Thursday, 8 September 2016

Scotland, Scotland, Independence, Scotland

Just a bit of fun - no cheats, no repeats


p.s. I didn't create this (I wish I had)

Wednesday, 31 August 2016

Response to Prof Hughes Hallett Letter to the FT

The following letter from Professor Andrew Hughes Hallett  appeared in today's FT


I have sent this reply

Sir, with reference to today’s letter from Professor Andrew Hughes Hallet “Scottish Oil and the case of the missing 45%”, I’m afraid that the esteemed professor has failed to understand a rather fundamental point. North Sea oil revenues included in the Government Expenditure and Revenue Scotland (GERS) figures to which your editorial referred are generated by taxes on production profits, not revenue.

The only mystery is therefore not why they’ve declined so dramatically, but how a member of the SNP’s Fiscal Commission Working Group (FCWG) could be ignorant of this basic fact.
Kevin Hague
MD, M8 Group 
*****

I kept it brief to increase chances of publication - with the freedom this blog affords me I'd add:

This is shocking not just because a member of the FCWG should be aware of this basic point, but that he chooses to leap to the erroneous conclusion that our national accounts must be flawed. It's almost as if he's trying to help the SNP by offering voters an excuse to ignore the hard economic facts.
Coming hard on the heels of fellow FCWG member Prof Joseph Stiglitz's admission that "Independent Scots currency union plan 'may have been a mistake', you have to hope that even Yes supporters are starting to realise that Sturgeon's "Council of Economic Advisors" might not be the infallible seers that she would have us believe.

****

** UPDATE **

A slightly edited version of my brief letter was published in the FT on 01/09/2016.

As an aside: the original FT piece he refers to mentioned factors which had “reduced Scotland’s notional share of British oil revenue from £9.6bn in 2011-12 to £60m in 2015-16”

A passing familiarity with these numbers would make it clear that these figures are government tax revenues, but one possible explanation for the Prof's confusion is he thought the decline reported related to value of output or GDP contribution.

A quick glance at GERS shows us that from 2013-14 to 2015-16, Scotland's oil generated GDP declined from £18.2bn to £9.7bn, a drop of 47%. This squares well with the prof's "price down 54% offset by modest production increases" logic - so no mystery there.

The only alternative explanation I can see is that - as I assume in my letter - he knew the figures were taxes but was unaware those taxes are raised on profits not gross output. An easy mistake to make perhaps, but certainly not grounds to assume that the UK's national accounts do not conform with the European System of National Accounts (which, see below, they of course do)

** UPDATE ENDS **


For details on sources of North Sea tax revenues, see GERS p 21, Table 2.1


For confirmation that the UK national accounts do in fact conform with the European System of National Accounts see (for example) the ONS statement here






Thursday, 25 August 2016

GERS - Good News for Scotland

The Scottish Expenditure and Revenue Scotland (GERS) figures for 2015-16 were published this week. Despite some of the headlines that followed, they were great news for Scotland.

Scotland’s onshore economy (as measured by the taxes we raise before including North Sea Oil income) grew in real terms by 3.6% in 2015-16 and is shown to have steadily grown by about 2.2% a year for the last 6 years. Our total public spending also actually grew by 1.0% in real terms last year, despite the much moaned about “Westminster austerity”. These aren’t the figures of an economy that’s suffering.

The reason for the doom & gloom headlines is of course the £14.8bn (9.5% of GDP) “Scottish deficit” caused by the decline in oil revenues following the collapse of the world oil price.

Four years ago Scotland’s oil revenues were £9,663 million. The independence White Paper assumed oil revenues in the range of £6,800 to £7,900 million for this year. The actual figure last year was just £60 million and - because of decommissioning costs and tax credits - it’s now forecast to be negative.

This loss of oil income means that, despite the strong growth of our onshore economy, our total revenues grew by just 0.3% last year and are actually down by a whopping 10.6% in real terms since 2011-12 (the base year used for the Independence White Paper). In contrast, since 2011-12 Scottish public spending has declined by just 1.1% in real terms.

This means that, while we now raise £400 less in taxes per person, Scots continue to receive £1,300 higher spending than the rest of the UK (as we have done for over a decade). That’s one of the benefits of UK-wide economic sharing - we’ve been able to maintain our higher public spending despite our dramatically reduced revenues.

If you add our higher spending and lower tax generation, you can see we are now responsible for £1,700 per person more deficit than the average for the rest of the UK. Gross that figure up by our population and you get just over £9 billon, the infamous “black hole”. Even the SNP can't deny that this means we now receive an effective £9bn fiscal transfer from the rest of the UK, that pooling and sharing works massively in our favour because we share the UK’s deficit rather than being burdened with all of Scotland’s.

So these figures are only bad news if you’re determined that independence has to be the answer, because then we’d have to fill that £9 billon gap some other way.

To close the gap simply by spending less, we’d need to reduce all public spending by 13%. Nobody wants that.

So if we’re to eliminate the black-hole that currently scuppers the case for independence, we have to find a way of growing our onshore economy faster than the rest of the UK. Unless we achieve that we’ll continue to be net beneficiaries of fiscal transfers. You don’t have to be a die-hard nationalist to want that to change.

Obviously the main way to grow public revenue is by increasing the tax base though creating jobs and paying people more (who then go out and spend more). That means creating an environment within which businesses can thrive.

The SNP appear to be pinning their hopes on achieving this by managing to keep Scotland in the EU. Unfortunately remaining in the EU now means leaving the UK, which means waving goodbye to that £9bn fiscal transfer. There’s also a logical problem when the reason being given is a fear that EU/UK trade will be hindered as a result of Brexit. This seems to ignore the simple fact that we export four times more to the rest of the UK than we do to the EU. If a UK/EU border hinders trade, being on the EU side of that would hurt us four times more than being on the UK side.

There is another option: the SNP could stop talking up the prospects of yet another referendum and focus instead on building our economy within the UK.

Investors don't like uncertainty so they’re put off by the threat of yet another referendum and the resultant uncertainty around our future currency and UK trade borders. But I'd argue the cost of continual threats of indyref2 is more than just the effect on big business and investor confidence - it runs much deeper than that.

Scotland is a country where our political leaders invest their energies into trying to break our Union rather than working to build our economy.  Our young people are bombarded with negative messages, provided with excuses not to succeed, hampered by reasons they can't instead of encouraged with reasons they can. It's Westminster's fault, it’s the UK's fault - we're cheated, hard done by, put upon - we can't succeed unless we break from the UK, or so the SNP argument goes.

I can't think of a worse environment within which to try and encourage ambition, engender confidence, fuel entrepreneurial spirit and fill people with a sense of the possible - and yet that's surely what we need to do if we are to see our onshore economy out-grow the rest of the UK.

