Last week the BBC treated viewers to a Question Time hosted in Edinburgh, where a right-wing economics journalist from MoneyWeek magazine called Merryn Somerset Webb explained to a somewhat disgruntled Scottish audience why the government were right to bail out the bankers, but not steel workers.
It capped off an interesting week but to see why we’ll have to rewind a few days and revisit the work of an amateur Unionist blogger of our unwelcome acquaintance.
The amateur blogger in question has been garnering a fair amount of attention lately from straw-clutching Unionist hacks for his “analysis” of the Government Expenditure and Revenue Scotland (GERS) figures, in which he purports to show a sizeable deficit in the economy of an independent or “full fiscal autonomy” Scotland.
In essence, the analysis amounts to dumping all the GERS summary tables into a Microsoft Excel graph, adding the Office of Budget Responsibility (OBR) forecast for oil revenue, and pointing to a resulting £9.1bn gap between Scotland’s public spending and its total revenue.
This, he asserts, is in addition to Scotland’s share of the hefty deficit the UK currently runs. His conclusion, shouted loudly and often by every angry Unionist on Twitter, is that the government of an independent Scotland – which tellingly they always assume to be an SNP one – would either have to drastically cut public services or raise taxes to fill this “black hole”.
It’s an interesting piece of analysis. Or it would be, if it wasn’t total nonsense.
First of all, the OBR’s somewhat less than stellar forecasting track record might lead fair-minded observers to believe that it couldn’t reliably predict what it’s going to have for lunch, let alone what oil revenues are going to look like two years from now.
(As this site has pointed out many times before, you might as well try to predict next week’s lottery numbers by standing on a tall building blindfolded and throwing a dart in the vague direction of a pub which may – or may not – have a dartboard.)
It should also be noted that whilst the OBR is an “independent” body, it’s hardly an impartial one, having been set up by George Osborne in 2009 and formalised as a ‘non-departmental public body’ (a quango to you and me) by the coalition government in 2010. It’s Tory from its top hat to the tip of its brogues.
Indeed, no less esteemed a figure than Alistair Darling – a man not widely noted for his sympathies towards the Scottish independence movement – said in 2010 that:
“Right from the start the Tories used the OBR not just as part of the government but as part of the Conservative Party. They have succeeded in strangling what could have been a good idea at its birth.”
But in fairness everybody on all sides got the oil figures wrong, so we won’t hold it against them. In this article we’re more interested in the GERS data itself.
GERS is quoted virtually daily by unionists and nationalists alike. (Admittedly less so by nationalists recently as – let’s be honest here – the current oil price is not exactly to our liking.) It’s basically the only data source we’ve got in terms of the Scottish Government’s income and expenditure, and that’s why everybody references it.
All of the pre-indyref numbers you heard about Scots paying more tax than the UK average (true), and Scot Gov spending more that the UK average on public services (also true) comes from this dataset – as do, of course, our amateur blogger’s shiny, journalist-dazzling Excel graphs.
As we’re about to see, Scotland’s income and expenditure as documented in GERS has fluctuated wildly since its inception, not only because of changes in the Scottish economy, but also because of changes in how they’re measured. But where does this data actually come from, and what does it actually show?
Scotland’s finances breaks down into two basic chunks; there’s the block grant assigned to the Scottish Government essentially as its operating budget, and then there’s the reserved chunk which is composed of apportioned UK government expenditure on Scotland’s behalf. Things like defence, foreign policy, and a good deal of infrastructure fall into the reserved category. The split is roughly 60% block grant, and 40% for Westminster “reserved matters”.
The block grant is calculated based on UK government expenditure with the (in)famous Barnett Formula applied, which gives Scotland slightly (about 10%) more for provisioning public services than a straight population share would.
(Barnett recognises that delivering devolved services can cost more because of regional or geographic challenges that affect the expense of provisioning, so it’s meant to level the playing field.)
How the Scottish Government spends its block grant is entirely up to it. If it wanted to blow the whole lot on pizza and ice cream it could – although obviously not without some very angry (but very full) voters.
The obvious outcome, though, is that the Scottish Government’s expenditure patterns will loosely follow the UK’s government’s on the basis that, by and large, we have to provide the same public services as you’d expect elsewhere in the UK.
(We say “loosely” because the Scottish Government tends to spend proportionately more on health and education than the UK average.)
But because the block grant figures are derived from UK expenditure it follows that, even though an area may be devolved, there’s a direct relationship between what the UK government has budgeted and what Scotland will receive in the block grant for provisioning that same area within Scotland.
