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.

38 comments:

Stewart Gray said...

"GERS is the authoritative publication on Scotland's finances".

I knew that was around, but I'd only found a statement from an anonymous Swinney spokesman.

You tracked it to their "White Paper". You are a great (but evil, if you see what I mean) man.

Some fun to be had when new GERS comes out...

Alastair McIntyre said...

Can you offer some figures on imports/exports to EU countries excluding those to rUK? Also some figures on what Scotland pays for being in the EU against what we receive from them in terms of grants, etc.

It just seems to me that many say we're benefiting from being in the EU but from what I can see we're a net contributor.

It also seems to me that the main reason for the SNP wanting to be in the EU is that their own foreign policy is based on the fact that the EU would take care of all that for an Independent Scotland as we have no expertise on that area ourselves.

Kevin Hague said...
This comment has been removed by the author.
Kevin Hague said...
This comment has been removed by the author.
Kevin Hague said...

Alastair

Export statistics are in the Scottish Exports 2014 paper linked to in the article above - repeated here > Export Statistics Scotland 2014

As for Scotland's contribution to EU I covered it here > Thoughts on EU Referendum. Is simple cash transaction terms its <£100 per person per year. Of course we could debate at length the less easily quantifiable financial benefits (free-trade market access, collaborative academic working, level playing field on workers' rights etc) and the softer aspects of unity, solidarity & harmony ...

Kevin Hague said...

Alastair

Export statistics are in the Scottish Exports 2014 paper linked to in the article above - repeated here > Export Statistics Scotland 2014

As for Scotland's contribution to EU I covered it here > Thoughts on EU Referendum. Is simple cash transaction terms its <£100 per person per year. Of course we could debate at length the less easily quantifiable financial benefits (free-trade market access, collaborative academic working, level playing field on workers' rights etc) and the softer aspects of unity, solidarity & harmony ...

Alastair McIntyre said...

Many thanks for the information and the link Kevin... much appreciated.

ian said...

UK government oil and gas income for 14/15 is only around 5%, any other business turning over £40+ billion a year taxed at 5%? Do you believe the government figures?

Anonymous said...

"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)."

Hi Kevin, excellent as always. A wee correction for you: London Sewers are paid for by Thames Water customers and are not funded through general taxation.

https://next.ft.com/content/e596801c-4a29-11e5-9b5d-89a026fda5c9

Fraser Whyte said...

Thanks for the plug

On point #4, 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 - https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/479717/statement_of_funding_2015_print.pdf

theambler said...

The problem is the contradiction between internal belief, and external information.

Internal belief: independence is good for Scotland and Scots.
External information: there is a large structural deficit in Scotland which is currently manageable because of fiscal transfers from the UK government, and which would end in the event of independence.

How is this contradiction resolved? Well, you can abandon ones belief that independence is good for Scotland and Scots. Alternatively, like George Kerevan, you can admit the problem and (at least partially) the harsh problems in the short term that independence would cause. The other solution is to search around for any straw that will allow you to abandon belief in the external information. It is not a surprise that the last method is the one preferred over the other two.

Anonymous said...

Kevin, I'm old and very stupid, so may I say that your answer to the "unknown origin" myth is unclear to me, and perhaps could benefit from snappier packaging if it is to counter the likes of Warwick. As it is, I can see why this get-out-of-jail-free theory could run and run. The argument against reads like a government book-keeping convention (and more reason why GERS can't be trusted) rather than an explanation of how/where real money is moving about.

As I understand (and would explain) it the unknown origin issue is completely irrelevant because: 1. all TAX REVENUES (the bit that actually matters to public finances) derived from this volume of trade are still properly allocated to Scotland anyway within the GERS figures, as for example with oil. And so 2. if Scotland were independent, there would be NO increase in tax revenues by reassigning this "unknown origin" business from the UK to Scotland.

Is that anywhere near right?

rocoham


Kevin Hague said...

rocoham - that's an accurate summary

Drew said...

It should be pointed out Nationalists are far from alone in their poor grasp of GERS figures and Scotland's finances.

There are plenty of Unionists on the internet making rookie errors.

