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GERS really is CRAP

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It was largely by accident that I became a commentator on the Scottish government's Government Expenditure and Revenue Scotland (GERS) statement about 18 months ago. I dislike poor accounting, and GERS is very poor accounting because it fails to use the same basis for accounting for revenue and expenditure, which builds in an automatic, and I think significant, bias to overstate the Scottish government deficit. And the statement does not also accurately reflect anything that might remotely represent the true consequences of decision making that might happen if Scotland was to be independent. It admits this in the small print. Most forget it when coming to comment. A detailed critique is here: I won't repeat it.

This morning the Scottish government has published the latest GERS data, for the year to 31 March 2018. Three things stand out.

The first is that the method for calculation has not changed. It is still as flawed as ever.

The result is that, secondly, it is still claimed that Scotland is doing terribly compared to the rest of the UK:

According to the data Scotland is now doing very slightly better than the whole of the UK at the time of the 2008 financial crisis. That, however, is nonsense.  If the data was produced correctly what it would show is that Scotland is doing better than most parts of the UK but is doing vastly worse, as is everywhere else, than the south-east of England, including  London. The divide is not between Scotland and the rest of the UK, as all the GERS charts imply,  but is instead between the south-east of England and the rest of the UK.

And this matters. UK  economic policy is a run for the benefit of the south-east of England;  its taxes are structured to appease them;  much of government expenditure is there because it includes the capital;  and expenditure decided upon to  suit the voter in the south-east of England is apportioned to Scotland as if it was policy to benefit that country, which quite often it is not. In that case all these comparisons are simply wrong, and it is time the Scottish government said so. Part of good accounting is choosing good comparables with which to contrast reported data: the GERS team is letting Scotland down by not choosing to make the appropriate choices in this area.

Third, there is the issue of data quality to consider.  I have in the past suggested that GERS is CRAP. CRAP  in the way that I use it here as a technical term: it stands for 'completely rubbish approximations'. And table B.2,  published this morning,  confirms this to be true. Look at the table of comparisons for revisions to Scottish and UK data and you will see that, as always happens,  there are some revisions to UK data but the revisions to Scottish data are very much bigger in proportion, and the largest overall UK provision actually relates to a Scottish tax. In other words, GERS really is CRAP.

It is time the Scottish government invested in better national income accounting for the country, which I contend is possible. GERS is not a basis for forecasting Scotland's future, and one of the weaknesses of the Growth Commission is that it presumes that it is when that is a wholly inappropriate assumption to make. There is a duty to identify what really happens in Scotland so that there can be informed debate on the country's future. GERS does not do that. It's time to have the right data, and GERS is not it.

Beware GDP: it can be seriously misleading

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I am reposting this from the Commonspace website, which is mainly targeted at a Scottish audience, who published it yesterday afternoon:

ECONOMIC EXPERTS Professor Richard Murphy and Dr Craig Dalzell have joined the Scottish Green Party in responding to the latest Gross Domestic Product (GDP) figures by arguing that better measures are needed if the true state of economic wellbeing – felt in the pockets of the population – is to be reflected.

The Scottish Government published the GDP figures for the third quarter of 2017 on Wednesday, which indicate that the Scottish economy grew by 0.2 per cent in real terms compared to the previous three months. Compared with the last three months of 2016, the economy has grown by 0.6 per cent.

The GDP per person remained the same, with zero per cent growth.

Broken down by industry, the output in the services sector grew by 0.2 per cent, and by 1.2 per cent in the production sector, while output in the construction sector fell by 2.9 per cent.

The Scottish Government has presented the statistics as positive due to the overall growth, while opponents in Labour and the Conservative Party have criticised the SNP for allowing Scotland to “lag behind” the rest of the UK, where GDP since the final quarter of last year has grown by 1.7 per cent.

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However, GDP is far from universally accepted as the most effective measure of economic growth, for a number of reasons.

Speaking to CommonSpace, political economist and tax expert Professor Richard Murphy suggested that both the accuracy of the data, and its usefulness from the perspective of how the economy is impacting on people’s wages, are dubious.

Murphy said: “There will, no doubt, be those saying that low GDP growth (and none in terms of GDP per head) is bad news for Scotland. This, though, assumes that, first of all the GDP data is right, and second that GDP matters.

“There is no way we can be sure that the GDP data for Scotland is right because the calculation of GDP requires accurate data on imports and exports from Scotland and all experts agree that Scotland does not have that information.

“In that case whether or not the data is accurate depends upon whether or not a fair proportion of estimates to and from Scotland to the rest of the world, as well as to and from the rest of the UK, are correctly estimated.

“I have my doubts about this and explained why to the Scottish Parliament last year. I suggest that it would be wise to share my suspicions.”

Murphy argued that there are other measures which would better reflect how well the economy is doing in tangible terms: “We now know that GDP is a poor indication of well-being. In particular, the share of wages in GDP has been falling steadily over time whilst that of profits has been rising.

