Podcast: GERS-onomics: reflections on the latest figures

Episode Summary

This week, Chirsty McFadyen is joined by Director Mairi Spowage and Deputy Director Joao Sousa to discuss the latest GERS (Government Expenditure and Revenue Scotland) figures published today, along with some reflections on the Scottish Government response.

Episode Notes

Episode Transcript

00:00:05 Chirsty McFadyen

Hello and welcome back to another episode of the Fraser of Allander Podcast. I’m Chirsty McFadyen, an economist at the Fraser of Allander Institute and today I’ve got with me Mairi Spowage, the director of the Fraser, and Joao Sousa, the deputy director. Today, we’re going to be talking about GERS. That’s the government expenditure and revenue Scotland statistics which came out today for the period 2024-2025. I thought would be good to just start with a little bit about what GERS is and why it matters. Mairi or Joao, do you want to start off?

00:00:37 Mairi Spowage

Sure. So GERS is a statistical publication that’s been produced by the Scottish Government for many years. I think this is the 33rd edition or something like that, but it’s, you know, it’s been produced for years and years and years and, and it’s an accredited statistics publication, which means it’s produced by professional statisticians in the Scottish Government, and it’s sort of overseen by the statistics watchdog to make sure it, you know complies with all of the sort of standards and regulations. So it’s, you know, it’s it’s got the official kite mark of basically a good set of numbers which you know can be relied upon, not only to be of good quality but also to be produced free of political interference. And you know, according to sound methods.

So um, so it’s a statistics publication. You know, so far so you know, so what? It’s uh, there’s lots of stats that are produced by the Government, of course. But what GERS tells us is, in, in short, is what Scotland spends its money on. So, what money is spent for the benefit of people of Scotland on services by the UK Government, by the Scottish Government, by local government. So. what’s spent on services kind of, no matter who delivers them it it it, it covers all spending. And it compares that with what we raise in tax revenues in Scotland you know, so reserved taxes, devolved taxes, local taxes. So no matter who we pay the tax to.

So it adds up all the spending and adds up all the revenues and it compares them with each other to produce what’s called the notional deficit. So the idea of of the the publication really is to answer the question to what extent are the revenues that we raise in Scotland covering the services that we enjoy from, you know, from the government at all levels in Scotland, so that’s the purpose of GERS. It does it for the latest financial year. So April 2024 to March 2025, it’s sort of backward looking. So it’s it’s estimating, you know what those two numbers are, and the difference between them for the last financial year under the the current constitutional arrangements. So listeners might have heard some of the coverage this morning saying that this is the deficit an independent Scotland would have faced last year. That’s definitely been said. I’ve heard it said.

And it’s that’s not quite right, because the point is that it’s under the the current arrangements as part of the UK. So you know it certainly raises some questions for those who advocate for independence. I’m not saying it’s not relevant, but that’s not quite right either. Because obviously, if if we were an independent country, then potentially different choices would be made on on both sides of the Ledger.

00:03:33 Joao Sousa

Yeah. And it I think you’re right. It’s it’s a, it’s a really useful starting point to think you know this, if you think about what an independent Scotland might have to begin with. this would be kind of the inherited system. You can obviously make different decisions in terms of how much to spend on different things, how much revenue to raise, how much revenue you would need to raise. But I think I think it illustrates just the fact that that that decision has to be wrestled with.

Because in some sense, these figures, as you said, they’re notional, they’re kind of intra sovereign state, it’s perfectly normal for different parts of of a sovereign state to have higher or lower net contributions, to have higher or lower revenues. There’s lots of, we know that for example oil and gas is much more concentrated in Scotland, so Scotland would, you know, you’d portion more of of that revenue to Scotland if you if you’re doing it on a geographical basis.

And you know, finance is a lot more in, there’s quite a lot in Scotland, but it’s much much more in London, for example. There’s all sorts of of different geographical concentrations of of industries and and of regional productivity and all of that, it’s it’s totally normal within… And in fact, it’s not just totally normal, this is what happens in every, pretty much every country you know, you, you just have different areas contribute more, in other areas you might spend more because they are more remote, because they’re more rural, because each, you know there’s there’s a baseline level of of service provision they they want to implement across the country.

So all these things are are perfectly valid. But this is just notional at this point. If Scotland had to raise funds from the debt markets, then it would have to to to decide, you know what we’re gonna do about this on day one, and that’s why that’s some of the relevance of that for the independence debate.