A parting thought. Consider how much of our time, energy and money has been expended fighting against the UK and pursuing the dream of independence at any cost.

Now imagine you could take just a fraction of that resource and invest it against positive, job creating, wealth building, economy boosting projects.

Just think what we could achieve.

*****

This article appeared in the Daily Record on 26/08/2016

For detailed analysis of the GERS figures that supports this piece, please see > GERS: A Story Told Through Graphs

Wednesday, 24 August 2016

GERS: A Story Told Through Graphs

Today saw the publication of the Government Expenditure & Revenue Scotland (GERS) report for the fiscal year 2015-16.

Regular readers of chokkablog will be familiar with my predilection for helping us get our heads around large quantities of data by plotting some graphs. Well buckle in.

Let's start with the simple headline fact: Scotland's GERS deficit was £14.8bn last year. It has remained at similar levels for the last four years but has slightly deteriorated in the last two1.


As a percentage of GDP our deficit is now 9.5%. To place this figure in context, the EU's "excessive deficit threshold" is defined as 3.0%2


Of course we're not an independent country, we voted No. This means that the deficit that really matters to us is the UK's, because that's the one which we share. The UK's deficit, on the same basis, is 4.0% and improving steadily.


At this point somebody normally pipes up that this proves the UK's economic strategy is failing Scotland because the UK as a whole is improving but Scotland isn't. This is of course a rather daft observation. It's daft because it doesn't allow for the impact of North Sea oil revenue declining due to the global oil price crash and maturing North Sea reserves.

North Sea oil revenues are now effectively zero3, as the OBR and many of us predicted some time ago. This of course contrasts rather dramatically with the £6.8 - 7.9bn annual North Sea income that the Independence White Paper recklessly predicted. In fact - due to decommissioning costs and tax credits - the latest forecast is for the North Sea to represent a net fiscal cost for the foreseeable future.


We can easily exclude the impact of this North Sea decline by looking at Scotland's onshore economy only (the green line below).


This shows that our onshore economy has in fact been improving broadly in line with the trend for the UK as a whole4.

"But hold on Kev" I hear you ask, "if it's all about the loss of oil revenues, surely that's a problem for the UK as a whole as well?". The answer to this is simply that the North Sea is proportionately way less important to the economy of the UK than it is to Scotland. Here's that same graph on a total UK basis  -  makes the point pretty clearly I think.


So the apparent lack of progress on Scotland's deficit is really just due to the fact that we used to have oil and now we don't. The improvement in our onshore economy's performance is masked by the decline in our offshore revenues. But now oil's gone, why in relative terms is our deficit so much worse than the UK average?

This is easily explained by looking at Scotland's revenue generation and expenditure (on a per capita basis) versus the rest of the UK. Regular readers will be familiar with this graph5. The figures below are all in real terms (i.e. adjusted by the UK GDP deflator).


This graph shows us:
  • Red line: we consistently receive about £1,300 higher expenditure per capita than the rest of the UK
  • Green Line: we consistently generate about £400 per capita less onshore revenue than the rest of the UK
  • Black line: when you include oil revenue, we've historically generated considerably more revenue than the rest of the UK, sometimes (most recently 2011-12) enough that our higher revenue more than compensates for our higher spend.
The difference between the red and the black lines is our per capita deficit gap, the amount by which our per capita deficit exceeds (or not) that of the rest of the UK.

Here's an updated plot of this gap - the trend is clear



The Independence White Paper assumed the same average level of North Sea oil income as generated on average between 2009 and 2012, implicitly in perpetuity. The recklessness of that assumption is glaringly apparent.

What these graphs tell us - and what this blog has frequently argued - is that there's long been an onshore deficit gap of about £9.0bn between Scotland and the rest of the UK. This was simply masked by surges in oil revenue. When the oil revenue goes (as it has now), that deficit is exposed. The idea that oil was ever just "a bonus" for the independence case is risible.

There are arguments to be made for calculating this deficit gap either on a per capita or percent GDP basis and versus either the UK as a whole (including Scotland) or versus rUK (the rest of the UK). If you really care, you can read the arguments here (> FFA For Dummies; Methodology) but all you really need to know is it makes little difference. The graph below shows the size of this onshore deficit gap over time, calculated in both ways


We can safely say that, for the last decade and more, there's consistently been an £8 - 10bn onshore deficit gap between Scotland and the rest of the UK and there's currently no sign of it going away. This is the "black-hole" that some of us keep banging on about.

Let's clear a common point of confusion: the "black-hole" doesn't mean the deficit. It means the amount bigger our deficit would be than that we now share with the UK ... if we were independent and still raising and spending public funds at the rate shown in GERS.

This matters in part because we could continue our trajectory of onshore revenue growth and slower spending growth and eventually we would eliminate (or at least reduce to manageable levels) our deficit - but we wouldn't close the gap with the rest of the UK unless we raise revenues faster or increase spending more slowly than them. As long as we perform on the same track that gap remains - a gap that translates into an effective fiscal transfer from the rest of the UK to Scotland of £9bn a year or £1,700 for every man, woman and child in Scotland.

Is it fair that we should receive that money? Well there are two ways of answering that.

Firstly you could argue that the principle of union is that we receive equal levels of service from the state (not equal levels of spending) and so if an area is high "cost-to-serve" it should receive more public funds. Think Scottish islands and rural areas being subsidised by Scottish cities. Scotland is high cost-to-serve relative to the rest of the UK because of low population density and dispersed communities, but also because we have health and demographic challenges (see Two Types of People). 

Secondly you could argue that it's the quid pro quo for the fact that when we have a windfall like North Sea oil, we share it. We definitely did share it of course - if you start the clock in 1980 (the most favourable point to do so from Scotland's perspective) we can see clearly that for a long time Scotland was a massive net contributor (black above red) to the UK's economy.


For what it's worth, if you sum up the total real terms net contribution by Scotland to the UK over this time period we are still "in credit" by just over £10k per capita (so at the current rate of transfer we'd still be in credit for another 6 years). Nobody in Scotland needs feel embarrassed by the fiscal transfer - we are pooling and sharing over time as well as geographically. Of course we could try and run this calculation from 1707, but that way madness lies.

Nobody is arguing that an independent Scotland wouldn't want to and indeed have to do things differently - but GERS does show us the starting point, the run-rate, the pro-forma accounts on which an independence case needs to be built. Those who champion independence have to make a credible for case for how and why and by how much we'd change the GERS figures by being independent. Just saying "the GERS figures tell us nothing" simply doesn't wash - they tell us what happens if we were to keep taxing and spending at these levels (and why we can't).

So let's look at where we spend the money today: here's our total managed expenditure in real terms over the last 17 years


Of course some of that money is controlled by Westminster. In the cases of debt interest and defence these cost are allocated to us on a per capita basis. The other main reserved expenditure is elements of social security, most notably pensions, which are allocated on an actual spend basis.