“It is the increase in profits that have pushed up UK GDP as a whole - reflecting the activity of the City of London - whilst real wages have been stagnant or falling when adjusted for inflation. If you want to know what is really happening in Scotland look at employment data, average wages and changes in them, and how this data compares to the UK.

“The Scottish Government would be wise to adopt increases in median pay as its economic goal and stop worrying about the nearly meaningless Scottish GDP measure that is beloved only by those who do not seem to have the best interests of Scottish people at heart.”

The left wing and pro-independence think tank Common Weal has long advocated for economic measures which better represent a progressive approach to the economy, arguing that GDP “tends to reinforce the interests of corporations” and drive a policy focussed on improving short term profits.

Head of research at Common Weal, Dr Craig Dalzell, spoke on the subject before the Economy, Jobs and Fair Work Committee at the Scottish Parliament on Tuesday. He explained his view to CommonSpace: “Since the 2008 Financial Crisis there has been a significant decoupling between GDP and wage growth.

“Where wages used to rise in line with GDP, they have been flat or declining in real terms for the past decade with the difference being largely pocketed as company profits or sent overseas.

“The government would be well advised to focus as much on inclusiveness in the economy as they do on growth in and sheer size of overly simplistic measurements such as GDP.”

This view was reflected in the Scottish Green Party’s response to the latest figures. In contrast to the other opposition parties’ suggestion that GDP ought to have been higher, Scottish Greens co-convener Patrick Harvie was critical of the measure itself.

Harvie said: “GDP gives a very limited insight into our economy, when the real figures we should be focusing on are stagnant wages, persistent poverty and the failure to promote low-carbon capital investment.

“More equal societies have successful economies, so if we’re looking for a brighter future, we should be prioritising investment in local services, fully funding an inflation-based pay rise for frontline workers and bringing forward infrastructure spending on sustainable transport, housing and energy projects.”

Its time for the GERS debate to move on: everyone with any sense now agrees that it’s just not good enough

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I have already noted my submission of evidence to the Economy, Jobs and Fair Work Committee of the Scottish Parliament on the quality of Scottish Economic Data.  Given that I will be appearing before the committee I have now, at least briefly, read all the other submissions. Some I will ignore, not because they are not interesting but because they do not touch on the issues in which I am interested but focus instead on local economic data in Scotland. Another, from Common Weal, I will; look at separately because it is so distinct from all the others. My concern here focuses on GERS (Government Expenditure and Revenue Scotland) data, as did my own submission. In this respect the most important submissions in my opinion are those of Margaret Cuthbert, The Fraser of Allander Institute, The Scottish Fiscal Commission and 4-Consulting, who advised the committee. I apologise to those omitted: there is not time to review them all here.

Margaret Cuthbert provides, to me, the most amusing submission, and in some ways the most telling. She says in her summary of that submission:

Despite the appalling and verging on ignorant comment by Richard Marsh in the Sunday Herald that “GERS data is what I technically describe as crap”, GERS data continues to improve. The original quality of the data was comprehensively examined line by line in 1977 and thereafter statisticians in the Scottish Government have made considerable efforts with UK departments to work with them and obtain reliable estimates for Scotland.

In a strange way she makes my case for me. First, the review was in 2007: GERS did not exist in 1977. Second, I made the comment about 'crap' (which I carefully defined as 'completely rubbish approximations') that she says is ignorant . Richard Marsh is director of 4-Consulting. Marsh is a 'crap' (completely rubbish approximation) to Murphy, just as 1977 is to 2007. I am aware, of course, that it could be said that I am nitpicking in saying so, but I am doing so for a reason. The evidence is clear that approximations will not always do. They no more than inadvertently undermine what Margaret Cuthbert has to say here; they massively undermine GERS for reasons I have already explained.

Nor am I in the slightest bit apologetic for using the term crap, to which Margaret (who I have never met) takes offence, I suspect on the grounds that she has been invested in the GERS process. I used it to highlight an issue to draw political and public attention to the significance of a concern that requires the focus of the parliament and the Scottish media. If by doing so the issue got more attention - and the comment reached the front page of the Sunday Herald - I call that a success. I have been involved in the process of seeking change on dry technical issues for a long time. The comment was not ignorant or appalling: it served a purpose and I am unapologetic for that. Sometimes effecting change requires a lack of subtlety: that's the nature of political economics.

What is more it is a purpose Margaret Cuthbert clearly supports. As she says in her submission:

However, it is time to assess what the Scottish Parliament needs as its powers continue to grow. This is particularly the case as the fiscal settlement holds many ill-advised conditions that will now face Scotland.

The first problem is the publication of data by NDPBs and their offshoots where it is nigh on impossible to find out how the data given are derived. What checks are being made by the relevant central government departments on the quality of the data and its definitional fit with main government statistical data regarding the economy?

Second, there are departments within the Scottish government that produce statistics where it is difficult to understand what the statistics actually mean, where it is difficult to get a handle from the staff themselves on the meaning of the data, and it is therefore wide open for reporters and non-government researchers to get the wrong picture.