For example, here is a comment I saw online recently:

'Scotland with a £15bn deficit - contributes zero to defence. Scotland doesn't raise enough revenues to even cover identified public spending in Scotland, let alone contribute towards defence, eu, debt interest, international aid, diplomatic missions.'

If this person had even an elementary understanding of GERS they would know that Scotland is apportioned a share of defence expenditure within GERS which comes to around £3.5 billion, while our apportioned share of debt interest is closer to £4 billion.

You shouldn't fall into the trap that all the spreading of misinformation is one sided, that door swings both ways.

Kevin Hague said...

Drew

There is of course ignorance on both sides but ... I cite examples with links and we're talking high profile and widely read sites like Wings over Scotland or journalists like Kavanagh and McKenna or politicians like Mason and McAlpine - I could go on (and on and on)

I don't think an unattributed quote you read online (which I don't doubt - people from both sides will get stuff wrong) is comparable to the stream of misinformation spread by GERS deniers or those presenting false narratives like "oil is a bonus", "we send more than we get back" etc etc.

Anonymous said...

"If this person had even an elementary understanding of GERS they would know that Scotland is apportioned a share of defence expenditure within GERS which comes to around £3.5 billion, while our apportioned share of debt interest is closer to £4 billion."

£3.5 billion Defence?
£4 billion Debt interest?


According to SNP Government GERS

£3.019 billion Defence expenditure
£2.760 billion Debt interest

http://www.gov.scot/Publications/2016/03/3692/5

Drew said...

When you say 'high profile and widely read' you are really only talking about the 10,000-15,000 regular readers of the National and at a push 50,000 people on Twitter that regularly read Wings.

Which sounds a lot but it only really adds up to 1-2%, at best, of the adult Scottish population.

I would say most politicians and political activists are all equally guilty of manipulating statistics and economic data.

The Conservatives are the best in the business at it and it has made them extremely successful at winning elections.

Most sensible people know deep down you can't have both well funded public services and low taxes because the sums don't add up. But election after election the public fall for this huge myth because they want to believe it is true.

The UK is £1.6 trillion in debt and hasn't made an annual budget surplus for 13 years. In fact it has only made 7 budget surpluses in 40 years.

But the Conservatives have successfully sold the myth that the UK's ability to fund public services is working perfectly well when they are in charge and we can still reduce taxes. Even though they have been in charge for 6 years and the overall debt is still rising and they have missed every target for getting back to an annual budget surplus.

They managed to convince the UK public that Labour were to blame for a world wide crisis in financial services, as if Gordon Brown was simultaneously in charge of the US Treasury and UK Chancellor at the same time.

Ironically, under Tony Blair, Labour made more budget surpluses than Thatcher did in her whole time in office.

Kevin Hague said...
This comment has been removed by the author.
Kevin Hague said...

Oh Ian - yes I believe the government figures - you do know tax is charged on profit not sales, right?

are you seriously suggesting they are hiding taxes somewhere? how do you think they get the accounts to reconcile?

Kevin Hague said...

If you read my blog you'll know I consider Osborne's tax cuts indefensible - but when it comes to "grass roots" misinformation spreading I'm not buying that "they're all as bad as each other" - show me the equivalent of the GERS deniers from other sides of the debate

Drew said...

The largest Unionist party in Scotland at the moment are the Conservatives and most of their MSPs, activists and supporters back tax cuts, despite the fact Scotland is facing a huge deficit every year.

You cannot hope to reduce the deficit and propose tax cuts at the same time.

This is pure fantasy economics and equally guilty of deceiving the public as GERS deniers.

Leading Unionist Ruth Davidson set up the Commission on Tax Reform in January to propose various tax cuts at local and national level.

She gets get ample air time and column inches in leading newspapers to spread this misinformation to the public.

Leading Scottish newspaper columnists like Brian Monteith and Chris Deerin support tax cuts, despite also continually highlighting Scotland's large deficit. When Scotland's spending is so high, we need more revenue coming in, not less.

We can't hope to have a sensible debate about tax and spending in Scotland if people are allowed without question, to propose such nonsense.

I like your blog because it is well-informed and evidence-based but it is too one sided. If you really want to inform the voters about the the real crisis facing Scotland's public finances, you need to raise awareness of the dangers of politicians that get away with calling for tax cuts when the books don't balance.