What strikes me is the fact that, despite the austerity rhetoric, our overall public spending has increased in the the last year by £650m or 1.0% in real terms (this compares to spending in the rest of the UK having risen by 0.8%)

If you strip out the reserved and per capita allocated (and highly contentious in terms of "value") categories of debt interest, defence & international services we still received £650m higher spending in real terms. 

Go a step further and strip out the world of pain that is accounting adjustments and the remaining categories have seen a spend increase of £1,420m or 2.5% (having been flat last year). We can debate how the pain has been spread, but the overall level of spending on key services has in fact risen as a result of the ongoing UK fiscal framework and the wonders of the Barnett Formula.

Remembering that the value of the fiscal transfer from the rest of the UK to Scotland is £9bn, it's worth noting that if you (ridiculously) assume no debt and no defence costs at all we'd still be missing £3bn a year if we were out of the UK and wanted to continue to spending these other sums.

You're probably wondering in what areas are we spending more than the rest of the UK on a per capita basis? Well we have a graph for that


The simple answer is basically "everywhere". We used to spend less per capita on 
Public order & Safety, but the centralisation of Police Scotland appears to have put paid to that. There has been a long overdue - but to be applauded - marked increase in Education and Training spend.

The only area where we spend less is "Accounting Adjustment" which needs a little explaining. In this graph this includes "EU transaction costs" which are broken out in GERS this year for the first time. Although EU membership is a net cost to Scotland (about £39 per capita) it's £85 lower than the cost for citizens in the rest of the UK. The other main source of difference is "English Housing Associations" which have been reclassified into the Public Sector in England and account for £132 per capita spend in England but zero in Scotland as they have not (yet?) been reclassified into public spending here6.

So we can see where we spend more and this adds up in total to £1,300 per capita (presumaby it will be more if ONS decide Scottish Housing Associations should also be classified as public expenditure). If we're to close the deficit gap - to reduce our dependence on Barnett - we could of course simply spend less. The figures above give you a starting point to try and find £9bn. Suffice to say a £9bn reduction in spend would be an order of magnitude greater than any cuts we've seen under "Tory austerity"

So let's look at the other side of the equation, our onshore revenue generation


This shows a very encouraging real-terms growth trend which is in-line with the UK as a whole4. The onshore revenue growth in the last year of £1.9bn is greater than the £1.8bn loss of North Sea revenue, so it's true that overall our revenue has grown. Of course we've already seen our spend has grown as well, which is why our deficit has very slightly deteriorated.

Now depending on the cut of your cloth you either see this as showing that Westminster's economic policies work for Scotland as well as they do for the rest of the UK or (if you aren't too busy arguing that GERS numbers show us nothing of value) that they show what a super job the SNP are doing. Given the SNP have refused to use our hard-fought-for tax raising powers to any meaningful degree, I find it hard to conclude that this is anything other than the UK's economic strategy working for Scotland's onshore economy.

Now I imagine you'll be wanting to know why we consistently generate less revenue per capita than the rest of the UK, so let me throw one last graph at you:


As noted before on this blog, we depressingly raise more per capita in sin taxes (tobacco, alcohol and gambling duties) and the corporation tax assumption is the one big "punt" in GERS: companies don't report profits split between Scotland and rUK so it's frankly a guess. The key point is that this guess is not a material factor in explaining the lower revenue generation we see - that's clearly down to lower income and wealth taxes. Basically, on average Scots are paid less and we are less wealthy than the rest of the UK.

I sense a grievance building, but as Nicola Sturgeon was at pains to point out today: "Scotland, in terms of economic output per head – and even excluding offshore revenues – remains the most prosperous part of the UK outside of London and South-east England"

****

So I think we've understood the GERS figures through these graphs and they produce no surprises. If we'd have voted Yes the oil decline would still have happened and the gap that is being filled by fiscal transfers from the UK would have to have been filled from elsewhere - some combination of spending reductions, tax rise or even higher borrowing. That's before we even start to consider the immediate cost of independence, currency issues, business flight etc. We can safely conclude that those of us who voted No helped us dodge a bullet.

Even Yes voters can't deny that we now receive an effective £9bn fiscal transfer from the rest of the UK, that pooling and sharing works massively in our favour.

The question remains: how do we improve the economy of Scotland, how do we deliver not only onshore revenue growth in-line with the rest of the UK but revenue growth that's superior to the rest of the UK? Only by answering this question can we reduce the fiscal transfer without drastically cutting our public spending.

Well I have some thoughts. Obviously the way you grow public revenue is by growing the economy, creating jobs and paying people more (who then go out and spend more). That means creating an environment within which businesses can thrive.

The EU question is a thorny one and it's right that all options are explored to see how we can maintain our links with the EU whilst remaining within the UK. But any solution that proposes leaving the UK to join the EU has to address two major issues;
  • Leaving the UK means leaving behind the £9bn pa fiscal transfer - the "black-hole" becomes very real and would have to be filled through tax rises, spending cuts, yet more borrowing or (hardly likely) the EU picking up the tab
  • If the reason given for leaving the UK to join the EU is a fear that EU/UK trade will be hindered, that reason has a very simple logical flaw. If EU/UK trade is hindered as a result of Brexit, we lose far more being on the EU side of those borders than we do by being on the UK side (because we export four times as much to the rest of the UK than we do to the EU)
Investors don't like uncertainty. Continually threatening them with the disruption of yet another referendum and all of the contingent risks that entails (what currency, what tax regime, what trade barriers?) hinders investment and doesn't help our economy.

But I'd argue the cost of continual threats of indyref2 is more than just the effect on big business and investor confidence - it runs deeper than that.

Scotland is a country where our political leaders invest their energies into trying to break our Union rather than working to build our economy.  Our young people are bombarded with negative messages, provided with excuses not to succeed, hampered by reasons they can't instead of encouraged by reasons they can: it's Westminster's fault, its the UK's fault - we're cheated, hard done by, put upon - we can't succeed unless we break from the UK.

I can't think of a worse environment within which to try and encourage ambition, engender confidence, fuel entrepreneurial spirit and fill people with a sense of the possible - and yet that's surely what we need to do if we are to see our onshore economy out-grow the rest of the UK.

A parting thought. Consider how much of Scotland's population's time, energy and money has been expended fighting the UK and pursuing the dream of independence at any cost. Now imagine you could take just a fraction of that resource and invest it against positive, job creating, wealth building, economy boosting projects. Just think what we could achieve.

