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.
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I look forward to Kev’s thoughtful response to you… 😉 keep up the good work…
Kev? Thinks? Oh come on….
Er um…me bad… but he will be screen grabbing this as we speak lol….
I am sure!
https://twitter.com/roguecoder250/status/901162677032157184 Aye…Kev’s taking it very well
I despair
I strongly suspect he does not suspect the consequent argument
Hard to see with a Union Jack tied around your eyes
Richard, I read recently that Ireland has an 8% of share of global whiskey sales with some £2 billion plus receipts for the Irish Government
In contrast, Scotland distilleries enervate 80% of global whiskey sales with taxes of £4 billion going into the UK Treasury as such revenues are taken in England.
Two questions:
– why are UK receipts, relative to market share, so much lower than in
Ireland?
– why are such revenues not allocated to Scotland and used witching the
GERS figures as I can find no reference to them?
My big concern here is I am not quite sure you have the ‘e’s in all the right places
Thereafter, you make a very good place
And I won’t tell you what my tipple might be tonight
As a book-keeper of many years I concur entirely with this.
The entire point of using accruals is to match revenue with revenue expenditure so that accurate profits can be assessed.
If I bill £100 in June and spend £20 in May on the project but don’t get paid until July, my accounts are not
£20 loss for May,
£0 for June and
£100 profit in July,
The correct accounting is that there is £80 profit in June, irrespective of when the cash is received.
If appropriate revenue is not balancing costs then accruals are utterly pointless and potentially deeply misleading.
I’ve been banging on about the very point you make for years. 60% -70% of an employee’s earnings our taxes pay for in Scotland returns in direct or indirect taxes after a year or so. Billions of Scottish (and Welsh) expenditure is spent in England on employees, associated activities etc. where the revenue created (60-70%?) is completely lost as far as the GERS accounts go. Black expenditure if you like, which simultaneously enhances UK revenue making the deficit proportionally much worse.
As you say though, the ripple effects of the lost revenue from Scottish taxes could compound the revenue enderestimates much further.
Iv had a similar thought for a while. All those government, civil service, hmrc tax office, Scotland office, head offices of things like museums, arctic survey, the British this or that which are positioned in South England and London are partly paid by Scotland but England gets the benefit of the wages, taxes and economic multiplier.
I think your very right to try to get this corrected.
If civil servants in Scotland weren’t on the Westminster payroll, complaints about money from Scotland going to England would be valid.
The latest aircraft to join the Royal Navy was partly built in Scotland, and to this day, I hear no complaints from nationalists about the money that ended up in Scotland as part of that project.
I am struggling with your logic
A very simple logic, we have civil servants, based in Scotland, paid for by Westminster, not the Scottish Government, post independence, that stops.
Then the SC has two choices hire or fire.
Thank you Richard.
It is good that this is getting thrashed out by those with more abilities than my gut.
The whole aspect of the spend that Scotland contributes outwith Scotland, and then does not recover any allocation of tax on, never-mind effects of that economic redistribution of that spend within Scotland, has always wound me up somewhat.
Richard,
I have often though that about how the pension costs were assigned to Scotland and from what I can tell from GERS we seem to be assigned 8.5% of the overall pension costs. (I am not accountant or an economist so I could be wrong).
But in Scotland we have a shorter life expectancy than than the UK average, below is an extract from a BBC report on 29th Nov 2016.
“Statistics from the National Records of Scotland put life expectancy at 77.1 years for baby boys born in the past three years, and 81.1 years for girls.
This was two years lower than the UK average for men, and 1.7 years lower than the female average”
So life expectancy for a Scottish male is 14% less than the UK average, which means that 14% of the Scottish male pension bill is not being spent is Scotland and will not benefit from the multiplier affect.
Maybe someone with more accounting knowledge could check this, but on my reckoning that is about £1 billion not being spent in Scotland.
You got it
I have also been saying this….
All of this, however much it amounts to in numerical terms, is down to the fact that Scotland is a region in economic terms. In other words, Scotland does not have a national economy (despite all the good things the Scottish Government has done). If we did, then the distinction between “in” and “for” would disappear and the multiplier would have come home to roost.
Many gyrations have to be performed in the calculations behind GERS to estimate how much Scotland spends and receives. There are further gyrations in QNAS (Quarterly National Accounts Scotland). I wonder if the income and expenditure approaches to GDP in QNAS might help with further analysis of your concerns about how income and spending is represented in GERS. http://www.gov.scot/Topics/Statistics/Browse/Economy/QNA2017Q1
Gordon
Your assumption re the Scottish economy is flawed
Richard
Hi Richard,
I may have been unclear in my earlier post, but I’m not sure why you said “Your assumption re the Scottish economy is flawed”.
When I said that “Scotland does not have a national economy”, I meant that Scotland is not sovereign and therefore lacks control of most of the levers of a proper national economy.
Currently, it also means GERS is subject to the apportionment of ONS data, which may be hiding a multitude of errors.
I also suggested that the additional details provided in QNAS might assist in your investigation.
Regards, George
Pension costs are higher in Scotland because a larger proportion of the population are above pension age. Got nothing to do with life expectancy
How can our pensions costs be higher when life expectancy in Scotland is lower and earnings are lower, thus meaning that Scotland’s State Pension and State Second Pension liabilities should also be lower than the UK average?
