{"id":8933,"date":"2019-08-22T10:36:39","date_gmt":"2019-08-22T10:36:39","guid":{"rendered":"https:\/\/sceptical.scot\/staging\/?p=8933"},"modified":"2026-04-18T19:34:31","modified_gmt":"2026-04-18T19:34:31","slug":"gers-2019-and-indyref2","status":"publish","type":"post","link":"https:\/\/sceptical.scot\/staging\/2019\/08\/gers-2019-and-indyref2\/","title":{"rendered":"GERS 2019 and indyref2"},"content":{"rendered":"\n

The size of Scotland\u2019s inherited fiscal deficit, and how best to deal with it is likely to remain a highly relevant issue if the prospect of a second independence referendum rises. Unlike the currency issue this topic is one that has been little debated by those who favour independence.<\/strong><\/p><\/blockquote>\n\n\n\n

The Scottish Government has published the latest edition of GERS, covering financial years 2014-15 to 2018-19. Here we look at (i) the latest results for Scotland\u2019s fiscal balance (i.e. tax revenues less public expenditure), (ii) project forward Scotland\u2019s absolute and relative (to the UK) fiscal balance up to 2023-24, and (iii) examine the implications for a potential Second Independence Referendum.<\/p>\n\n\n\n

Key Points<\/h2>\n\n\n\n

\u2022 Scotland\u2019s overall fiscal balance improved by \u00a31.1 billion in 2018-19, from \u00a3-13.8 billion to \u00a3-12.6 billion. However, revisions to earlier years means that the balance for 2017-18 worsened, by just over \u00a30.3 billion.  <\/p>\n\n\n\n

\u2022 Relative to the size of the economy, Scotland\u2019s deficit amounted to 7.0% of GDP, while the UK\u2019s amounted to 1.1% of GDP. <\/p>\n\n\n\n

\u2022 Scotland\u2019s relatively poorer position vs the UK can be explained by the fact that while its population share is 8.2%, its share of onshore Revenues is below this, at 7.8%, and its share of Expenditure is above it, at 9.3%. <\/p>\n\n\n\n

\u2022 Looking forward, the latest OBR forecasts suggest that Scotland\u2019s fiscal balance will worsen a little and then hover just below the \u00a3-13 billion mark up to 2023-24 (i.e. around 6% of GDP). <\/p>\n\n\n\n

 \u2022 North Sea revenue prospects remain subdued. The latest OBR forecast is of between \u00a31 and 2 billion a year, based on around $63 a barrel. That range is well below the near \u00a37.5 billion average seen over the period 2005-06 to 2011-12. <\/p>\n\n\n\n

\u2022 The latest GERS figures confirm that any Second Independence Referendum needs to involve greater debate on how an underlying fiscal deficit position, of close to 6% of GDP, might be lowered to a more manageable one, i.e. of 3% or under of GDP (a reduction of \u00a36 to 12 billion). The latest fiscal deficit projections are over \u00a31 billion higher than estimated at the time of the Sustainable Growth Commission work, as a result of new data and a variety of revisions.<\/p>\n\n\n\n

\u2022 This debate will need to address whether, and if so how, such an adjustment could be managed without a return to a period of public spending austerity, both in general terms and specifically with regards to non-NHS budgets.<\/p>\n\n\n\n

Scotland\u2019s fiscal balance, 2014-15 to 2018-19 (see Table 1 A)<\/h3>\n\n\n\n

–           Scotland\u2019s\noverall fiscal balance (i.e. total Scottish revenues (onshore plus offshore)\nless total Scottish public expenditure) improved by \u00a31.1 billion in 2018-19, to\nstand at \u00a3-12.6 billion;<\/p>\n\n\n\n

–           Over the 5\nyears shown in GERS, Scotland had a notably worse fiscal deficit position (in\nterms of the size of the deficit as a share of GDP) than the UK in every year.\nIn the past, when offshore revenues were high, the reverse has been the case,\nalthough the last time this occurred was in 2011-12;<\/p>\n\n\n\n