So if the UK government decides to cut the NHS budget in England by 10%, then the NHS allocation in Scotland’s block grant will be cut proportionately, although Holyrood can choose to divert money from other parts of its budget to fill the gap if it wants to. Similarly, if Westminster increases NHS spending, then the Scottish Government can expect a cash bonus, and it isn’t obliged to spend it specifically on health.
These are what are referred to as “Barnett consequentials”, and as you’d expect, it’s a contentious topic. Take the 2012 London Olympics, for example. The UK government decided that the UK as a whole would benefit from the sporting fiesta, and so there should be no Barnett consequentials triggered for the three devolved administrations in Scotland, Wales and Northern Ireland on the £9bn of London 2012 expenditure.
This meant that areas such as Stratford in London received huge sums of money for regeneration paid for by the UK taxpayer – including Scots – which would normally have triggered consequentials in Scotland, but didn’t because the UK government determined that “everybody” would somehow benefit from them, despite the obvious fact that the investment was highly regionally concentrated.
But later on, the UK government wasn’t interested in contributing to the Glasgow 2014 Commonwealth Games, and the Scottish Government had to find 80% of the money itself, with Glasgow City Council providing the other 20%.
And this is one of the serious problems with the current devolution settlement; it’s the UK government that determines how and where expenditure is made, and if Barnett consequentials are triggered.
A more current example is the proposed Heathrow airport expansion. As Alex Salmond has pointed out, it depends on (currently proposed) £5bn of public money which Scots are expected to contribute to via taxation, but are unlikely to see a direct benefit from – unless it triggers a proportionate Barnet consequential for infrastructure improvement in Scotland. The UK government, no surprise, disagrees.
(Indeed, it may actually draw business AWAY from Scottish airports.)
How UK expenditure is initially classified and subsequently apportioned in relation to Scotland has historically been a serious problem, as renowned economists and GERS experts Jim and Margaret Cuthbert have pointed out in a series of publications dating back to before the Scottish Government even existed.
In 2011 they reflected on the creation of GERS itself:
Yes, you read that right: GERS was originally created specifically to be used as a political tool by the Tories against their opponents in Scotland.
The Cuthberts go on to highlight some of the more devious accounting practices and downright erroneous data those early GERS reports used to that end. The article is very enlightening and well worth reading in its entirety, as are the two papers they wrote underpinning these arguments in 2005 and 2007.
Most of the figures fed into GERS for reserved matters come from the Public Expenditure Statistical Analyses (PESA), a detailed breakdown of the UK government’s departmental budget and expenditure. When preparing GERS, there’s a complicated set of calculations required to determine what portion of government expenditure pertains to Scotland.
This is a lot harder than it sounds, since you have to go through the budget line by line and figure out whether individual policies and projects affected Scotland, and to what degree. A lot of the historical calculations were hotly disputed, as we’re about to see, not least because initially the statisticians compiling GERS did not have access to PESA, and were therefore presented with figures as a fait accompli, with no indication as to how they were arrived at.
The Cuthberts documented many of the more serious concerns in a series of articles and papers. I’ve picked a few of my favourite highlights – these don’t represent the worst accounting methods or the most fiscally damaging, but are chosen more as illustrative of the UK government mindset.
The first two come from “A Constructive Critique of the Treasury’s Country and Regional Analysis of Public Expenditure” (2005):
page 8 :
Then from “Time to Stop the Abuse of GERS” (2007):
And finally from “GERS: where now?”, penned in 2011:
So, let’s have a quick recap:
– GERS was first established in 1992 by the Conservative Secretary of State for Scotland, Ian Lang. He envisaged it explicitly as a political tool, rather than a serious set of accounts.
– In 1999, as part of the delivery of a Scottish Parliament, GERS was enshrined as the primary tool for identifying income and expenditure relating to Scotland.
– the effort to ascribe an accurate share of UK expenditure to Scotland between 1999 and 2007 was at best farcically incompetent and at worst a deliberately disingenuous effort to cook the books and load Scotland’s balance sheet with “costs” it didn’t incur, and credit the UK government with expenditure in Scotland that was never actually spent there.
Any calculations painting a gloomy picture of Scottish finances which are based on pre-2007 GERS should therefore be treated with the greatest of suspicion. But what about the figures after 2007?
By the time that the SNP took power at Holyrood, it was clear that GERS was fundamentally flawed and needed serious overhaul. That overhaul was carried out by statisticians working for what was now called the Scottish Government, and the first set of revised GERS figures came in 2008.
It was a significant improvement over the previous effort, but still far from perfect, as the Cuthberts go on to note. Indeed, the need to improve how both revenue and expenditure are assigned to Scotland continues unabated. There’s currently a 23-page consultation paper on how the calculations need to be updated for to account properly for, among other things, corporation tax and the Crown Estate.