The only political parties in my eyes that have any credibility on the public finances are Scottish Labour, the Scottish Lib Dems and the Scottish Greens.

None of their proposed tax rises go anywhere near far enough but Scotland's tax powers are currently too limited to make any real dent in our deficit anyway.

Kevin Hague said...

Drew mate - the SNP near as dammit mirrored Tory tax policies and I'm on record frequently arguing for more aggressively progressive taxation so you're arguing with the wrong guy (or perhaps have not been reading my blog - which is forgivable). I was vocally supportive of Scottish Labour's tax proposals for example > SRIT: Scottish Labour's Proposal

As for suggesting parties offering policy proposals you (and in many cases I) disagree with is equivalent to attempting to deny the validity of historical actual data - well that's just daft.

Drew said...

Fair enough, I dip in and out of your blog and don't have time to read every article but it seems to me you focus most of the attention on the SNP's policies. Which is fair enough because they are currently the party of government.

And when talking about a sensible debate, I meant more generally, not you and I.

There are many Unionists politicians, bloggers, activists and commentators (by that I mean mostly Conservatives because they are currently the largest block of the UK parties) that attempt to deny historical data.

They deny the UK's finances (and by that I mean tax levels and public spending levels) are unsustainable now and have been historically for decades. They deny the UK was spending more than the revenue it brought in frequently, even before the financial crisis of 08. Only peak oil revenues in the 1980s and early 1990s disguised the problem. Instead they claimed the 1980s and 1990s were a prosperous era. But our public finances have been progressively worse since, not better.

Scottish independence is off the table. There isn't going to be another referendum any time soon because the UK Government can reasonably block it, on the grounds we have answered the question in a fair and reasonably manner.

The SNP only run a very limited set of public accounts, they have no control over 70% of the revenue streams. They cannot reduce the spending levels in Scotland, even if they wanted to, because we get a fixed block grant. When they don't spend all of the block grant, they come under pressure from opposition parties for not spending enough!

So you need to focus on Scotland's finances as part of the UK. That is where the fiscal accountability lies, at the Treasury. Which as I've explained, those finances in a terrible shape and there is no credible plan or even the first idea, of within any party, to get them back into shape.

David GREEN said...

Some muddled thinking is creeping in from Drew. It is self-evident to me that a party that is committed to the Union is also potentially committed to sustaining the Barnett money. So, Ruth Davidson can be in the position of ignoring the problem of losing the GBP 9 billion a year subvention from rUK, and still advocating tax cuts. She balances the books, after receiving Barnett money, by reducing services, etc. Some people may not like it, but there is no obvious hypocrisy involved.

Moreover, it is wrong to suggest that the Scottish Government is constrained in its expenditure distribution by the terms of the block grant. Take the NHS, for example. It is well recognized that the SNP spends less per capita on health than rUK, despite the fact that the Barnett formula provides for NHS expenditure at the UK level. It is not called a block grant for nothing. The "NHS" money that is unspent by the SNP is not returned to the UK government. It is spent on keeping the Scottish middle-class quiet; for example, by subsidising Scottish university fees. As we all know, it is the poor that get screwed by the SNP in Scotland, and there is no better evidence than in the appalling achievement expectations of children from poorer families.

If there is hypocrisy, it lies with the SNP, who refuse to confront the 9 billion Barnett loss that would occur on independence, and who implicitly want to inflict eye-watering austerity as a result upon a dumb Scottish population. The nearest you will get to recognition is George Kerevan.

I was interested, therefore, in your latest blog, Kevin, and in the existence of "GERS deniers" and the manifold shapes that their denying took. There is a kind of morbid fascination in seeing the collision between rational, evidence-based arguments of the kind espoused by you, and the faith-based rubbish of SNP supporters awaiting the Second Coming (of the independence referendum, that is).

Sturgeon, I am fairly certain, does use evidence in making some of her decisions, but where she is a shocker is in her temptation to exploit the "rapture" of her independence supporters. I had the impression, a few months ago, that she was going to proceed cautiously with IndyRef2 and resist Alex Salmond's obvious pressure, but Brexit appears to have disinhibited her.