–           Scotland\u2019s share of UK expenditure has remained fairly steady at around 9.2 to 9.3% in recent years. However, its share of (onshore) tax revenues has declined from 8.2% to 7.8%.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Scotland\u2019s projected fiscal balance, 2019-20 to 2023-24 (see\nTable 1 B) <\/h3>\n\n\n\n

Projections of Scotland\u2019s overall fiscal balance beyond the\nyears shown in GERS have been made using the following assumptions:  <\/p>\n\n\n\n

The main points of interest to emerge from the forecasts\nare:<\/p>\n\n\n\n

–           Scotland\u2019s\noverall fiscal balance is projected to be just below the \u00a3-13 billion mark by\n2023-24, equivalent to 6% of GDP.<\/p>\n\n\n\n

–           Relative to\nthe UK, Scotland\u2019s fiscal position remains significantly worse (in terms of the\nsize of the deficit as a share of GDP) than the UK. This equates to a\ndifferential of around \u00a32,100 per person, or to an adjustment of almost \u00a312\nbillion that would be needed for Scotland to reach the same fiscal position as\nthe UK.<\/p>\n\n\n\n

–           Scotland\u2019s\nfuture budget position will, in part, be influenced by whether or not its share\nof UK onshore revenues continues to decline. Of late, this share has declined\nfrom 8.2% in 2012-13 (just below Scotland\u2019s population share) to 7.7% in\n2016-17, although it has recovered a little since (to 7.8%). The decline has\nbeen fairly widespread, including with respect to: Income Tax; National\nInsurance contributions and VAT. The forecasts in Table 1 B assumes that\nScotland\u2019s revenue share does not continue to fall, but if this assumption\nturns out to be overly optimistic then Scotland\u2019s fiscal balance would worsen\nfurther.<\/p>\n\n\n\n

Future North Sea revenues remain highly uncertain. The\nestimates used in Table 1 B are based on the latest OBR forecasts (March 2019)\nwhich assume an oil price of around $63 (\u00a347) a barrel, similar to the price\nseen over the last few months. Even if the price were to rise to $100 a barrel\nit is estimated (in the most recent (2015) Scottish Government analysis) that\nNSOR would still be under \u00a33 billion. <\/p>\n\n\n\n

(Note: Chart 1 shows a one-off increase in the UK and\nScottish deficits in 2019-20. This is due to UK government tax policy changes\nresulting in a re-profiling of tax payments that reduces revenues for that\nyear.) <\/p>\n\n\n\n

Implications for a Second Referendum Debate <\/h2>\n\n\n\n

As well as acting as a record of the Scottish Government\u2019s\nexisting fiscal position, GERS is also the best starting point from which to\nproject forward in order to understand some of the public finance implications\nof independence. <\/p>\n\n\n\n

The future fiscal position of Scotland at the point of\nindependence – based on existing UK, Scottish and EU tax and spend patterns –\nis illustrated in Tables 1B and 2B. On the assumption that independence took\nplace in 2023-24 then Scotland would inherit a fiscal deficit of nearly \u00a313\nbillion (or 6% of GDP). <\/p>\n\n\n\n

The anticipated size of this deficit is not particularly\ncontroversial. The figures shown here are roughly in line with those estimated\nby other commentators (e.g. the Institute for Fiscal Affairs (IFS)) and with\nthose utilised in the SNP\u2019s Sustainable Growth Commission report (SGCR) as an\nindependent Scotland\u2019s fiscal starting point. In fact, due to the emergence of\nnew data and data revisions the Scottish fiscal balance estimates shown here\n(in both absolute and relative to the UK terms) are higher than those used in\nthe SGCR, by around \u00a31.5 billion (although roughly the same as a % of GDP).\nAgain, such shifts are largely non controversial and there may be further\nchanges, potentially in either direction, to come. <\/p>\n\n\n\n

Such a level of inherited deficit would need to be brought\ndown to a more manageable level. However, what this target level should be is\nopen to debate and the final choice will significantly affect the size of the\nadjustment made. For example: <\/p>\n\n\n\n