Third, there are departments and NDPBs which produce statistics that are equivalent to their turning a handle year after year, and where the statistics given shine no light on the performance of Scotland, particularly with relation to where the government says it wants to be going.

Fourth, and possibly due to policy groups within government, the frontline publications covering economic matters have tended to become glossies showing how well the government is doing.

And, finally, there is the personal experience that statistics collected, collated and analysed do not appear to be given due importance when the policy makers set to and devise their policies. It is difficult to find mention in the published policy documents of detail of how, in describing the creation of new policies and their implementation, the policy people have been using statistics to help define their policy, or how they are going to collect and publish statistics to monitor and evaluate their policies.

The role of both economics and statistics in the Scottish Government needs to be substantially extended. There is a need for a strong central statistics unit that is capable of fighting its corner for resources and relevant place in the decision making of policy, and the necessary schedule of monitoring and evaluation.

What can I say? We seem to be singing from the same hymn sheet, especially given the comments in my own submission, noted here. I'd almost say that, despite her comment about me, we're in harmony in saying that the data is just not good enough, because her evidence is that it clearly is not. She also agrees with Common Weal on the need for a statistics unit, which I endorse.

Let me move to the Fraser of Allander Institute then. They say:

Significant progress has been made since devolution to improve the coverage and quality of economic statistics in Scotland. Scotland is much better served than the other devolved nations (and English regions) in terms of economic statistics. However, there is work still to be done. In particular –

 There are a number of gaps – for example, we lack robust statistics on things like Gross National Income, capital investment, inter-regional trade and prices that independent governments would routinely collect.

 Some of the data that underpin core elements of Scottish economic statistics rely upon apportionment of UK figures rather than bottom-up Scottish-specific data. Whilst this is understandable given resource constraints, more be-spoke estimates would be beneficial.

 Like the UK as a whole, there remain ongoing challenges in sampling and response rates to surveys. Some response rates – e.g. the Labour Force – are falling whilst for others – e.g. the Living Cost and Food Survey – the sample size for Scotland is small.

The Scottish Government should be commended for investing in a distinctly ‘Scottish’ economic statistics unit in government. Further investment would be welcome however, particularly in the light of the new economic and fiscal powers coming to Holyrood.

New investment on its own will not deliver the step-change that many people would like to see. For this, other reforms – for example around how UK businesses report their activities – would be needed. At the same time, as ONS continue to make better use of administrative data it is important that data sharing and access arrangements are established to enable the Scottish Government to also benefit from these reforms.

Let's be clear about this. What the FAI is saying is that there are serious gaps in Scottish economic data, and what data there is may not be Scottish data at all, but apportionments of unknown quality from the UK, whilst many of the estimates used may be unreliable because of small sample sizes. I hate to suggest that they're agreeing with what I said, but candidly I cannot see that any other conclusion can be reached. And they do in fact imply support for many of the recommendations I make in my submission on improving data capture: I just spell it out in detail and they do not.

I also think it important to note just what the FAI say really is missing:

That being said, there are a number of important gaps.

 Gross National Income (GNI) – is arguably a preferable measure of economic prosperity than GDP. This has only been produced once – on an experimental basis – for Scotland. GNI is particularly difficult to measure and will require a much better understanding of how income is produced and distributed across the Scottish economy. Data on financial flows in and out of Scotland are largely unknown. We have for example, despite its importance in the policy landscape, very little in the way of robust data on international investment (FDI) to Scotland.

 Prices – there are no separate price indices for Scotland. This is a limitation in compiling real-terms series such as trends in earnings, poverty or changes in government budgets.

 Imports – there are only limited official estimates of imports to Scotland from overseas or the UK. In the National Accounts, rather than being measured directly they are estimated as a balancing (residual) item.  Capital investment – there is little in the way of data on investment for Scotland either in the aggregate or by sector.

 Treatment of the North Sea – the Scottish Government has invested significantly to improve its coverage of the North Sea. This has included more robust estimates of the share of revenues raised from the profits of offshore oil and gas operators, output, investment and exports. However, much less is known about the linkages between the onshore and offshore Scottish economies.

 Longitudinal data – there is very limited data on a longitudinal basis of Scottish households – particularly in terms of issues like income, wealth and spending

If I might be blunt, what that really admits is that much of the key data required to appraise the macroeconomy of Scotland simply does not exist. And to go back to my very first comment on GERS, in March this year, that cannot be by chance: someone in London decided not to supply that information. We again seem to be in remarkable agreement.

So what about the Scottish Fiscal Commission? From April 2017 the Scottish Fiscal Commission has been responsible for producing the independent and official economic and fiscal forecasts for Scotland that will support Parliament’s Budget process. They say:

 In general, the statistics available for Scotland are more comprehensive than available in other countries and regions of the UK and this is to be welcomed.

 We accept that the depth and breadth of available economic statistics are to some extent limited by the surveys that are conducted in Scotland on both the household and business side. These surveys could be expanded, or the way data is collected could be changed, but this is an expensive and long-term ambition, and may have implications for burden on businesses.

