And we’re off… Government Expenditure and Revenue Scotland 2019-20

As we highlighted in our podcast on Monday, today sees the publication of the latest Government Expenditure and Revenue (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 and our new 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 -£15.1 bn or –8.6% of Scottish GDP for 2019-20. This compares with a UK net fiscal balance of –2.5% of UK GDP.

Table: Net fiscal balance – Scotland and UK 2015-16 to 2019-20

Net Fiscal Balance: Scotland and UK

Source: GERS 2019-20, Table S.1

The net fiscal balance as a share of GDP has worsened for both Scotland and the UK in 2019-20, by 0.6 percentage points for the UK and 1.2 percentage points for Scotland. The publication states that in part, this will be due to the impact of COVID-19, with the OBR estimating that UK borrowing in 2019-20 has increased by 0.4 percentage points as a result of the pandemic.  However, there are also other changes that can help explain this, such as the looser fiscal stance on spending in general, the above inflation increase in the personal allowance, and falling oil revenues (which largely explains why the impact on Scotland is larger as a share of GDP).

How does this link to devolved powers?

Most of the today’s coverage will concentrate on the headline numbers and what this all means for the independence debate.

However, there continues to be some interesting implications from the devolution of powers to the Scottish Parliament. Data from HMRC from the last few years has indicated that the number of higher and additional rate income taxpayers in Scotland is lower than was previously estimated using survey data.

This has for the last two publications been reflected in the most recent years of the GERS figures presented in the document itself. As far as we can tell, this data have not been used to adjust earlier years of the GERS estimates (available in the accompanying spreadsheets), so we still have a bit of a step change in the timeseries of the Scottish share of UK income tax receipts. These issues are discussed in Box 1.1 of GERS 2018-19, which is not in the current version.

How has the coronavirus pandemic impacted on the figures?

The figures published today are for the financial year 2019-20, ending in March 2020: therefore, they largely do not include the fiscal stimulus injected by the UK Government to support businesses and households through the pandemic and associated lockdown (the Scottish Government has also supported the COVID-19 response but largely through Barnett consequetials). They also don’t include the collapse in tax revenues that we are seeing as economic activity ground to a halt.

Instead the impact of COVID-19 will show up in the 2020-21 publication, which is due in August 2021.

Of course, this weakening in budget deficits is not unique to Scotland. The latest estimates produced by the OBR in their Fiscal Sustainability Report are that the “central scenario” for the UK deficit is 16% in 2020-21, falling down to around 7% in 2021-22.

As the difference between estimated net fiscal balance and the UK position is structural – i.e. driven by permanently higher expenditure – the figure for Scotland will be higher (i.e. more negative) than that. As an illustration, applying the gap of around 6 percentage points that is the average gap between the Scottish and UK deficits over the past 5 years to this OBR figure means that we can expect the figure for 2020-21 in GERS next year to be around 21-22%.

Final thoughts

GERS is an annual publication that sparks off a debate about Scotland’s public finances.

As we say regularly in our GERS guide, in our numerous articles and podcast: 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 2020 are the same points that we always make about this publication – and when quoting us it’s 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. Put simply, it’s not possible to run structural deficits of this scale over the long-run (even if you believe that a country’s central bank can simply print money to pay for it…btw, they can’t)

But GERS does provide an accurate picture of where Scotland is in 2020. 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’s 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 pressure, 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.

Authors

Director of the Fraser of Allander Institute.

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