In my last post I looked to criticise the SNP’s approach to economic figures. They have a kind of default position which is ‘ we won’t know how much tax revenue we will get until we go independent and we will make decisions based on the realities of oil price and the global economy at that time’. Well that is not good enough ! They should really be challenging the GERS figures and not allowing them to be a stick they beat themselves with.
In particular in my last blog I came amazingly, and suspiciously close to GERS figures for tax revenue by using UKGov and GERS statistics, oft quoted by Better Together. Suspicisoulsy because I allocated pro rata to the 8.6% of total UK population and made only a minor tweek to income tax revenue, due to the surpisingly higher average wages which Scots can now boast over rUK average. With the deficit accredited by GERS, I was within a couple of billion either way, and I didn’t have the entire tax picture, there was more to come.
Hard to Get A Handle on Scotland Ltd’s Top Line ?
The trouble is with GERS is that it is very difficult to disaggregate Scotland Ltd from United Kingdom PLC on the balance book. The over riding reason for this is that companies are not forced to have a legal accounting entity north of the Border and even when they do, goods and services may well be accounted for by their southern offices or depots.
This applies to every part of the (private sector and VAT’ed) economy, apart from of course North Sea oil & gas which has a fortuitous geographically defined, by oil field reporting method due to the royalties excised per barrell. (Or not when tax right offs exceed income or what ever other fiendish mechanisms big oil corporates are using. They do invest hugely and have decommissioning costs too it has to be said. ) However the GERS figures and UKGov publications reveal discussion and disagreement about these figures, and make some estimates about on shore and supply chain contributions to Scotland Ltd. If for example, the majority of 200,000 odd oil workers were taxed and payed NI in Scotland, or this was equated into GERS today, with their famous wage packets, how much smaller would the deficit be?
It should be easier for the GERS figures to come up with an income tax and NI figure based on statistical analysis of average wages and size of the work force. So I took a fag-packet figure on this. However higher wages and lower house prices mean that people are spending more on life’s luxuries, which are VATable, and it doesn’t look like GERS revenue factors in this or the Scot’s liking for a bevvy, or that commuting distances can be longer for our motorists. After my minor adjustment for higher revenues from income tax and NI, adding on arbitrary per capita basis, x 8.6% that is, we get amazingly within +/- £2bn of the GERS budget deficit of between £11-15bn depending on the year in the period 2012-2016.
What the SNP Need to Prove to Themselves and the Electorate- GERS Are Wrong
Now the SNP cannot go into a new referendum without being able to say that Alec Salmond’s lower than Westminster Corporation tax would work, and the rest of the country would pay much the same income taxes and VAT without a far better handle on what Scotland Ltd’s actual turn over is ( ScoGDP) . Depending on the year GERS varies between 7.4% and 8% allocation of ScoGDP to UkGDP. Yet we have higher average wages and we have the lion’s share of the North Sea industty off – and on- shore. However GERS manage to allocate as high as 15.7% of the national UK budget deficit to Scotland, mainly by how they allocate expenditure above Barnett block grant. Or are they missing somethign else out from their revenue equations such as local authority taxes AND incomes ?
I didn’t complete my tax summary for Scotland because I got bored and am neither a tax accountant nor an economist. I stopped when revenues tied with the balance sheet and a deficit or around £13-15bn. Niether did I scrutinise that allocation of Westminster public spending which ends up in Scottish hands directly and not via Holyrood. Nor did I enter the agruments about what Scotland would have to pay for itself in terms of defence, pensions, social security and so on. This is because I am a bit thick and lazy. But also because it gets rather complicated in terms of horse trading between money which is locked into the Scottish economy, or so what if public spending rises as a proportion of GDP if those are jobs in the new armed forces and governmental departments.
Let us keep it simple, stupid. The balance sheet. What does Scotland Ltd turn over, how much does it tax of this turn over, and how much must it borrow or pay off in debt each year? That is what my last blog was about. This blog is about what could be wrong with GERS.
Exports Are the Fly in the GERS Ointment, The Smoking Gun for a Bigger ScoGDP
Where have they come up then with this figure of £50bn exports to rUK versus £12.3 bn to EU and why is ROW not in that BBC and other media report for exports from Scotland Ltd? This is important because the balance of trade is a major economic indicator. Arbitrarily, Rest of World (ROW) exports should be around £13 bn on a per capita basis, meaning that Scotland Ltd exports exactly twice to rUK than it does to anywhere else. Not a surprise, we are an island group of nations with a common language. It is difficult then to disaggregate what these exports are then? How many get sold on and shipped further out of the UK? How many become major economic components or ingredients of items or services exported outside the UK? I played dirty, I took it as bible BBC figures and then added up the same sources quote on exports to the EU, and then took 8.6% of total UK exports to RoW.
However how was this figure, £50bn, a third of the Scottish economy, deduced and how accurate is this as a figure in itself? Now you can give the estbalishment a stick to beat themselves with as I pointed out, because Scotland has a propensity to export goods. If would take the position that far more than half of this fifty billion rUK ‘export’ goes further in the world to reduce Scotland Ltd to the same proportional balance of trade as UK PLC, which is 30% import as GDP, 20% export for 2015 and as a trend around those figures for some years going back.