 Given the information that is available, and accepting the uncertainty inherent in it, the Commission strongly encourages the Scottish Government to produce more information in certain instances which would support the Commission’s activities.

 We believe more could also be gained by considering statistics that could be published by the ONS based on existing surveys, and again this is something the Scottish Government should be pursuing.

 The Scottish Government should also seek to access administrative data, such as that held by HMRC, to ensure that the statistics produced are the best quality possible given the limitations on the survey data collected.

To the first comment, I admit I just despair of the data available elsewhere. To the others, yet again it seems that the points I have made are agreed: there are poor approximations, limited surveys and limited data access available to support what information Scotland gets. I hate to say that the result might be what I define as 'crap', but I think that possible.

And so to 4-Consulting. They say in the summary to their report:

It‟s likely that Scottish Government statisticians would describe themselves as more opportunistic, but relatively powerless, statistical scavengers. It is important that Scotland takes up the challenge laid down by the Bean Review and looks at new approaches to develop the next generation of economic statistics.

Do I need add more?

In summary, I inadvertently joined this debate and seem to have helped fuel it since doing so. I do not regret that fact, if it is true. During it I have been subject to considerable criticism. That seems to be continuing, as noted above. Back in March in my first comment on this issue I made these points on Scottish economic data:

Why might the data be misstated? First, there simply isn’t enough data to reliably estimate Scottish GDP. We have no figures for where sales take place in the UK, for example. VAT returns are an utterly unreliable source for this: a UK company does not submit data separately on sales in Scotland from elsewhere. The same is largely true on spending. So forget Scottish GDP data: we just don’t know what it is.

Then there are tax revenues. That VAT point still stands. And the truth is Scottish Revenue are struggling to be sure who is resident in Scotland whilst on corporation tax there is no way of knowing where revenues are earned at present. And so on.

So we come to spending. The allocation of government spending to Scotland will be arbitrary: how much defence should it pay, for example? Or interest? The arbitrary areas will be too great for this number to really be reliable.

In which case what of Scottish imports and exports? Let’s be blunt: no one has a clue what crosses the borders from Scotland to England and Northern Ireland. These numbers are literally made up in that case.

So two further issues, both serious. One is Westminster could pretty much manipulate this data at will. And two, nothing will be the same if Scotland leaves: a government of an independent Scotland will have a very different structure to that imposed now.

My point? Simply this: if there is to be meaningful debate on this issue then the SNP have a lot of work to do to produce best possible data.

The reference to the SNP is as the government as well as the party. What I can say now is that the submissions made to this committee suggest that I was right to make those comments in March and that, as I said then, a lot more work is needed to produce reliable data. I trust that those who have said otherwise (who did not seem keen to submit evidence, I note, despite having the opportunity to do so) will now rest their case. Let's move on and discuss what might be done about it, as I did in my submission. 

My proposals for improving Scottish Economic Data suggest there could be life after GERS

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I am appearing before the Economy, Jobs and Fair Work Committee of the Scottish Parliament at Holyrood on September 19. The committee is reviewing the quality of Scottish economic data with a focus in these issues:

  • Accuracy (how reliable is the data)
  • Utility (how useful is it)
  • Interpretation (how to make sense of it)
  • Scrutiny (what are we measuring and does it encourage effective scrutiny)

That committee published the submissions made in advance of that hearing yesterday, my own included. My submission is available in sightly extended form is also available here (some introductory material has been removed by the committee).

In that submission I have focused on a number of what I think are the key issues, with an emphasis on GERS (because  this is the issue on which I have focussed to date).

The first is the argument, now fairly well rehearsed on this blog, that the methodology of this statement, which claims to be based in the accruals principle but which it is not, renders the data reported not just misleading but quite simply wrong.

Second, having noted that this effectively renders GERS redundant as useful economic information I focus on the reforms that are required. In this area it is only the proposals from me and Common Weal that seem to really address this fundamental issue (I will be reviewing the other submissions in another blog, soon).

I took the opportunity to lay out quite specific proposals on data could be improved now. I was not making a proposal for an independent Scotland: that is another, separate issue. As I said in my submission my concern was to suggest data that:

  1. Reveals either its source or the body responsible for managing it;
  2. Indicates the degree of control over that issue that any decision maker might have as a result;
  3. Suggests the degree of uncertainty in the data in question;
  4. Provides comparisons between periods;
  5. Provides comparisons with equivalent data sources;
  6. Is designed to be accessible.

In every case the aim is to make the data accessible to those who need to use it. As a result I suggested the following reforms that I hope show that my interest in this issue is wholly positive and solution focussed:

 

Scottish Government Expenditure

With regard to GERS reporting should start with expenditure because:

  • Government exists to spend and not to raise revenue and so spending data is of higher priority;
  • More spending is under Scottish control than not at present;
  • Most scrutiny will be on this issue as a result.