Now that again, it’s not to say, you know, you can’t do this. Obviously the answer of of how much you should raise in tax revenue is not necessarily, perhaps it really isn’t how much the UK as a whole raises as a share of GDP, nor is it necessarily how much should be spent as a share of GDP. And that’s a decision for the policy to make as a whole. But it it is, it is kind of like the starting point in the short term. Again, it doesn’t tell us anything about the long term either.

00:06:20 Mairi Spowage

No, and I think if listeners are like new to any of the slight madness around GERS, let’s face it is a bit crazy every year, some of the coverage it gets. We have to remember the importance that it did have around the independence referendum and you know, the fact that the figures were used as the basis, sort of the, you know, completely the agreed basis from both sides of the argument, whether it was yes or no, that you know, this was the starting point of Scotland in you know, 2012/13 or whatever the latest data was at the time of the White Paper being produced and all of the stuff around the independence referendum.

And indeed the Scottish Government when they were sort of making the case for independence in the run up to the referendum used the GERS figures as a basis and then produced financial projections for might what might happen over the next you know, 5 to 10 years as as Scotland became independent in their, you know, ideal scenario where the where Scotland voted yes.

So these figures have been very important in the independence debate,l sort of accepted as, you know the the sort of where we are now or where we were a few months ago at the end of the last financial year. And so in talking about the sorts of challenges and opportunities that potentially independence would would bring, you know, in our view, people who are advocating for independence do need to deal with the issue of the fact that that the level of the Scottish deficit, that’s that that’s implied through these figures would probably be be unsustainable. I mean, we’re jumping ahead to what the figures showed today, which we’ll come on to next, no doubt.

But you know that is it is important to remember their resonance during the independence referendum debate. I think one thing that I found quite interesting today, and I don’t know if you agree, Joao, it’s the fact that perhaps the slightly more muted coverage of this city than maybe in the past, maybe highlights or underlines a little bit the fact that this isn’t a, this isn’t such an issue that’s going to be debated in the run up to the Hollyrood election and and and things like that, as maybe as it was a few years ago. I don’t know if you agree with me, but it it feels a bit symptomatic of the fact that people generally aren’t wanting to talk about this issue right now. Is that fair?

00:08:55 Joao Sousa

I I I think so. I think the temperature has has dropped a little bit in in the discussion. I think you know, I I’d like to think that some of it is because so many people have for for the last over a dozen years, been talking about what what things do and don’t show and and there’s there’s a lot more coverage about this bit of… Because because they this is a an exercise that you know, there’s some slightly different assumptions that are made, but ultimately, this is an exercise that’s done for for all 12, they’re called ITL1 subdivisions of the UK, so you can find what the notion of deficit is for Scotland, for Wales, Northern Ireland, for the East Midlands, whatever. And Scotland obviously it has more prominence, but it also means that it has more coverage as to what is and isn’t included.

And and and so I think that there there surely is a bit of that. But I think it’s also reflective of the fact that I think you’re right that there are, there are perhaps a great many people who would have been very keen to talk about this that a few years ago that perhaps don’t see it as being the be all end all now.

00:10:19 Chirsty McFadyen

Thanks both. It’s really useful context for thinking about the figures that have come out today. So let’s talk about the results that we’ve seen today. What do the latest figures tell us and what drivers have impacted on them and the changes we’ve seen since 2023/24?

00:10:38 Joao Sousa

Right. So this year, the, the, the notional deficit is about 12% of GDP. That’s that’s a bit higher than it was last year. So when I say last year, this is actually the figures for last year 24/25 and for the year before 23/24, it was a little bit lower than that.

And it’s about £25-26 billion, which is not an insignificant number as detailed by the fact that it’s about 12% of GDP, so that is…

On the whole, the biggest thing is that spending is higher in Scotland than the UK average and significantly higher, and this is highlighted by the fact that per person it’s over £2000 higher for Scotland than it is for the rest of the UK.

How has it changed since since the the previous iteration? Well, it’s it’s gotten a bit wider, and and it’s mostly because devolved expenditure has grown more quickly than revenues. And in fact, so that contributes to… So when I say grown more quickly, it’s grown, it’s grown by more. And so the the Scottish Government made a big thing about the fact that devolved revenues were growing at a faster rate than the devolved expenditure and that that is true. So devolved revenues grew at nearly 10% whereas the devolved expenditure grew by nearly 7%. However. Devolved revenues are about 25 billion and devolved expenditure about is about 70 billion. So even if you were growing at a slower rate, if you’ve got such a vastly bigger number that you’re growing by that percentage, it’s going to mean that the overall effect is, is for expenditure to grow by more than your revenues grew by. So that’s the biggest driver that that drives about 2/3 of the of the increase.

