The Fraser of Allander Institute at the University of Strathclyde says of itself:
Fraser of Allander Institute is Scotland's leading independent economic research institute with over 40 years of experience in real-world policy analysis.
Since 1975, the Fraser has developed an unrivalled knowledge and understanding of the Scottish economy and is Scotland's expert authority on economic policy issues.
Whether this is true or not is something I am not qualified to comment upon. What I do know is that In a blog published late last week, David Comerford of that Institute noted that:
On the back of this, we have been asked about the significance of the ‘for' vs. ‘in' methodology GERS uses to calculate public spending.
He then added:
Some have argued that Scotland is short-changed — be that via spending on Defence or Whitehall civil servants — and that too much of what is allocated to Scotland in GERS is actually spent elsewhere in the UK.
The purpose of this blog is not to address that particular argument directly but instead to simply ask — if true — what could the potential impacts be on the net Scottish fiscal position?
I am amused by the post. It is very obviously a response to my commentary on this issue, but, not for the first time, the Fraser of Allander has published a blog in response to my suggestions without acknowledging my work or referencing my piece. I could speculate on why this is, and won't bother doing so. Instead I will note that this is not an adequate or even appropriate response to my latest criticism of Government Expenditure and Revenue Scotland (to which the Institute is particularly attached since its director was previously responsible for the production of GERS for seven years). There are three reasons why this is the case.
First, my criticism was that GERS did not apply the accruals principle correctly. I used the arguments to which The Fraser refers as examples of this, but to illustrate a point.
Second, as a result I suggested that this meant that GERS was inherently unreliable since its methodology was fundamentally flawed.
Third, I suggested it needed reform as a result.
The Fraser has, in a fashion quite peculiar to some in Scotland, sought to suggest that even if it is wrong GERS must still be retained. I won't quote at length from a piece, largely because it obfuscates from the moment it sets out to ignore the real issue raised. Instead I will draw the conclusions that it actually reaches, but does not state.
First it agrees that income is omitted from the GERS statement as a result of failing to account of expenditure for Scotland spent elsewhere which is recognised as Scottish spending in GERS but for which no credit is currently given in the income side of the account.
Second, it admits there would be a multiplier effect on this in economies outside Scotland.
Third it admits that Scottish GDP is understated as a result.
Fourth it admits that the Scottish deficit would be reduced if proper taxation account was taken of this issue.
In other words, it agrees that all that I claimed is right. I thank them for that.
That's not how they put it, however. Instead their claim is that the impact would be small. Their precise words are:
Changing assumptions about how much spending is allocated ‘for‘ Scotland or spent ‘in' Scotland in GERS will change the net fiscal position. But any revisions are relatively small.
They add to that:
The idea is an interesting nuance when linking the GERS figures to the constitutional debate. But the “on behalf of” vs “in the territory of” issue does not explain the Scottish fiscal position vis-Ã -vis that of the UK as a whole. Of course, it is possible to close this gap by explicitly reducing certain expenditures or by assuming higher tax revenues — either through increased rates or faster growth. Others will argue though, that in the context of independence, there may be additional costs. The debates will no doubt continue.
They certainly will. Let me offer some suggestions as to how that debate should go now. No doubt it might continue on 19 September when both Graeme Roy, director of The Fraser of Allander and I are giving evidence on this issue in the Scottish parliament.
First, the assumption that he data in GERS is good enough, implicit in this blog and in all the Fraser of Allander commentary is not good enough. As the consultant on GERS to the Scottish parliament Economy, Jobs and Fair Work committee has said:
Compared to ONS statisticians, it's more likely that Scottish Government statisticians would describe themselves as more opportunistic, but relatively powerless, statistical scavengers. The economic statistics published by the Scottish Government tend to pick out relevant data from UK wide surveys and administrative data where possible.
It is ludicrous that this is the case, and as ludicrous that GERS is ONS accredited in that case. The data sources have to be reviewed, especially when it comes to income. My evidence to the Committee (which will be published soon) addresses that issue and makes it clear that doing so is possible.
Second, the methodology has to be revised if, as the Fraser of Allander agree, it is wrong. No accountant could use the GERS methodology without risking the allegation of professional misconduct, in my opinion. Comparing two wholly different bases of accounting for income and expenditure, as it does, is simply unacceptable. It should not be in Scottish national accounting in that case.
Third, how the resulting data is to be made more useful needs to be on the agenda. Right now it seems as though GERS is produced as the basis for an annual kick-about on the state of the Scottish economy and not as the basis for economic decision making. The trouble is that economic decision making is now devolved to Scotland but the data it has to use for the task is no better than that which was available when that was not the case.