For each category of spend GERS should report:

  1. Who has made the spend i.e.:
    • The Scottish government;
    • A Scottish local authority;
    • Another Scottish agency;
    • The UK government or an agency of it in Scotland;
    • The UK government or an agency outside Scotland;
  2. The spend by each agency;
  3. The budget set by the government or agency making the spend for that item or a note that no budget was set and that the spend in question is uncontrolled;
  4. A comparison between spend and actual by agency unless there is no budget when a note of the uncontrolled spend should be made instead;
  5. A comparison in total for the sum spent, budget and actual spending with the addition of a note on uncontrolled spending in total.
  6. A comparison with the previous year;
  7. Any narrative notes required to explain:
    • Any changes in the basis of calculating sums noted over time and their impact;
    • Any item requiring additional information to ensure proper scrutiny can be undertaken;
    • The degree to which the sum expended is based on actual data and the extent to which it is based on estimates and the considered likelihood that the estimates in question are robust, with reasons stated;
    • The estimated impact in terms of tax revenue and GDP lost to Scotland as a result of expenditure being incurred outside and not within the country and how this sum has been estimated (the ‘multiplier effect’ of spending outside Scotland);
  8. If the expenditure is on capital items these should be categorised sufficiently to allow ensure that the nature of the spend can be readily understood by someone subjecting the spend to scrutiny with the following additional information being disclosed:
    • How these sums will be accounted for in the UK’s national accounts;
    • The estimated life of the assets in question;
    • Any specific capital funding (such as PFI) associated with the acquisition of these assets; the sum raised as capital funding as a result and the total cost to be incurred over the life of the assets in paying for the items funded during the year;
    • The depreciation to be charged over each of the following five years as a result of the spend incurred in the current year.
  9. If the spend relates to capital sums other than the acquisition of assets:
    • The nature of the spend;
    • The reason why it was incurred;
    • Any associated costs e.g. in terminating financial arrangements.

If this data is presented the design criteria should be met.

Reporting Scottish government income

With regard to Scottish government income the most important issues to be addressed are:

  • Identifying income in Scotland;
  • Identifying income for Scotland directly arising on activity undertaken for it outside the country;
  • Identifying the revenue lost to Scotland because of the multiplier effect of economic activity for Scotland being undertaken outside the country.

At present of these three only the first is attempted, and, as has already been noted, it is usually done by extrapolation from reports for the UK as a whole. As the consultant to this review noted[i]:

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.

This failure to collect relevant, reliable, complete, comparable and comprehensible data that this represents is the single highest priority issue that the Scottish parliament needs to address with regard to the Scottish economic data. Unless there is a willingness to address this issue no reliable economic data for Scotland will be available.

This will, in particular, mean that the Scottish government agree with the UK government and with HM Revenue & Customs that the UK national tax authority be asked to:

  1. Reliably identify those persons tax resident in Scotland, which is a task that is underway but that cannot be said to have been completed as yet;
  2. Reliably identify businesses trading in Scotland, which tax gap data suggests is an incomplete process[ii];
  3. Reliably identify those companies that are trading in Scotland, for which there is very little available evidence at present and where there are numerous issues with the management by the Registrar of Companies of the Scottish company register, which along with the register for the UK as a whole sees more than 400,000 companies ‘struck off’ each year, mainly for failing to comply with their regulatory obligations to file accounts and other data[iii];
  4. Reliably apportion the income of these people and entities to Scotland over the whole range of taxes for which they might be liable, only a few of which are directly administered in Scotland;
  5. Appropriately apportion the cost of tax reliefs and allowances (such as the more straightforward ones for pensions and ISAs, to the much more complicated issues of inheritance tax reliefs for agricultural land) to Scotland so that the cost of these to the Scottish economy can be appraised and decisions can be taken on them.

This requires change in HMRC procedure with regard to tax returns. If the principles of country-by-country reporting as now adopted by the OECD[iv] were applied to the apportionment of data between UK constituent countries then a sufficiently reliable apportionment formula for sales and business income could be computed if the following were disclosed on tax returns:

  1. Sales within or from each constituent country of the UK were required to be disclosed on a tax return. For businesses turning over less than, say, £10 million with more than ninety per cent of their activities within one constituent country this disclosure may not be necessary. This data is not onerous data to collect: almost all existing accounting software systems could be easily adapted to supply it;
  2. Sales to each constituent country of the UK were required to be disclosed on a tax return, with similar points to those made in the previous paragraph being repeated in this case;
  3. The location by constituent country of the staff employed (on an averaged basis) by the business during the year;
  4. The location of the tangible assets of the business by constituent country during the year: again, if more than 90% were in one country no further disclosure would be needed.

Using this data:

  1. VAT data could be directly apportioned to constituent countries on a destination basis;
  2. Income tax and corporation tax revenues from trade could either be directly apportioned in many cases or could be apportioned on a weighted formula basis in others using the principles of unitary taxation[v]. The suggested weighting would be to allocate one third of tax adjusted income weighted on sales by origin, one third by location of employees and one third by location of assets. For large groups the weighting would have to be based on consolidated data;
  3. Income tax from employment and investment income could be directly attributed, as could most other direct taxes;
  4. National insurance liabilities could be appropriately apportioned.