–           the shift\nfrom a fiscal deficit of 6% of GDP to one of around 3% is equivalent to around\na \u00a36.5 billion reduction in the Scottish deficit (as shown in Table 2 B).\n(Note: a 3% target is seen by some commentators as necessary in order to reach\na \u2018stable\u2019 fiscal position, i.e. one which could be comfortably financed);<\/p>\n\n\n\n

–           the shift\nfrom 6% of GDP to the UK average of 0.5% of GDP is equivalent to a near \u00a312\nbillion reduction (again, as shown in Table 2 B). (Note: this equates to the\nsame level of deficit per head as seen at the UK level.)<\/p>\n\n\n\n

The latter figure (\u00a312 billion) is what is effectively being lost as a result of Scottish independence from the UK.  (In other words, \u00a312 billion is the extra funding Scotland receives from being part of the UK, due in part to higher needs based on criteria such as geography, economic and social conditions, etc and partly on non-needs based historical accident.) The former figure (\u00a36.5 billion) is a sub-set of this, i.e. it involves a \u00a36.5 billion reduction in the level of the deficit along with moving to a higher on-going deficit level than is seen for the UK (i.e. up from 0.5% to 3% of GDP).<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

While these starting point estimates are fairly widely\naccepted, how any such  \u2018sustainable\u2019\nlevel of annual fiscal deficit might be reached is much more controversial. <\/p>\n\n\n\n

The SGCR looked in some detail at how this starting point might be altered at the point of separation (see Full Report<\/a>). (Note: the SGCR included projections made by this author to judge what that starting point might be expected to be.) Commentary on the strengths and weaknesses of the SGCR analysis can be found in the Scottish Trends paper \u2018Reflections on the SNP\u2019s Sustainable Growth Commission Report\u2019 <\/a>. Furthermore, the Scottish Trends analysis paper \u2018Potential impact of Brexit analysis and negotiations on any second Scottish independence referendum\u2019 (see HERE<\/a>) looks at further ways in which fiscal adjustments might be made. <\/p>\n\n\n\n

While there are a variety of ways in which the inherited\nfiscal deficit position might be reduced, many of these will be subject to\nnegotiation at the point of separation. As Brexit has shown, the degree to\nwhich any such proposals come to fruition, either at all or on the scale\noriginally foreseen, is difficult to predict in advance.  <\/p>\n\n\n\n

All of this means that there is a lot at play for in terms\nof i) how much by, and how quickly, to reduce the inherited deficit, and ii)\nthe degree to which this adjustment should be spread between: increased\ntaxation; reduced public spending, and; increased borrowing. <\/p>\n\n\n\n

As the political debate starts to swing away from the\noutcomes of Brexit and towards the possible implications of Scottish\nindependence, it seems inevitable that greater attention will be focussed on\nthese difficult questions. <\/p>\n\n\n\n

So far the post SGCR discussion has been dominated by querying the choice of currency in an independent Scotland and there has been little debate over how best to reduce the size of the fiscal deficit. However, what deficit reduction strategy should apply will clearly be a controversial question, and potentially influential on the outcome of the referendum itself. Greater clarity needs to emerge on this vital issue. If it does not, then pressure may grow for a second, confirmatory, vote, i.e. once a fuller understanding of the implications of independence emerges.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n
\"\"<\/figure>\n\n\n\n

First published by the author on <\/em>Scottish Trends<\/em><\/a><\/p>\n\n\n\n

Image courtesy of Ewan Morrison<\/em><\/p>\n\n\n\n

Further reading: Fraser of Allander Institute blog below and here<\/a><\/p>\n\n\n\n

Common Space<\/a>, Gap between spending and revenue fell by \u00a31bn<\/p>\n\n\n\n

Tom Gordon<\/a>, The Herald, Deficit six times bigger than UK’s<\/p>\n\n\n\n

Richard Murphy,<\/a> Tax Research UK, 21 August 2019<\/p>\n\n\n\n

Update on GERS 2019 analysis <\/h2>\n\n\n\n

Some of the commentary on yesterday’s publication was confused in its thinking and it is worthwhile explaining why. <\/strong><\/p>\n\n\n\n

