Does Scotland Simply Spend Too Much?

From the archive — published in 2016 on the original Chokkablog, kept as it was written.

Today saw the release of the latest HM Treasury Country and Regional Analysis (CRA) report which looks at public spending levels across the UK.

From a Scottish perspective the figures suggest a simple and powerful headline message: "Public spending in Scotland ‘£1500 higher than UK average’"

This is of course not news. In a post-indyref world, surely most Scots are aware that Scotland enjoys higher public spending than the average of the rest of the UK?

Regular readers of this blog will know there are nuances aplenty and some caveats needed (which we'll come to) - but the simple maths is easy to follow: £1,500 per person higher spending on 5m people = £7.5bn. That's the lion's share of the current c.£9bn effective fiscal transfer Scotland receives from the rest of the UK - so the transfer is largely explained by the fact that we spend more, not that we generate less.

Those who react to observations about the scale of Scotland's notional* higher deficit (and the resultant fiscal transfer from rUK) with "this just proves we suffer under mismanagement from Westminster" have overlooked this very simple fact: we have a bigger deficit because we enjoy higher levels of public spending. These are levels of public spending that (as I frequently tire of pointing out) would be simply unsustainable without either ongoing fiscal transfers from the rest of the UK or - were we to be independent - new windfall revenues (like another oil boom) or decades of spectacular economic growth.

* notional, because the whole point of being in the UK is that this deficit doesn't actually exist - Scotland's spending doesn't have to be met by Scotland's tax revenues and our population share of the UK debt alone, we get to pool and shares across the UK (if you like, this support for our higher spending now is merely fair reciprocation for sharing "our" oil revenues in the 1980s)

So few people should be surprised to hear that Scotland has relatively high levels of public spending. The absolute size of the difference may, however, cause raised eyebrows among that small cluster of people who are familiar with the Scottish Government's own Government Expenditure and Revenue Scotland (GERS) figures
That's a difference of £250 per capita or £1.3bn - so not an insignificant amount.

There are a few factors that can explain the difference ;
  1. The CRA headlines are based on identifiable expenditure only - but given the vast majority of non-identifiable spend is allocated in GERS on a per capita basis, it seems unlikely that this would explain the difference3
  2. Timing: by publishing GERS earlier than in previous years, the Scottish Government had to rely on their own estimates and analysis rather than using the published CRA figures as they were able to in prior years4. We'll probably have to wait to see how the GERS 2015-16 figures are restated in the 2016-17 publication to find out the extent to which this led to inaccuracies.
  3. Methodology: the Scottish Government make various adjustments to the CRA spending data when compiling GERS - for a combination of technical and/or judgement-based reasons5.
I haven't fully reconciled the figures - life's too short - but overall it seems like overall identifiable expenditure matches reasonably well between Scottish Government GERS and the CRA report - with a net difference of only about £90 per capita (with higher spend in the CRA analysis)6. We'll use the detail of this analysis to apply caveats below - read the note if you really want to follow the data trail or just trust me; it's up to you.

The balance of the difference between GERS and CRA (£160 per capita) must be explained somewhere among the world of pain that is "accounting adjustments" - we'll leave those for another day8.

So armed with the above knowledge and caveats, here's what the CRA analysis shows us.

First of all there's the age-old question of whether we compare our spend per capita with UK average (including Scotland) or with the rest of the UK (rUK). Personally I find it easier to think in "vs rUK" terms, on which basis our (CRA analysed) spend is in fact about £1,600 higher.

As an aside: those who think that HM Treasury are always spinning against Scotland might ask themselves: if that's the case, why they don't use "versus rUK" comparisons for their press-releases?

Looking at the breakdown by spend type in the table below it's clear Scotland  spends more than the UK average in all spend categories (as we have aleady observed through the GERS figures in blogs passim).