This is all very interesting in historical context, but to bring things back to the present day we need to take a look at something the Cuthberts said in that 2011 article:
(Again, our emphasis, not the Cuthberts’.)
But, most importantly, they point out:
This really is fundamental. GERS relates only to the current devolution settlement. It says absolutely nothing about the economy of an independent Scotland, or indeed anything about what it might look like if and when the Scotland Bill 2015 is eventually enacted. And in any event using GERS to “prove” that Scotland would be worse off if it were independent is absurd because:
GERS doesn’t represent a full set of accounts;
Currently 40% of the costs (and the policies which drive them) aren’t under Scottish Government control because they’re reserved to Westminster.
(If you want to summarise this entire article in 50 words, use those last three lines.)
Last week it was suggested to the amateur blogger that his conclusions were suspect because he wasn’t “an economist”, and perhaps had failed to consider the larger picture in his haste to use GERS figures for political ends.
What happened next was interesting. In a characteristically frantic quest for approval, he tweeted several prominent economic journalists with two questions:
Some of them ignored him, while Frances Coppola gave the supremely non-committal response “1. Anyone can say they are an economist. 2. Anyone can do statistical analysis”. But here’s where our old friend Merryn Somerset Webb comes back in.
The blogger triumphantly retweeted her rather ambiguous answer, presumably taking it as vindication. Which was a touch unfortunate, because in an article she wrote for MoneyWeek last May, Somerset Webb had concluded – just as the Cuthberts had done – that due to the way GERS is compiled, you simply cannot extrapolate an independent Scotland’s economy from it.
The amateur blogger had crowingly cited as backup a Tory economic journalist who a full four months before the referendum had already casually destroyed the entire foundation of his GERS-based argument against independence. Whoops.
Nevertheless, almost all countries run a deficit, and even with all the flaws in GERS it seems beyond much doubt that Scotland would too. So could an independent country plug up its “black hole” without those famous and beloved broad shoulders of the UK lending a generous helping hand (cough)?
Next year the Scottish Government gets increased income tax powers delivered under the Scotland Act (2012), which finally delivers (most of) the recommendations of the Calman Commission, a mere eight years after they were laid down – but it can’t do so selectively. It can’t raise the top rate without raising the basic rate.
That power doesn’t come until we get the goods in the Scotland Bill 2015, currently scheduled for April 2017 (but don’t hold your breath just yet).
Even then, it probably wouldn’t want to. As Prof Andrew Hughes-Hallet pointed out in this 2013 interview (13m 35s in), raising the tax “take” doesn’t necessaily mean raising the rate of income tax. Independence would give Scotland the full set of fiscal levers to apply to the Scottish economy, and you have a number of options there.
For starters you can shut down the thousands of loopholes and exceptions which currently allow the rich and corporations to drive truckloads of cash through the UK tax code perfectly legally. HMRC’s most recent figures estimate these “tax gaps” cost the UK £34bn a year in lost revenue (of which a proportionate share for Scotland would be just under £3bn).
You can expand the tax base by, for example, encouraging increased immigration – or indeed, just creating the kind of economy where young Scots don’t have to leave as thousands do every year.
You could easily revise the tax shelter limits for ISAs (Individual Savings Account, currently £15,240 per year) and SIPPs (Self-Invested Personal Pension, currently £40,000 per year) – both of which disproportionately benefit those on high salaries (ie those with more than £15,000 of spare cash every year).
And of course, it goes without saying that you can make entirely different choices about that 40% of the budget still under Westminster control so that perhaps you don’t even need to raise additional tax revenue. Below, for example, are some comparably-sized European countries and the proportion of their GDP they spend on defence. Spot the odd one out.
Saving our share of the recently revised estimate of £167bn over 40 years on nuclear weapons would beyond any reasonable doubt be the First Minister’s immediate port of call. Closely following that might be the downsizing the huge £3bn defence allocation to something a bit more appropriate for a country our size with no imperial ambitions of “punching above its weight on the world stage”. Then there are the fat subsidies for the nuclear and other polluting industries – they can go tout suite.
The list goes on – or not, according to your own political inclinations.
But the entire point of independence is for Scotland to make its choices for itself, for us to determine our own priorities (and make our own mistakes) rather than having the consequences of somebody else’s foisted upon us.
To deem that goal an economic fantasy based solely on the flawed and fundamentally irrelevant content of GERS is, therefore, to miss that point in the most spectacularly short-sighted and wrong-headed way possible.