There’s there’s two ofsetting effects on the on on the on taxes. 1 is kind of reserved revenues, so Jeremy Hunt cut National Insurance contributions for 24/25 from 10 to 8% for employees. So that means that uh it uh, revenues would fall by 0.8% of GDP. Uh devolved revenues grew by 0.8% of GDP. So on that we’re kind of like, you know, back to square 1.

And North Sea revenues also fell by 0.4% of GDP, and that’s mostly driven by the fact that oil and gas prices fell relative to the previous year. We we’re in a point where, you know, there’s there’s, there’s a lot more revenue that’s that’s being extracted per pound of profit at the moment from than there was a few years ago from oil and gas companies because of the energy profits levy or the windfall tax. So that was, that was a factor in that, and that’s that’s partly why some of the the the there’s been some excess revenues from oil and gas, but ultimately we’re kind of like trending back towards an equilibrium.

Where Scotland’s oil and gas industry just isn’t as profitable as it used to be, and we’re kind of on on the transition to net zero as well, which means that there’s no real prospect of that changing massively for the, the, the, the benefit of of the exchequer.

So. Ultimately, that’s part of the story here, but as I said, the biggest driver is really spending on public services that are controlled by Hollyrood.

00:14:24 Chirsty McFadyen

And you mentioned you mentioned the Scottish Government response to the figures. Should we go into that a little bit more?

00:14:31 Mairi Spowage

Yeah, yeah, sure. I mean. I think it’s, Joao, you can correct me if I’m wrong, but I think I’d sum up what you said about the headline of the Scottish Government response, which was that devolved revenues were increasing faster than devolved spending is sort of technically true, but not particularly insightful or like it really doesn’t tell you much about the situation.

Joao Sousa

Exactly. Yeah.

Mairi Spowage

Yeah. Given the the relative size of both of the blocks and the fact that and. And we covered this in our blog, which listeners can go and have a look at, you know.

The the thing that determines that that mostly determines devolved spending, devolved revenues are of course important and of increasing importance now that income tax is mostly devolved. But you know the main thing is still the block grant, so it’s it’s determined by that.

And then there’s an additional kind of technical complication, which we probably won’t go into and about the fact that just because devolved revenues are increasing, at a particular rate does not necessarily mean that’ll translate into spending power for the Scottish Government because of the way the fiscal framework operates and the fact that the the block grant is adjusted.

And and therefore if if revenues in Scotland are are increasing as fast per person as at the at the UK average for income tax, then the budget might end up, you know, not as well off as it kind of should be with the higher tax rates we’re we’re paying in Scotland. So I mean we’ve we’ve talked to that about that at length, but it’s just it’s an interesting difference between the way that revenues are actually gonna translate into devolved spending. So it’s not like there’s sort of some surplus that’s being generated somewhere that the Scottish Government aren’t spending or that this is offsetting some some other deficit, so it’s important to just say that.

And there was a couple of other things and the the Scottish Government response and maybe I’ll take one of them and and and Joao can take the other.

The the first was a statement and the response that all revenues generated in Scotland were enough to cover day-to-day devolved spending, plus all reserved Social Security payments.

So this was, you know, the second line of the press release, maybe something like that, you know, as a great fanfare as a some sort of, yeah, some sort of, you know, interesting point to make about the figure.

But I mean, we’ve said this before because they used this line in the 2022 response to GERS, and I think it also appeared in the, the economic paper that was published as a series of building a new Scotland which was the kind of last series of independence you know, briefing papers that they published.

But to me this is quite a meaningless statement. I mean, technically it’s true that that figure of all revenues covers these two things, which is day-to-day devolved spending, plus you know, all reserve Social Security payments, including the state pension. It’s true, but what does it really tell you? I mean, you know, it doesn’t cover the almost £10 billion of devolved capital spending, for example.

It also misses out lots of other things that are covered by the total spending amount, including, you know, the entirety of defence and public sector debt interest and you know other other stuff. So I find it a little bit of an odd one and and and I don’t find it a particularly insightful or meaningful thing to say.

00:18:21 Joao Sousa

No. And I think I think it, yeah, it fits in the same category. I think that that you mentioned before, it’s kind of like true. But, but why would you say that?

00:18:31 Mairi Spowage

Yeah.

00:18:31 Joao Sousa

Because the the corollary of that is that it it isn’t enough to cover all the other things.

00:18:39 Mairi Spowage

Well, quite, yeah.

00:18:39 Joao Sousa

Which which which which to begin with we knew because there was a defecit to explain to begin with.

00:18:45 Mairi Spowage

Yeah, yeah.