To be fair, Scottish independence is not the only faith-based political project around. Another is the Labour party. How a misogynistic, anti-semitic party headed by a doddery old man expects to get elected as a UK Government should be beyond comprehension, but the Corbynistas clearly expect great things.

Interesting times.

Drew said...

I'm afraid it is you that is muddled David.

If the UK was making a surplus every year then you would be correct, the UK could afford to make up the difference between Scotland's revenue and expenditure.

The UK can't afford this £15 billion deficit because it is making a deficit every year itself. Which makes the UK's own deficit even larger.

There is no magic money tree from the UK to help Scotland, the UK has to borrow this money from the markets.

You cannot wish away the UK's addiction to borrowing, it simply doesn't work like that.

In real terms this costs every single UK taxpayer, usually at least a few hundreds of pounds a year individually. Money in their taxes that could be spent on public services.

It means every pound in Scotland to plug the gap between income and expenditure means more cuts elsewhere in the UK and libraries, community centres and other public services have to take reduced funding or even closure.

With regards the SNP's so called power over expenditure, you can criticise their spending choices on univeral benefits in health and education but the bottom line is the budget is fixed so if they want to make spending in a certain area a priority, it means cuts elsewhere.

They have very little power over the ability to increase revenue, even when the new powers over income tax come to Scotland.

Income tax would have to rise to eye-watering levels before Scotland could make a serious dent in our deficit.

You make great play of denouncing the fantasy politics of other parties but trying to claim the cost of Barnett and plugging the gap in Scotland's finances is without a cost to the UK is confused at best.

Anonymous said...

Good blog, Kevin, and a useful one for referring to in discussion with friends and colleagues.
Clear presentation of Titanium-plated facts. Much appreciated.

theambler said...

Drew, the money being borrowed by the UK is being spent on public services. If the money currently being borrowed was not borrowed, taxes would have to rise or cuts to spending would have to be made, both of which would have a severely negative impact on growth. As to the deficit, a number of UK government bonds actually had a negative interest rate yesterday, and pension funds are crying out to buy more long dated government bonds. These facts suggest that the deficit is perfectly managable, and in fact a large scheme of public works is not only smart, but imperative. Austerity should be abandoned by the May government, but this will for a time increase the deficit. If she does not initiate one then it will be a dramatic missed opportunity.

john scarlett said...

Great blog as usual and good to see some hoary old Nat chestnuts getting a right good roasting!
However, please excuse a naive question:
How does the portrait of Scotland's economy painted by the GERS figures correlate with what actually happens in the real fiscal world?
For example, GERS methodology assigns VAT to Scotland according to our consumption, but is this methodology actually used by HM treasury to redistribute the VAT it collects ?
Or does our VAT just become just another vague ingredient in a pot, some of which is returned via the block grant or Barnett?
Enlighten me please so I can pursue further with my Nationalist friends!

David GREEN said...

As I see it, Drew is concerned about two things: the overall affordability to the UK of the Barnett settlement, and the inflexibility of the powers of the Scottish government when it comes to increasing revenue.

The issue of affordability is, to some extent, in the eye of the beholder. Drew appears to regard government budget deficits, whether UK or Scottish, as signs of unaffordability. I tend to agree, but we might be in a minority. There is a school of thought, of which Martin Wolf in the FT appears to be a member, that feels the UK should continue to borrow. After all, money is cheap and it keeps away the most-overused term in current UK politics, "austerity". Austerity, or living within your means, is economically damaging. Better to keep the fragile plant alive by borrowing. George Osborne, on this view, was wrong to try and reduce the budget deficit, because it created "austerity". My own view about Osborne is that his attempts to reduce the UK budget deficit were slow and largely ineffective, but that he wanted to be seen as a responsible Chancellor emphasising the need for sound economic policies, including some belt-tightening. He attracted the opprobrium of "austerity" politics, whilst actually producing little effect.

