Friday, 25 August 2017

GERS: An Inconvenient Truth

With the Scottish Government GERS figures published on Wednesday, the pro-independence spin-machine has been in over-drive trying to prevent people understanding what they show us.

The SNP’s own Independence White Paper clearly stated that GERS “provides a useful indication of the relative strength of Scotland’s public finances as part of the UK and a starting point for discussions of Scotland’s fiscal position following independence”. So let’s cut through the spin and discuss what this starting point now tells us.

The latest GERS figures show Scotland’s deficit is £1,900/person higher than the rest of the UK. This is the Deficit Gap - the amount effectively transferred to Scotland through UK-wide pooling & sharing – and it’s worth over £10 billion a year.

The graph on this page explains how that Deficit Gap arises.

The green line shows that Scotland’s onshore economy consistently generates about £350 per person less tax income than the rest of the UK. The black line shows what happens when you add on to that Scotland’s North Sea oil revenues. When the black line has been above the axis, Scotland has generated relatively higher tax that the rest of the UK - that has only ever been because of North Sea oil. With oil revenues now close to zero, Scotland would be reliant on its lower than UK average onshore revenues to fund its public spending.

The rest of the deficit gap – the large majority of it – is explained by Scotland’s now over £1,500/person higher spending, shown by the red line on the graph. The fiscal framework (underpinned by the Barnett Formula) ensures that Scotland can maintain these higher spending levels despite the loss of oil revenues. That’s what pooling & sharing means, that’s the safety net we would have lost had we voted Yes in 2014.

When the black line is higher than the red line, GERS figures demonstrate Scotland having stronger public sector finances than the rest of the UK. That’s only been materially true once in the last 17 years, when oil peaked in 2008-091.

That’s why the SNP’s independence White Paper assumed North Sea revenues of £6.8 - £7.9 billion a year – it was the only way they could make their economic case add up. Many of us observed at the time that those forecasts were recklessly optimistic. Now the actual figure turns out to be close to zero, we’ve been proven right.

So how do the SNP deal with this inconvenient truth?

They hint that we can’t trust the data because estimates are involved – neglecting to mention that these qualify as National Statistics and that the main differences they highlight relate to spending, where actual figures not estimates are used.

They talk in non-quantified terms about “different spending choices”, nearly always using Trident as their example - neglecting to mention that our share of Trident costs account for maybe £0.2bn of our allocated defence spending. In fact the SNP’s notoriously optimistic independence White Paper could only find net savings of £0.6bn through “different spending choices”.

No amount of SNP obfuscation can hide the fact that their economic case relied on nearly £8bn of oil revenues and they’ve yet to offer a credible answer as to how an independent Scotland would manage now those oil revenues have gone (and the fiscal gap is in fact now over £10bn).

So in what looks like a frankly desperate move, last week-end’s pro-independence press ran headlines blaming “Westminster mismanagement” for the decline in our oil tax revenues.

The support offered for this was a report from the unashamedly pro-SNP and notoriously flaky “Business for Scotland”. The report itself did little more than observe that Norway has generated lots of tax revenue from oil in the last few years and suggest that it would therefore “not be unreasonable to add Norway’s £11bn revenues” to Scotland’s fiscal balance2.

I mean seriously? They might just as well argue that it wouldn’t be unreasonable to add the taxes generated by Norway’s forest and timber industry to Scotland’s fiscal balance, seeing as how we both grow trees.

To be clear: North Sea revenues are generated by taxing production profits. While it’s true that both the Norwegian and UK industries are exposed to the same oil market prices, our costs of production are much higher, our production volumes are lower and with more mature reserves we’re incurring greater decommissioning costs. This means the UK offshore industry simply doesn't produce production profits like Norway’s does – and without profit there is no tax.

The Business for Scotland report even argues – incredibly - that Westminster has failed to tax the North Sea oil industry heavily enough since the oil price crash in 2015. Do they think voters have memories like goldfish?

In 2015 the SNP’s then Finance Minister John Swinney called for tax cuts for the North Sea industry3. The SNP’s 2017 election manifesto then proclaimed “only after pressure from SNP MPs did the Tory Chancellor abolish the petroleum revenue tax and halve the supplementary charge to 10 per cent.”

Quite how protecting Scottish jobs by reducing the tax burden on the North Sea oil industry – as called for and celebrated by the SNP – is “mismanagement” is anybody’s guess. In fact the decline in profitability of our oil industry has been so dramatic that even if tax rates hadn’t been cut, the revenue generated would have dwindled to close to zero anyway, but that’s by the by.

To put the cherry on the cake, SNP MP Joanna Cherry QC took to Twitter to promote the Business for Scotland report, saying “Serious questions raised by this excellent research”4.

When their cheer-leaders in the press and one of their high-profile MP’s promote a misleading think tank making transparently ludicrous arguments, you know the SNP’s economic strategy is in tatters.

