Latest economic statistics offer relief for the Scottish Government, but it could be one step forward, two steps back with Brexit says Bill Jamieson
“Rejoice!” as a former Prime Minister once urged on us all. And rejoice, Scotland’s First Minister certainly did yesterday when the latest figures for Government Expenditure and Revenue Scotland (GERS) were released.
Tax revenues are up. The gap between spending and revenue – the “notional deficit” as Nicola Sturgeon describes it – is down. And Scotland’s economy, she declared, “remains strong”, growing nearly four times faster than the UK – based on figures for the first three months of 2017.
Onshore revenues – largely income tax, national insurance and VAT – is up by £3.3 billion or 6.1 per cent between 2015-16 and 2016-17 – the fastest increase, Ms Sturgeon added, since current records began in 1998-99. And North Sea revenues also grew.
But the GERS figures this year are not only as capable of conflicting interpretation as ever they were; they also contain ominous dark clouds ahead for Scotland’s economic and fiscal fortunes.
In recent years the annual release of these figures sparked an almighty bunfight between unionists and supporters of independence. Now the figures are unveiled in an altogether less incendiary atmosphere. They show a modest improvement in Scotland’s net fiscal balance (including North Sea oil) - from a deficit of £14.5 billion or 9.3 per cent of GDP in 2015-16, to £13.3 billion (8.3 per cent of GDP) in 2016-17.
Who can blame the administration from selecting the better figures and talking up this improving if modest trend? But other data in the GERS report gives a less flattering picture. Scottish Secretary David Mundell describes the figures as “a cause for concern”, noting that Scotland’s deficit is still more than three times higher than that of the UK as a whole (2.4 per cent of GDP) and falling at a slower rate than the UK . Economic growth is also lagging behind.
Independent economist John McLaren points out that Scottish GDP is only 1.5 per cent above its previous peak level in the second quarter of 2014, whereas the UK figure is now more than nine per cent higher.
And what of North Sea oil related tax revenues? At £208 million in 2016-17, these, says McLaren, were “trivial” in comparison with the eight year period (2005-2012) when Scottish offshore oil revenues averaged around £7 billion a year and never fell below £5 billion in any single year. An adjustment to the Scottish share of North Sea oil and gas revenues to be in line with the HMRC estimate, as opposed to previous editions of GERS, has reduced Scotland’s revenue share in most years.
As for prospects, the chances of a revival, he adds, are slim. While production levels have grown of late, “North Sea output remains only a third of the level seen in 1999 and the recent upturn is expected to be short-lived. Meanwhile the oil price remains stuck in a range between $40-$55 and the Scottish Government’s latest projection (2015) estimates that, even if the oil price were to reach $100 a barrel again, the North Sea would contribute less than £3 billion a year of tax revenues for Scotland (up to 2019-20).”
For years Scotland’s fiscal black hole was at the centre of fiery argument over the SNP’s ability to finance its ambitious public spending programme. But what the latest figures show is that despite the administration’s earnest hand-wringing over “Westminster austerity”, Scotland has pulled through a post-recession period of low growth rather better than most feared.
Public spending in Scotland on education, health and social protection combined has consistently risen, from £41.3 billion in 2012-13 to £44.6 billion in 2016-17, a rise of £3.3 billion. And government spending overall in Scotland has risen 4.5 per cent over this period to a record £71.2 billion. This is still a squeeze in real terms, of course, after adjusting for inflation. But there is barely a business in the land that has not had to deal with budget reduction of this size and more in recent years.
Recent analysis on the GERS figures took place in the thunder and lightning of the Scottish independence debate. Today the weather has shifted – and here the picture looks altogether less benign than the modest improvement in the GER figures would suggest.
Setting aside the predictable political skirmishing, what is it in this latest statement on our finances that should give us concern?
The major worry is how Scotland’s economy and finances are likely to fare under Brexit. Indeed the First Minister yesterday declared that “our long-term economic success is now threatened by Brexit, which risks reducing household incomes, employment and funding for public services.”
If that is indeed the case, I have two specific concerns. The first is the need to bolster economic activity and growth over the coming years. Here Scotland’s spending priorities do not look as fully aligned to this requirement as they should. Government spending on enterprise and economic development at £1.04 billion represents just 1.5 per cent of Scotland’s total budget. Even adding in spending on science and technology, employment, agriculture and fisheries and transport, the total is just £5.7 billion, a figure dwarfed by spending on social protection.
If Scotland is to achieve anything like break-out from the marked underperformance relative to the UK since the financial crisis and equip the economy for the future, then we must shift spending priorities more towards capital expenditure and infrastructure improvement.
It was not David Mundell, but Nicola Sturgeon herself who said yesterday that if voters backed independence in the near future, Scotland would need a dramatic improvement in its finances to bring its current spending deficit of 8.3 per cent down to three per cent - the level most economists see as sustainable.
And arguably as pressing a problem for the administration is obtaining a more comprehensive, accurate and reliable guide to economic activity generally – a problem that is now the focus of a review by Andrew Wilson and also the work of the Scottish Fiscal Commission.
A return to status quo ante on North Sea oil revenues is just not going to happen – and that has wider implications for the wider economy in Scotland. So where is the strategic thinking being done? As John McLaren points out, forecasts for future years have had to draw on OBR’s forecasts for the UK. Since the Scottish Government White Paper estimates made in 2013 there is little information available on what any alternative path for how sustainable public finances in Scotland might look like.
The Scottish Government’s ‘latest’ (sic) Oil and Gas Analytical Bulletin is now more than two years old. “Much has happened since 2013 (or even 2015)”, he argues, “so that a new explanation for how a sustainable fiscal position might be reached is badly needed.”
Are our spending priorities properly aligned? And is our tax policy truly incentivising for business growth and investment? These are the central dark questions at the heart of the latest GERS report. And the longer the delay in addressing them, the more urgent and challenging they will become.