00:18:45 Joao Sousa

So we we’ve kind of gone full circle.

00:18:50 Mairi Spowage

The other one I think was I hadn’t seen them say in quite this way before in terms of presenting the figures in in GERS and and you know and it’s obviously ministers prerogative to try and present the figures in a positive light, but was the the point that they made on defence and the in the press release. Joao why don’t you cover that and and what we made of it?

00:19:13 Joao Sousa

Yeah. So this this was an interesting one. So obviously the fence is a reserved power and it’s one that in the way the statistics are compiled is calculated on a on a population basis because we benefit, the judgement is that we we all benefit across the UK from, say, patrolling the waters off the coast in Hull or from maintaining a standing army and things like that. All all those things. So it’s it’s really regardless of where you you station s omeone, like they it’s it’s a combined Army, Navy, Royal Air Force etcetera.

So. You could make a a really good argument and I think it quite persuasive argument that that is the best way of of doing things because the the specific geography where where this occurs is is not here nor there, you know that that that’s that’s like saying like you know that you know. The, the and and there’s there’s troops stationed abroad as well, so it’s just like saying, well, there’s no point Scotland doesn’t benefit in any way from us having a an Air Force Base in Akrotiri and the Dhekelia in Cyprus. I mean obviously we do and and it it’s really hard to to just say well it’s just whatever is, you know, north of uh, of of the border counts towards Scotland.

So so that that would be quite a simplistic way of doing it and nonetheless I think that’s that’s partly what the Scottish Government is attempting to do in this response by saying that you know this portions about £5 billion to Scotland in terms of defence spending, but actually only £2.1 billion they say is spent with industry in Scotland.

Another statement that is factually correct because you go in and check it in the in the MOD Stats release. However, that’s that’s only procurement and that is far from the totality of spending. So if you believe that, then you have to ascertain that that no spending matters, say on personnel or on R&D that’s conducted in-house or any other things that don’t require you to have contracted out.

So it’s true that the 2.1 billion goes to industry in Scotland, but it o mits all civilian and military staff based in Scotland, for example, that are employees of the Ministry of Defense.

That to me doesn’t sound like a a particularly persuasive way of of pushing this, and actually the other thing that is interesting is that the procurement share for Scotland is actually very similar to the to the, to the population share. I mean, it’s a few decimal points difference, but it really wouldn’t change very much in in terms of calculation if you just apply that to the whole of defence spending.

And that kind of turns us back to one thing that we say year after year, about GERS is that you might quibble with some of the assumptions and some of them are obviously a simplification. It’s really hard to apportion things in terms of profitability of of companies and where they’re based and where, how you should apportion them on the basis of employees, which I think is what it’s done. I think things like that. So it it can be really hard, however if you make some other assumptions that are in the realms of plausibility, you end up with a story that is essentially the same, even if the details are slightly different year to year.

00:22:52 Mairi Spowage

Well two things I’d say in in response to that. I mean, you know I’ll declare an interest. I used to be the statistician responsible for GERS back in the day and including in the run up to the referendum.

I will say is a statistical publication and the methods that use, there’s been no statistical publication which has faced more scrutiny, more user engagement, more, you know, work with the statistical watchdogs to ensure that the methods are as beyond reproach as as possible. You know, and as seem to be and and and are, you know, the best quality possible. And you know, and so on. So that’s one thing I would say and always using the most, the best methods, the most up-to-date data. And so on.

I’ll say as well though, that with this defence thing and the, I mean, I think it’s a little bit more egregious than even you’re saying because the implication in the press release is that it should be 2.1 rather than 5.1.

You know? Now that’s not what’s said exactly, but I think that’s what the reader might make of it, is that, you know, in GERS, you know, it’s double what it should be or something like that. And the fact that none of the spending that happens by the MOD on military staff, which are based in Scotland, of which there are quite a lot.

I think it’s about of order and the fact that the 2.1 billion is of what 28 billion which the Ministry of Defence spends with industry in the UK, you know that’s what half of the defence budget?

You know, so I just find like, I find that pretty out of order to be honest, because I think it’s implying something which you know isn’t exactly fair. And I think it’s a little bit, I think it’s a bit, it’s about misleading to be honest.

00:24:46 Joao Sousa

Yeah. It’s kind of like walking you towards that. And then just saying, I’m not saying that, but.

00:24:55 Mairi Spowage.

Yeah.

00:24:55 Joao Sousa

And and I think I think you’re right, it is.