***************************************************

Notes

1.As with every GERS release there have been some adjustments made to prior year figures. The most material of these for Scotland have been on the expenditure side - I haven't unpicked these
2. The EU uses a slighty different deficit definition than that in GERS, but it's not significant in this context
3. Actual North Sea revenues were £76m of which Scotland's geographic share was £60m
4. per GERS page 3: "Non-North Sea revenue in Scotland grew by 3.7% in 2015-16, similar to that for the UK as a whole, 3.8%."
5. I produced this graph way back when 2013-14 were the most recent figures available - I think it stack up pretty well compared to the actuals



6. See GERS page 2: "The ONS reclassified English Housing Associations (HAs)1
 into the public sector on 30 October 2015. In 2015-16, this increased UK public sector revenue by £6.9 billion and UK expenditure by £10.8 billion, resulting in a £3.9 billion increase in the UK net fiscal deficit. A similar impact is seen in earlier years. Scotland is apportioned none of this additional revenue or expenditure in GERS. The ONS have not yet announced a decision on the classification of Scottish Housing Associations". I haven't yet understood the implications of this

Wings' Idiot's Guide for GERS Deniers

There's a new offering from Wings Over Scotland - what we might call an idiot's guide for GERS deniers


Let's take each of the six points in turn - this won't take long ...


As this blog has frequently highlighted, the Scottish economy's onshore revenue generation compares well with other UK regions. What the GERS figures show is that UK-wide pooling and sharing allows us to maintain a higher level of public spending than we would otherwise be able to sustain. Quite how the fact that - when oil has declined - Westminster allocates us more than our "fair share" of spending is a source of grievance escapes me.




This is a tired trope that I address in detail here (> Gers Deniers). In simple summary: the methodology has been completely overhauled since the figures were originally produced, are published now by an SNP-led Government with Scottish civil servants being willing to override the treasury's figures and who - for example - provide their own analysis of the Scottish Government's preferred definition of Scotland's geographical share of oil revenue



I've yet to see any evidence to support the bizarre accusation that the UK government "refuses" to give the Scottish Government access to relevant important data.

As for the quote from Merryn Somerset-Webb: if you read the original article (or are lucky enough to discuss it with Merryn, as I have done) you would know her substantive point was about assumptions around corporation tax allocation which - as this blog has also pointed out - can indeed be little more than guess-work. The point, of course, is that given it's the Scottish Government doing the guessing, the assumptions are more likely to be generous to Scotland  than pessimistic.

For what it's worth, Merryn has quoted chokkablog's GERS and Price of Independence analysis at length in her FT column, and agrees with it.



This one's a cracker. As this blog has argued in painful detail and explained at great length, the "black-hole" (as identified by the IFS and this blog among others) is the amount by which Scotland's deficit is greater than our current share of the UK's. The deficit isn't the black-hole, the deficit gap is the black-hole. For example in 2014-15 Scotland's deficit was £14.9bn but the deficit gap (the "black hole) was roughly £8bn.  See Full Fiscal Autonomy for Dummies if, like Wings, you still haven't grasped this basic concept.


Here Wings takes a point that nobody disputes (namely that an independent Scotland's finances would necessarily be different from those we see in GERS) and leaps to the idiotic conclusion that where we start from (GERS) "has no bearing at all" on where we might end up if we were independent.

GERS shows how our public finances stack up based on the revenue we currently raise (the taxes we're used to paying) and the money that we currently receive in public expenditure (yes, including reserved spending and shared UK costs). The whole point is that this is just the starting point, the run-rate, the pro-forma accounts from which anybody making the case for independence needs to build.

If this isn't clear, I address the argument in more detail here (GERS deniers)

As for the argument that a newly independent Scotland might establish its own currency or join the Euro after reneging on its share of UK debt - well it's a (to be kind) very debatable strategy, but it's not a "Fact about GERS". GERS explicitly shows our share of debt interest cost (£2.8bn in 2015-16) so anybody who believes they can argue for a debt free Scotland can easily see the theoretical debt cost saving.




This is effectively the same point as "Fact" 5 above. Nobody is arguing that things would remain the same. Those of us who argue for rational debate simply ask for those making the case for independence to actually explain coherently what the different "economic strategy" would actually be and provide a realistic assessment of how (and by how much) it would change the figures compared to those of Scotland being within the UK.

Of course to be robust, any such analysis also needs to take into account the downsides of leaving the UK, like finding and funding a currency solution and managing the impact of being on the other side of an EU/UK trade boundary.

As a parting observation: we don't know yet if a future EU/UK trade boundary will exist, but if it does and being on the UK side of it hurts our EU trade, the obvious mirror effect also applies - being on the EU side of it would hurt our UK trade - and we export four times as much to the rest of the UK than we do to the rest of the EU.




Friday, 12 August 2016

Response to Herald Letter from a GERS denier

The Herald's Readers' Opinon section today featured a letter headlined: "GERS tells us nothing about prospects of an independent Scotland"

I have sent the following response - I publish it here on the off-chance the Herald choose not to print it.

*****

Dear Sirs

Today's Readers' Opinion from Alasdair Galloway under the headline "GERS tells us nothing about prospects of an independent Scotland" includes a number of incorrect assertions.

With reference to the GERS figures he stated "we don't know the true situation with precision".

The UK Statistics Authority designates the GERS figures as National Statistics and - unsurprisingly - statisticians know how to deal with statistical uncertainty. In fact the GERS report explicitly addresses the question of precision, showing [p.36, Table A12] that we can have 95% certainty that the figures are accurate to +/-£0.5 billion. So we know exactly how precise the figures are and should recognise that they're equally as likely to be generous by this amount as they are to be pessimistic.

He goes on to assert that costs associated with Crossrail and the London Olympics are attributed to Scotland on a population basis.

This is a widely held misconception and simply incorrect. The GERS report states [p.37] "In GERS, Scotland is allocated none of the expenditure associated with the London Olympics". Similarly the 2015 GERS report [p.77] explains clearly that railway costs are attributed to Scotland on an "in" basis, which means that only money spent in Scotland is allocated to Scotland. The only explicit exception to that policy is HS2, where Scotland is allocated just a 2.0% share based on our assessed share of the economic benefits - this is of course far less than our population share of 8.3%.

So Mr Galloway is wrong to state that being independent would mean we'd "no longer contribute to" transport spending in London - we aren't allocated any of those costs in GERS anyway.

He then cites economists Jim and Margaret Cuthbert as supporting his assertions. I presume he's referring to comments they made before the GERS methodology was overhauled under the SNP's watch. In this very paper in June 2008 the Cuthberts lauded the Scottish Government's work on GERS, stating "HM Treasury data [..] has been vetted thoroughly by statisticians in Scotland, and they have shown themselves willing to override the Treasury's figures"

Putting the methodological misunderstandings to one side, it's clearly ridiculous to assert that the GERS figures tell us nothing about the prospects of an independent Scotland. The figures explain our run-rate, describe how our independent public finances would look if we carried on raising taxes and receiving spending at these levels. Nobody's suggesting we would continue doing that. Indeed some of us are at pains to point out that we clearly couldn't carry on with this rate of tax and spend and want to hear a credible description of the sacrifices we'd need to make for our independent economy to work.