To be fair to Wolf and those like him, it might be acceptable to run an expansion of UK government debt in line with increases in GDP, and keep the debt/GDP ratio at about 90%. Whether 90% is an appropriate figure, who knows? Quite a number of countries have similar figures, and the wheels are clearly not falling off. But Italy at about 140% and Japan at 250% suggest there are some levels that cause difficulty. Reinhart & Rogoff have done excellent work which suggests that economic performance does deteriorate as the ratio moves above 90%. The real Achilles' heel is servicing the debt. I think I am correct in saying that Japan spends about 25% of government revenue on debt servicing at an interest rate of 1%. Obviously, an increase to 4% would entail all Japanese government revenue going on debt servicing; an impossible situation that would result in default. Just as it would have been difficult 20 years ago, when interest rates were much higher than they are now, for us to see them fall to almost nothin (just ask the pension funds), it is currently difficult for us to see how they could ever rise again to levels that would cause governments to default on their debt. But nothing is impossible, and the prudent person would surely start cutting their cloth accordingly.

This is a roundabout way of explaining why I have some sympathy with Drew's position on affordability. I lived in New Zealand for some time, and saw the determined efforts by New Zealand governments of all political persuasion to keep their borrowing costs down by balancing budgets (that is, not running deficits). New Zealand currently has a government debt/GDP ratio of 30.36% and is seeking to contain it at that level. One of the factors that has lead to a centre-right government in New Zealand for a decade is the perception that New Zealand Labour and the Greens would start running large budget deficits, causing immediate currency problems. The UK, by contrast, obviously feels it is immune to currency problems.

But moving to balanced budgets would be painful for the UK and even more so for Scotland. Both entities are living well beyond their means, but Scotland more so. Whether rUK should be making transfer payments to Scotland in these circumstances is a moot point. I personally think it is beneficial for the UK as a whole, but their is little doubt it costs.

David GREEN said...

On the issue of Scottish government flexibility on tax raising, tax expenditure and distribution, I think we disagree. Scotland has considerable powers for a regional government within the UK polity.

The reason I pour scorn and derision on Sturgeon more than others? Because the SNP is illiterate economically and the Scottish electorate, sad to say, is naive. I don't believe for a moment that an independent Scotland wouldn't rapidly learn the lessons learned by New Zealand, a country of similar size, the hard way, and I think the New Zealand electorate would see the SNP as shysters if their policies were ever offered in New Zealand. New Zealand Labour offers them in dilute form and has been rejected (on 3 year electoral cycles) for a decade.

I hope this clarifies matters.

Drew said...

David

Scotland isn't independent and is unlikely to ever be independent. The UK Government isn't stupid enough to gamble the continued existence of the UK for a second time.

You are focusing on a hypothetical situation whereas I'm talking about reality. Which is both Scotland and the UK spend far too much money in comparison with their revenue.
The UK holds most of the economic and political powers and as you say the SNP only has the status of a regional government. To deny that just isn't credible.

I think you need a reality check. The UK Government makes 60% of the tax and revenue decisions in Scotland, has total control over 40% of reserved spending in Scotland and 100% control over how much money is spent in Scotland.

There is a strange new element appearing in UK politics and that is political commentators, politicians and individuals obsessed with the SNP. They seem to spend most of their waking hours worrying about the SNP and that Scotland is in the grip of some sinister hypnosis, when the reality is most people in Scotland, probably 95% of them, rarely give politics a second thought in their daily lives.

Anonymous said...

Drew, it's difficult to make out what your point is here. If it is that the UK (which includes Scotland) spends too much for what it raises in revenue, that's fine and true, but that wasn't the topic of the original post, so it is unsurprising that this "reality" isn't front and centre in the discussion. And given that in various forms (eg "if you think our debt is bad look at the UK's..") it is regularly used by Indie proponents as an entirely unjustified and misleading economic argument that independence wouldn't be a financial disaster for Scotland, you will I hope excuse some here for treating it as largely irrelevant.

If your point is that independence will never happen so why are we here all banging on about it, well, I think a quick look around you will show that the die-hard nationalist is still alive and well, still living in a tartan-lined "wha's like us" echo-chamber, and still trotting out the same old, long disproved Indie lies, wishful thinking and conspiracy theories day after day, week after week. If places like this don't keep a banner flying for evidence-based decision-making rather than emo-nat flag-waving, then the field is left clear for the dangerous crazies to occupy unchallenged, which would be a shame.

