Day: August 17, 2023

Strong growth in income tax and energy sector

Scotland’s notional deficit has continued to fall at a faster pace than the UK’s, driven by record energy sector revenues and strong growth in the tax take, figures for the 2022-23 financial year show.

Total revenue for Scotland increased by 20.7% (£15 billion) compared with 11.3% for the UK as a whole. This includes a £1.9 billion increase in revenue from Scottish income tax and £6.9 billion increase in North Sea revenue. These increases have partially been offset by a rise in spending on cost of living measures and interest payments on UK Government debt.

To mark publication of the 30th Government Expenditure and Revenue Scotland (GERS) statistics, the Cabinet Secretary for Wellbeing Economy, Fair Work and Energy, Neil Gray, visited the University of Glasgow’s Mazumdar-Shaw Advanced Research Centre to learn about the significant economic potential of quantum technology to Scotland’s economy. Recent research has suggested the sector could be worth £1 billion to Scotland by 2030.

Mr Gray said: “I am pleased that Scotland’s finances are improving at a faster rate than the UK as a whole, with revenue driven by Scotland’s progressive approach to income tax and our vibrant energy sector.

“While the record revenues from the North Sea show the extent that the UK continues to benefit from Scotland’s natural wealth, these statistics do not reflect the full benefits of the green economy, with hundreds of millions of pounds in revenue not yet captured.

“It is important to remember that GERS reflects the current constitutional position, with 41% of public expenditure and 64% of tax revenue the responsibility of the UK Government. Indeed, a full £1 billion of our deficit is the direct result of the UK Government’s mismanagement of the public finances.

“An independent Scotland would have the powers to make different choices, with different budgetary results, to best serve Scotland’s interests.

“While we are bound to the UK’s economic model and do not hold all the financial levers needed, we will continue to use all the powers we do have to grow a green wellbeing economy, while making the case that we need independence to enable Scotland to match the economic success of our European neighbours.

“I’m grateful to the University of Glasgow for showing me their world-leading quantum technology research, which could be worth £1 billion to our economy within seven years, highlighting just how bright Scotland’s future could be outside of the UK.”

Government Expenditure and Revenue Scotland 2022-23

Government Expenditure & Revenue Scotland figures ‘show Scotland benefits from being part of a strong United Kingdom with a sharing and pooling of resources’

The Scottish Government has published their annual Government Expenditure & Revenue Scotland report, which shows the difference between total revenue and total public sector spending in Scotland.

The figures for 2022-2023 showed that people in Scotland are continuing to benefit from levels of public spending substantially above the United Kingdom average.

And even in a year of exceptional North Sea Revenues, Scotland’s deficit is still more than £19 billion, demonstrating how the country continues to benefit from being part of a strong United Kingdom, with the vital pooling and sharing of resources that the Union brings.

Commenting on the figures, Scottish Secretary Alister Jack said: “The Scottish Government’s own figures show yet again how people in Scotland benefit hugely from being part of a strong United Kingdom.

“Scotland’s deficit is more than £19billion – even in a year of exceptional North Sea Revenues. Without oil and gas, that figure soars to more than £28billion.

“People in Scotland benefit to the tune of £1,521 per person thanks to higher levels of public spending.

“As we face cost of living pressures and unprecedented global challenges it is clear Scotland is better off as part of a strong United Kingdom.”

GERS 2023 – Uptick in oil revenues narrows the gap between Scottish and UK Deficit

Fraser of Allander Institute’s MAIRI SPOWAGE, JOAO SOUSA and CIARA CRUMMEY unpick the latest statistics:

This morning sees the publication of Government Expenditure and Revenue Scotland 2022-23.

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 what different choices Scotland could make in terms of taxation and spending.

So what do the latest statistics show?

The latest figures show that the net fiscal balance for 2022-23 was -£19.1 bn, which represents -9.0% of GDP. This is a fall from the 2021-22 figure of -12.8% of GDP and is down significantly from 2020-21 which was inflated hugely by COVID-related spending.

The comparable UK figure for 2022-23 is -5.2% of GDP. The UK figure is unchanged from 2021-22. The reason for the differential trend for Scotland and the UK as a whole has been driven by North Sea revenue, which contributed £9.4 billion to Scottish revenue in 2022-23.

Chart 1: Scottish and UK net fiscal balance, 1998-99 to 2022-23

Source: Scottish Government

In this year of record North Sea revenue (at least in cash terms), the difference between the Scottish and UK deficit is driven by the expenditure side of the net fiscal balance equation.

Chart 2: Spending and revenue per head, Scotland-UK, 1998-99 to 2022-23

Source: Scottish Government

On revenues, including the North Sea, Scotland raised £696 more per head than the UK, whilst on expenditure, Scotland spent £2,217 more per head than the UK average.

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.

In 2021, we discussed the differences between parts of the UK in an episode of BBC Radio 4’s More or Less programme.

The Scottish Government doesn’t have a deficit as it has to run a balanced budget

This statement isn’t quite 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 2023. 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:

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 arrangement
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.

Look out for more analysis

It’ll be interesting to see the coverage of these statistics today and the talking points that are generated given where we are in the constitutional debate.

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 our weekly update later this week!