As readers of this site will be well aware, 40 years ago the UK government economist Professor Gavin McCrone analysed the effect of North Sea oil on the finances of a notional independent Scotland, which at the time seemed a real and possibly even imminent prospect. His assessment was so alarming to Westminster that its findings had to be kept secret from the Scottish public for over three decades.
With the information suppressed, Scotland remained in the UK (and was even refused modest devolution despite voting for it in a referendum), resulting in the imposition of a series of Conservative governments elected on English votes, beginning with Margaret Thatcher’s turning-point victory in 1979.
Ironically, we have Mrs Thatcher’s government to thank for the collation of the data which demonstrates the true state of Scotland’s finances within the UK, in the shape of the GERS figures (Government Expenditure and Revenue Scotland).
The data was subsequently collected into the Scottish National Accounts Project, which provides the figures (Excel document) for the following analysis. What it reveals provides a surprisingly unambiguous statement of Scotland’s financial condition, and one which is agreed across a broader political spectrum that you might imagine.
The chief difficulty in establishing Scotland’s position relative to the UK is that when ascribing income and expenditure to individual parts of the UK, a number of estimates and presumptions have to be made. For example, defence spending or foreign affairs are essentially non-geographic in the Scotland/UK context, and so spending in these areas is generally apportioned on a population basis.
North Sea oil presents a particularly sensitive issue, and the presentation of the data has been fudged for political reasons, obfuscating the reality by producing figures on an economically meaningless per-capita basis as well as the proper geographic basis which would in fact be the case upon independence.
The prominent feature of the UK data is the regularity of annual deficits. There’s nothing unusual in this – rather, it’s the norm among developed western economies. What’s more concerning, however, is the rapidly growing level of debt in recent years.
The red line on the following graph represents the UK debt as calculated from the data, and accurately reflects the known position. The debt has grown from about £98bn in 1980 to £1.2 trillion in 2013. In this graph, debt is shown as a downwards line. (Such graphs are more commonly shown upside-down, with the mounting debt depicted as a rising line, which is psychologically less alarming.)
Scotland’s share of this debt – on the “pooling and sharing” basis presented by Labour as a benefit of the Union – naturally follows an identical trajectory, and can be seen marked by the red line in the graph below, with only the values on the vertical axis different. It’s grown from £8.2bn in 1980 to £99bn in 2013.
The orange line, however, shows the equivalent effect of using the data specific to Scotland. It begins with the same population-based share of debt in 1980, namely £8.2bn – although, as noted in this article, Scotland had already been outperforming the UK for decades before that.
Even with that unfavourable starting point, it can be seen that the debt is replaced by a credit balance for several years before moving back into debt in 2003/4, with the debt since rising to almost £70bn in 2013. This is a significant improvement (of £29bn) on the position calculated by a per-capita debt share.
But this doesn’t accurately represent Scotland’s true historic fiscal position. Within the annual expenditure ascribed to Scotland is a share of the cost of servicing the UK debt (ie paying interest on it). GERS allocates a population share of UK interest payments, rather than calculating a separate Scottish figure.
This means that the Scottish figures are misrepresented by including too large a share of the UK’s debt repayments. Scotland is being made to pay for the UK’s proportionately-higher deficit, not just Scotland’s own. Fortunately, the data enables us to rectify this and calculate a fair share of the UK debt interest. This is shown as the yellow line on the graph below.
The cumulative debt so calculated for 2013 is only £3.8bn, compared to the £99bn with the UK’s debt shared across the whole country. In fact, we see that Scotland has been in credit since 1982/3 and right up until 2012, only dropping into a modest level of debt in 2012/13. During those 30 years of credit an independent Scotland would have paid no debt interest at all, because it would have had no debt.
But this still understates Scotland’s true fiscal position. What does a country do when it has a credit balance? It invests it for a return (as with Norway’s fabled $1 trillion oil fund). How much positive income would this generate?
A 4% return on the credit balance (similar to the average produced by Norway’s fund), would be a reasonable, even slightly conservative, estimate. If we factor that into the figures, along with the absence of any UK debt interest payments, it leads to an accumulated surplus of over £63bn in 2013, shown by the green line.
This figure is slightly below the £68bn produced by the pro-Union economist Professor Brian Ashcroft last year.
“I estimate that Scotland’s share of UK debt interest amounted to £83 billion at 2001-12 prices. Subtracting this from total estimated Scottish spend of £1,440 billion we get a debt interest adjusted estimate of spend of £1,357 billion. This means that Scotland was in overall surplus by about £68 billion“.
Yet this figure still doesn’t necessarily reflect the true position. Scotland has accrued, on its own account, a substantial credit, while the UK has accrued a substantial debt. The UK services that debt, paying interest to creditors at rates which have varied over the years. Scotland has been a de facto creditor of the UK, because its credit balances have offset overall UK debt.
The effective rates paid by the UK (and therefore earned by the creditors) can be calculated, year on year, from the data, and therefore we can apply those rates to the calculated Scottish credit balances, to determine our fair return on those surpluses.
Those calculations produce the final result, depicted by the blue line below.
The credit balance reaches £207bn in 2013. Scotland would in fact have been in “profit” every year since 1982/3, with the single exception of 2009/10. Just as McCrone predicted, it would have become “a country with a substantial and chronic surplus”.
Therefore, using only figures provided by the UK government and some very reasonable and modest assumptions, we can answer the question “What has it cost Scotland to be part of the UK since 1980?”
The answer is the difference between the red line (a cumulative debt of £99.2bn) and the blue line (a credit of £207.8bn, very close to the £222bn calculated by the independent body Full Fact last year). That is to say, Scotland has lost a massive £307bn since 1980 through “pooling and sharing” its resources with the UK.
While the numbers sound astonishing, they’re entirely consistent with what Professor McCrone predicted way back in the 1970s. Unlike almost every other UK government body across that period, up to and including the current OBR, he got his sums right.
The Norwegians have made their wealth work for them. They retained their wealth in their economy rather than giving away over £300bn to someone else, and made the money work for them, generating more wealth. They avoided the ravages of wholesale deindustrialisation and high unemployment in the 1980s, and the credit crisis of 2008. They’ve spent their money looking after their citizens, both in the present and by investing for when the oil runs out.
Although the biggest of the boom times in oil are now past, an independent Scotland would still, according to some extremely learned experts, have the opportunity to produce surpluses. There are decades of healthy oil receipts left, and a renewables potential that could come to dwarf them.
Scotland might never catch up with Norway, but will shortly face the opportunity to at least start travelling in the same direction, and free itself from a UK that’s currently got its foot jammed on the throttle and its wheels pointing straight at a brick wall.