Your reality check comment is also strange. As part of the UK (however much devolved) Scotland's public expenditure will always be allocated as part of a UK-wide expenditure pattern by the UK government. Some expenditure in Scotland will inevitably still be reserved. Logically how could it be any other way? Yet a) Barnett ensures that the allocation to Scotland is considerably more generous than it would be under a needs-assessed formula. And b) within the confines of its block grant Scotland's government has considerable freedom of choice over how money is spent. And on taxation, to date in those areas where it also has powers to vary tax rates (for example) it has chosen to mirror those of the UK rather than adopt a more progressive approach. In the absence of any firm statement it is hard to see what it would/will do radically differently with greater tax powers.

The reality check that would actually be helpful would be a "ground zero" picture of Scotland's finances the day after independence, together with a proper economic plan. No block grant, uncertainty over currency, massively underestimated transition costs, EU accession certainly some years away and with painful entry conditions. The variables of debt interest and intra-UK payments would have to be run, but an honest five-year picture of an iScotland's public finances and the potential economic consequences of separation should be the minimum the Scottish public should expect on which to make a decision on independence. Not just more of Salmond's inexcusable "because Scotland".

And my "obsession" with the SNP is that they persist in evading this fundamental point. Their talk about a new "case for independence" treats it as if all that were needed was a bit of PR spin, some better packaging and more comforting presentation for the "doubters". Their PR machine wilfully perpetuates fantasies and smears opponents rather than face the facts head on. There is not a hint of addressing the painful "reality" because now for the SNP the word "independence" is no more than a canny flash of knicker; it keeps the punters' eyes on stalks, tongues hanging out and their brains scrambled enough never to realise that there's nae chance of the real deal, ever. ****-teasers.

rocoham

Drew said...

Essentially my point is this. There will be no second independence referendum. Arguing over it is pointless.

The UK Government made a calculated gamble to hold the 1st referendum on independence because historically every poll every held on the question in the last 3 decades gave opposition to independence at 70/30 against, they thought they would win easily.

Given then that the No campaign threw away the 40 point lead at the start of the campaign and turned it into a 11 point win, I can't imagine the UK Government would be stupid enough to take the risk again.

So Unionists and Nationalists and anyone else for that matter arguing over the prospect of independence that isn't ever likely to happen.

The real question is how did Scotland's public finances get in such a mess and how did we start to fix it. Tax rises are not possible under the feeble new devolved powers coming to Scotland. Income tax would have to rise to levels unheard of in Western Europe to cope with our current level of spending, set by the UK Government, which is racking up an eye-watering amount of debt because of decades of incompetence.

Half of Scotland's £15 billion deficit annually is made up of our share of UK defence expenditure (£3.5 billion) which is way too high for a country of our size (Ireland hasn't faced a serious military threat for well over 100 years, isn't in NATO and spends less than 1 billion Euros on defence) and the said debt interest (close to £4 billion) but there's nothing we can do to reduce them.

Scotland has no power of alcohol duty or to change the legislation regard the misuse of drugs act yet we are stuck with spending £7 billion per year on the cost of alcohol and drug misuse to public services like police, courts, health and social services and ultimately prison.

You can critique the SNP until the cows come home but until they have real powers over tax and spending, you are wasting your energy.

Anonymous said...

Once again, you've lost me. In no particular order, alcohol licensing powers are fully devolved to the SP, and the Alcohol (Minimum Pricing) (Scotland) Act 2012 was passed in June 2012 specifically to address the issue of alcohol misuse. The Scotch Whisky Association then raised a legal challenge and the matter is now, I believe, back with the Court of Session to adjudicate finally. Nothing to do with the UK or duty levels, unless someone is determined to find a grievance. On drugs, powers over the classification of controlled substances is indeed reserved to the UK government, although the Scottish Government does have its own strategy for tackling drug abuse and addiction in Scotland which appears to be delivering positive results - recorded (yes, I know) drug use is falling.

Scotland is inescapably in NATO as part of the UK, the white paper made clear it intended to remain so, and incidentally in the UK Scotland benefits hugely from defence spending. And of course a significant % of the UK's total debt is accumulated by the cost of servicing - Scotland! Given that you appear to start from the premise that Scotland spends more than it earns, and the UK as a whole is too far in debt, you cannot responsibly be suggesting that Scotland should not carry its fair share of the debt burden, can you?