The Scottish Government's White Paper on independence rightly referred to GERS as the "authoritative publication on Scotland's finances" and cited them no less than 15 times while trying to make an economic case for independence. Unfortunately that case was built on recklessly optimistic assumptions about North Sea oil revenues.

Those who wish to champion the case for independence would do well to actually understand and address the issues raised by the GERS report rather than adopting the head-in-the-sand approach of GERS deniers.

Yours sincerely

Kevin Hague
Lynwood, Gifford


Sources:
GERS 2016
GERS 2015
Herald Scotland June 2008 

Sunday, 31 July 2016

GERS Deniers

Anybody who ventures onto social media and attempts to engage in rational economic debate about the case for Scottish Independence will quickly encounter "GERS deniers".

The primary source of data for Scottish finances is the Government Expenditure & Revenue Scotland (GERS) report. GERS deniers are people who, when faced with the uncomfortable economic reality of Scotland's finances, choose to try and rubbish the data rather than address the issues highlighted by the figures.

GERS deniers typically employ one of two generic arguments which are sometimes "supported" by a variety of specific misunderstandings, misdirections or myths.

This blog post is an attempt to provide answers to the more common confusions - I'll try to keep it up-to-date and as always will correct if any factual errors are pointed out to me.


For ease of navigation, the following is a list of the specific points addressed in this post: if you're interested in that specific question simply click on "answer" to be taken there

The Two Generic Arguments
  • The GERS numbers only show how our economy performs under Westminster rule, they tell us nothing about how an independent Scotland's finances would look: Answer
  • The GERS numbers can't be trusted because they were established by the Tories as a "political tool" to make Scotland look bad: Answer

Specific Misunderstandings, Misdirections and Myths
  1. Taxes are not attributed correctly because they're based on companies' head-office locations: Answer
  2. We don't get allocated all of our Whisky duty because of  exports that go via English ports: Answer
  3. Defence assumptions are wrong because not all of that money is spent in Scotland: Answer
  4. Scotland pays for things that we get no benefit from, like the Olympics, Crossrail, London Sewers, HS2, etc.:Answer
  5. The figures for the Scottish economy are understated because of  exports assigned to "unknown region": Answer
  6. The GERS figures are not facts, they're based on estimations and guesswork: Answer


Generic Arguments

The GERS numbers only show how our economy performs under Westminster rule, they tell us nothing about how an independent Scotland's finances would look

This blog has been very consistent about this: the GERS figures can be used to explain Scotland’s past economic performance (as an integral part of the UK) so as to inform our understanding of the future choices a possible independent Scotland would face.

The figures only tell us how an independent Scotland’s finances would have looked if we had already been independent but were still raising taxes and incurring public spending (including reserved expenditure) as we have been as an integral part of the UK. We are looking at what in financial accounting terms would be considered pro-forma accounts.

The figures do not tell us what the future accounts of an independent Scotland would look like. They do however describe the starting point (the “run-rate”) from where we can start to consider the possible impact and fiscal implications of independence.

Precisely how independence would change Scotland’s economy is of course a hugely complicated subject that would require us to consider, among other factors;
  • The outcomes of uncertain negotiations around issues such as currency, inherited share of debt and EU membership
  • The explicit tax and spend choices that the government of an independent Scotland might make. Although inevitably constrained by the result of the negotiations above, these would include decisions around wealth redistribution, defence, industrial and economic policy, international affairs, debt and deficit management, social policy priorities and much more
  • The impact of factors outside the Scottish Government’s direct control such as how businesses and the labour force would respond, international energy prices, international credit ratings and Scotland’s cost of debt
  • The cumulative effect of all of the above on Scotland’s economic growth
The GERS figures provide the foundations on top of which any credible economic case for independence must be built.

To illustrate. According to 2014-15 GERS our pro-forma accounts show Scotland running a £14.9bn deficit. If - as the White Paper suggested - an independent Scotland were to spend £0.6bn less on defence and other costs (compared to the amount allocated to us in GERS) then our deficit would become £14.4bn. 

Here are two examples of this particular type of GERS denial in use;
“the GERS figures tells (sic) us almost nothing that can be related to the finances of an independent Scotland” (Gordon MacIntyre-Kemp in the National)
"the total expenditure in GERS says nothing about the total public expenditure resource which a Scottish Government might choose to deploy [..] the GERS revenue figures say relatively little about the tax revenues that could be available to a Scottish government" (The Cuthberts, as quoted by Paul Kavanagh using this meme)
To suggest that how our fiscal balance would look based on the taxes we're used to raising and the public spending we're used to receiving tells us "nothing", "almost nothing" or only "relatively little" about an independent Scotland's potential finances is frankly insulting to the intelligence of the reader.

The figures tell us a great deal about where we start from and the scale of the challenge we'd face.


The GERS numbers can't be trusted because they were established by the Tories as a "political tool" to make Scotland look bad

The GERS methodology has been developed and refined continuously since it was introduced. With each publication of GERS any improvements made are applied to past figures so the most recent publication always includes historical data restated on a consistent basis.

Any quotes that pre-date 2008 are frankly irrelevant because the GERS reports have been produced by an SNP controlled Scottish Government since then. As nationalist cheerleaders Jim and Margaret Cuthbert (previously strident critics of the GERS figures) themselves volunteered in 2008;
"This GERS follows a major review, which has been carried out by officials after consulting widely with users of GERS, (including economists and statisticians like ourselves) [..]
HM Treasury data, which is the basic source for the expenditure figures in GERS, and which until recently was a black box to all outside the Treasury, has been vetted thoroughly by statisticians in Scotland, and they have shown themselves willing to override the Treasury's figures [..]
In presentational terms, the report is now supported by very much more detail: this not only gives it increased credibility, but also makes it a very much more useful document"
A further eight years have passed since then, eight years of ongoing improvement and refinement by an SNP controlled Scottish Government. That's why the SNP now take confident ownership of these figures;
  • The Scottish Government's Independence White Paper (page 67) states: "GERS is the authoritative publication on Scotland’s public finances"
  • They are the responsibility of the Scottish Government's Chief Statistician
  • As the GERS report itself explains: "The United Kingdom Statistics Authority has designated these statistics as National Statistics, in accordance with the Statistics and Registration Service Act 2007 and signifying compliance with the Code of Practice for Official Statistics"
  • The Independence White paper cites GERS figures on no less than 15 occasions and used them as the basis for the economic case presented
  • "Alistair, You know that, because its in the GERS figures" - Alex Salmond


Apart from anything else, to deny the validity of the GERS data would be to deny the source of the data that gave rise to following partial truths so beloved of the YES campaign (all outdated now as made on the basis of 2011-12 figures which included £9.6bn of N Sea oil revenue):



Specific Misunderstandings, Misdirections and Myths

[Frankly all of these could be answered with a simple rhetorical question: "do you honestly believe the SNP controlled Scottish Government are so stupid that they would have missed this?"]

