A Simple Summary of Scotland's Economy

30 Mar 2015

From the archive — published in 2015 on the original Chokkablog, kept as it was written.

I've spend a lot of time looking at GERS and associated arguments - this is the simplest summary I can offer

1. Scotland's deficit relative to the rest of the UK (rUK)

When Scotland's deficit per capita is lower than the rest of the UK we are a net contributor (above the line); when it's higher we are a net beneficiary (below the line)
Scotland has been a net contributor to the UK economy in three of the last 15 years.
The five year historical period used for most of the Yes campaign's "average" assertions included a clear outlier in 2008-09
The Scottish Government White Paper was written using 2011-12 as a starting point - since then Scotland's performance relative to rUK has declined dramatically. As we'll see this is almost entirely explained by oil revenues.
As long as Scotland is in the UK and the Barnett Formula (or equivalent) is maintained the people of Scotland are spared from the impact of any relative economic under-performance because we pool and share resources UK-wide
In the two most recent recent years this pooling and sharing has been worth over £800 for every person in Scotland

2. How Scotland's revenue and expenditure compare with rUK

The gaps between the black revenue and red expenditure lines on this chart are the deficit figures we were looking at in the first chart
We can see that - as oft stated by the SNP - in each of the last 15 years Scotland (including geographical share of oil & gas revenues) has indeed generated greater tax Revenue per capita than the rest of the UK
We can also see that - as less oft stated by the SNP - Expenditure per capita is consistently higher in Scotland (and that the gap has actually increased over the last 15 years)
The are some structural reasons for the higher per capita expenditure levels in Scotland. To quote directly from GERS "lower population density in Scotland relative to the UK [..] increases the cost of providing the same level of public service activity, particularly in areas such as education, health and transport"
Of course only when the relatively higher levels of Revenue raised exceed the relatively higher levels of Expenditure made is Scotland's deficit less than that of the rest of the UK. Again; three of the last 15 years where the black line is above the red.

3. The significance of Oil & Gas

The difference between the black Revenue line in this chart and the preceding one is that I've simply removed Oil & Gas revenues
It should be clear to everyone that without the "bonus" of Oil & Gas Scotland consistently generates lower Tax Revenues per capita than the rest of the UK

4. The Trend & Outlook for Oil & Gas

The extent to which 2008-09 and 2011-12 were particulary good years for oil & gas revenue is obvious
The Scottish Government oil & gas revenue forecasts used in the White Paper were optimistic when it was published (the "low" scenario was 60% higher than the OBR forecasts that existed at the time)
The White Paper forecasts have subsequently been shown to have in fact been recklessly optimistic. The red portion of the graph is the difference between the White Paper scenarios and actual figures or (lightest grey) latest OBR forecasts
It is now widely accepted that even the levels of Oil & Gas Tax revenues enjoyed in 2013-14 are unlikely to be repeated in the foreseeable future

So What?

Given further oil revenue declines since the most recent GERS numbers, if today we were preparing for independence we would be preparing for every Scot to immediately be at least £1,000 pa. worse off
Without repeating the indyref arguments let's simply note that this is before factoring in short term downsides of independence (currency negotiations, increases in unemployment due to jobs shifting South, one-off costs etc) or the (in my view highly debatable) possible long term benefits
If we succeed in achieving Full Fiscal Autonomy (as is the SNP's stated current aim) we will be making every person in Scotland over £1,000 worse off (unless oil booms again)
Over time we might see economic growth relative to rUK sufficient to off-set the higher expenditure we currently require - but that seems to be both a highly optimistic assumption and one that implicitly accepts years (decades?) of hardship before we'd get there

If you are curious as to the detail of where the revenue comes from and cost goes please read the following

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Addendum
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The SNP are fond of quoting deficit as a percent of GDP when making comparisons. This has some merit but is internally inconsistent because we are allocated a per capita share of the debt cost (not a GDP share) so what matters is our per capita contribution to that debt. If the SNP want to argue that % of GDP is the right measure then GERS should allocate debt cost on a GDP share basis and when negotiating debt split on independence they should argue that Scotland deserves it's GDP share of the debt. They don't. There are also issues due to the high proportion of foreign owned Scottish GDP which means much of the benefit of that GDP doesn't fall to Scotland's citizens. GNP may be a better measure but let's not get bogged down with that here. Caveats now given; for completeness here's the relative deficit graph on % of GDP terms;

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