As we highlighted in our article yesterday, today sees the publication of the latest Government Expenditure and Revenue Scotland (GERS) Report.
GERS estimates the contribution of public sector revenue raised in Scotland toward the public sector goods and services provided for the benefit of Scotland. The estimates typically cause significant controversy, and our podcast from last year and our GERS guide highlight some of the usual areas of debate.
These arguments are not going to go away, but the GERS figures present the most reasonable approximation to help us understand the nature and extent of public spending and revenue in Scotland in the latest financial year.
What is the headline figure?
The GERS report shows an estimated net fiscal balance (including a geographical share of North Sea oil) in Scotland of -£36.3 bn or –22.4% of Scottish GDP for 2020-21. This compares with a UK net fiscal balance of –14.2% of UK GDP. See Chart 1.
These figures are the largest ever seen in terms of the notional deficit, due to the unprecedented public spending associated with the Coronavirus pandemic, which has also led to the largest peacetime deficit at the UK level.
Chart 1: Scotland and UK Net Fiscal Balance
The increase in the Scottish deficit relative to the UK is a little larger than we might have expected, all else being equal. This is due to a larger relative fall in Scottish nominal GDP, driven by a 40% contraction in North Sea GDP in 2020-21.
Impacts on tax revenues
Revenues as a whole have fallen by 5% compared to 19-20, to £62.8 billion. The largest impacts are in spending related taxes such as VAT and Fuel Duties, with Non-Domestic Rates (NDR) also down on last year given the relief schemes given to businesses. See Chart 2.
Chart 2: Main revenues in Scotland (equivalent to 65% of total revenue)
Wage support schemes have meant that the level of income tax and national insurance contributions have held up well, remaining broadly flat compared to 2019-20.
Impacts on Spending
Overall spending increased by 21% in 2020-21, taking total spending to £99.2bn. Unsurprisingly, there have been significant increases in Social Protection spending (due to more people claiming Universal Credit and other social security support) and Health spending.
There have also been enormous increases in Enterprise and economic development spending (around a 6-fold increase), capturing the business grants that have been given out through various schemes over the past year.
Chart 3: Main spending lines in Scotland (equivalent to 65% of spending)
To sum up
GERS is an annual publication that sparks off a debate about Scotland’s public finances.
As we say regularly: it is a statistical publication produced by the Scottish Government; it contains some elements which are estimated but that does not mean it should be discredited; and altering any assumption made does not really change the overall picture.
The final thoughts on GERS 2021 are the same points that we always make about this publication – and when quoting us it is important to read the next two paragraphs together!
GERS takes the current structure of UK Government reserved taxation and spending as given. If the very purpose of independence is to take different choices (good or bad) about the type of economy and society that we live in, then a set of accounts based upon the current constitutional settlement and policy priorities will look different to the long-term finances of an independent Scotland.
Having said that, GERS does provide an accurate picture of where Scotland is in 2021. So, in doing so, today’s numbers set the starting point for a discussion about the choices and challenges that need to be addressed by those advocating independence or new fiscal arrangements. It is not enough to say ‘everything will be fine’ or ‘look at this country, they can run a sensible fiscal balance so why can’t Scotland?’. Concrete proposals and ideas are needed.
The UK too faces significant budgetary pressures in the long-run. And this will impact upon Scotland inside or outside the Union. An honest debate about managing these pressures, including in a post-Brexit world, is needed too. With COVID-19 making everyone’s public sector deficits that much bigger, the challenge of building a model of fiscal sustainability just got harder.