Figures we can trust: materially consistent between CRA and GERS
The £ figures in these bullet points are how much higher Scottish annual spend per capita is than the rest of the UK, the percentage is that figure vs the rUK per capita spend
  • £331 (+8%) on Social Protection (mainly pensions & benefits) 
  • £195 (+15%) on Education & Training (primary, secondary, tertiary)
  • £149 (+7%) on Health 
  • £131 (+168%) on Enterprise & Economic Development
  • £99 (+105%) on Public & Common services (executive & legislative etc.)
  • £93 (+154%) on Agriculture, Forestry & Fisheries
  • £90 (+82%) on Recreation Culture & Religion (sports & culture)
  • £79 (+19%) on Public Order & Safety (police, fire, law courts, prisons)
Figures to treat with Caution as CRA vs GERS differences are material
  • £68 Transport (road, rail, other) - GERS suggest even higher?
  • £91 Environment Protection (mainly waste management) - GERS suggests not that high, (nuclear related?)
  • £239 on Housing & Community Amenities - but big caveat as GERS suggests a far smaller figure (Housing Association7 accounting treatment related?)
It's pretty straightforward really - even with caveats around methodology and even if we accept the (kinder on Scotland) Scottish Government GERS assumptions - Scotland, as it's governed today, is an expensive country to run.

The extent to which this relative high cost is a structural issue (remote and island communities, demographics that mean a relatively high dependency ratio, areas of chronic deprivation etc.) or are a result of a Scottish Government that's keen to spend the Barnett Formula money on freebies that win votes (no tuition fees, free prescriptions, scrapped tolls etc.) is a debate that will run and run.

This analysis is a timely reminder that there would be one easy way for the SNP to further the cause of Nationalism: they could ask for the fiscal framework to be scrapped so that Scots could get used to the lower public spending we'd need to endure while we waited for the miracle of independence to produce exceptional economic growth ...





NOTES

1. GERS 2015-16 page 4 table S.4 shows this rounded to £1,200 - precise figure from back-up data tables

2. CRA Report page 14 table A2 - per capita spend figures: UK £10,536 - Scotland £9,076 = £1,460

3. The three largest non-identifiable spend areas are public sector debt interest, defence and international services. Between them these account for more than 80% of non-identifiable expenditure. All of these (and many others) are allocated to Scotland in GERS on a per capita basis (they therefore can't explain any per capita spend difference between Scotland and the UK average)

4. GERS page 25:
"This edition of GERS sees a change in methodology to allow earlier estimates of expenditure to be produced. Whilst expenditure for years prior to 2014-15 continues to be based on the CRA, the 2015-16 estimate is primarily based on data from the Scottish Government accounts system combined with data from HM Treasury‟s Public Expenditure Statistical Analyses"

5. Detailed Expenditure Methodology Paper page 10
"A number of adjustments are then made to this spending estimate.
1. Public sector debt interestIn 2015-16, UK public sector debt interest includes expenditure associated with English Housing Associations. Scotland is allocated none of this expenditure in GERS. This decreases the Scottish share of HM Treasury current expenditure on public sector debt interest.
2. Network RailIn 2015-16, spending by Network Rail has been moved from an accounting adjustment into TES. The shares from GERS 2014-15 will not reflect this spending. Spending associated with Network Rail has therefore been added into Scottish spend estimates. This increases the Scottish share of Department for Transport current and capital spending on transport.
3. Social protection expenditureScottish social protection expenditure by the Department for Work and Pensions and HMRC is estimated directly, rather than apportioning shares of the UK total. Spending by the Department for Work and Pensions is estimated based on data from the tabulation tool and UK spending data. Spending by HMRC is based on HMRC spending data and HMRC geographical award statistics."
6.


7. GERS page 2.
"The ONS reclassified English Housing Associations (HAs) into the public sector on 30 October 2015. In 2015-16, this increased UK public sector revenue by £6.9 billion and UK expenditure by £10.8 billion, resulting in a £3.9 billion increase in the UK net fiscal deficit. A similar impact is seen in earlier years. Scotland is apportioned none of this additional revenue or expenditure in GERS. The ONS have not yet announced a decision on the classification of Scottish Housing Associations."

8. I confess to being flummoxed by the fact that the non-identifiable cost totals in table A.1 are not explained by summing the figures given by spend category - see figures highlighted amber


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