1.  Taxes are not attributed correctly because they're based on companies' head-office locations

This myth is summed up by a document written by pro-independence group Business for Scotland. This document has since been deleted but can still be found on the web and some of the assertions made within it are regularly repeated as fact on social media.

Take this direct quote
"For many companies, VAT and Corporation tax for the whole of UK operations are paid at company headquarters which is most often in London or the South East of England. It doesn’t count as Scottish revenue, despite the fact it’s a tax paid on sales / profit generated in Scotland."
The GERS Detailed Revenue Methodology states very clearly (page 13): “GERS apportions a share of UK corporation tax revenues based on the economic activity undertaken in Scotland and not the location of companies’ headquarters”.

Similarly for VAT, the same GERS methodology document (page 19) makes it clear that VAT is allocated based on consumption survey data and has nothing to do with where companies report figures.

This isn’t something that’s changed recently. The same statements exist on the same pages of the 2011-12 GERS Methodology Statement .

The Business for Scotland document goes on to say:
"Put simply, if you buy a packet of Walkers shortbread in Tesco in Edinburgh, the VAT you pay is taken to be generated at Tesco’s head office in Hertfordshire."
Apart from being fundamentally wrong about how VAT is allocated in GERS, they're also amusingly wrong about which products incur VAT.  Shortbread is zero-rated for VAT purposes (unless it's chocolate coated).

2. We don't get allocated all of our Whisky duty because of  exports that go via English ports

This myth appears in many forms. Take this example written by Paul Kavanagh and (still) published on the crowd-funded Nationalist campaigning website “Wings Over Scotland”:
"There are other ways in which Scottish revenues are invisible in GERS. Much of the alcohol duty paid by the whisky industry is not counted as revenue from Scotland. Alcohol produced in the UK which is exported abroad becomes subject to UK alcohol duty at the point of export, and a large proportion of Scotland’s multibillion whisky exports gets shipped out from ports in England. The UK Treasury counts the duty levied on this whisky as income from the tax region in which the port is situated.
Billions of pounds of Scottish revenue is magicked away in the official statistics, and doesn’t count as Scottish revenue. It masquerades as revenue from other parts of the UK, most commonly as revenue from London. In total, the extra revenues which don’t currently figure in the GERS stats, but would accrue to an independent Scottish Treasury, would likely be larger than the entire annual income from the North Sea" 
That article states: “The original version of this piece appeared on the splendid ‘Wee Ginger Dug’” and the first paragraph appears in precisely the same form in this Business for Scotland document. It also includes completely incorrect assertions about the effect of "head-office" reporting (see 1. above) on reported Scottish revenue figures. This is how myths are spread.

To be absolutely clear: the whisky export duty statement is quite simply, unequivocally, demonstrably nonsense. We can go all the way back to GERS 2006-07 to get an explanation on this one
"In GERS, VAT and excise duty estimates for Scotland are based on the consumption approach.
This is appropriate as the burden of the duty is borne by the final consumer rather than the producer. This is considered best practice as within a system of regional fiscal accounts, the VAT liability 'sticks' when the item is purchased by the final consumer. The location of production is of no relevance.
Tobacco and alcohol duties are only collected if the product is consumed in the UK. If the product is exported, the producer receives export relief. For example, while duty is levied on Scotch Whisky when it leaves a bonded warehouse, in reality it is only collected if the whisky is consumed in the UK. Consequently, the ultimate payer of the duty is the UK consumer of the product.
Therefore, GERS estimates duty collected from Scotch Whisky based upon the level of whisky consumption in Scotland, even though Scotch Whisky is only produced in Scotland. Similarly, the estimate of tobacco duty collected in Scotland is based upon the level of consumption of tobacco products in Scotland, even though most tobacco goods are produced outside Scotland"
A senior industry insider with decades of experience working at the highest level in the industry offered the following quote for Chokkablog :
"No alcohol duty is levied on Scotch Whisky exported from the UK to the EU or third countries, whether from Scottish ports or from ports elsewhere in the UK. UK alcohol duty (excise duty) is only levied on Scotch Whisky when released from bond for consumption in the UK. Under EU law, the rate of excise duty has to be consistent across the territory of a member state. If Scotland were an independent country, the rate of excise duty on Scotch Whisky would be set by a Scottish Government within the parameters for excise duty on alcoholic drinks set by the European Union. The excise duty revenue accruing to a Scottish exchequer would only be the amount raised on the release from bond of Scotch Whisky for consumption in Scotland."
This has also been confirmed by the Scotch Whisky Association, but the myth has gained so much traction that the Scottish Government posted the following “response to GERS query” relating to whisky Export duty:
Exports, including exports of whisky, do not attract UK duty. Therefore, no 'whisky export duty' revenue is allocated to Scotland in GERS.” 

There's a version of this myth that combines confusion over export data (see 5. below) and goes something like this:
"£2.8bn of whisky revenue counted as English export (because it goes out through English ports)"
This takes a bit of unpicking;
  • The £2.8bn is never sourced - it certainly doesn't appear in any data I've yet seen and the ever diligent @fraserWhyte (you should follow him by the way) checked and it's nonsense

  • As shown below (point 5) the Scottish Government Export stats don't use port of export data (they use survey returns)
  • Even if the assertion were true (it definitely isn't) it would have no impact on our GERS reported deficit anyway. Whisky exports generate no duty - neither GDP or fiscal deficit is influenced by the whisky export figure (which is correctly assigned to Scotland anyway)


3. Defence assumptions are wrong because not all of that money is spent in Scotland

To answer this one simply has to read what the GERS report itself says:
“Public sector expenditure is estimated on the basis of spending incurred for the benefit of residents of Scotland. That is, a particular public sector expenditure is apportioned to a region if the benefit of the expenditure is thought to accrue to residents of that region.
This is a different measure from total public expenditure in Scotland. For most expenditure, spending for or in Scotland will be similar. For example, the vast majority of health expenditure by NHS Scotland occurs in Scotland and is for patients resident in Scotland. Therefore, the in and for approaches should yield virtually identical assessments of expenditure. However, for expenditure where the final impact is more widespread, such as defence, an assessment of 'who benefits' depends upon the nature of the benefit being assessed. Where there are differences between the for and in approaches, GERS estimates Scottish expenditure using a set of apportionment methodologies, refined over a number of years following consultation with and feedback from users.
The for approach considers the location of the recipients of services or transfers that government expenditure finances, irrespective of where the expenditure takes place. For example, with respect to defence expenditure, as the service provided is a national 'public good', the for methodology operates on the premise that the entire UK population benefits from the provision of a national defence service. Accordingly, under the for methodology, national defence expenditure is apportioned across the UK on a population basis.”
Needless to say, not all of the money spent "for but not in" Scotland would be replaced by money spent "for but in" Scotland were we independent: international services and debt interest being the main obvious examples.