How can other social security benefits supposedly cost so much in Scotland when our housing, and thus housing benefit, are so much cheaper than most of the UK and our unemployment is lower than the UK average?
How can our public sector pension costs be so high in GERS when there are a tiny number of well paid civil service jobs in Scotland compared to London and other parts of the UK?
These and other aspects of GERS costs bear little or no relationship to the expenditures in Scotland. Instead, Westminster charges huge amounts to Scotland each year despite such expenditures creating very little economic benefit here.
GERS data cannot be trusted.
Hi,
I am no accountant, so maybe you can help me try to understand this.
The Westminster government buys 100 cars 10 of which are deemed to be Scottish and therefore the Scottish government has the cost of those 10 cars assigned to it.
7 Scottish cars are only driven in England. The tax generated by the use of those cars, fuel duty, road tax and maintenance costs are accrued to the English tax take.
Although the Scottish government pays for all 10 cars no income is derived from the use of 7 of those cars because they are never used in Scotland, leading to an imbalance in the ‘GERS’ figures.
You are right
The answer to this would presumably be transparency in the presentation of the calculations used in GERS, line by line, item by item. I can see no reason why they should be a secret. Your focus rightly is on the statement of the methodology, which of course is often difficult to interpret; but it is only when the actual application of the method is applied to “real” data (or estimates or extrapolations, or guesses) that all the potential problems will be revealed. Unfortunately the taxpayer does not have an independent auditor.
I may add that I do not believe that the public understands the mechanics of the Barnett formula in sufficient depth, or the way it is actually applied by Government, case-by-case; or what exceptions to Barnett may be either assumed or selected. I do not know whether the application of Barnett is fair to all or not, or advantages Scotland or rUK, but that is not my point. There is no reason why the public should not understand precisely how their Government chooses to spend the state’s money.
It is one thing to elect a Government to spend and tax; it is another that government believes it is entitled to keep the details of how it allocates both a state secret. It seems obvious to me that this is unacceptable in the 21st century.
Hi Richard,
This is another very interesting piece, thanks for your work on this.
I’m not an accountant/economist, but Ive seen similar concerns raised in the past over spending on projects of national interest eg HS2 and large London infrastructure projects. Because these are “national” a portion of the expenditure gets attributed to Scotland, Wales etc. But almost all of these projects are in London and the South of england, very few in the North of England, Wales, Scotland. In contrast large projects in these other areas are usually not considered “national” and thus get attributed entirely to wlesh, Scottish expendature e.g. Forth Road Bridge.
This is something I have always wondered about. As far as I understand it the following is the case but please remember I am no economist. Which is something which is abundantly clear if you ever saw my bank accounts.
There is a database of projects that Westminster deems to be of national importance and Scotland is apportioned a percentage of the costs based on population.
Very few of these are located in Scotland.
However, of the hundreds that are listed many, if not most, will never see the light of day but are the costs part of our spending just because they are on the books or is it only when a project is given the go ahead that Scotlands share is apportioned?
Its something I have tried to find out about but cannot find the answer too.
I cannot answer for sure
Let’s call it ” the Great Missing Multiplier Manipulation ” Good work , Richard , good to have you on board.
Fascinating piece. I think you’ve helped me see a bit more clearly what is happening with GERS.
Let me try and see how GERS really should be applied to an iScotland
iScotland spending contains 3 parts
(i) spending IN Scotland
(ii) spending FOR Scotland which will cease at independence Scots (e.g. Trident, HS2)
(iii) spending FOR Scotland which we would need/choose to reproduce in iScotland (e.g. civil service)
On independence (i) remains roughly the same, (ii) vanishes to zero while (iii) remains as spending but now will actually be spent in Scotland and so it starts to generate new revenue in Scotland.
So spending figures goes down by (ii) because it has vanished and the revenues figure rise in line with some factor of (iii). Ergo iScotland’s ‘deficit’ is reduced to something more believable immediately and inevitably because of its new independent status.
I am being too simplistic here or is this the gist of it?
If the above is along the right lines, then it would be good to have some insight into the relative contributions of (i), (ii) and (iii) to the Scottish spending figure.
ps – I think your analysis also explains why London and the South East come out as the only ‘profitable’ regions as the reverse argument must surely apply to them.
Your analysis us spot on
I too want the estimates
Would aggregated deficits for all regions of the UK on this basis add up to more than the deficit for the entire UK? Quite likely they would, but would that illustrate the wrongness of the approach on its own? Or would it simply add fuel to the ‘London and the South-East subsidises everyone else’ point of view?
The latter, in all likelihood
But that would not mean the data was right
It would just represent the view from London and the South East
It seems we now need to be talking about uGERS (u=Union) and iGERS (i=independence). We know that iGERs will be better than uGERs. The question now is by how much?
The formula linking them is iGERs = uGERS – B + xC
where iGERS is the deficit of independent scotland at independence
uGERS is the deficit of Scotland in union before independence
B is spending attributed to Scotland which will be discontinued on indy (e.g. trident HS2)
C is spending which will be brought back home to Scotland on indy (e.g.civil service) which now generates new revenue
x is a multiplier which determines how much revenue is created by the additional public spending
Any suggestions where the necessary figures/estimates might be lurking within the public domain to put some numbers on this?
