hope to return to.
Health expenditure is +£190/cap or 10% higher in Scotland than rUK. I haven't investigated this further but factors here will include the fact that the Scottish NHS is fully devolved, free prescriptions are given and (I think) the Scots are simply on average less healthy than those in rUK. The significantly higher alcohol and tobacco consumption implied by the duty figures above must be a factor here.
Education spend is +£75/cap or 5% higher - presumably largely due to the abolition of tuition fees in Scotland. Wiser heads than mind are grappling with the question of whether or not the Scottish education system is delivering a better education to all as a result of this.
Transport spend is +£240/cap or 85% higher as a result of lower population density and remote Scottish communities. This factor is rarely acknowledged when people complain about high profile transportation infrastructure investments in the rest of the UK.
Public Order & Safety (i.e. Police) spending is -£19/cap or 4% lower in Scotland than rUK.
Other areas which can be broadly defined as "social expenditure" are all materially higher than rUK. Across Public & Common Services, Environment Protection, Housing & Community Amenities and Recreation, Culture and Religion Scotland spends +£396 or 57% more than rUK. I must confess this figure intrigues me.
Expenditure on Enterprise and Economic Development is +£125/cap or nearly three times that in rUK. Agriculture, Forestry and Fisheries expenditure is +97/cap or more than double that of rUK.
International Services and Defence are allocated on a per capita basis already (and Full Fiscal Autonomy is normal interpreted as everything except foreign relations and defence - so the GERS figure are consistent with that principle).
It is worth noting that Public Sector Debt Interest is already allocated on a per capita basis in the GERS figures. This is consistent with Scotland having a per capita responsibility for the UK debt (which was widely accepted as the fair basis for allocation during Independence discussions). This should be remembered when the likes of Ms Sturgeon make wild statements about Scotland "putting in more than we get back" from the the UK. This statement is normally justified with dodgy comparisons of percent of tax raised with percent of spending received. The main flaw in this logic is that if you gave Scotland the same share of UK expenditure as it's share of UK revenue, Scotland would be responsible for its revenue share (not population share) of debt. It's also worth noting that even on this flawed basis of comparison, in fact in 2012-13 Scotland was responsible for 9.16% of revenue raised and received 9.29% of expenditure.
So when you add all of that up we actually spend +£1,382/cap or 13% more than rUK. Of course this higher spend more than offsets the higher Revenue we generate due to North Sea Oil such that the Scottish deficit is +£512/cap worse than rUK in 2012-13. In absolute terms that means we need to find about £2.7bn simply to be no worse off than the rest of the UK.
The higher Scottish spend/cap figure has been remarkably consistent over the last five years (ranging between £1,225 and £1,438).
Now may be a good time to remind ourselves that in 2014-15 we are likely to have a Revenue advantage over rUK of only maybe £250/cap - so we can expect to see a deficit difference to rUK of nearly +£1,100/cap.
Let's pause and think about that for a moment. If we tax and spend as we do today the accounts for a fully fiscally autonomous Scotland are likely to show that - for every man, woman and child in Scotland - we would be £1,100 a year worse off than if we continue to pool our lot with the UK.
Something would have to be done. Tax take would need to go up or public expenditure would need to be reduced. These are the economic realities from which we can't hide. Of course economic growth would help but it's hard to imagine how or why a fiscally independent Scotland would miraculously create growth (or how long it would take before it materially affected the deficit). We already spend a relatively high amount on Enterprise and Economic Development as well as Agriculture, Forestry and Fisheries - and it's worth remembering that EU rules constrain the level of government support that can be given to industry.
Now whether or not Scotland is fully fiscally autonomous (or indeed independent) the economic challenges we face are clear (and largely shared with rUK). To put absolute numbers against this - the GERS deficit for Scotland in 2012-13 was £12.1bn and the Oil & Gas revenues in 2014-15 are likely to be another £3.2bn lower giving us roughly a £15.3bn deficit problem to address.
The graphic below (a work in progress) attempts to put the sources of revenue (in Green) and areas of Expenditure (in Red) is some kind of relative context. All you have to do (given we know the oil & gas number is now much lower) is work out how you might find £15.3bn through higher taxes or lower expenditure to eliminate the deficit.
If that defeats you - on the basis that we appear set on devolving away Barnett benefits and driving to full fiscal autonomy - try and find £6.0bn or so to make us at least no worse off than being within the UK.