So this really boils down to a defence spending argument - how much would we spend and where would we spend it? The White Paper had a stab at this and ended up with a £0.5bn net saving.


4. Scotland pays for things that we get no benefit from, like the Olympics, Crossrail, London Sewers, HS2, etc

This comes up a lot from people who haven’t bothered to understand how the GERS figures work. At its simplest, the GERS methodology works to include only expenditure in Scotland or Scotland’s share of value from expenditure outside Scotland. This is clearly explained in the GERS detailed expenditure methodology paper.

Let’s take Olympic Games costs as an example. To quote the current GERS detailed expenditure methodology paper (page 3):
“as discussed in previous editions of GERS, all capital expenditure associated with the Olympics has been assigned to the rest of the UK, primarily London and surrounding area, on the basis that Scotland will not receive a lasting benefit from the infrastructure and regeneration associated with the games. Current expenditure on the Olympics has been assigned across the countries and regions of the UK using the estimated regional distribution of the associated increase in tourism expenditure.”
Another widely quoted example is HS2. Because Scotland’s share of the economic value of HS2 is assessed to be 2%, this is the figure used in GERS (page 77).
“Within GERS, the expenditure has been apportioned to Scotland in line with the regional breakdown of the benefits of High Speed 2 reported within The Economic Case for HS2, published by the Department for Transport. This assigns Scotland 2% of the total expenditure.”  
The same page of the GERS report explains the more general point which would apply to the likes of London's Crossrail project
“As discussed in previous editions of GERS, railways expenditure, alongside expenditure on roads, is apportioned to Scotland on an 'in' basis. This means that expenditure 'in' Scotland on railways is apportioned to Scottish public sector expenditure while, where possible, a zero share is allocated to Scotland for all expenditure on rail across the rest of the UK. This required a number of modifications to the underlying CRA data which affected the expenditure by London and Continental Railways, the Channel Tunnel Rail link, and Network Rail.”  
Obviously London sewers costs and the like are not allocated to Scotland in GERS as they are clearly examples of "Identifiable expenditure" (that is expenditure that can be clearly allocated to a country or region in terms of having been spent for the benefit of that country or region).

*** CORRECTION ***
as @fraserWhyte quite correctly points in a comment below this blog:
it's worth noting that the London sewers aren't a public spend at all, it's all private sector investment with Thames Water customers and some foreign investment paying for it. There's some government underwriting of risk (overruns etc) but no direct money. It really is a stonker of a myth.
Also worth noting that we actually *benefit* from Westminster spend on Crossrail and HS2 as they qualify for Barnett consequentials, see Table C16 here for source 
*** ENDS *** 


5. The figures for the Scottish economy are understated because of  exports assigned to "unknown region"

This tweet illustrated how this myth become propagated: an out-of-context extract of a report being used to question the validity of our GDP figures
If we go to the source document (Export Statistics Scotland 2014) we can see it has nothing to do with GERS figures or GDP calculations and in fact it explicitly excludes North sea oil and gas


The graph in question is included only within the context of comparing these Scottish Government export statistics with HMRC regional export stats


So the Scottish Export Statistics explicitly exclude Oil & Gas anyway and as the document states clearly:  "The estimates in this publication are based on the completed survey returns from 1,664 businesses in Scotland to the 2014 Global Connections Survey". I've filled in these forms; the data is provided on the basis of where the customer is, not which port you ship from.

So this "unknown region" issue has no impact on the Scottish Government's published export statistics.

Needless to say, HMRC regional export figures are not used when calculation our GDP (see Scottish Government "How is GDP calculated"). You can view the full list of data sources here and regional export data is not among them. 

What about our fiscal balance? Well similarly the way oil tax revenues are allocated in GERS has nothing to do with the HMRC regional data (see GERS Revenue Methodology)



6. The GERS figures are not facts, they're based on estimations and guesswork

Statements like this are often made by people who simply don't understand how statistics are compiled and who ignore that the data are accurate enough to be designated as National Statistics.

The confusion arises because in some cases GERS apportions revenues based on survey data. The GERS report (page 36, Table A.12) includes confidence interval analysis that shows we can have 95% certainty that those figures are accurate to within +/- £0.5bn.


There is one figure worth highlighting as being an heroic estimate and that is the assumption around (non-North Sea) corporation tax allocation. On this figure HMRC and GERS make very similar assumptions, basically assigning £2.9bn or 7.3% of corporation taxes to Scotland. As a sanity check, Scotland account for 8.3% of the UK's population. The simple truth is that given companies are not currently required to report profit split between Scotland and the rest of the UK, nobody knows what these figures would be were Scotland to be independent - changes to tax rates and corporates' decisions around where to base activities and how to report profits make this figure a moving feast anyway.


******************************
ADDENDUM
******************************

Rather magnificently, the day after I posted the above blog I had this tweet drawn to my attention.

This combines confusion over export data (which is compiled by Scottish Government based on survey data, is completely unaffected by which port goods are shipped from & has no impact on our fiscal deficit figure), hints at lost whisky export duty (which doesn't exist), mentions the "unknown origin" HMRC data (which isn't used by Scottish Government and has no impact on our fiscal deficit figure) ... and somehow attempts to equate these with the "£15 billion black hole" (by which I assume he means the total fiscal deficit as opposed to the £10bn onshore deficit gap).

So the examples he gives of "misappropriation of revenue" have precisely zero impact on our reported deficit or indeed any figures published by the Scottish Government - so they don't affect "my graphs" at all, thanks for asking.

You have to laugh.

Wednesday, 27 July 2016

Unknown Region Exports & Hidden GDP

A very quick post to clear up the latest "the statisticians are hiding Scotland's true wealth" myth.

This stems from the likes of these tweets;



There are loads more along similar lines (many from people who've blocked me funnily enough) which all suggest that the issue of "unknown region" in  HMRC regional export stats must be hiding the true extent of Scottish GDP and/or by implication exaggerating our deficit.

Frankly the idea that the Scottish Government might have missed such an obvious trick when calculating the value of Scotland's GDP is ridiculousness enough to let us know this is highly likely to be yet another calculated attempt at spreading misinformation - something independence supporters are very adept at.

