GERS 2023-24 is out tomorrow!

Tomorrow sees the release of Government Expenditure and Revenue Scotland (GERS) 2023-24, the annual National Statistics publication which sets out:

• Revenues raised in Scotland, both from devolved and reserved taxation;
• Public spending for and on behalf of Scotland, again both for devolved and reserved powers; and
• The difference between the two figures, called the “net fiscal balance” and often referred to as the “deficit”.

These statistics form the backdrop to a key battleground in the constitutional debate, particularly regarding the fiscal sustainability of an independent Scotland and what different choices Scotland could make in terms of tax and spending.

We have a handy guide to GERS, going into detail on the production of these statistics and their publication, and addressing some of the myths and odd theories around them. We also did a podcast episode back in 2020 focused on these. We’ll be doing a podcast tomorrow, on publication day, to talk through the new data that will be published.

But to go through the main claims usually made about it:

1. GERS is an accredited National Statistics produced by statisticians in the Scottish Government (so is not produced by the UK Government) and is a serious attempt to understand the key fiscal facts under the current constitutional arrangements.
2. Some people look to discredit the veracity of GERS because it relies – in part – on estimation. Estimation is a part of all economic statistics and is not a reason to dismiss the figures as “made up”.
3. Will the numbers change if you make different reasonable assumptions about the bits of GERS that are estimated? In short, not to any great extent.
4. If you have any more questions about how revenues and spending are compiled in GERS, the SG publish a very helpful FAQs page, including dealing with issues around company headquarters and the whisky industry (which can often be the source of misinformation about GERS).

So what will GERS show tomorrow?

Last year’s statistics for 2022-23 showed a net fiscal balance in Scotland of 9.0%, which compared to 5.2% for the UK. The difference between these figured had narrowed in 2022-23 compared to the previous years mainly due to a huge uptick in oil revenues, which increased massively due to the large increase in energy prices, and because of the introduction of the energy profits levy.

The UK deficit has fallen in 2023-24, driven both by growth in some revenues (such as income tax, as wages have gone up considerably, while thresholds have been frozen in cash terms) and a reduction in some items of spending (such as the massively expensive energy profits levy and other cost of living support).

The amount brought in from North Sea revenue has fallen by around half for the UK, in 2023-24 which is likely to mean that revenue for Scotland in GERS from the North Sea will also halve, from around £9bn to around £4.5bn. We are likely to see strong growth in some onshore revenues, particularly income tax, driven by the fiscal drag issue already discussed and the higher income tax rates that prevail in Scotland.

Chart: UK North Sea revenues, 1998-99 to 2023-24

Source: GERS, ONS (FAI calculations)

The reduction in spending on measures like the energy price guarantee will also take a chunk out of spending: it was estimated in GERS 2022-23 that around £4.5bn was spent on the EPG and cost of living payments in Scotland – current UK figures on the amount spent in 2023-24 suggest this could have fallen to roughly £800m if the shares of payments are broadly the same as last year.

So, there are lots of moveable parts which make it difficult to predict exactly what the figure will be. However, it will still be negative, larger than the UK, and the difference between the UK and Scotland is likely to be greater than last year due to the fall off in oil and gas revenues.

So what does all this mean? Why does it matter?

The significance of GERS depends somewhat on your view on the constitutional question, but the cut and thrust of debate around these statistics leads to some curious statements if one thinks about it for a wee while (and we think about it a lot!).

To emphasise, GERS is not a description of the Scottish economy, does not describe the success or otherwise of the economy. The overall growth in the economy is measured through the GDP statistics, health of the labour market through labour market statistics, changes in living standards through changes in statistics like disposable household income.

GERS measures tax and spend, and the difference between them: certainly, related to the health of the economy (e.g. if economy is growing, and wages are growing strongly we will probably be getting more income tax), and the bigger the economy is the smaller the deficit will be (given it it the denominator in the calculation), but these statistics are not a “verdict” on the Scottish economy.

The generally higher deficit in Scotland (particularly if we exclude volatile oil and gas revenue) mostly comes down to much higher spending on services per person. This has been the case over the time series of GERS (which starts in 1998-99).

This in turn is because of the way the Scottish Block Grant is calculated using the Barnett formula, which baked in higher spending per person when it was introduced in 1979. Changes through the fiscal framework since 2016 have made some changes to the overall funding made available to the Scottish Government due to income tax devolution and the devolution of some other taxes and benefits, but the Barnett formula is still the key reason for higher spending in Scotland.

So, I would interrogate the statements politicians make about GERS through the lens of their view on the level of spending in Scotland.

Some people might say, as they have in the past (even though they are generally supporters of the union) that GERS shows “SNP mismanagement of the Scottish economy”. This doesn’t really make sense, as what it broadly shows is the higher public spending due to the Barnett formula which supporters of the Union would presumably point to as a benefit of the Union (of course some do, just to be clear).

In turn, we saw the curious double-think during some of the years of austerity where the Scottish Government was arguing against the spending restraint put in place by the UK Government, whilst at the same time welcoming the reducing deficit that was shown in GERS in some years (when this was basically a consequence of austerity). Look out for what they say about the deficit tomorrow (if it is a falling deficit).

Perhaps GERS Day is not the place for logical statements from politicians… but we live in hope. And you can be sure we’ll be here with our analysis tomorrow to point it out, as ever!