Economics: The art of explaining why all of your models fail to accurately predict either the future or the past.
It’s the time of year again when everyone glances at the first page of a dense booklet of complex economic data and immediately starts using it to make wild forecasts and proclamations despite the long-known problems with doing so.
So it’s also, once again, time to try looking a little further to tease out some details that others might have – let’s be generous here – accidentally missed.
First, to get some of the headline figures out of the way: there’s been a slump in offshore oil revenue, due largely to the crash in the oil price resulting from an ongoing economic conflict between Saudi Arabia and the USA.
This has caused Scottish oil revenues to drop from £4bn in 2013-14 to £1.8bn in the 2014-15 figures. A £2bn “black hole” in the accounts, if you will.
Except… total Scottish revenue is only down £600 million, from £54.05bn last year to £53.44bn this year. That’s just a touch over 1% of a fall, and is comparable to some of previous year’s “budget underspends“. Thus it could even be said to be within the margin of error of budget estimates. So what’s going on?
The first thing to understand is that our transport and energy infrastructure is still almost entirely dependent on oil, thus is highly sensitive to changes in price. When oil prices go down, fuel and heating becomes cheaper which allows the average consumer a bit more money, assuming a fixed income, to travel and to spend money in the local and greater economy.
This drives up demand, which leads to more non-oil jobs, more supply and a general increase in economic activity. Indeed, some sources credit such effects as being even stronger, in the long term, than the shock caused by the collapse in the oil industry. This likely goes a fair way in explaining the year-to-year increase in income tax, onshore Corporation Tax, VAT, fuel duties and the like.
Now, it can also be seen that the UK’s receipts are rising too, by around 3-4% (as they have done for the past few years) but there are a critical couple of numbers missing from the these raw data which haven’t been accounted for.
First, inflation in recent years has run at around 1-2% and the UK’s population is rising at approximately 1% per year, largely due to inward net migration, whereas Scotland’s population is and has long been largely static (the Scottish Government has almost no control over immigration and can do nothing about that fact).
These figures erode the UK’s real-terms revenue-per-capita growth rate to very nearly zero. George Osborne’s “fastest growing economy” is clearly not being felt in the pockets of the average Briton.
(It also suggests the positive effect of immigration to the UK. Those folks coming in appear to be paying their way and not being a “burden” on the taxpayer).
With these factors laid out, and bearing in mind that some of the feedbacks can take some time to work through the system, we can consider Scotland’s overall change in GDP (not the best single figure with which to measure an economy but it’s the one everyone uses) which, if the critical voices are correct should have taken an absolute catastrophic dive in the wake of the collapse of oil.
What has actually happened, as laid out on page 35 of the GERS figures, is that North Sea GDP has dropped by £5.67bn, from £18.2bn to £12.5bn but that the onshore economy has risen by £5.54bn (from £135bn to £141bn). The Scottish economy has shrunk in the wake of the oil crash, but by only 0.09%, or £132 million. Not bad for a country supposedly totally reliant on oil.
So now we can look a little deeper at some of the other comparisons between Scotland and the UK within GERS. Scotland’s population share of the UK is 8.3%, so any tax revenue which lies at or around 8.3% of the UK revenue can be said to be broadly similar to the UK’s receipts.
(With some very notable exceptions. It turns out that there is very little data for some taxes which disaggregates Scottish and rUK receipts. For example, VAT, National Insurance and tourist-related taxes are not noted in this way and thus, for the purposes of GERS, a straight population share is generally assumed. This should be recalled when trying to extrapolate such figures to the performance of an independent Scotland. The data simply doesn’t exist to support any such extrapolation).
As noted in an article I wrote last year, income tax, Corporation Tax and Capital Gains Tax remain significantly below the UK average despite Scotland having a higher employment rate than the rUK. This shortfall reflects a lower average wage (until very recently) and fewer of the very rich living in Scotland, and amounts to approximately £2.3bn potentially lost to the Scottish coffers.
This is a substantial increase over last year’s £1.7bn shortfall, and reflects the increasing concentration of the UK economy inside London and the South-East. And remember that Scotland is the second-best-performing area of the UK outside London.
