The latest Gers figures will make Indyref2 an even harder sell for First Minister Nicola Sturgeon, writes Bill Jamieson
Cling, clang and seconds out for the latest round of the annual Scottish heavyweight title fight over the Government Expenditure and Revenue Statistics (GERS). Are we solvent? Are we bust? And does it matter? Few sets of figures have been more quoted – and more hotly disputed – than this summary of Scotland’s finances. This year’s will be no exception: they are dreadful. But I can offer some comfort. The incoming orthodoxy is that debt seems to be yesterday’s worry: big budget deficits and high spending finance ministers are back in fashion.
But for now – and especially for a First Minister who continues to insist that a second independence referendum before too long is “very likely”, the figures will make “Indyref2”a very hard sell indeed.
Two years ago the GERS figures were at the centre of the independence referendum battle. With the oil price over $100 (£75) a barrel and tax revenues buoyant, the SNP made great claim on the health and strength of our national finances on independence.
Today, with oil tax revenues having collapsed, it’s a far less positive story.
The official Scottish Government statistics show we spent £14.8 billion more in 2015-16 than we raised in taxes. The figure is equivalent to 9.5 per cent of Scotland’s Gross Domestic Product – more than double the four per cent figure for the UK as a whole. As economist John McLaren points out: “Key claims from the 2013 White Paper that, compared to the UK, Scotland contributes more tax per head; has stronger public finances; and has much higher GDP per head, are all out of date, with the reverse now being true in most cases.”
And the reason? Scotland’s illustrative share of North Sea revenue has collapsed from a peak of almost £11bn in 2011-12 just ahead of the 2014 referendum to £1.8bn in 2014-15 – and now to just £60 million. For reference, the SNP had predicted £7bn of oil revenues in 2015-16 in its blueprint for independence. Surely spending cuts and/or tax revenues (“fiscal consolidation” is the whispered euphemism on the SNP back benches) could not be avoided on independence?
But that’s not the full measure of our worries. On Tuesday, ahead of the release of the GERS numbers, First Minister Nicola Sturgeon unveiled an analysis of possible Brexit consequences, saying the Scottish economy could lose between £1.7bn and £11.2bn a year by 2030. This, she said, could have a severe impact on public spending.
Cynics charge that this estimate was released to detract attention from the fiscal gap that would be glaringly exposed by the GERS numbers. From the First Minister’s viewpoint it has certainly provided an alternative explanation for misery ahead. While she asserted that “the foundations of the Scottish economy remain strong” she added this qualifier: “However, Scotland’s long-term economic success is now being directly threatened by the likely impact of Brexit.”
How seriously can we take this estimate? Can the foundations of Scotland’s economy really be described as strong when independent economists were downgrading their forecasts last year and when figures for the first quarter – before the Brexit vote – showed growth in Scotland’s GDP had slumped to zero?
The projected gulf between £1.7bn and £11.2bn a year is so wide as to be laughable. This also assumes credibility can be attached to estimates stretching 14 years ahead. Few would sign up to those – especially economists.
In her determination to rev up the grievance machine to generate support for a second independence referendum, Ms Sturgeon shows scant regard for the effect such further political uncertainty would have on business confidence, still less on the effect estimates of Scotland’s economic underperformance stretching to £11.2bn might have on investment and spending decisions. Who would want to invest here on such a miserabilist view of our prospects from no less than the First Minister?
Unfortunately for the SNP – but mercifully for the rest of us – the doom-laden predictions made by the Remain camp two months ago about Brexit have failed to materialise. On the contrary – unemployment has continued to fall while numbers in work across the UK have risen to a record high.
A business investment slump? Net lending to non-financial businesses hit £2.3bn in July – the largest increase since January and more than double the average monthly increase of £1.0bn over the first seven months of 2016.
An export tumble? The CBI reported this week exports of manufactured goods have risen to their highest level in two years. And the overall picture is of an industry with orders that remained “comfortably above the long-run average” and with output growth “at a healthy pace”.
A consumer panic? Retail sales figures UK-wide show retail sales jumped by 1.4 per cent month-on-month, smashing expectations of a rise of just 0.1 per cent to 0.2 per cent. And on an annual basis, retail sales were almost six months higher than in July 2015.
As for tourism, the UK will “hold up well” in 2016 according to the World Travel and Tourism Council, which predicts growth of 3.6 per cent – higher than the predicted global growth in the sector of 3.1 per cent.
Whatever ails Scotland’s economy, the First Minister can hardly blame a raw deal from Westminster. Total expenditure by the public sector in 2015-16 was £68.6bn, equivalent to £12,800 per person – £1,200 per person greater than the UK average. Scotland contributed 7.9 per cent of UK tax and received 9.1 per cent of UK spending, demonstrating how Scotland receives secure and stable levels of spending irrespective of the volatile tax revenues from the North Sea. And our borrowing is almost £1,700 per person larger than the UK average.
Scotland’s deficit is now more than three times more than what is widely seen as a safe level of deficit. That may be a problem for EU purposes: Eurozone rules state the ceiling for deficit should be three per cent of GDP.
The original idea behind Barnett was that this extra spending would in time enable Scotland’s economy to narrow the gap. But clearly that has not happened. So why is that higher spending not yielding better outcomes? The SNP administration would do better addressing this than doom-laden posturing over Brexit. The First Minister has painted herself into a corner on her insistence of a second referendum and cannot now escape without loss of face.
The one comfort I can offer is that tackling this budget deficit now would be to turn against the swell of economic opinion. Central bank measures to sustain growth by monetary loosening here and overseas are widely seen to have failed. Now policymakers are turning towards fiscal stimulus – tax cuts and/or spending increases: “helicopter money” in unofficial parlance.
It is a measure of how desperate economic thinking has become that we may now need to add to those debt and deficit totals. Thus, while GERS matters politically in blowing a hole through previous SNP independence assertions, it may not matter much given the greater problems we face.