Tax rises are very possible under the new powers, and have been perfectly possible under existing ones. It seems bizarre to suggest they are intended to "cope with" Scotland's current level of spending, which has never been their point - the block grant effectively continues as before. The question is though, is the SG brave enough to implement the powers it is given? And Scotland's current high level of public spending is hardly "set by" the UK Government, as you seem to suggest; in a number of recent years the SG has under-spent its budgeted allocation, and there is nothing to stop it spending even less if it chose to.

All governments are incompetent to one degree or another. Examples of how to do it better are always welcome.

The answer to your question on public finances is that Scotland is a large land area with a relatively small and sparsely distributed population, which makes the cost per capita of most universal public services expensive. Scotland just costs a lot more than the UK average per head per year to run. To fix it, one could adopt some drastic tax and cut measures, which would probably crash the economy and cause a popular revolt, or thank the stars we are part of a union in which the single biggest money engine (London) is prepared to subsidise the rest of the country so generously.

And Drew, we are not arguing over whether independence will or won't happen. I agree with you, it won't. Not just because it is unlikely (but not completely impossible) that the UK government will choose to allow another referendum, but mainly because it is self-evidently an economically unsustainable notion. If you really want the arguments to go away, please make your case direct to the SNP, because they and their acolytes are the ones who seem determined to keep stirring the independence pot for cheap political gain (without any intention of going all the way). Like you, the rest of us would be glad if the whole issue was formally shelved, say for a generation, as promised.

rocoham

Anonymous said...

Reply to Drew (16 August 2016 at 06:54)

" (Ireland hasn't faced a serious military threat for well over 100 years, isn't in NATO and spends less than 1 billion Euros on defence)

Perhaps not spending enough on Defence is why Eire has to get UK RAF to assist ? " Ireland lacks aircraft that can climb high enough or go fast enough to intercept Russian aircraft which came close to Irish airspace on a couple of occasions in 2015, being driven away by British jets."
and
"British combat aircraft will shoot down aircraft over Ireland if they are hijacked by terrorists, according to local media."

More info here
https://ukdefencejournal.org.uk/royal-air-force-asked-defend-ireland/



Drew said...

Alcohol and Tobacco duty are reserved to the UK Government and won't be devolved to Scotland under the new tax powers.

The minimum unit pricing policy is able to be challenged in the courts precisely because the alcohol industry knows the Scottish Government doesn't have effective powers to legislate to reduce alcohol abuse, namely raising alcohol duty, which the alcohol lobby know they would be powerless to oppose in the courts.

Scotland has a drugs strategy once again without any legislative powers to back this up and make the radical changes required to tackle both addiction and the cost of addiction. For example in Portugal, following their policy of decriminalization, the per capita social cost of drug misuse decreased by 18 percent. The number of people arrested and sent to criminal courts for drug offenses declined by more than 60 percent since decriminalization. This huge saving on the costs on the courts, police and prisons can than be reinvested in other areas. This is the sort of radical approach Scotland can only dream of taking with the weak and ineffective devolved settlement.

The point I make about NATO, defence, the debt interest and the fixed budget is that these are costs the Scottish Government has no control over. From a fiscal point of view, that is all that matters. If you cannot reduce spending, that is not fiscal responsibility. Without responsibility, there is not accountability.

Essentially Scotland is going to be stuck in a never ending cycle of debt, poverty and economic under performance unless the UK grants it proper and effective powers to improve things. Real powers and not the weak political fudges the UK has being devolving so far. Relying on handouts and pocket money from Westminster isn't working and hasn't worked for decades now. Look at all the key social and economic indicators regarding life expectancy, addiction and deprivation. If politicians running Scotland for the last generation don't take responsibility for this mess then who does?





Anonymous said...

"Handouts and pocket money"!!! Actually that's £billions annually of working people's hard-earned taxes that many other folk in the UK would be damn grateful to have spent in their region, and in many places is needed just as much or more than it is in Scotland. Really, that's entirely pathetic.

rocoham

Drew said...

I think you are being a touch melodramatic but ultimately you are correct.

Scotland's over generous funding settlement is a political tool, designed by the UK Government to keep Scotland in the UK.

Personally I don't think it works well for either Scotland or the rest of the UK, but it is deemed so important to keep the UK together that no political party has the courage to scrap it.