Bill Jamieson: GERS is rosy looking – but still red

Good news to be cheered? Or a flashing amber warning? Both, it seems, judging by the reaction to the latest Government Expenditure and Revenue Scotland (GERS) report.
Derek Mackay hailed Scotland's 'strong performance on taxes'. Picture: Jane Barlow/PADerek Mackay hailed Scotland's 'strong performance on taxes'. Picture: Jane Barlow/PA
Derek Mackay hailed Scotland's 'strong performance on taxes'. Picture: Jane Barlow/PA

So, great or grrr?

Some major news outlets hailed the figures last week as indisputably good news: Scotland’s public spending deficit has fallen by a further £1.2 billion over the past year. Others were not too sure – typical, you might say, of the hotly opposed bun fight that nearly always erupts over the politically sensitive GERS numbers.

The bald figures are these: Scotland raised a total of £62.7bn for the public purse in 2018-19 – about £2.9bn more than the £59.8bn raised in the previous year. Over the same period, the amount spent by the government rose by some £1.8bn – from £73.5bn to £75.3bn.

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The report also estimated that Scotland raises £307 less per person than the UK average in tax, while public spending was about £1,660 per person higher than the UK average.

The “good news” in all this is that while Scotland is reckoned to have spent £12.6bn more than it raised in taxes, the shortfall is lower than the £13.8bn estimated for the previous year.

A downward trend in the deficit? This reached £15.5bn in 2015-16 when the global oil price collapsed. But it has fallen in each of the three subsequent years.

Now, it never does to pour cold water on better news. And to the extent that the gap between what the Scottish Government spends and what it raises in taxes has narrowed, this is to be welcomed.

There is also nothing wrong per se in a country having a budget deficit. Almost all countries have one. The broader context of the figures reveals that other regions of the UK have budget deficits, ameliorated by transfers from the more prosperous regions, such as London and the south-east, which enjoy a surplus.

Scotland has a similar deficit per person to the north of England, while Northern Ireland and Wales have an even higher shortfall per person. The large surpluses in London and the south-east are used to transfer funding to the Midlands, the North, Scotland and Wales and Northern Ireland.

It has also been widely acknowledged for decades that Scotland, because of its geographic size and scattered rural hinterlands, merits higher spending per head than the UK average. We receive £1,661 per head more than the UK average, while paying £307 less tax.

And in any event, Scotland’s budget deficit is by no means the highest. Those advocating a second independence referendum can fairly argue that Scotland’s fiscal position looks better than it did in 2013. Back then, Scotland’s budget deficit was equivalent to some nine per cent of GDP. Today it stands at seven per cent.

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SNP Finance Secretary, Derek Mackay, lost no time in hailing the figures: Scottish Government revenues, he said, had topped £60bn for the first time. “Our notional deficit,” he declared, “has fallen while public spending has increased thanks to our efforts to grow the onshore economy and the strong performance of taxes in Scotland.”

But the GERS figures also signal a warning that it would be foolhardy to ignore. And this warning is all the more prescient given the current context of widespread calls for a major uplift in government infrastructure spending.

The problem is this. When you’re starting off with a budget deficit already equivalent to seven per cent of GDP – more than six times higher than the UK-wide figure of just 1.1 per cent and more than double the EU’s three per cent target for its members – this mightily constrains the amount of fiscal boost that an independent Scotland could muster without those amber signals flaring into bright red.

For the record, the average deficit across all 28 EU member states was 0.6 per cent of GDP last year. For the UK, the estimated fiscal deficit in 2018-19 was £23.5bn – or 1.1 per cent of its GDP – some £18.3bn lower than the previous year and the lowest for 17 years. Not that the UK is without budget problems of its own – public sector finances in July saw a surplus shrink from £3. 5bn a year ago to £1.3 bn. Over the first four months of the fiscal year, borrowing totalled £16bn – some £6bn or 60 per cent higher than previously – and this before the much-mooted Boris spending spree.

Scotland had a relatively stronger fiscal position than the UK as a whole in 2010-11, but this has since been reversed largely because of the collapse in the oil price. Revenue from North Sea oil and gas at £1.43bn is a shadow of the £8bn raised in 2011-12. And while fiscal transfers apply across other parts of the UK, not just Scotland, the crucial difference is that we have an SNP government intent on pursuing a second referendum, an independent economy and government finances capable of standing up to international scrutiny.

What, then, is the alternative for a country starting off hobbling with the ball and chain of a budget deficit of seven per cent? It can, of course, raise taxes and curb spending – but both are politically fraught.

Assuming its application for EU membership succeeds, Holyrood might seek to rely on greater funding support from Brussels by way of more generous regional grants and economic development aid enjoyed by poorer EU members.

But while Brussels might eagerly embrace Scotland as a new EU member, it would, as matters currently stand, lose one hefty net contributor (the UK) and gain another net supplicant – not a prospect likely to be eagerly embraced by biggest financial donor Germany, currently teetering on the brink of recession.

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Or it can seek, as Professor Graeme Roy, director of the Fraser of Allander Institute, has pointed out, “the Holy Grail of faster economic growth”– an achievement that has so far largely eluded successive Holyrood administrations.

“Advocates of greater autonomy and independence,” he says, “have to provide a really robust, clear-cut case in how to address the scale of the deficit that Scotland would inherit on Day One. That has to be a bit about getting faster economic growth but you cannot guarantee that.”

Good news, then – but mightily tempered.