Sure enough as we'll see it's very similar to the "whisky export duty" and "VAT revenue attributed at head office" myths already covered by this blog (see "Stop Getting GERS wrong" or Appendix A of "The Price of Independence")

So the source of that graph is this publication: Export Statistics Scotland 2014

That document has nothing to do with GERS figures or GDP calculations and in fact it explicitly excludes North sea oil and gas


The graph in question is included only within the context of comparing these Scottish Government export statistics with HMRC regional export stats


So the Scottish Export Statistics explicitly exclude Oil & gas anyway and as the document states clearly:  "The estimates in this publication are based on the completed survey returns from 1,664 businesses in Scotland to the 2014 Global Connections Survey".

So this "unknown region" issue has no impact on the Scottish Government's published export statistics.

But surely it means our GDP is understated?  Well no, because the HMRC regional export figures are not used in our GDP calculation (see Scottish Government "How is GDP calculated"). You can view the full list of data sources here and regional export data is not among them. 

What about our fiscal balance? Well similarly the way oil tax revenues are allocated in GERS has nothing to do with the HMRC regional data (see GERS Revenue Methodology)


I could go on but this just gets silly. Some idiots on Twitter and Facebook have found a graph and leapt to a ridiculous conclusion in an effort to stoke a grievance.

Plus ca change.

Tuesday, 26 July 2016

The Certainty of Independence



Earlier this week First Minister Nicola Sturgeon suggested: “it may well be that the option that offers us the greatest certainty, stability and maximum control of our own destiny is that of independence”.

Her uncharacteristic coyness in only saying independence “may well be” the best option in those terms betrays the fact that she knows it would in fact offer just one certainty: greater uncertainty and even more instability.

Take the issue of trade. 64% of Scotland’s exports go to the rest of the UK whereas just 15% go to the EU. We won’t know until Brexit negotiations are completed whether leaving the EU might jeopardise 15% of our exports, but if it does then leaving the UK would be placing four times as much of our trade at risk.

As for stability, latest figures show Scotland running a deficit of 9.7% of GDP, a level that would be unsustainable without the support we receive from being an integral part of the UK.

Establishing our own currency and/or being a stand-alone member of the EU would inevitably require a level of fiscal discipline that might not translate into having “maximum control of our own destiny” – just ask Greece.

Which brings us to the biggest source of instability that independence would create. We would be certain to lose the effective fiscal transfer (the cash) we receive from the rest of the UK. This issue is hugely important but so poorly understood that it’s worth taking time to explain it (with apologies to regular readers of Chokkablog).

This graph covers the last 17 years and has just three lines on it. When you know what these lines mean you will realise the simple truth that the SNP seem determined to avoid people understanding.


Look at the black line. This shows us how much more tax per person Scotland contributes than the rest of the UK when you include all of “our oil”. This line shows that it was quite correct to say “Scotland contributes more in tax per head than the rest of the UK” all the way through the independence referendum and up until March 2016 when the most recent figures were published. Unfortunately that’s no longer the case and it was only ever half the picture anyway.

The green line shows how much less tax per person Scotland contributes before including oil. This shows that our onshore economy underperforms relative to the rest of the UK by about £350 per person. Frankly that's not very much in the grand scheme of things.

The red line shows how much more spending we receive than the rest of the UK - consistently about £1,500 per person more, a somewhat more significant issue than the relative lower onshore tax revenue generation.

The relative difference between Scotland and the rest of the UK's deficit performance is far more to do with the fact that we spend more than the fact that our onshore economy generates slightly less tax income. This is why I have little patience for those who claim the scale of Scotland's notional deficit shows how badly "Westminster" handles our economy. By that logic if Westminster slashed our budget by scrapping the Barnett Formula and reneging on the fiscal framework these same people would presumably applaud them for managing our economy more responsibly?

Moving on. Because we share the cost of the UK’s deficit, when the red line is above the black line the difference between them is the amount of cash we effectively receive from the rest of the UK. In 2014-15 that amount was over £8bn.

We can plot the difference between the red and black lines to show the historical scale of our net contribution to (above the line) or benefit from (below the line) UK wide pooling and sharing.

In only three of the last 17 years has Scotland been a net contributor on this basis - and only materially so when oil peaked in 2008-09.

The Independence White Paper was written when the most recent figures available were those for 2011-12, coincidentally the last year we could say we "paid our way". This is why despite more up-to-date figures for 2012-13 being published 6 months before the referendum, these were studiously ignored by the Yes campaign. Since then we've had another two years worth of figures published and yet SNP politicians still frequently make assertions based on the ridiculously out-dated 2011-12 figures. You can clearly see why. You can also clearly see why anybody suggesting oil was "just a bonus"(as Alex Salmond did) was either badly misinformed or simply attempting to deceive their audience.


For those who thinks it might make a material difference, here's the same analysis versus total UK and on a percentage of GDP basis - the picture barely changes



But this is all in the past. We’re interested in the future and – because we know oil tax revenues have effectively declined to zero - going forwards it’s the gap between the red and green lines we’re looking at.



The current fiscal settlement allows us to maintain the relatively higher public spending we’re used to, so the red line will remain roughly where it is. The same is true for the green line if our onshore economy maintains its performance relative to the rest of the UK.

This means that under the status quo we will effectively go on to receive about £1,900 per person annually from the rest of the UK. Multiply by our population and you find the £10bn “black hole” in Scotland’s finances. This £10bn is the amount we’d need to find just to maintain our deficit at UK levels if we left; it shouldn’t be confused with our total Scottish deficit which was actually £14.9bn in 2014-15.

Of course this only shows us what happens if we continue raising taxes and spending money as we’ve become used to and if we were independent that wouldn’t be possible. So what would we do?

There are plenty of reasons to believe that independence may slow the growth of the Scottish economy (not least by creating a border with the market where 64% of our exports go), but even if you believe independence would deliver superior economic growth it would realistically take several generations to close the gap through lifting that green line alone. [See: Let's Talk About Growth]

So to close the gap we’d need to lower the red line by cutting public spending. Now of course some of the figures allocated to us as spending in GERS are sums of money spent for us or on us but not by us. This causes a crazy amount of confusion with people believing we're being charged for things like infrastructure projects in London (we're not) and other unfair costs. This blog has debunked many of those myths (see; Stop Getting GERS Wrong and Appendix A of The Price of Independence) but all you really need to know is that the Scottish Government is responsible for these figures and that the SNP's own White Paper could only find £0.6bn of savings versus the spending allocated to us in GERS (primarily from defence spending).

So we'd still be looking to find a further £9bn of annual savings or £1,700 a year for every man, woman and child in Scotland. That’s 13% of our total spending - it’s more than Scotland’s entire education budget.

Maybe our First Minister’s coyness comes from knowing that the option of independence offers only one certainty: spending cuts that would make the austerity we’ve experienced to date pale into insignificance.