In this post in April I responded to a Scottish Government document which offered a summary of trends in total Scottish tax receipts since 1980-81. The document shows that Scots have paid more tax than UK tax payers if a geographic share of oil revenues is allocated to Scotland. Hence, according to the Scottish Government "Scotland more than pays her way in the UK."
My April blog sought to point out that conclusions about Scotland paying her way need also to bring spending into account. The blog showed, using Scottish Government data, that spending per person in Scotland has also been higher in each of the last 30 years than it has been across the UK as a whole.
I concluded, that the data suggest that "the greater tax receipts were invested for the people of Scotland, creating jobs and investing in public services. ... The Scottish people have received a significant dividend from North Sea oil revenues .."
I have recently revisited these data and can conclude not only has Scotland received a significant dividend from North Sea oil revenues, it has been almost fully compensated for these higher revenues by higher public spending.
The chart below shows tax and spend per capita in Scotland over the period 1980-81 to 2011-12 at 2011-12 prices.
When you do the numbers, over the 32 year period the total value of tax receipts is £1,425 billion while the total value of public spending in and for Scotland is £1,440 billion. Spending was nearly £15 billion higher in Scotland than the tax receipts including a geographic share of oil revenues. That amounts to additional spending over and above tax receipts of £89 per person per year.
So, it could be argued that the large oil revenues in the 1980s generated a surplus. This was banked with the UK Treasury building up an oil fund that was then drawn on subsequently to meet Scotland's needs.
It might be objected that the gap between public spending and tax receipts was much greater in the UK than Scotland. This is correct. In fact the amount of spending over tax receipts amounted to £644 per person per year. So, net English borrowing was implicitly greater than Scottish borrowing and some of that borrowing was in effect from Scotland. But it has been paid back.
However, a significant, objection to the present analysis is that the estimation of Scottish spending includes a population share of UK public borrowing costs, about 8.3%. With a geographic share of oil revenues assigned to Scotland borrowing costs, at UK borrowing rates of interest, would have been much lower, or even zero, over the period.
For most of the period, the Scottish account would on this basis have been in surplus, as we built up an oil fund in the 1980's (banked with the UK Treasury) and drew it down to meet Scotland's needs.
I estimate using 19 years of Government Expenditure and Revenues Scotland (GERS) that Scotland's share of UK debt interest amounted to £83 billion at 2001-12 prices. Subtracting this from total estimated Scottish spend of £1,440 billion we get a debt interest adjusted estimate of spend of £1,357 billion. Total estimated tax revenues are £1,425 billion. This means that Scotland was in overall surplus by about £68 billion.
To put this another way Scotland had returned to it in spending for the Scottish people 95% of the tax revenues it generated.
So, I hear some supporters of Scottish independence say "well that proves, Scotland can pay its way better than the rest of UK and so would do better if independent."
But this would be an incorrect interpretation of these data.
First, that was the past and actually Scotland did all right from the Union over a period of 30 years.
Secondly, the future looks different as oil will not be at those levels again and production is expected to be negligible by the 2040s according to Kemp and Stephen's estimates.
Thirdly, an independent Scotland would have to borrow to manage cash flow and keep spending at present levels. There are two problems with that:
- First, it might well pay higher interest rates. The UK Government was easily able to borrow the money to fund the gap between spending and tax receipts, an independent Scotland would find borrowing more costly and less easy as I and others have noted, for example, here and here. Though, so long as the interest rate paid on Scottish borrowing is not penal it will not be critical. But Scottish government outlays would rise, by about £1 billion if a premium of only 1% above UK borrowing costs is paid as I noted here. That would mean additional borrowing, or a diversion of spending from investment in the people of Scotland.
- Scotland couldn't keep borrowing to pay for spending in excess of its tax take – the markets wouldn't allow it, especially a new state with no financial track record, with no central bank and borrowing in a foreign currency if sterling is adopted.
Fourthly, Scotland has had the benefit of its oil fund without all the uncertainty that would have been caused in an independent Scotland due to the volatility of oil prices and production.
So, this analysis suggests that Scotland has already spent most, if not all, of its oil fund, while the possibility of creating such an oil fund in a future independent Scotland will be significantly less, unless there are major cutbacks in spending.