That said:

  1. Existing methodologies could be used for devolved taxes;
  2. Other methodologies would need to be reviewed to bring them into line with this new method of working.

The result would be that an internationally accepted method of estimating the location of where economic value arises from tax data would be in use for attributing revenues to Scotland and other UK countries. Simplified data might assist English regional accounting.

This would then only need the estimated tax due on expenditure for Scotland to be calculated, along with its multiplier effect. Detailed methodologies for this would not be difficult to construct.

It should however be noted that the appraisal of Scottish government revenue on this basis should be explicitly adjusted to allow for:

  1. The tax gap, i.e. the revenue which HMRC is unable to collect for Scotland;
  2. The cost of allowances and reliefs, especially if decisions upon those allowances and reliefs are not made in Scotland.

This means that both the gross potential and net actual tax revenues for Scotland could also be estimated, resulting in an estimate of the policy and compliance tax gaps for Scotland also being available, allowing functional decision making on the resources to be allocated to tackling such issues to be made within Scotland when at present it has almost no say on such matters.

Reporting surpluses or deficits

The reporting of surpluses and deficits for Scotland has been undertaken to date by comparing accrued incomes with accrued expenditure, with or without allowance for capital spending depending upon the balance reported. As has been noted there are deficiencies in this approach which space does not allow to be fully addressed. It would however, and in summary, be desirable that any new statement of this type be supported by:

  1. A Scottish balance sheet, but if this could not be prepared, then,
  2. A statement on the movement in the net investment made in government funded infrastructure in Scotland during the period, and
  3. A statement of how the surplus or deficit reported impacts on the liabilities of the Scottish government, Scottish local government, other Scottish government agencies and other government agencies and the likely impact that these liabilities (if any) might have on the agencies in question.

To ensure that this data can be properly appraised the impact of funding accounted for within any GERS statement resulting in any enhanced asset worth in Scotland, whether tangible or intangible, must also be estimated so that the net impact of spending on likely future income streams can be appraised. Only then is appropriate information for genuine economic decision making likely to be available for use by those working on these issues in Scotland.

[i] http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/Economic_statistics_report.pdf page 14

[ii] https://www.gov.uk/government/collections/measuring-tax-gaps

[iii] http://www.taxresearch.org.uk/Documents/Intheshade.pdf

[iv] http://www.oecd.org/tax/automatic-exchange/about-automatic-exchange/country-by-country-reporting.htm

[v] https://www.taxjustice.net/2014/01/14/towards-unitary-taxation-transnational-corporations-sol-picciotto/

My thanks to the Fraser of Allander for agreeing I am right on GERS. Now let’s have the debate on what to do about it

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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-à-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.

GERS: is this why it always says the Scottish deficit is so large?

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I have been continually bemused by the fact that GERS - Government Expenditure and Revenue Scotland - and its equivalent data for Wales and Northern Ireland - says that Scotland runs a deficit so  much larger in proportionate terms than that for the UK as a whole. The current GERS data is as follows:

Proportionately the Scottish deficit is suggested to be, after North Sea revenue is taken into account, 3.45 times that of the UK as a whole. The trend is meant to be growing, but that's broadly speaking the impact of oil revenue decline. The figure is, however, picked on by some commentators to show that Scotland is unable to meet its own costs and is subsidised by the rest of the UK.

I have been ruminating on this. What follows is speculation at present: think of it as an idea put out for peer review right now and not a final argument.

First, a few more facts. Start with revenues:

It will be noted how insignificant oil revenues now are. It will also be noted that it's suggested that Scotland collects about the same share as the UK as a whole, give or take North Sea oil and GDP. Per head though the figure is slightly different:

Until 2013 Scotland collected more per head than the rest of the UK, Now it collects less: this is an obvious reason why the scale of its deficit appears to be growing.

It is however said that the real problem is in spending. These are the totals:

And this is spending per head:

Revenues per head may look slightly adrift, but here things look really awry: it's always said Scotland outspends the rest of the UK as a result of what's called the Barnett Formula.  Shoulders are shrugged as a consequence and the apparent deficit in Scotland is accepted as a fact. But I want to speculate for a moment on whether this is entirely appropriate.

Much, but not all of my criticism of GERS has focussed on the fact that almost all the significant revenue figures are estimates based on either data extrapolation of the whole of the UK or on relatively small samples for Scotland meaning that I think that there is doubt about whether all the major tax revenues are fairly stated. I have also on occasion questioned why it is appropriate to apportion some costs to Scotland. But when I was reading GERS this year another thought occurred to me on the expenditure side of the equation. This is the note in GERS that got me thinking:

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.

The methodology note on the GERS website provides a detailed discussion of the methodologies and datasets used to undertake this task.