This seems to me to be such a significant insight because this is an real dividend created by indy. And as soon as scotland goes for indy then we get the dividend. What we then choose to do with indy is another different question? I think this can be a very persuasive argument once some of the unknowns figures in the above formula are pencilled in, because the idea of beginning with a £13 – 15 billion deficit is frightening for many people. To those that will listen, this may well be a genuine breakthrough. It certainly is a new argument to me which clarifies my own thinking.
Thank you!
I agreed your logic
In short, the system does what the system was designed to do. Thanks for that Ian Lang.
Perhaps the best comment this week was this one, from Robin McAlpine:
‘GERS shows us that all sorts of successful independent countries would struggle if forced to become regions of the UK’
Amused
And of course, big ticket items such as defence that are charged proportionately to the the Scottish account – but at the same time as a huge closure of RAF, Army and Navy assets in Scotland tips the balance to deficit even more.
It is time the GERS was scraped and a system based on your findings be employed. If the Scottish Government is responsible for producing these “Annual Accounts” then surely it has the power to change the methodology?
It gas indeed got tgat power
Cue “The nat government is fudging the books!” headlined on the BBC.
Great work Richard.
I have never understood why its so easy to get revenue and expenditure figures for the Celtic fringe countries of the UK but nigh on impossible to get the same figures for England–(to cross refer against) which is always UK#figures. Even trade figures relating to England are impossible to retrieve– online anyway.
GERS apportions around £3.2Bn to Scotland to cover our share of the UK’s national debt interest payments. Is this calculated on a simple population share basis?
A large portion of these interest payments go to UK banks, building societies and pension funds.
This interest is presumably taxable if it assists these organisations in making a profit.
If these organisations are predominantly based in London, then would the tax paid on profits made on payments which are then debited against Scotland in GERS, be credited to England’s income figures?
You are right
This is interesting and should be followed up on (not that I understood much of it. Can you summarize it in one paragraph?)
However, if London does better than most of UK (and let’s face it, London is England’s biggest sector by far), it is likely through arms deals transactions in London markets (arms is biggest London export market), as well as financial fees on foreign banks and businesses, things like that.
http://www.independent.co.uk/news/uk/home-news/britain-is-now-the-second-biggest-arms-dealer-in-the-world-a7225351.html
Are the declining oil revenue figures itself reasonable? I downloaded the “Complete Production History since 1975” spreadsheet from the Oll & Gas authority: https://www.ogauthority.co.uk/data-centre/data-downloads-and-publications/production-data/
Looking at the first “Annual oil production sorted by” sheet, and taking the total offshore production…
… there are annual highs above 140 million tonnes (I believe these figures are in tonnes) in various years in the 80’s and 90’s. Since 2010 it’s been around 50 million – more than 50 million in each of 2015 and 2016. Is current revenue around a third of the all-time high years?
Current revenue is basically non-existent
Yes, and yet production is at around a third of the peak year figures. Can the peak year revenues really have been only 3 x (basically non-existent)?
Seems entirely reasonable, and it’s not just the tax paid, it’s the economic activity which is recursive. The civil servants in Whitehall, Croydon and abouts spend money around, those businesses employ people who spend around them, and so on. I did see a figure used for defence, for instance, a multiplier of 0.6 on spending for economic activity. It seems reasonable that office work would be considerably higher than this, as the HMRC offices are not buying tanks from the Yanks!
Well, I don’t think so, anyway, though it would need to be checked 🙂
Wings did an expose of that recently with a comparative re Norway.
Sorry wrong post: what you are alluding to is Ricardo’s law which essentially outlines the multiplier affects our contribution to London has: ie we finance the Olympic games; the transport routes are improved generating increased heritable prices and consequential lending rates etc for commercial enterprises. We may be stuffed by the system but the North of England is well and truly stuffed by their fellow countrymen particularly with a vibrant secessionist Scotland on their doorstep.
The north of ENgland is well and truly stuffed, we’re better off in Scotland, but the East and West Midlands and the Sourth-west of England don’t do well either. As for Wales and Norn Ireland … some disunited kingdom all right. Look at figure 1:
https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/articles/countryandregionalpublicsectorfinances/2015to2016#net-fiscal-balance
As for cash accounting versus accruals, years ago an inspector tld me with tears in the eyes about a builder she’d had to bankrupt under the rules. The builder had incurred spending and reclaimed any VAT, the build was finished, presented the bill, and the customer didn’t pay. There was/is a way to get the VAT due cancelled, but it takes years. Meantime the VAT was due and had to be paid from no funds in the bank. I think it was Gordon Brown brought in cash accounting. He did do some good stuff.
I use cash accounting, and at the end of each quarter (as long as I have the funds) chase suppliers to give me invoices and pay the lot by fast transfer to help the cashflow the next month (well, the month after that plus 11 days).
Hi Richard
I think expenditure/head is the key. I posted the below on a well known blog around 6 months ago:
O/T After yesterdays discussion on Gers this morning I downloaded a document “Country and Regional Analysis Noverber 2016” from the HMRC website.
It purports to breakdown “identifiable expenditure” spending in England, Scotland, Wales and N. Ireland into its various components, health, education etc.
One item in particular was amazing to me at least. According to this document:
“The UK average spend per head is £9,076. The highest spend per head is in Northern Ireland at £10,983, this is followed by Scotland at £10,536, Wales at £9,996 and then England at £8,816.”
So the spend in Scotland per person is now £1720/person more than in England. Take note that “identifiable expenditure” is only 88% of expenditure, the other 12% being deemed as “UK expenditure”.