If the Fraser of Allander really is what it claims to be then I would expect it to address these issues and not waste its time defending the indefensible current state of play, which seems to be its preferred current option as if all it is concerned about is defending its past work, much of which is based on GERS and related data. That may be the core of its current intellectual property and status, to which my response is that it has to get over the fact that what it has done to date may no longer be good enough. What it needs to do is move the debate on and embrace whatever comes with doing so. I look forward to seeing the evidence that this might happen. But it's not available as yet.
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Foa and Scot statititians seem to end any discution with ” the difference would be minimal. But if you add Accruals and multiplier to Scotland it has to come out of Englands balance sheet bringing Scotlands deficit down and Englands up.
In other words, as I said
Hi Richard, it’s “David”, not “Douglas” – happy to have a chat offline if you’d like? You have my mail…
Apologies
Corrected
Will mail
Richard
Your blog on FAI has a number of dismissive statements, such as –
“But the “on behalf of” vs “in the territory of” issue does not explain the Scottish fiscal position vis-Ã -vis that of the UK as a whole.”
Did anyone claim it explain’s that? What it does, as clearly expressed by Richard, is cast further doubt on the methodology of GERS.
Can you tell me how the “confidence intervals” published in GERS for some of the revenue streams were derived? A reference to the evaluation would be ideal.
Great work, Richard!
Wonderful to behold how you dismantle (and expose) all that they produce. I mean, it’s kinda like they’re trying to hide something from us..
Thank you, God, for the gift of this boffin
At last a breath of fresh air in the Scottish economic debate. No realistic economic assessments can be make about the current Scottish economy, far less any future economy in an independent Scotland unless we have clear and reliable figures to work from, and clearly GERS does not provide this.
Otherwise all we will get, as we are getting now, is ignorant politicians using statistics as a crude propaganda tool.
Thanks Richard, logic demands that we get accurate figures if we want a serious economic debate
Great work Richard. Enjoyed your gig (again) at the Edbookfest.
I have emailed Peter Murrell re your latest analysis and comments re Fraser of Allander. Have the Scottish government ever asked you to work for them or is your relationship with Labour an issue?
Keep up the good work
I have never been asked to work in these issues
I have had no funding fir doing so
I guess that makes me more impartial than average
Statistical mechanics was developed with precision in physics in the 19th century where it was simply not possible to conduct the analysis by direct examination of the evidence, gas molecules, that were too small and fast moving to observe. It is this background to statistical success, and the power of the method, that gave the current prestige to the use of statistics across the board, that the discipline now enjoys. At the same time, the complexities and uncertainties arising from the use of statistics in what are termed the ‘social sciences’ are much more awkward to address than in physics; I can say this because there have been problems with the use of statistics in research that have been publicly acknowledged in a number of disciplines; including economics. This, I would have thought, is undeniable.
The use of statistics in GERS is both wholesale, and is used where the facts, the evidence, could be directly examined (they are not, in principle, unobservables); at least in many cases. We do not generally expect a company to estimate its turnover statistically, deriving it indirectly from an examination of data for the total market sector. It would not be acceptable, even if a statistician was pleased with the accuracy of the estimate he/she could make. We expect the company data to be directly derived, even if it costs money to do it.
The fundamental decision in GERS not to examine the underlying facts, but rely solely on estimation and statistics is not a scientific one, but essentially political, and one that is quite simply unnecessary, except in support of political convenience. I consider the appeal made by the defenders of GERS that the difference in results is small, does not address the real issue. I also think the statisticians are being sucked into defending the indefensible; for doing the professional job they were long required to do; but which should not have been asked of them, and which may now be set aside. There is still a job for them to do, but not to produce the current GERS.
The argument is NOT about whether or not Scotland would be better or worse off, or look better or worse off; it is rather a more serious matter: that Scotland does not have access to the underlying facts (quite basic facts) about the Scottish economy that should be identified and sought directly. Where these facts are not separately identifiable, the detailed selection of the precise statistical methodology used in establishing the allocation (wherever still required) should also be made public, on a closely scrutinised, item-by-item basis. Statisticians can operate both openly and effectively here.
GERS is not satisfactory, and while it is understandable that it has been carefully and no doubt assiduously produced, making the best of it in a climate led by what was politically acceptable for decades, it is not good enough for Scotland now, either inside the UK or EU, or outside.
I agree with you
You get it
John, spot on, as Richard has observed.
The problem is that the methodology for accounting of governance in the UK does not reflect the post-devolution arrangements for governance or the attendant need for accountability of the relevant governments across all the nations of the UK. You couldn’t run a successful sweetie shop without accurate knowledge of where the money is being made and spent, yet UK and devolved governments are expected to do so.
While The Scottish Government probably can’t currently verify all the required prime data from own sources while it remains part of a highly-centralised UK, it should seriously consider setting up its own improved data collection and record-keeping with a view to challenging the GERS estimates/allocations. This would then provide a basis for demanding expansion of prime data collection as well as a foundation for a system of government accounting should Scotland ever gain independence. In the meantime, as I’ve already suggested, the Scottish Government should attach a health warning to GERS detailing the values & percentages of total of verifiable income and costs as well as indicating clearly the sources of all entries.