The emphasis on for and in by use of italics is in the original.

Might I say now that I have read the GERS methodology notes with care? Might I add that I know they are accounting adjustments to both income and expenditure (many of which are the equal and opposite of each other)? Might I also add that right now I cannot see that they explain in any way the matter I refer to below? Nor, as far as I can see, does anything in the detailed methodology notes on expenditure and income. And then can I note the following statement in the GERS income methodology note:

These data are presented on an accruals basis ... The international standards for National Accounts and Government Finance Statistics use the accruals basis rather than a cash approach. This is because accruals accounting reflects a more accurate picture of when revenue is due and spending occurs than the more volatile alternative of cash, which, for example, records when bills are settled rather than when the expenditure occurs.

An accruals basis, according to the main GERS statement, means:

Accruals: the accounting convention whereby an expenditure or revenue is recorded at the time when it has been incurred or earned rather than when the money is paid or received.

Now I hate to be an accounting pedant here, but I am not sure I agree. Let me offer a third party view, found using Google on a web site called Accounting Coach. It says:

Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.

As an accountant I will say straight away that this second version is what accruals really is, and not what GERS says it is. And this matters, and could explain why GERS appears to sell Scotland so short. That is because the GERS version of accruals accounting treats income and expenditure as independent variables even though it then goes on to compare them when computing a deficit. So in GERS income is treated on an accruals basis and so is spending in the strict sense that it is not cash flow that is declared in GERS but sums receivable and payable. So far, so good: in accounting terms this makes sense.

But accruals also requires that the expenses be those recorded to incur the income. Or, perhaps more accurately in government accounting terms, the income shoukd be that received as a result of the spend since, as a matter of fact, national income accounting shows that government spending is a part of GDP and is then a driver of tax revenue, and not the other way round.

This is where my new problem arises with GERS. I agree that a significant part of the spending in GERS - at least sixty per cent of it - is devolved spending managed by the Scottish government and unsurprisingly as a result almost entirely spent in Scotland.

And of course I agree that some of the spending by the UK government for the supposed benefit of Scotland is also spent in Scotland. There are defence establishments, for example, in the country.

But the point that some spending for the benefit of Scotland is not spent in Scotland would not need to be made if it was not true. I have perused the GERS data and the GERS data set and admit I cannot be sure I can determine the sum in question with complete accuracy at present: I stressed at the outset that this is not a finished piece of work.  The best estimate appears to be that the sum in question is unlikely to exceed £10 billion, but I stress, this will need refining.

The point then is this: a significant sum is spent for but not in Scotland. The cost is recorded as Scottish. But because the version of accruals accounting in GERS is a distortion of what that accounting concept actually requires, which is that costs and revenues be matched, the tax paid as a result of that spend does not appear to be credited to the Scottish tax account. Instead it is credited where the activity takes place.

Take an example of spending on the civil service in London charged to Scotland in GERS. The cost is in GERS. But where is the revenue? That's in south east England.

If that is the case, and I think it is, then I would suggest that the accounting base used for GERS is misleading, and the distorted view of accruals accounting as defined for GERS might suggest that this is  by design.

If GERS was to present a true picture of the Scottish income and spending arising as a result of activity for the government  then not only can costs from the rest of the U.K. be attributed to Scotland but so too should  the tax resulting from them be attributed as well.

Actually, it's rather more than a basic basis of attribution that is required. What we know, after all, is that government spending has what is called a multiplier effect. In other words the impact of the spend ripples out into the economy because, of course, the income recipient of that spending does in turn spend what they earn. And the recipient of that spend then spends, and so on. And if a lot of government spending for Scotland is actually spent outisde the country - and it may well be - the revenue side of GERS may be seriously deflated and have no real connection with spending side of GERS at all under the accounting convention adopted because not only is the first and direct stage of tax collected not attributed to Scotland but nor either is its multiplier imoact, which may be much larger.

I stress, I can't be sure as yet that this explains why the Scottish deficit (and come to that the Welsh deficit ) is so disproportionately stated. But I can say three things.

First, it needs to be confirmed whether the tax paid on spending for Scotland is credited to GERS. Incidentally, the adjustment the other way would be tiny.

Second, the sum in question  needs to be calculated accurately, as does its multiplier effect.

Third, if the revenue in question is not credited then it is entirely reasonable to say that the accounting basis for GERS is flawed and that it is very likely to seriously overstate the Scottish deficit as a result. That would be because the reason why Scotland is so consistently reported to be dependent on the rest of the U.K. is at least in part because the rest of the U.K. takes tax revenue that should be credited to Scotland and would be if Scotland was really in charge of its own affairs.

I look forward to informed comment, please.

GERS 2017: why it remains irrelevant to Scottish decision making

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I have been asked for my comments on GERS 2017 - the Government Expenditure and Revenue Scotland statement, of which the latest version was published this morning.

