I confess that I find the annual GERS debate both compelling and frustrating. Politicians and journalists seem to struggle to make sense of what the figures say, so we are reduced to soundbites from politicians and uninformed point scoring from the media.
And then, out of the blue last year, like the first sign of spring, there was a modest improvement in the quality of the debate. This brought greater scrutiny and understanding of what GERS does and does not tell us. This included David Comerford’s excellent blog post showing the potential effect of recursive revenue on the deficit figure. This drew out the distinction between spending ‘in’ and spending ‘for’ Scotland.
Using the Fraser of Allander’s Input-Output model, Comerford analysed the beneficial impact that recursive revenue would make to the Scottish economy if the spending ‘for’ Scotland actually occurred in Scotland. The answer, based on the 2016/17 GERS figures but an “extreme example” using a “what if” scenario, could theoretically be £3.5 billion or as much as £4.9bn, an acceptable dowry for any newly independent country and reducing the current (notional) ‘deficit’ to 6 percent or 5.2 percent (compared to the UK’s 2.6 per cent).
Most of the focus on GERS is centred on one number – the Scottish deficit. It is this number that the Scottish Daily Express put in large red letters on its front page on 24th August. The deficit is the difference between two larger numbers: the total revenue attributed to Scotland less total public spending, including spending both ‘in’ and ‘for’ Scotland. In 2018, the deficit was £13.4bn which is obtained by subtracting the revenue of £60bn from the total spending of £73.4bn. These two pie charts show the percentage breakdown of these figures.
Reserved taxes
The surprising thing that these charts reveals is the limited degree of control the Scottish Government has over the GERS figures. It turns out that 62.4% (£37.4bn) of Scottish revenue is obtained by taxes that are reserved. Take for example, the revenue obtained by oil and gas. This has shown a modest increase (owing to a rise in oil prices) to £1.26bn. The UK Government chose to offer tax breaks in 2015 and 2016 to aid a struggling industry. Tellingly, the Scottish Government has no direct role in determining the levels of revenue generated through oil and gas or in setting the tax breaks offered to the industry to stimulate recovery. Yet oil and gas revenue is a very significant factor within GERS.
A similar pattern emerges in regard to spending. GERS itself states that 32.6% (£19.5bn) of Scotland’s allotted spending is reserved, meaning Scotland is allocated its fair share of UK spending on a pro rata basis. In addition, the overall amount of the block grant Scotland receives is wholly determined by the UK Government; the role of the Scottish Government is not to set the amount, but only to decide how and where to spend it. So again, the largest part of the GERS figures for spending is determined south of the border.
All this is entirely reasonable. Scotland is in effect a region of the UK, albeit with its own distinctive form of devolved government. However, allegations of poor economic performance cannot be laid solely at the door of the Scottish Government. If anything, the GERS figures reveal how little direct control the Scottish Government actually has over the notional deficit of £13.4bn.
Whose tools?
Curiously, the SNP seems content to appease the public perception that it is responsible for the poor state of Scotland’s finances. Nicola Sturgeon’s comments on the 2018 GERS figures are those of a politician who apparently accepts full responsibility for GERS. And we have an opposition all too ready to lap this up. It seems strange that the SNP is apparently willing to take responsibility for a set of fiscal figures over which it has only modest control. A large part of the toolkit required to stimulate increased revenue through economic growth is reserved, not devolved.
Where does this leave the GERS debate? It suggests that in order to properly address the current fiscal position, Scotland would need much greater control over fiscal matters. The current situation in which the Scottish Government is held to be responsible for something it has limited control over says much more about the polarised state of Scottish politics than it does about the Scottish Government’s ability to run an economy.
The real tragedy here is that this is not some tale about fiscal figures. Behind the numbers are real people, real homes and real businesses. A strong economy contributes to human well-being, health and happiness. When the economy becomes a political football and politicians and the media focus on a blame game, there can only be losers. The UK Government needs to take more ownership for the perceived troubles of the Scottish deficit because it is clearly responsible for many of the revenue and spending decisions that have got us to where we are. The SNP and Nicola Sturgeon must also seek to clear the air by showing how much control and responsibility they actually have, and if they really believe they can do a better job of managing Scotland’s economy, then let’s hear it.
Please also see:
https://fraserofallander.org/scottish-economy/gers/gers-location-location-location/
https://fraserofallander.org/scottish-economy/gers/gers-2017-18/
neil allan says
I would not disagree in general with the blog, but I think the Scottish Government has more control than it is suggested there. The obvious additional expenditures promoted by Holyrood are “free” Care for the elderly, free prescriptions, and “free” tuition fees. In the case of tuition fees, I acknowledgethat the rationing of university and college places makes up most of the difference.
In respect of expenditure, the devolution of most welfare benefits, the largest single bloc of public expenditure, has been postponed at the request of the Scottish Government to 2020/21. Westminster are not to blame. The main lever historically for raising or reducing taxes, tax on earned Income, is now entirely devolved. And the implication that Westminster can ameliorate Scotland’s economy by improving fiscal policy is optimistic: most of such effects are beyond the control of any government.
Ian McEwan says
Hi Neil,
Thanks for the comment. From what we have both said, we are, I think, not that far apart on this one. For me the point about the non-reserved block grant which covers “free” care for the elderly, free prescriptions etc is that the SG only distributes the grant, it has no say over the total amount and therefore not much say in the overall £73.4bn spending figure.
I’m more optimistic than you that fiscal policy and spending decisions can stimulate a struggling economy to some extent at least. The ‘coming home’ of recursive revenue would be a start, if it is anything like the FAI analysis. Ireland is an example of somewhere that has used taxation very effectively to grow its economy, although we might disagree with their approach it has worked. To me, Scotland feels like it is betwixt and between – my gut feeling is that the current devolved settlement is not stable because of this.