This Article Appeared in the Daily Record on August 25th 2017


1. In fact as explained within the GERS report itself and the GERS consultation document, past oil revenue assumptions used have been very significantly down-graded
The impact is material: the graph below shows the figure pre-revisions as dotted lines (note there have been some cost & onshore revenue revisions too, as is normally the case)

Because of the revisions to prior years that have since been made (most notably, but not only, the change to oil revenue assumptions) I thought it would be interesting to correct what the White Paper stated at the time:
Since 2007/08, Scotland has run an average net fiscal deficit of £8.3 billion £10.0 billion (5.9 per cent 6.8 percent of GDP). [..] In 2011/12, the latest year for which data is available, Scotland is estimated have run a net fiscal deficit equivalent to 5.0 per cent 7.0 percent of GDP. In the same year the UK is estimated to have had a deficit of 7.9 per cent  7.1 percent of GDP. 
2. For a full evisceration of that report, read The Big Oil Lie

3. Swinney calls for further North Sea tax relief

[Swinney] called for tax cuts for the North Sea, and additional moves to encourage exploration in the basin. Swinney also wants the government to make it easier for companies to access tax relief for decommissioning projects, and consider non-fiscal support such as government loan guarantees.

4. Joanna Cherry MP QC on Twitter


Anonymous said...

According to the SNP government produced GERS 2016/17

£46.215 billion UK deficit = 2.36% of UK GDP (£1,955,442 billion)

take away Scotland's

£13.257 billion deficit = 8.32% of Scotland GDP (£159,389 billion)

Leaving rUK (excluding Scotland)

£32.958 billion deficit = 1.84% of rUK GDP (£1,795,053 billion)

(deficit for Wales & N Ireland at least £24 billion,)

I know it's very rude to compare Scotland to England (too wee poor etc)

tabs s.6 & a.3

John Silver said...

So, three blogs so far about the latest GERS figures: 2 of which completely fail to mention that Scotland's deficit fell by well over £1bn compared to last year's figures.
There are 2 brief mentions in your graphfest, but you go on to assure us that this is not " the deficit that really matters"

By comparison you devote hundreds of words to the deficit gap between Scotland & the UK. Presumably, this is what really matters.
And you can make a case for that as long as Scotland remains in the UK.

If Scotland leaves the UK any "deficit gap" with the rUK has no more relevance than our "deficit gap" with Peru or Switzerland.
What would undoubtedly matter is our deficit and, given recent events, particularly our onshore deficit, which as far as I can see, from your graphs has been consistently decreasing by at least £1bn a year for the past 6 or 7 years.
It's also worth noting that, as you have been at great pains to point out, there has been no significant reduction in public expenditure over that period and almost all the reduction in the deficit has come through increased revenue.
Surely, this gives some cause for a rather less pessimistic view of an independent Scotland's prospects than the rather bleak one you offer?

Glenn Middleton said...

@John Sliver

The two previous GERS report were £15 billion, so nothing to brag about, especially as the two preceding GERS reports were £9 and £12.5 billion.

You also miss a huge flaw in independence, the economies of scales, HMRC losses a few million taxpayers, Scotland gains them, and the associated costs.

How about focusing on the billions that will be needed to collect the tax revenues?

Andy said...

I can understand the importance of reminding people annually via GERS that independence would have been economically very damaging for Scotland.

I feel, however, framing the arguments for and against Scotland's place in the Union in purely financial terms is counter-productive:

1) people don't always pay attention to economics in any great detail e.g EU referendum
2) economic circumstances can fluctuate. Arguing against independence on the basis of falling oil revenues means for consistency you should have supported independence when oil was discovered in the 70s
3) greater resentment from people living in England that they are being fleeced (which they are, Barnett is based on population and not need)
4) Barnett/fiscal transfers create no incentive among Scottish politicians to contribute to the UK's deficit/debt reduction plan (can you remember a single Scottish politician, including the Tories, ever talking about reducing Scotland's deficit in a speech or manifesto ever?)
5) Finally and most importantly it is highly unlikely any UK Government will ever grant a 2nd referendum ever, at least not for 30-40 years.

Even in the unlikely event the SNP won another majority in either Scottish or UK elections, the UK Government will say we had the vote, no need for a rerun. There's not much to gain for them and 2 thirds of the landmass (which many UK aristocrats/businesses own privately) and some priceless strategic military locations to lose.

Personally, the best argument for the UK is a shared sense of escapism and hedonism amongst the drudgery. That's what UK culture has been built on. For the most part life in the UK is about static wages, long hours, wealth inequality, unaffordable housing, long and expensive commutes and those are just the lucky ones to have all of this.

So people escape the boredom, crap weather, underinvested public transport, concrete jungles, rich and distant political elites via pop culture; usually pubs and clubs, football, clothes and music.

Unfortunately for pro-UK politicians and supporters, this is largely intangible and difficult to measure. But Merseybeat, Northern Soul, Ska, Punk, Indie, Acid House and Britpop have made the bad times worthwhile. Mancs, Geordies, Cockneys, Brummies, Scousers, Scots, Welsh and Irish have danced and had a good time alongside each other to forget.

My biggest fear about Brexit is that irrespective of the economics, we are going to miss the vibrant influx of culture that generations of immigrants have brought here.

We are going to deny our children and grandchildren the freedoms to travel on one passport to dozens of great European distinations with just a beat up old car or a student railcard from Barcelona, the Balerics, Berlin and the rest. Cheap holidays in the sun is one of the few things people in the UK have to look forward to every year. If that goes because we reject freedom of movement, it will be a sad day.