This morning sees the publication of Government Expenditure and Revenue Scotland 2023-24.
These statistics set out three main things:
- The revenues raised from Scotland, from both devolved and reserved taxation;
- Public expenditure for and on behalf of Scotland, again for both devolved and reserved expenditure;
- The difference between these two figures, which is called in the publication the “net fiscal balance” – but as you may well hear colloquially referred to as the “deficit”.
These statistics form the backdrop to a key battleground in the constitutional debate, particularly when it is focussed on the fiscal sustainability of an independent Scotland and the different choices Scotland could make in terms of taxation and spending.
So what do the latest statistics show?
The latest figures show the net fiscal balance (including a geographical share of North Sea revenues) for 2023-24 was -£22.7 billion, which represents -10.4% of GDP. This is an increase of 2% of GDP relative to the (revised) 2022-23 figure of -8.4%. One of the significant drivers of this is the fall in North Sea revenues year-on-year, which halved due to lower energy prices. The net fiscal balance excluding the North Sea is little changed on the previous twelve months.
Chart 1: Scottish and UK net fiscal balance, 1998-99 to 2023-24
Source: Scottish Government
This effect can be seen more clearly in the chart below, which shows that after a spike in revenues in 2022-23 due to high energy prices and the introduction of the Energy Profits Levy (more commonly referred to as the ‘windfall tax’), Scottish revenues per person exceeded the UK average by £720. This has been reduced to £60 in 2023-24, as energy prices fell, and despite the new Electricity Generators’ Levy, which added some receipts to onshore corporation tax in Scotland. Spending per head, meanwhile, rose by 6% in nominal terms in Scotland, compared with 5.1% at UK level, further widening the gap, with social security being one of the largest elements in this increase.
Chart 2: Spending and revenue per head, Scotland-UK, 1998-99 to 2022-23
Source: Scottish Government
Income tax contributes strongly to growth in onshore revenues
Onshore revenues in Scotland grew by almost 20% in cash terms over the past three years, compared to a slightly lower 19% for the UK as a whole. This can largely be explained by the policy divergence between Scotland and the UK on income tax. Scotland’s income tax system in subsequent years has raised rates, which means that more revenue is raised overall, which is contributing to faster growth in revenues.
For instance, the total income tax take grew in Scotland by 14% in 2023-24, compared to 10% for the UK.
In addition, we have our old friend fiscal drag. This is the phenomenon where thresholds for starting paying tax, and starting to pay higher rates of tax are frozen in cash terms while wages are rising. This phenomenon is exaggerated in Scotland because of our higher rates and therefore also contributes to stronger growth.
A shifting picture between council tax and non-domestic rates
Local taxation in the form of council tax and non-domestic rates (NDR) has long been devolved, and differences in approach reflect not only differences in tax rates but differences in valuations. Of course, both rates and valuations are also in control of the Scottish Government and other devolved nations, as well as the UK Government in the case of England.
Scotland raises pretty similar levels of local taxes to its population share, and has done so for a long time. But the underlying patterns reveal a pretty significant and sharp contrast in approach to the rest of the UK.
On council tax, the cumulative effect of the long-term freeze in Scotland has significantly reduced receipts, contrasting with the above inflation increases in England and Wales in particular over the same period. Scotland now raises well below its population share in council tax receipts, accounting for only 6.6% of the whole of the UK.
On NDR, the opposite has occurred. Scotland has consistently raised more than its population share of NDR receipts, and this has further increased in recent times – partly as a result of the higher poundage for higher value premises, and partly due to lower generosity in some reliefs, especially in recent years.
Chart 4: Scottish local tax receipts (council tax and NDR) as a share of the UK, 1998-99 to 2023-24
Source: FAI analysis of Scottish Government data
So what do these statistics really tell us?
These statistics reflect the situation of Scotland as part of the current constitutional situation. That is, Scotland as a devolved government as part of the UK. The majority of spending that is carried out to deliver services for the people of Scotland are provided by devolved government (either Scottish Government or Local Government). To a certain extent therefore, the higher per head spending levels are driven by the way that the funding for devolved services is calculated through the Barnett formula. Add on top of that the higher than population share of reserved social security expenditure, and we have identified the two main reasons for higher public expenditure in Scotland.
Let’s go over some of the main points that may come up today when folks are analysing these statistics.
Scotland isn’t unusual in the UK in running a negative net fiscal balance
This is absolutely right. ONS produce figures for all regions and nations of the UK, and these have shown consistently (in normal years, so excluding COVID times) that outside of London and surrounding areas, most parts of the UK are estimated to raise less revenue than is spent on their behalf, as the chart below illustrates.
Chart 3: Net Fiscal Balance (% of GDP) for the nations and regions of the UK, 2022-23
The Scottish Government doesn’t have a deficit as it has to run a balanced budget
This statement isn’t completely true (the SG now has limited capital borrowing powers and resource borrowing powers to cover forecast error). The Scottish Government’s Budget is funded through the Barnett determined Block Grant, with some adjustments to reflect the devolution of taxes and social security responsibilities (most significantly, income tax).
The SG do not have the flexibility to borrow for discretionary resource spending.
However, to focus on this around the publication of GERS somewhat misses the point of the publication. It looks at money spent on services for the benefit of Scotland, whoever spends it, and compares that to taxes raised, whoever collects them. As touched on above, the Barnett-determined block grant funds services at a higher level per head in Scotland than in England in aggregate.
What does this tell us about independence?
Setting aside the noise that will no doubt accompany GERS today, there are essentially two key issues, that need to be considered together.
GERS takes the current constitutional settlement as given. If the very purpose of independence is to take different choices about the type of economy and society that we live in, then it is possible that these a set of accounts based upon the world today could look different, over the long term, in an independent Scotland.
That said, GERS does provide an accurate picture of where Scotland is in 2024. In doing so it sets the starting point for a discussion about the immediate choices, opportunities and challenges that need to be addressed by those advocating new fiscal arrangements. And here the challenge is stark, with a likely deficit far in excess of the UK as a whole, other comparable countries or that which is deemed to be sustainable in the long-term. 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.
And please guys… dodge the myths!
We have produced a detailed guide to GERS which goes through the background of the publication and all of the main issues around its production, including some of the odd theories that emerge around it. A few years ago, we also produced a podcast which you can enjoy at your leisure.
In summary though, to go through the main claims usually made about GERS:
- 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 arrangement
- 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”.
- 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.
- 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.
Look out for more analysis
We’ll be updating this blog post throughout the day with additional analysis, so check back over the course of the next few hours! We’ll also be releasing a reaction podcast, and will release further analysis in our weekly update.
If you have any questions about GERS for us, then why not get in touch? Submit them to fraser@strath.ac.uk and we’ll try to cover them in one of our subsequent updates!
Authors
Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.
João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK's public finances and on the effect of economic developments and fiscal policy on the UK's medium-term outlook.