00:24:57 Mairi Spowage

And I think I think like and and you know, I’m not in government, I’m not a civil servant anymore. But like you know, for the statisticians producing those statistics to the best possible methods, you know, under such scrutiny, accredited, you know they get kicked up and down the road every year these are published. To have your own Minister doing that. And I I I think it’s slightly out of order to be honest, but you know. I get quite grumpy about these things.

But yeah, I mean, you know what we’ve done, what we’re supposed to do, which is to point out that these are are probably not helpful ways of presenting the numbers, that you know this is what they really mean. And I suppose that’s our job done and all we can do is is hope that that the presentation is better in future as we do every year.

00:25:51 Chirsty McFadyen

No thanks both that’s really useful to kind of understand where we’ve got the facts versus where there’s maybe sort of opinions being added and and things being changed a little bit through words. Thinking more broadly and and into the next general election. What impact is this likely to have, if any and and you know will GERS be used as part of the general election in terms of campaigning and things like that?

00:26:16 Mairi Spowage

It’s a really interesting question and I I was quite interested to see in the coverage in the run up to the release of this, this this morning. You know there was, there was a bit of coverage which suggested that, you know like these will feature.

I’m not so sure they will, to be honest, hugely as we touched on at the beginning of the podcast, it really depends.

You you know, the fact that we have this notional deficit is not a problem if you are, if you’re going to be remaining in the UK, essentially it’s a you know, as the UK government did in their statement, it’s basically it demonstrates that we get, we get significantly higher public spending per head than the UK average, which you know could be seen as as a benefit, so you know.

If, if the Constitution and independence and and so on, isn’t it a big feature, then I don’t think GERS will be a big feature. I think it’s only if that is the case that we’re going to see these figures being used widely in the campaign and and I think I think especially given the the sort of, that what the the first Ministers laid out and so on about the, you know what the tests would be for the the, the election being a verdict on whether he should seek to try and get a, you know, to to negotiate for independence, you know, I I just don’t think it’s gonna feature that heavily. I don’t know. Joao do you agree?

00:27:52 Joao Sousa

Yeah, I think I think you’re right. I I think it it won’t feature in and of itself as as a big thing. I think it will be subordinate to whatever discussion is on the Constitution and it doesn’t feel to me like the Constitution is as big a feature as it has been at other points, I mean far from me to say why and or why not, but but it does feel like there’s there’s a bit, like I said a bit lower temperature on on the debate and and so it feels like this is kind of something that people don’t feel as strongly about?

And and therefore I, I I I I really do think that there will be. It’ll be a lot more about particular areas of of services over which the Scottish Government does have control.

Rather than hypothetical discussions, and I think I think some of it, you know some of it will, people might might agree or disagree in terms of whether that’s good or bad. But I think some of the focus especially next year will be, will be, it will make sense in terms of like the maturity of the of the Scottish Parliament, Parliament, right. Like I think people have a better understanding than they used to, even if it’s not perfect of of the the powers that are in control of of, of Hollyrood and of Scottish ministers.

And and I think particularly things like the health service will be much more of the focus than than necessarily the the Constitution. But I I say this nine months out or something like that.

00:29:39 Mairi Spowage

Well, I was going to say, you know who knows.

00:29:41 Joao Sousa

Happy to be proved wrong.

00:29:42 Mairi Spowage

You know, yeah, things could be thrown up in the air and I think I think people are getting a better understanding. But like, I think there’s still, you know, more to do particularly on the kind of tax sides to ensure that people really understand what’s in the power of the the Scottish Parliament and…

You know, it’ll be really interesting to see what different proposals that the parties have for this election, now that all of the Smith Scotland, 2016 powers Scotland 2016 powers have now been more or less implemented, they’re kind of…

00:30:18 Joao Sousa.

Apart from the unimplementable.

00:30:21 Speaker 3

Yes, exactly. So everything’s pretty much up and running, so it’ll be really interesting to see what this range of parties and given we’re probably going to have six parties involved in some way, are are going to like offer in terms of how they’re going to utilise these powers, that there are and and how much, if any, the discussions in the manifestos will be about things which really aren’t on the ballot. But it doesn’t stop the parties talking about it. So. So yeah. So that’ll be really interesting to see.

But, but yeah, my money’s on GERS figures not really featuring, but yeah, but I shouldn’t be a betting woman.

00:31:01 Chirsty McFadyen

Well, we’ll definitely have more on that closer to the time. Thank you both very much for the chat today. That is GERS day officially over for us. We will see you next year with more stats on that, but please feel free to check out other episodes of our podcast. You can also have a look at the blog we’ve done on the GERS output today on fraserofallander.org along with lots of other research. Thanks very much for listening and we will see you next time.

00:31:34 Ben Cooper

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