(Incidentally, the absence of accurate figures in areas where Scotland does well, like tourism, and the presence of accurate ones for areas where it does less well, like income tax and Capital Gains Tax receipts, is just one of several factors that skews GERS negatively against Scotland.)
Now, if Scotland had full control over its income tax rate it could adjust banding, including the zero-rate Personal Allowance, to set rates more commensurate to the Scottish demographics and economy. We might even consider raising the minimum wage to the Living Wage to increase both the amount of income tax paid and the amount money people would have to spend in the local economy which, as we’ve seen, is the primary driver of overall economic wellbeing.
But, as we know, we’re not getting nearly that level of control. We’ll eventually be able to adjust non-PA bands but the PA is the one almost everyone falls into. Changes to that, which are the preserve of the UK government, will severely curtail the Scottish Government’s ability to use its tax powers, and of course we’re not getting any power over Corporation Tax, Capital Gains, National Insurance or VAT.
With notional control over only about 30% of Scottish income (and with severe caveats on much of that) Scotland’s economic fortunes will still be strongly tied to the whims of Westminster – another thing to remember if trying to extrapolate from GERS to the fortunes of an independent Scotland.
As last year, we can also see the “surplus” revenue within Scotland compared to the UK in tobacco, alcohol and gambling, contributing some £575m above the UK expected average – a pattern which is historically directly related to the stresses of living in an unequal society.
(Though it must be noted that this “surplus”, and indeed the total revenue from these taxes, has dropped since last year, which is – alongside a fairly flat level of health spending – potentially a positive indicator of better wellbeing within Scotland.)
On the expenditure side there’s rather less to say, as much of it has remained more or less static in recent years. The total expenditure has increased by about £900m, which means that the notional fiscal deficit (including current and capital budgets) has increased from £13.4bn last year to £14.9bn this year which represents 9.7% of GDP.
This is the number that’ll be seized on by many commentators as showing how much of a failure Scotland would be as an independent nation, but it does omit some very critical factors. Just as Westminster controls some 70% of the revenue of Scotland, it also controls more than 40% of expenditure IN Scotland (including money spent outside of, but “on behalf of”, Scotland).
This includes very large keynote items such as social protection, defence and the financing of the national debt. It is quite simply impossible to use these numbers in reference to the fortunes of an independent Scotland, as the whole point of Scottish independence is to gain control of these levers so that they can be changed.
In particular, the debt servicing figures assume that Scotland would, at the outset, take on a population share of a debt burden which was almost entirely run up outside Scotland. It’s almost inconceivable that this would actually occur – any Scottish Government which argued for it would be rightly subject to public outrage.
Similarly, “Scottish” defence spending occurs very largely outside of Scotland and one could follow the SNP’s plan to increase national defence whilst realising a very significant saving to the budget line. Or one could go further and follow the plan of others to almost entirely demilitarise – as Iceland has done – or to build an outward-looking humanitarian and aid force instead of an armed military.
Similarly, a country which paid people enough to live on might find itself with a population which doesn’t need quite so much social “protection”.
We should also consider that trying to judge any country based on one, two or even a dozen years is fairly pointless. The whole point about Scotland is that we would be in control of ourselves for generations, not just a fleeting period like the lost decade the UK has faced since the Great Recession of 2008.
Scotland remains a country under some economic strain, and without the powers to release some of that strain for ourselves. But it also remains a remarkably resilient one. All things considered, the worst (but gleefully anticipated) nightmares of the anti-independence commentariat have been averted. A huge oil crash has barely left a scratch on the nation’s balance sheet.
(It should be noted that its effects will be felt on next year’s figures too – the crash happened some months into the period which this year’s GERS cover. But there’s no fundamental reason why the same principles won’t apply, with the beneficial effects of the low price counteracting the lost revenue.)
Scotland remains full of potential if we want to use it, and independence is still a bright horizon towards which we should walk.
Dr Craig Dalzell is a Scottish Greens activist. He blogs at The Common Green.