There are a couple of really interesting facts in there like for General public services the spend in Scotland is £189/head and in England less than half that at £89/head.
I’ll bet you didn’t know that for Environment Protection (dealing with waste) spend in Scotland is £258 and in England just £165.
Or I’ll bet you be thrilled to hear that Scotland spends £199/head on Recreation, culture and religion compared to the poor English who only get £102
Here’s a biggie the UK generously spends £261/head on national and local roads in Scotland. What’s the score then as England only get’s a paltry £130/head spent on roads?
Now we must have the best roads in the UK eh! I smell ****.
https://www.gov.uk/government/statistics/country-and-regional-analysis-2016
To put some meat on this from 2015-16, “For the £17.8bn of UK welfare spending in Scotland in 2015-16, detailed benefits information is used to identify where claimants actually live and how much they receive etc.”
Fine, but how much of that £17.8bn relates to departments and offices, computers, IT spending outside Scotland, rather than being spent IN Scotland by the claimants or adminstered by offices IN Scotland? And even for the offices in Scotland, how much of their spend is “central” in the rUK – e.g. IT systems in Croydon or wherever?
“For the remaining £10bn or so of UK Government (non-devolved) spend in Scotland — e.g. defence and debt interest etc”
Again, how much spent IN Scotland, where does the debt interest generate economic activity?
Taking the total of £28 billion at a multiplier of 0.6 = £16.8 billion. If half of this was NOT in Scotland, that’s £8.4 billion right there, a third would be £5.6 billion.
Substantial sums, and not only that, in terms of this ridiculous “deficit gap” it is used to reduce the rUK deficit – but should be used to reduce ours instead.
But yes, all this needs checking. Good luck with that!
Your comment about the Scottish welfare bill seems to be missing a reality, if Scotland was independent it would have to pay for the creation of a welfare system, and pay for the administration of it.
For some reason, which escapes me, nationalists don’t understand the economies of scales disappears if Scotland has to administrates its own welfare system.
I really wouldn’t mention the new delayed Scottish Social Security Agency, you know delayed by the Scottish Government.
Medium sized states across the world manage this perfectly well
Scotland would be a medium sized state
I think you’re talking nonsense
“Luxembourg has an extensive welfare system. It comprises a social security, health, and pension funds.[1] The labor market is highly regulated, and Luxembourg is a corporatist welfare state.[2] Enrollment is mandatory in one of the welfare schemes for any employed person.[3] Luxembourg’s social security system is the Centre Commun de la Securite Sociale (CCSS).”
Population? 590,000.
Plus the spending on it, creation and admin as well, creates an economic benefit for Scotland.
Scotland’s “tax take” is important for another reason.
The Fiscal Framework means it is essential to know how much is raised by each of the newly devolved taxes. The ‘relative’ performance of Scottish devolved tax revenues is crucial for how the framework operates in practice (Graeme Roy). If the tax on spends made on our behalf in London is not recognised in Scotland’s accounts, the outcome of the Fiscal Framework analysis will be in error.
Even experts such as Graeme Roy have said “we are dealing with an exceptionally complex framework”, so I won’t attempt to guess the likely outcome of the error.
For the avoidance of doubt – I am not a supporter of Graeme Roy.
However, his analysis of the Fiscal Framework is comprehensive, provided you ignore the following snide remark – “If you’ve been following the GERS debate on social media in recent weeks then I apologise if the use of some numbers based on estimation here and throughout my talk upsets you!!”
See http://www.davidhumeinstitute.com/graeme-roy/
But he consciously defends what he worked on, of course, and the snideness if part of that
The reality is that he ignores the structural deficits in the whole framework, which I think exist
Re my earlier post there are figures in that document that I can believe are all per person Scotland v England.
Spending on health: £2258 Sco £2106 Eng
Education: £1470 Sco £1266 Eng
Social Housing: £245 Sco £67 Eng
Note that these are all Devolved issues which in itself speaks volumes. Compare with roads which is under the Department of Transports budget.
Don’t you just get the feeling they are dumping “spending” on Scotland that really isn’t attributable to Scotland?
On page 9 you have a cracker of a get out clause for the figures for spending on roads for the “regions”, it is this:
“a robust methodology is not available to allocate all expenditure to regions on a ‘who benefits?’ basis. This is particularly difficult for spending on motorways and trunk roads (by the Highways Agency) due to the nature of the networks, so expenditure is therefore allocated on an ‘in’ basis”
Now not entirely sure just what means but it does imply that costs can be attributed to Scotland even if we don’t benefit. There are two types of spend according to them “who benefits” which is directly attributable and “who’s in” which is all of us.
I guess their argument is that Scotland “benefits” from improvements or maintenance of the M1 just as much as England does cause we Scots might use the M1 on our trips to England.
Laughable so it isnae!
Can you tell me why there is a “geographical share” on North Sea revenue..?
That means it is the part supposedly coming out of Scottish waters
Does “scottish waters” as used for calculation purposes relate to the nautical boundary as drawn by Blair and Brown on the eve of the devolution settlement in 1999 (i.e. all fields south of a line running east from approx Arbroath are defined as “English”) or the conventional boundary as recognised in maritime law as running parallel to the equator from the point where the political boundary meets the ocean (i.e. between Berwick and Eyemouth)?
If the former, it makes quite a negative difference to Scotland’s attributable share of oils and gas revenues.