1) There was some suspicion as to why, taken together, the\ncombined deficit for Scotland (\u00a3-12.6 billion for 2018-19) and for Wales\n(\u00a3-13.7 billion for 2017-18, see Welsh Fiscal Analysis estimates, 29\/7\/2019) is\ngreater than the fiscal deficit for the UK as a whole (\u00a3-23 billion in 2018-19).<\/p>\n\n\n\n

In fact, this is not surprising. Latest estimates by the ONS (28\/05\/2019) for 2017-18 showed UK constituent country fiscal balances (inc. North Sea oil revenues distributed on geographic basis) as:<\/p>\n\n\n\n

\u2022          UK: \u00a3-41.8\nbillion<\/p>\n\n\n\n

\u2022          England:\n\u00a3-5.7 billion<\/p>\n\n\n\n

\u2022          Wales:\n\u00a3-13.7 billion<\/p>\n\n\n\n

\u2022          Scotland:\n\u00a3-13.3 billion<\/p>\n\n\n\n

\u2022          Northern\nIreland: \u00a3-9.2 billion<\/p>\n\n\n\n

Given that the UK fiscal balance is estimated to have\nimproved by \u00a319 billion in 2018-19, this implies projected UK constituent\ncountry fiscal balances for 2018-19 of approximately (rounded to the nearest\nbillion):<\/p>\n\n\n\n

\u2022          UK: \u00a3-23\nbillion<\/p>\n\n\n\n

\u2022          England:\n\u00a3+11 billion<\/p>\n\n\n\n

\u2022          Wales: \u00a3-13\nbillion<\/p>\n\n\n\n

\u2022          Scotland:\n\u00a3-12 billion<\/p>\n\n\n\n

\u2022          Northern\nIreland: \u00a3-9 billion<\/p>\n\n\n\n

Hence, the fact that Scotland and Wales (and Northern Ireland) have a combined deficit above that of the UK is explained by the fact that England has moved into a position of fiscal surplus. <\/p>\n\n\n\n

2) There was also confusion by some over how Scotland, with\na population share of just 8.2% of the UK as a whole, could account for over\n50% of the UK deficit. However, such a situation is perfectly possible and\nindeed to be expected under certain conditions.<\/p>\n\n\n\n

When a balance (in this case the fiscal balance) is arrived at by aggregating across more than one element (in this case the four UK constituent countries) then, as that balance approaches zero, it becomes more and more likely that a) some of the contributors will be in a positive balance position and others in a negative balance position, and thus b) that these balance shares may be very different to population or GDP or any other shares, as is happening in this case (indeed a particular contributor’s deficit could easily be over 100% of the aggregate figure).<\/p>\n\n\n\n

A similar \u2018distortion\u2019 applies in other circumstances. For example, when looking at the relative position of two countries with differing, but linked (like Scotland and the UK) fiscal deficits then when Country A\u2019s fiscal deficit stands at 12% of GDP and Country B\u2019s stands at 6%, then Country A\u2019s is double that of Country B\u2019s. Should both countries’ deficits be falling over time, near proportionately, then when Country A\u2019s gets to 6%, Country B\u2019s will be below 1%, at which point it could be claimed that Country A\u2019s deficit is at least six times higher than Country B\u2019s. While this is true, it is largely irrelevant when analysing the situation. The reality is that both deficits are falling but when Country B is in balance Country A will still have a deficit. To take this example to its extreme, if the UK has a \u00a31 deficit and Scotland still has a \u00a312 billion pound deficit then Scotland\u2019s is higher by a near infinite amount! (Equally, point 1 above highlights the fact that, in 2018-19 England most likely has a surplus while Scotland has a deficit, which makes this type of \u2018comparison of deficits\u2019 redundant.)<\/p>\n\n\n\n

Further update in light of political comments:<\/h2>\n\n\n\n

A\nspokesperson for Finance Secretary Derek Mackay yesterday stated that \u201cGERS\nalso shows our deficit reduction is ahead of the Growth Commission\u2019s projections.\u201d\n<\/p>\n\n\n\n

Furthermore, SNP depute leader Keith Brown stated: \u201cThis year, the deficit fell by one per cent. So, on that trajectory, it would only take us less than three years from now to get to the Growth Commission target of three per cent.” <\/p>\n\n\n\n