If you use exports as a proportional index to work back to total GDP then the worse the balance of trade for Scotland, the more innaccurate the GERS figures for ScoGDP are, and the better the balance of trade for Scotland, the more unlikely the GERS tax revenue are correct because there is more economic activity in the private sector than the arbitrary allocation of taxes builds up.
Saying this is a proposterous index to take, then means that Scotland Ltd is a very, very different beast from rUK ltd. Firstly it looks like Scotland has a net positive balance of trade, which is extremely healthy for any economy. In turn that is an admission that Macro economic policy for the financial capital London, and the SE in particular is far out of line with that which will work in Scotland. Or Manchester for that matter. Secondly it means that Scotland has a higher productivity per worker but this is hidden somehow. Why is this the case though? Because a balance of trade negative means that the country is borrowing more money, and some of that has to be done by the national, central bank to hold up the credit in other banks. This then means that per capita, each worker has reduced productivity because they are working off debt.
That is a kind of a tautology you may say. Yet in reality as we know, a poor balance of trade and high consumer and national borrowing almost brought down modern capitalism in 2008 and it had to go to the tax payer and public pocket to bail it out.
The GDP to taxation ratio is the real over riding key indicator of an economies health in terms of what investors and creditors are looking for. Too high and the country looks like a communist run state, too low and the country is not spending enough on the societal welfare, defence, education and infrastructure. The next related pair of economic indicators are the public sector borrowing requirement, ie the budget deficit and the amount of national debt. These two are inter-related closely but it is not entirely the case that we have a mortgage which just gets bigger, nor the case that the PSBR is a temporary overdraught and national debt is longer term. I am nowhere near to understanding that equation. I like arithmetic. I like sums.
The SNP Are Not Finding the Devil, When It Is There in the Detail
The SNP do not have their sums right then. They cannot go in on a wing and a prayer that all will reveal itself to be shiny and we will balance the books based on current spending and borrowing, while maintaining public spending. However I consider them to be lucky in that the GERS figures are not giving the whole picture. It is true to say that like in the chemical baths of an olden days dark room the picture will develope once the jump is taken. However that will be the economic vagiaries of that period of time in change over. The SNP have to come with better figures on ScoGDP and real tax revenues, or a fiscal strategy more people can believe in before they go further.
Brexit is More Predictable as a Playing Park than Indy or Not?
Brexit in some ways is less risky than ScotXit fro UK PLC. This is because we know the ‘no deal’ position is WTO, whcih is not the end of the world by any means, and also we have the Swiss- EU , the Turkish to EU and the EEA – EU trade agreements as models for something better than ‘no deal / WTO Default’. However this is then only telling us the costs of trading, not the actual impact on trading, which for Turkey for example has been a positive. It could well be very negative for the UK.
Scotland will be a prize for the EU as post Macron, it starts to reassert its’ raison d’etre and economic security, but only if an independent Scotland is has a robust balance sheet, or can sustain a few years with borrowing to get to a better position. The SNP have not settled this issue of the balance sheet, nor has GERS in my opinion, which should in theory put independence into the category of much higher tax for Scots and lower welfare.
Why is Scotland So Much Smaller An Economy than Comparitive European and Former Colonial Countries? -Because the GERS are Wrong?
I do not believe that scenario of a basket case Scotland Ltd as in the paragraph above. If you take Norway, as Alex Salmond likes to, it has just under twice the Oil production of Scotland, and you could therefore say that GERS are roughtly right because Norwegian GDP is around twice that of Scotland – but 80% of their taxation comes from oil related activities. ( That figure could include a raid on the “oil fund ” by the Norsk chancellor the few last years, I would need to check)
In fact I believe that the Scottish economy is more like 2/3rds the size of the Norwegian economy at around £200bn, placing it around 9 to 12% of UK total GDP. This is because Norway has few other major economic activities outside oil, apart from fishing and aquaculture, which are net cash earners.
Denmark for example has run with a GDP averaging around about £244 BN for the last decade or so. Why is Scotland with its diversified economy not nearer a figure like this, since it has a much larger oil field than Denmark? Why is it down at £140-£162 bn depending on the year in the GERS figures ?
What about a more recent country which went independent from West Minster and has many similarities to Scotland – New Zealand. Oddly enough this nation of 4.6 million people had a GDP last year more than GERS allocates to Scotland in most of the last six years, at £155bn. Yet it has a tiny oil industry and is reliant on agricultural exports and tourism.
So I do not believe in the GERS GDP figures for Scotland Ltd, they are under estimating the size of the economy, and therefore they paint a bleak picture on tax returns, debt and public services. We have that unusually high level of exporting, which paradoxically betters the position for independence which ever way you slice it up with rUK, either in favour of a larger GDP or a much higher productivity per worker. You have other westernised countries of 4-5 million citizens with bigger GDPs, even without large natural resource deposits. Then you have that me, a motley fool, can recreate the GERS tax revenue estimates on the back of a cyber fag packet, suggesting much of it is allocated arbitrarily per capita, 8.6%. The SNP have failed to tackle this with real facts or lines of arguments which will point to a more secure future.