Critics and political opponents would undoubtedly complain about duplication of admin, waste of public funds etc, but the status quo is transparently unfit for purpose and devolved governments can scarcely be held accountable when there is so little reliable, factual evidence available on which to judge their performance.
Ken
Agreed John, specifically this,
“The fundamental decision in GERS not to examine the underlying facts, but rely solely on estimation and statistics is not a scientific one, but essentially political, and one that is quite simply unnecessary, except in support of political convenience.”
This brings to mind an Upton Sinclair quote,
“It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
Also, a thank you to Richard for exposing the inexactidudes of GERS.
Such a shame that David (not Douglas) seems to see you as a threat to their good work/reputation rather than recognising GERS obvious flaws and trying together to approach that issue in the best way possible.
I tried to explain to various defenders of our annual guesstimates that it doesn’t really matter how competent an accountant/economist is or whether they’re Nobel prize winners or not, it all simply comes back to the information presented to them and their source.
This is not a dig at our Scottish statisticians, this is a demand that our Scottish Government insists that we receive in-depth & exact information that we need in order to produce a set of accounts that actually mean something. One would have thought that the Fraser of Allander would have jumped at the chance of your expertise and your input?
So on behalf of me and quite a few others. thank you for all your great work, Richard.
Thanks
Excellent stuff. Well said Richard.
Thank you Richard for ALL your work against ALL your detractors in exposing the fraudulence of the GERS con and misinformation.
And thanks also to John S Warren to highlight the usage , whether by design ( deliberate obfuscation ) or by lack of provable information when that information can be accessed through endeavour , that permits guesstimates to become acceptable within a section of the scientific community when they have a dog in the race , also Robin who challenges the FAI on their motives for going along with this FARCE
I extracted these quotes from the David Comerford Blog to which you refer above (on ‘for’ v. ‘in’ Scotland):
“The ‘for’ methodology apportions spending to Scotland if the benefit is thought to accrue to residents living in Scotland.
The ‘in’ methodology would apportion spending — no matter who benefited — on the basis of whether or not the money was actually spent somewhere in Scotland.”
Notice the difference: ‘in’ apportions the spend on where it is spent. This is both clear and in most cases unambiguous. In the case of ‘for’, the apportionment is based on the benefit “thought to accrue to residents living in Scotland”. Even with the most generous will in the world, the two options do not stand on the same level ground of precision, accuracy and objectivity; even before anyone starts on the process of “thought”, however that is to be justified, or where that exercise is likely to go.
Apples and oranges come to mind
You are right
And all the GERS defenders continue to miss the point
Especially dear old Kevin Hague, who I note is now being very rude about me to distract from the fact that he just can’t or won’t get the argument
I will not reply in kind
Great Job, Richard. Your continual Economic Education of both Unionists and Nationalist, has been very enlightening. Best wishes for your presentation at Holyrood.
As for Kevin, well simple ignorance can be corrected by Information,
but arrogant stupidity is however, incurable.
Kevin who?
Note on methodology: A number of these figures have been plucked out of the air, thrown in the Spin drier to freshen them up a bit, then subjected to some totally inappropriate statistical tests to give scientific credibility and finally we arrived at the number we first thought of. Although some of the figures are completely random estimations any corrections on the basis of real data would still result in the number we first thought of.
A quick take on David Comerford’s article, I’l re-read it at leisure.
The carrier built in Scotland, mentioned as a big ticket item sailing down the Firth of Forth and therefore “self-explanatory” in terms of balancing off defence spending per capita. But it ain’t. It was even assembled from blocks built around the UK not just in Scotland, that gives a hulk of metal – a hull – which is as much use as a scrapped fishing boat. So add on the propulsion – built where? Lifts – where? Deck paint – where? Navigation, fire-control, fire-fighting, a complete breakdown, and what proportion of that whatever, £3.3 billion, spending is IN Scotland, to give us economic benefit? Not 100%, that’s for sure, nowhere near.
Second, the carriers won’t lead to further orders for the class abroad, leading to more economic activity. But for the F35-B the UK as a tier 1 partner (or some such name) gets 14% of all 3,000 F35-Bs on the order books, of which 138 are for the UK. We will be “charged” 8.3% of this. But in terms of economic mulitpliers, the 3,000 order book @ 14% mnus the 138 the UK pays for itself, gives the UK a massive profit over the years to complete build, and it;s likely there will be more.
Where’s Scotland’s share of that profit in GERS? If we’re being charged for 8.3% of the cost of 138, where’s our 8.3% economic mulitplier profit over the coming years on the other 2,862? Hey, the OTHER side of the balance sheet? The FoAI does know surely that balance cheets [1] should add up to 0? But the F35-B is not being built in Scotland, same as the Typhoon Eurofighter (Preston).