The former, I believe
It gets worse when you think more deeply about it. From that FoAI article:
“£40.5bn of spending in GERS is devolved (or around 60% of the total) and incorporated directly.”
Fine. But take Scotrail as one example, where are the trains and rolling stock built? In Scotland? Does the SNHS use computer systems built in the rUK? We do have a good pharma presence in Scotland, but what’s the relative figures for “imports and exports”, all of which generate economic activity somewhere?
So how much of that £40.5 bn of spending, is actually spent in Scotland?
The more I think of it, the more I’m afraid I don’t like that FoAI article. These are points it should be clarifying even in broad strokes, rather than being over-defensive.
Sorry, posting too much 🙂
A very simple example would actually be military spending. A share of military spending is allocated to Scotland, the salaries paid to all personnel either as a proportional allocation or based in Scotland, tax and NO are paid directly to the treasury, no income generation from either is allocated to Scotland.
I have no idea in this case whether tax for Scottish personnel is attributed to Scotland
There’s also the question of UK wide businesses that are HQ’d in the S.East of England. If I spend £1 in, say, Tesco and it’s corporation tax, VAT, PAYE/NI is paid from an accounting dept in London then how, if at all, is this apportioned to Scotlands revenues
This is done by estimation…
During my 48-year career in accounting it was known that HMRC & its predecessor bodies counted receipts for all taxes & NI at the point where they were collected, not raised. The explanation was that they didn’t need to know where the money came from, just that they had got their hands on it. If that is still the case, then allocations of receipts would be the only way to attribute tax/NI income, but that immediately raises issues about lack of verifiable accuracy. The sums involved could be massive, involving PAYE, NI, VAT, Corporation Tax, Tax on dividends etc.
The introduction of Scotland-specific tax code numbers is supposed to address this issue for Income Tax, but, as I understand it, there are still unresolved issues around the definition of domicile etc so any information derived from “S” code numbers is still incomplete.
These problems arise because UK tax & NI systems still do not recognise the reality of devolution in the UK. Given that the majority of items in GERS cannot be supported by substantive audit trail, perhaps the Scottish Government should get GERS audited, as no auditor would give it a clean docket; it would have to be heavily qualified. Alternatively, since the Scottish Government is charged with producing GERS, but not the bulk of the underlying data and resulting estimates and allocations, it should attach a “health warning” to GERS outlining its areas of concern.
Your suggestions are worthy of consideration
Great article.
So : Scotland gets billed for services it receives from the UK (such as defense / civil service) however the tax / wages resulting from that spending actually benefits rUK ?
Interestingly Scotland also gets billed an 8.4% population share of the UK debt. Seems fair. However : we haven’t actually accrued that much debt in last 30 years if oil revenues are considered.
GERs is clearly a government scam to make Scotland look poorer than it is.
Without equivalent figures for all devolved nations (including England) then it is a meaningless comparison.
Doug
Agreed
It’s wonderful to see agreement with the idea that GERs is clearly a Scottish government scam to make Scotland look poorer than it is.
There have clearly been some very naughty boys in short trousers at work. And they are getting away with it, when they should be getting spanked by Mrs McGregor if their scam can be proven.
Can we be sure that all Scottish exports, some of which go through England, are counted as Scottish?
I’m also bemused as to why, when Scotland is so dependent on England for alms, they want to keep hold of us.
Good question
I think exports outside the UK are probably correctly accounted for
But I can only say probably
Seems so.
gov.scot/Topics/Statistics/Browse/Economy/Exports/ESSFAQ#_Are_Scottish_goods
Richard, 96% of UK oil is in Scottish waters. We produce roughly 1 million Bpd @ approx 50 USD a barrel. That is 50 million USD per day GDP produced, billions over one year. Why is this not accredited to Scotland’s GDP? Also, the UK govt exports a large proportion of this oil. Who is credited with this export, Scotland or Uk? The oil produced in Scotland goes through only one Scottish refinery but I believe 4 in England and Wales. The fuel produced from these refineries is subject to around 50% vat & tax per litre, who receives this benefit in tax generated?
This multiplier effect is massive. If we generate 52 Billion in tax and receive around 28 billion back then almost half goes directly to London. How many jobs are created in England by the 24 billion tax receipts generated in Scotland. Would 250,000 be a conservative amount? If these jobs that we already pay for were returned to Scotland the multipliers would generate massive tax for an Independent Scotland. The BBC stated that the oil industry was worth 30 billion to the UK economy and supported 400 thousand jobs, we send 24 billion South and receive zero benefit. I am rambling a little now but I know that we are being severely fleeced.
And yet oil apparently produces almost no tax benefit for Scotland now
There’s would also have been the negative multiplier effect of the UK gov having to import all that energy over the past 4 decades.
Scotland’s energy potential is simply huge. The mainstream economics profession have this far done a great job in treating money as finite but energy as an externality.
Question folk need to ssk themselves is would they rather live in a country that can meet all its own energy needs or one that relies on imports. That’s far more important than revenue.
Agreed
I found this an interesting and complex article. Thanks. But I have a couple of questions.
Can I start by asking you to confirm that “as a matter of fact, national income accounting shows that government spending is a part of GDP”? Does this mean what I think it means, that every pound spent by government goes towards GDP totals? That’s news to me, if true.