While\nboth statements are technically correct they give a false impression of what is\nactually happening.<\/p>\n\n\n\n

With regards to the first statement, the Growth Commission projections referred to were made by myself, taken from a Scottish Trends paper of March 2017 (IFS estimates were also referred to). The table below compares those estimates with the actual out-turn:<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Table\n1 shows that the Scottish fiscal balance, as a % of GDP, is indeed better than\nI had projected it would be. However, it also shows:<\/p>\n\n\n\n

–      Unlike the UK deficit, the Scottish fiscal\ndeficit is worse in cash terms than was predicted (\u00a312.6 billion rather than\n\u00a312.2 billion) in 2017. However, Scottish GDP is higher than expected and so\nthe deficit as a % of GDP has fallen;<\/p>\n\n\n\n

–      The reason the Scottish deficit is higher\nis because the Scottish share of onshore UK revenues has fallen from an\nestimate of 8% to an out-turn of 7.8% while the Scottish share of expenditure\nhas risen from an estimate of 9.1% to an out-turn of 9.3%. However, some of\nthis deterioration has been offset by an improvement in North Sea oil revenues,\nup from \u00a30.7 billion to \u00a31.4 billion. (Note, however, that the Growth\nCommission works from the basis that it is the onshore balance that should be\ntargeted.);<\/p>\n\n\n\n

–      As a result of these shifts, the UK fiscal balance, as a % of GDP, has improved by even more than the Scottish fiscal balance, +0.8% of GDP for the UK vs 0.4% for Scotland. One interpretation of this could be that the goal of the UK Government to move towards fiscal balance has been more effectively achieved than was expected in 2017.<\/p>\n\n\n\n

One swallow…<\/h2>\n\n\n\n

With regards to the second statement, using such a simple extrapolation of one year’s figures is, unsurprisingly, unwise. The premise on which Mr Browns calculation appears to be based is that the UK Government\u2019s fiscal reduction plan is working well and will continue to do so. This is highly questionable. The improvement in UK (and Scottish) revenues in 2018-19 was bigger than expected and may well not continue, leaving aside the one-off slowdown expected in 2019-20. <\/p>\n\n\n\n

One\nnoticeable impact of the various shifts to fiscal balance relevant data since\nthe Growth Commission\u2019s use of Scottish Trends projections is that Scotland\u2019s\nposition relative to the UK has worsened. The impact of moving from being part\nof the UK to being independent, based on the same tax and spend policies, is\nnow estimated to be \u00a311.2 billion, rather than \u00a39.8 billion (both based on the\nfinancial year 2021-22). To be clear, this is not the figure that would need to\nbe adjusted for at the point of independence (by cutting spending, increasing\ntaxes or increasing borrowing), rather it is the effective financial loss of\nmoving from a shared public spending system to an independent one.  <\/p>\n\n\n\n

Scotland’s\nfiscal balance position, and GERS role in understanding it, is a subject where\nthe figures can readily be distorted, so it is worthwhile keeping the\nunderlying picture as clear as possible. This is especially true where\nofficial, government approved, statistics are involved.<\/p>\n\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

‘The comment by the Scottish Finance Secretary at the time of publication that \u201cScotland\u2019s economy and public finances are strong\u201d seems fanciful given any reasonable analysis of recent low economic growth figures and a still high, by international standards, fiscal deficit.’<\/p>\n","protected":false},"author":180,"featured_media":6829,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[319],"tags":[40,41,179],"class_list":["post-8933","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy","tag-devolution","tag-fiscal-framework","tag-scottish-economy"],"_links":{"self":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts\/8933","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/users\/180"}],"replies":[{"embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/comments?post=8933"}],"version-history":[{"count":1,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts\/8933\/revisions"}],"predecessor-version":[{"id":18747,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/posts\/8933\/revisions\/18747"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/media\/6829"}],"wp:attachment":[{"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/media?parent=8933"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/categories?post=8933"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sceptical.scot\/staging\/wp-json\/wp\/v2\/tags?post=8933"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}