The FoAI article started on the basis that such multipliers were negligible, and set out to “prove” it in a few lines. I personally would be ashamed of such a shoddy piece of work.
[1] “cheets” was a typo but seems singularly appropriate
“gets 14% of all 3,000 F35-Bs”
correct that to “gets a 14% part for all of the 3,000 F35-Bs”
I saw somewhere that Ireland had a GDP of £80 billion more than Scotland. With a smaller population and very little natural resources in comparison to Scotland, surely that gives the lie to accepting GERS as anything other than a devious Tory device to keep Scotland under the thumb of Westminster.
Irish GDP is deeply misleading because of the tax haven located there
To be honest, like the majority of the population, I have not got a clue what you or the Fraser of Allander institute are talking about but I do know that I need truth not lies and the Unionists rely on my ignorance of such matters to keep Scotland under the heel England.
More power to you for exposing the lies!
So – accruals. I guess the nearest in one way I can get to understanding that is cash accounting, for VAT purposes, But perhaps of more general interest is the following, something I was involved with in a previous life, and which is in fact of use in my own current micro business, though not applied strictly or even formally.
It’s the idea that a department of a company such as the post / courier / distribution for say an online sales company is a profit centre, NOT a cost centre.
One of the purposes for this for hugely big enormous companies is so that they can consider outsourcing parts of the organisation, to save money or office space, or even to “concentrate on their core business”. So companies (often foolishly in my opinion) outsource order fulfilment, or warehousing.
Doing internal accounting by profit centre as opposed to cost, gives a sound basis for the comparison of outsourcing, but can also lead to better motivation in what, otherwise, is considered an overhead of doing business, and therefore perhaps not worthy of investment. So for instance in a simple case, if a gismo is sold for £50, and P&P including labour is £5, the P&P is 10% of item price (ignoring VAT). Similarly the gizmos are bought, delivered, unpacked and stored in a warehouse, and the cost of that is reckoned to be £2.50 per gizmo – 5%. The company has a third party quote for fulfilment straight from their warehouse, of £6 – a clear savings of 3%. Should the company go for it?
But as a profit centre, the astute P&P manager notices that there are trucks and trolleys that move the goods from the warehouse that he or she is being charged for soley, rather than shared, and the computer system is also used by the after-sales team. After pushing for and getting accounting adjustments, the cost works out to be actually £4.50. If they are “charging” the company £5, then there’s a clear profit of £0.50 – a 10% profit margin, going into the company’s coffers.
Meanwhile the warehouse does something similar, as the trade sales office and pickup point is actually in one corner of the warehouse. Though the gizmo item price is still £2.50, overall they are achieving internally a profit by charging trade sales, an amount which represents £1 per gizmo, for a resulting cost of £1.50 – a nett profit of 40% on the £2.50 they are charging as a profit centre.
Suddenly the picture is very different from the point of view of outsourcing the order fulfilment.
Not a perfect example, but if Scotland was accounted for as a profit centre of the UK, and Wales, Northern Ireland and those regions that get a “deficit” similarly, I think the overall picture of the UK would look very different, and GERS would be oot the windae, as would the recent ONS regions “deficit” table.
Amused and you hit the issue – that this could all be a giant fudge that the statisticians are still taking at face value
And I do know all about the 2007 revisions
Thanks. I forgot to make the point that as a cost centre, the post and pack department effectively runs a 100% deficit (well, loss) because it has no revenue, whereas as a profit centre, it runs a 10% profit, because it has revenue. Even if “illustrative” as is GERS itself.
Kevin Hague has not only been rude, he’s also fudged the issue by misreading every one of your arguments. See my exposé at
http://www.scotlandisdifferent.wordpress.com
Thanks
But I suggest it’s not worth wasting your time
There are better arguments to have
I had a look at the 15/16 GERS excel spreadsheet last week. I was genuinely very surprised to find that the fourth sheet contains the UKs government spending figures – there are many more ‘Westminster’ numbers in there than there are ‘Holyrood’ numbers. These ‘Westminster’ figures underpin the GERS spending calculation – with costs applied to Scotland on a pro rata basis. This is a lazy, remote place to begin from.
The FoA! director Graeme Roy has described GERS as ‘Scotland as a mini part of the UK’ or words to that effect
He’s right
FofAl seem to defending the unionist position. Disappointing conduct for an independent think tank
As they scramble around trying to talk down the effect of the missing revenue they say this.
“Others will argue though, that in the context of independence, there may be additional costs.”
And equally ‘others’ would say the these additional costs would create additional revenue for iScotland, and an independent think tank would understand that you need to talk about both together.
Unless of course the FofAl are assuming the multiplier is zero.