So much here hinges on spending levels for the benefit of Scotland made outwith Scotland (in the rest of the UK). That being the case;
1) If spending “for the benefit of Scotland” but not in Scotland is “unlikely to exceed £10 billion”, realistically, what percentage of that would be expected to return in the form of taxes? Assuming somewhere between 20% and 50%, it wouldn’t explain and full negate the supposed £13.5 billion deficit.
2) I note you say “the adjustment the other way would be tiny…” This suggests you have a clear measure of spending the other way around and the potential tax returns; that being the case, I am wondering why you are less sure of the “for Scotland” data? I can’t explain to myself how you would find it any easier to measure the spending levels “the other way around” and (not that I doubt you) shouldn’t you be able to use the same methodology in “for Scotland” calculations?
3) Is it realistic to imagine us ever being able to accurately calculate the multiplier effect? It seems like such a complicated calculation. Maybe there’s an accepted formula.
You seem to be saying that spending for Scotland but outwith Scotland is no more than £10 billion. Being a daft layman, I could have misunderstood that, but it would be nice to know how it compares. How much is spent “for England” but in Scotland by comparison? Isn’t it normal for a country to spend money “for” itself outwith its own borders — I can only guess that Germany, for example, spends a lot “for Germany” in France, etc.?
I have kept meaning to get to this
I also keep meaning to take some time out
The latter has won
Sorry
I wonder if the Graeme Roy from Fraser Of Allander Institute could shed some light,
think he worked for 8 ½ years in the Scottish Government,so should know his way round how the GERS figures are ̶ ̶m̶a̶n̶i̶p̶u̶l̶a̶t̶e̶d̶ ̶ put together if anyone does,
the Institute does say,
`We are committed to informing and encouraging `public debate` through the provision of the highest quality independent advice and analysis.`
strange days when i get more enjoyment out of the machinations of accountants/economists than watching the fitba,
fiat money or SFA,no contest.
He calculated GERS
He is a little blinkered about it as a result
An article from last August in Bella Caledonia by John S Warren critiqued the GERS methodology and found it severely wanting: http://bellacaledonia.org.uk/2016/08/24/gers-or-a-wayward-exercise-in-the-capricious/
That’s good
But does not cover the points I make here
But on other issues spot
Good article and exposes another reason why we can’t rely on these figures and everyone is clear they are “estimated”
I have another point which is maybe covered but haven’t seen it.
Scotland is “debited” with 8.4% share of some infrastructure in England if it is considered we get some benefit.
What about infrastructure in Scotland that UK government contributes to ? Do we get debited with All of that or does England take a share ?
E.g. CIty deal for Aberdeen, Uk govt contributes a small amount but a booming Aberdeen also benefits people in England who work in North Sea so England should take a share ? And indeed England benefits from vast majority of North Sea tax take.
I would expect that we would be told that Scotland benefits from London Underground and HS but England doesn’t benefit from any money spent in Scotland.
Just a thought.
A fascinating analysis which certainly requires further investigation.
It occurred to me that potentially the next step would be to look at the UK’s revenue and spending without the Scottish revenue and the easily identifiable Scottish expenditure. The analysis would then focus on whether each of the ‘on behalf of the whole UK’ expenditures would go down now that Scotland had ‘left’ the UK. I think not in at least three cases:
It is unlikely that the rUK would reduce its defence & security spending by 8.4% if Scotland were to be independent.
It is unlikely that the rUK would reduce its Foreign Office spending by 8.4% if Scotland were to be independent.
It is unlikely that rUK would reduce its HMRC spending by 8.4% if Scotland were independent.
So an rUK deficit would be higher than it is right now.
If these hard to allocate spends wouldn’t reduce in a rUK scenario, then it certainly seems a problem to assign a proportionate population share to Scotland’s expenditure without also assigning a population proportion share of their revenues to Scotland.
Interesting idea
To be honest, people like you need to worry more about the costs north of the English border.
Post independence all military bases in Scotland will be the Scottish taxpayer problems, not the RUK’s problem.
It would be good for you to research the Defence Equipment & Support, it runs the procurement and logistics for the MOD, and based in Bristol. It employs nearly 30,000 people, and Scotland would need one of them post independence. It has offices in Scotland, guessing the one in Rosyth will be getting the push.
If you think defence spending just is about planes and warships, you are in for a shock.
I suggest you look at Ireland
Does it employ 30,000 for this purpose?
No
Does that mean it’s a failed state
No
You really need to get out more
You may see there’s a better world out there
I do look at Ireland, Ireland isn’t a member of NATO, the SNP are proposing Scotland to be a member of NATO, which would mean participate in NATO exercises and deployment to countries with NATO involvement.
If nationalists don’t understand how the defence budget is made up of, they really shouldn’t comment.
Must admit I have never been tempted to become a GERS anorak but hats off to you.
Personally I prefer to highlight the things that GERS omits. For example, tax revenues recycle existing money. The large tax revenues associated with the finance related jobs don’t tell us that they are in part due to public subsidy post GFC.
Then of course theres the false household analogy of fiscal deficits…
Where does one start!
Lots of accountants and would-be accountants on here. 🙂
The problem to me is simple. We’re an after-thought in someone elses country, but obliged to pay for that right.
I’m not being anti-Eng in saying that as human nature prescribes we look after our own first and with an 11-1 voting advantage why would the MPs of England, who need to be re-elected for their gravy train, ever prioritise scottish jobs, kids or whatever with a shrinking budget? Indeed, when you think about it, did they ever prioritise us?