To be candid, in many ways I have little to say to add to what I have already said on this issue. All my reservations about GERS remain. On the revenue side the vast majority of estimates are just that i.e. they are extrapolations from UK data that assume Scotland is a mini part of the UK as a whole, and I do not think that a useful basis for assessment. Some changes, e.g. on oil revenues, have taken place, with modest up-ratings in Scottish revenues as a result. Some devolved taxes reflect Scottish source data now: I accept that the latter in an improvement.

But, and I stress the point: what GERS still shows is the improbable likelihood that the Scotland is disproportionately responsible for the UK deficit when it is very clear that many decisions for which Scotland is asked to contribute would not be paid by Scotland as a whole if it had the choice. Trident and much of the defence budget is an obvious example, but there are others on the spending side, where Scottish demography would, for example, suggest that a very different pension system might be appropriate for Scotland when compared to the rest of the UK.

As for income, Scotland has very limited control over the income attributed to it and the tax system in operation, which heavily biases towards wealth and which is very large business friendly, may well be one it would not choose. In addition, I would hope a Scottish government would pursue the tax gap much more vigorously than HMRC does anywhere, and not least in Scotland, where it intends to withdraw from all local services above a line between Edinburgh and Glasgow, leaving some in the country many hundreds of miles from a tax office, and its scrutiny.

This leaves all aspects of GERS distorted by a decision making process centred in London which has devolved little real control of much of what happens to Scotland by keeping a tight rein on purse strings and strictly limiting the use of devolved tax powers either by statute or by the way in which powers have been granted. This lack of real interest is reflected in the fact that so little of the critical data in GERS is really collected in Scotland but has to be abstracted from that for the UK as a whole.

GERS is, then, a statistical anomaly prepared without consideration for what really happens in Scotland and as such provides almost no real indication as to what its potential might be, whilst leaving the Scottish government with no reliable data on which to make economic decisions. It is this that annoys me. Scotland has been granted the form of devolution but has no way to assess what that really means. GERS does then, without in any way questioning the integrity of those who prepare it, at best represent a continuing mechanism for control of the Scottish economic and so political agenda for London and that's precisely why in its current form it serves no useful purpose for those really interested in Scotland being managed for its own benefit within the UK.

Scotland is the only part of the UK running a consistent trade surplus

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As some readers of the blog will know I have been taking an interest in the data underpinning Scottish economic reporting this year. As a continuation of this theme I have, over the last few days, been aware of the reports on the Wings Over Scotland blog that UK Regional Trade Data has been restated to allocate to Scotland the benefit of oil sales previously allocated to the head offices of the companies making the sales in the past, and treated as unallocated for the purposes of the statistics as a result.

Let me start by saying that I am aware of all the controversy that surrounds the Wings blog. Just, however, because almost any mention of this blog riles every Scottish unionist does not mean that what is written on it is wrong: this report seems reliable; Scottish oil data does seem to have been consistently under-reported by HMRC who are responsible for these statistics, which also seems to rather prove my hypothesis that Scotland has been supplied with poor quality data by the UK government as a whole.

I have been asked by some people to establish whether this means the GERS statement for Scotland is wrong, and right now I am not sure of the answer to that. That is because the GERS data for the North Sea is estimated by academics according to the GERS methodology note and it is not clear what influence the Regional Trade Data has on that estimate. The best that can be concluded then is that the data as a whole, as well as GERS,  remains as unclear and unreliable as ever.

What I did happen to note form the Regional Trade Data is this (extracted from the excel download available here):

Note that only Scotland runs a consistent trade surplus according to the Regional Trade Data.

Now, don't get too excited: this excludes services, and is notoriously unreliable (as noted already, the data can include errors running to billions of pounds and still get published) but for those with an interest in Scottish economics the implication is at least interesting. The persistent claim that Scotland has a weak economy and is  unable to sustain itself is not supported by this data. The chance that it may now and certainly did, support the UK economy as a whole, is, however supported.

This will need more work. I offer it as a curiosity for now, but one that certainly needs to be investigated further.

Scotland really does need its own VAT and tax data if GERS is to be meaningful

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The FT featured an article on Thursday that I thought relevant to my recent debate on the quality of Scottish economic data. The Telegraph then came in with another spin on the issue.

What both noted was that the Office for National Statistics has now realised that their survey basis for calculating GDP can be quite misleading on occasion and that VAT and PAYE based data might be considerably more useful. I was, of course, making this same point when suggesting that the absence of any dedicated VAT and other tax data for Scotland was a severe impediment to its effective self management if its own economy in the contributions I made to debate.

There were those (oddly, and I think perversely) of mainly Unionist persuasion who seemed to take issue with me on this, claiming that I should be quite happy with the use of what I think to be poor quality apportioned UK data for the purposes of Scottish economic management. Respectfully, I now suggest my points have been made by the ONS for me. Not only is  survey data not as good as VAT and tax data but we also know as a matter of fact that reliable VAT and PAYE data is not available for Scotland, meaning it will have to make do with second rate information. That is, until it takes matters into its own hands, of course, whether a devolved or independent state.