Please drop me a line when you've worked it out.
Addendum
Here is how the absolute Scottish figures have shifted over the last five years, which may be helpful in considering what it takes to move these numbers by £6.4bn (to be no worse off than the UK is now) or £15bn+ to eliminate our likely deficit right now.
Taking sources of funding first:
If you follow the chart up from the bottom you can see;
- Frozen Council tax
- (Surprisingly?) Stable Business Taxes - although it's worth noting the GERS figure is a guess as no-one how business would report profits and hence pay taxes between Scotland and rUK. (HMRC estimate this figure would be almost £1bn lower)
- Duties fairly stable - creeping up slightly
- "Wealth taxes and other" have declined since 2008-09 due to reduced Capital Gains Tax and lower dividend & interest taxes (presumably because of lower dividend & interest payments)
- Employment (Income Tax and NI) is of course the biggest contributor and has increased by nearly £1bn over this period
- VAT has grown by nearly £2bn due to the VAT rate increase to 20% in 2011
- Gross Operating Surplus (GOS) is mainly Scottish Water profits - reasonably stable
- Oil & Gas is of course the volatile element
- The balance of funding required not met by theses taxes raised is of course deficit - the required increase in debt each year
Looking now at where that money is spent:
Again if you follow the chart up from the bottom you can see;
Addendum II
The initial response to this post on social media was interesting with some suggesting this data presentation was some sort of "spin" applied by me to the numbers or me in some way applying my "model". In fact all I have done is summarise the data all of which (with the exception of oil forecasts) are taken directly from the Scottish Government's own GERS data tables available here
There are also a surprising number of commentators who appear to get very confused about percentages and some - I'm looking at you "Wings over Scotland" - who don't seem to realise that we ran a large deficit in 2012-13 and that it was worse than the rest of the UK on any measure ... and that this was true before we factor in the known £3bn+ subsequent loss of North Sea oil revenues.
Others have highlighted how these figures compare to OECD international comparisons - I think this is because those figures are current account balances (i.e. before capital investment or consumption).
To save time in debates and on Twitter I have created the following table which I believe comprehensively summarises all of the different deficit figures over the last five years for Scotland, UK (and by implication) "rest of UK".
Finally - as I have aggregated GERS categories into my own sub-totals to make it easier to digest - here are the tables mapping most detailed GERS figures onto my categories;
Done.
Again if you follow the chart up from the bottom you can see;
- The biggest chunk of spend is Social Protection (welfare and unemployment) and this has increased by £4bn over the period
- Other Social (Housing & community amenities, public & common services, recreation, culture & religion, environment protection) is reasonably stable
- Health spend has increased by £1bn
- Education, Transportation and Public Order & Safety (Police) expenditures are fairly flat
- It is worth noting at this point we are already roughly spending about what we generate in public sector revenue (the black line)
- Other Commercial (Enterprise & Economic Development, Agriculture, Forestry & Fisheries, Science, Tech & Employment Policies) have declined a little
- The unhelpfully titled (in GERS) Accounting Adjustment is (I think) mainly cash versus reported cost accounting differences (e.g. when capex exceeds depreciation). GERS is a little opaque on this - comments welcome
- All we have to do now is pay our share of Defence (fairly stable) and Debt Interest (which of course grows with debt and varies with interest rates)
Take time to ponder these numbers - its what our politicians are (or should be) doing ...
Addendum II
The initial response to this post on social media was interesting with some suggesting this data presentation was some sort of "spin" applied by me to the numbers or me in some way applying my "model". In fact all I have done is summarise the data all of which (with the exception of oil forecasts) are taken directly from the Scottish Government's own GERS data tables available here
There are also a surprising number of commentators who appear to get very confused about percentages and some - I'm looking at you "Wings over Scotland" - who don't seem to realise that we ran a large deficit in 2012-13 and that it was worse than the rest of the UK on any measure ... and that this was true before we factor in the known £3bn+ subsequent loss of North Sea oil revenues.
Others have highlighted how these figures compare to OECD international comparisons - I think this is because those figures are current account balances (i.e. before capital investment or consumption).
To save time in debates and on Twitter I have created the following table which I believe comprehensively summarises all of the different deficit figures over the last five years for Scotland, UK (and by implication) "rest of UK".
Finally - as I have aggregated GERS categories into my own sub-totals to make it easier to digest - here are the tables mapping most detailed GERS figures onto my categories;
Done.
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