By joining this “union” on unequal terms, with an 11-1 voting advantage of one nation over the other, when it comes to decision-making on everything, our wealthy few who agreed to join the union on our behalf left us a benign minority worth little consideration.
The only way our kids and grandkids can prosper is for us to take back the levers that other European countries, who have half the advantages, take for granted.
I may open another can of worms here, but isn’t the Oil&Gas sector in the same conundrum, with dwindling profits for the whole of UK pounded by reckless tax breaks, but steadily rising costs – and they’re some costs, given the high risk nature of the job – on services supplied to the workers in the sector (Health & Safety, Healthcare, etc.) and to their families (free education, bus passes, etc) coming out of the Barnett allocation for devolved matters?
In other words, Scotland pays to enable O&G workers and the UK fritters the revenue away in tax breaks for companies registered in England?
And of course under either FFA or Independence all the rUK located civil service, defence, projects of national importance etc spend not only gets billed directly to Scotland IN Scotland (meaning we might be able to do it better/more efficiently) but we capture all those multipliers, our GDP goes up. If we mint a Scotpound and insist taxes be paid in it or spend time in Barlinnie (examples may need to be made) then this boosts our currency as you have pointed out Richard.
I remember pointing out a version of this on the doorsteps in the last indyref. If someone pointed out we would need to mint new government departments I would rejoinder that we get charged for those now but its spent in England and it would be spent here in Scotland instead and benefit the economy.
In terms of defence in the White Paper the SNP pledged to spend £2bn on defence vs the £3bn charged to us then. This would greatly increase the defence spend IN Scotland AND save us £1bn AND give us a useful and proportionate defence spend which would enable us to contribute to patrolling the Iceland Gap, which the UK has failed to do for some years now. NATO is not best pleased and it is part of the reason why retired Generals and Admirals in the US are wont to say the UK might want to do without Trident if it meant more money could be spent on conventional forces.
I’ve often wondered where BAe Systems pays it tax and whether its assigned to Scotland or rUK.
There are just three companies in Scotland that are part of the Type 26 supply chain. Far less than rUK, Europe and the Americas. I wonder how their income compares with the “contribution” Scotland is making to the Type 26 programme cost?
Re. paying for civil services located in England (or Wales) would only be relevant if the civil service numbers in Scotland weren’t 8.5%ish or more of the total UK civil service, surely?
I’ve tried to find relevant numbers to confirm this but haven’t been and to do so. Would anyone here know how many civil servants are employed in Scotland and the UK as a whole?
Don’t think this is the case, Mark
Scotland gets ‘billed’ for its contribution to UK civil service. This appears in current (union) GERS figures as a spend FOR Scotland and so it contributes to the scottish deficit.
On independence Scotland stops this contribution to the UK and many others (thus reducing spend). It can then choose to employ more civil servants in Scotland so the spend FOR Scotland now become spend in Scotland. If civil servants are employed in Scotland this creates new revenue in Scotland as result of the spend.
At present Scotland gets the spend and London gets the consequential revenue. That’s why the Scottish deficit is so large. More revenue in Scotland is good news all round and it is a real effect that kicks in the moment as we become independent.
The UK economy is structured to fund London. GERS has been created to make us grateful for the little we do get. It is an accounting artifice which actually reveals the real very improverishment of all the regions in the UK outside London.
You understand it
Now why doesn’t the Fraser of Allender?
Excellent Richard.
Very enlightening, raises serious questions the people Scotland should ask the uk government!
The mess that is brexit, will no doubt add impetus in getting these questions answered.
Richard,
The point about revenues is not helpful. Ex oil and gas, the average tax take from Scotland per capita in this data is £270 lower than rUk. So now that North Sea o&g is not very profitable at the producers operating level (but does support a large supply chain, hence the figure regarding total contribution to GDP). We don’t need a further explanation other than without profitable north sea production, there is a lower overall tax take per capita.
Second, referencing a Reddit user u/whitesatanicmills who found this, your example regarding the civil service spending is rather precisely the wrong way round. >10% of civil servants are based in Scotland, without adjusting for the overseas ones, i.e. significantly more than our population share. What do you make of this?
Civil servants are not the major part of goverent spend
What matters is what is spent
You are missing the point here
Surely the main multiplier transmission you are so focussed on here is the salaries and spending of the employees. You cited the civil service as if it’s a clear example of expenses for Scotland spent elsewhere, with the consequential multiplier and income tax revenues appearing in England’s revenues, which was the point of that diatribe on accruals. It’s an example which is provably false. What would it take for you to admit this ‘rumination’ has the approximate value as the end product of the bovine’s ruminations’?
With respect, I was referring to spending
Some may be civil servants
Some (most) will not be
But, of course, you ignore salary rates
Now why is that? Are you not aware that the sums spent not the head count matter?
10% of civil servants may be in Scotland but the vast majority of high earners are not, way above proportion.
Precisely
A point I made in another reply before I got to you
So I apologise for stealing your point, except I didn’t…it’s just great minds, and all that
Oil company profits from the North Sea are as large as they were in the boom years with extraction costs having reduced significantly. But we still don’t tax them.
I cannot understand some of the complaints/grievances by nationalists on here. So someone in support of independence wants to complained about roads and the allocation of Transport.
Okay, so they want to go there, fair enough.
Scotland per 1,000 has 10.5 kms of road compared the UK per average of 6.4 kms so logically, Scotland should have more costs allocated to it, because has 50% extra roads.
I appreciate this methodology might be called into question, especially as it is on the Transport Scotland website.
https://www.transport.gov.scot/publication/scottish-transport-statistics-no-32-2013-edition/j285663-07/
Have you noticed that not all Scottish roads are the same as English roads?
Have you taken this into account in your crude assessment?
Are the Scottish roads not paid for by the Scottish government out of the block grant? Therefore that additional cost, and therefore expenditure in Scotland, is included in the GERs figures, not based on an 8.5%ish of all UK road costs.
To be fair, either everything is calculated based on population, or all is precisely accounted for, not this halfway mess that unsurprisingly appears to show Scotland is heavily subsidised, despite being the only country in the UK with a trade surplus. Oh, and Norway managed to generate £20+ billion on lesser oil revenues than the UK.
Local roads in Scotland are maintained by local councils, truck roads and motorways by Transport Scotland.
It amazes me the people who comment have no idea what they are on about. People talk like everything is paid for by the block grant, when it is simply not the case.
Below is a link from Audit Scotland, an organisation probably nationalists are unfamiliar with, who lay out the facts, as usual.
http://www.audit-scotland.gov.uk/uploads/docs/report/2016/nr_160804_maintaining_roads.pdf
Glenn, clearly you are so much more intelligent than us “nationalists” so perhaps you could advise stupid old me where the funding for those roads in Scotland comes from, if not the block grant?
I had thought that around 80% of local council budgets came from the Scottish government with the rest made up using council tax. Am I wrong then? And what about those motorways? Who pays for those?
Are the Scottish roads not paid for by the Scottish government out of the block grant?
You initial comment, not mine, it clears states the Scottish government are paid for the Scottish Government out of the block grant, correct?
You lost me at ‘grievances’.
Likewise, The ongoing cost of roads is mostly maintenance, isn’t it? Scottish roads see far less use.
Please go to YouTube and search for John Jappy and find the half dozen videos he made prior to infyref. He is a retired civil servant who worked at the Treasury in London for approx 30 years. He explains how the UK governments have misrepresented Scotlands finances and where Scotland’s money goes.
Recommended
Seriosuly: read him
It’s three or more years since I came across figures charting infrastructure expenditure per head of population :
London and SE, £2500/person;Scotland £250/person; and wait for it..NE England £5/person!
I read through all the comments patiently waiting for Economies of Scale to be served up. Aye Right.
Disclaimer “not being an accountant” yet, the term Busy Fools comes to mind, meaning running a business with ultra poor profit margins, or indeed at a loss.That seems to apply to the UK.
Scotland is self-sufficient in oil, gas, generated power, a net exporter of goods, so any deficit arising surely is due to excessive overhead burdens placed on Scotland? The old colonial trick. Now being used by multinational companies for UK tax mitigation?
Please don’t bring facts into this!
Excellent article Richard, thank you.
Your talk/presentation about “Reframing the progressive agenda” with Prof. Bill Mitchell was very insightful.
MMT does apply, and as Scott Enger mentioned before, the analogy with the family budget is erroneous. An independent Scotland should issue its own currency, and its ability to spend would only be curtailed by the real resources it can command. Never by financial ratios. (bulls).
It would be useful if J Corbyn stopped criticizing the Tories for their inability to balance the books. It only reinforces the concept, the lie, that low deficits/debts are better than high.
And of course it would also be useful if the Tories spent more money to stimulate the economy.
Is it that difficult for them to understand that Gov spending == Non-Gov income?
That with a huge external deficit continued Gov spending is needed in order to avoid a recession?
That monetary policy only works to stimulate private credit creation–and what we need is high powered money that doesn’t have to be paid back (ie Gov debt)
I’d suggest everyone interested in macro / Scottish independence to look into MMT. Honest, no-BS economics that everyone can understand.
Seconded
This is the whole basis of what Scotland need embrace
And I suggest that in Scotland people will want to invest in its national capital
In England that’s called debt because the elite don’t want to share the control of the system
Excellent article and some very interesting comments/replies. I have always wondered about GERS and the negative slant on Scottish spending, my understanding has hopefully improved.
Off topic, for which I apologise, but very much concerning Scotland’s finances. Are we going to be liable for 8.4% of any Brexit divorce settlement? When we get our independence from UK are we going to be hit with a divorce bill from Westminster? Both of which will be a huge financial burden to an independent Scotland!!
Again apologies for going off topic but there seems to be too much financial savvy here not to ask.
I suspect that will be demanded
But will not be due
A crude assessment? To begin with I am using facts to back up my comment. A road is a road, why would roads in Scotland be made to a different specification to English roads? Are the materials used in Scotland different to those in England?
There is no point nationalists ranting that the numbers are bent/skewed/dodgy when they don’t even understand the basics, like Scotland having more road per head.
No, a road is not a road
Except to someone too stupid to notice that the A1 and A836 are not quite the same
Sorry to make this personal, but either write some sense here or I’ll be deleting you very soon
PS I’ve driven both, just for the record
If you delete me that is your decision, it is your website and you decide who and who cannot post.
I have nothing but the highest regard for you and your integrity, people can disagree without descending into abuse.
I appreciate you are a walking target for the Right , and been abused online and in person for your views, especially when it comes to taxation and economic policy, and that abuse is wrong.
I deleted you simply because you became repetitious and I can see no advantage to that