Scottish Tax and Spend

Today the Scottish Government published a two-page document providing a summary of trends in total Scottish tax receipts since 1980-81. The summary allocates to Scotland a geographical share of North Sea Oil revenues and draws from experimental statistics of Scotland's fiscal balance which are published on the Government Expenditures and Revenues Scotland (GERS) website here.

The data are not new. The fiscal balance estimates were updated for the GERS exercise to include 201-2 fiscal data and published on 5 March. Nevertheless, the Herald thought the information to be of sufficient importance to run the story as its main feature under the headline "New Report: Scots paying more tax than rest of UK" Given prominence in the story was a quote by Finance Secretary John Swinney from the government Press Release accompanying the report:

These figures confirm what we have known all along. Scotland more than pays her way in the UK. They show that the average tax receipt per person in Scotland has been higher in each of the last 30 years than it has been across the UK as a whole.

As the chart below shows John Swinney's comment is correct.

However, what was not reported in the Herald, wisely in my view, was John Swinney's further comment in the Press Release:

With the full control of our finances we could have invested this money for the people of Scotland, creating jobs and investing in public services.

The 'new report' does not contain any information on spending. An examination of the spending data on the same per capita basis as the tax data and taken from the GERS website reveals the following:

Yes, 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.

So, broadly, these 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, much more than people in the rest of UK.

Now, it is clear that oil revenues were exceptionally high in real terms in the 1980s - as the tax receipts chart indicates. The Scottish people might legitimately note that the greater spending received in that period was much lower than the tax receipt surplus.

A sense of this can be gained from the final chart, which expresses per capita spending in Scotland and UK as a ratio of per capita tax receipts. This is really another way of expressing the fiscal balance data as I did in this post.

The large scale of oil revenues in the 1980s meant that Scotland would have been in surplus - ratio less than one. But from 1990 the spending to tax ratio has tended to be similar in Scotland as in the UK, in fact a little higher in Scotland at 1.11 compared to 1.10 in the UK.

So, if we are to talk about a country 'paying her way', we need to bring into account spending as well as revenues. Public spending per capita has averaged more than ten per cent (10.86%) higher in Scotland than in the UK since 1990/91, while tax receipts (including a geographic share of oil revenues) have averaged less than ten per cent (9.67%) higher in Scotland than in the UK since 1990/91.

With the independent Office of Budget Responsibility predicting (page 102 of its March Economic and Fiscal Outlook) a sustained decline in future oil revenues from £11.2bn in 2011-12 to £4.3bn in 2017-18, Scottish tax receipts are set to fall relative to the UK.

And of course I have not brought into this discussion the issue that an independent Scotland is likely to have to pay higher borrowing costs than the UK as I noted in this and this post. It is not just the size and relative size of a government deficit that matters.

Funding costs must also be considered.

Comments

[Angus McLellan]

Counter-factual arguments relating to interest rates are likely to be weak, especially when dealing with a long period of time as with this data. After all, these GERS-world graphs purport to show "fiscally autonomous Scotland" with a sizable surplus in the 80s at a time when debt costs were high, both absolutely and as a proportion of government expenditure. It appears that UK debt today costs half as much to service, £ for £, as it did before Gordon Brown handed control over monetary policy to the BoE. Adjusted for inflation, that would seem to mean that £X of relative surplus in 1980 or 1990 is much more valuable than the same amount is today in an era of relatively cheap money.

And on that note, why don't Brown's defenders ever point up that simple, obvious "coincidence"? I don't put much faith in coincidences myself, especially not when it comes to breaking with a decades long habit. But perhaps there are other reasons?

[Dick Winchester]

I cannot agree that an independent Scotland with the benefit of oil revenues and other associated taxes plus a positive balance of trade supported by oil/gas supply side activity (hardware & services) is going to have higher borrowing costs than the UK.

In fact, the rUK's loss of oil revenues and its associated taxes plus the negative impact on its balance of trade could well drive its borrowing costs up and probably lead to another cut in its credit rating.

Why do you think the UK Govt suddenly came up recently with its own new oil and gas strategy? The industry is having a boom time again with increased production levels over the next few years and the Treasury wants those taxes!!

[Iain]

So all of this means, essentially that we might be a little bit worse off, or a little bit better off but Scotland is not too poor to look after itself? Am I getting this wrong? And for this reduction if it is so, we get to make most of our decisions (the EU of course makes many for the UK now as well)?

And if we are gong to be poorer we will have to make some savings, like Trident replacement, or ensuring we dont have nuclear and therefore avoiding the decommiisioning cost (this round is costing us £76 billion), or aircraft carriers that for a while we werent sure if one of them would have planes, or illegal wars etc.

[David McDonald]

Dick Winchester

It is worth bearing in mind that Norway has to pay 2.2% interest on money is borrows for 10 years, whereas the UK only pays 1.7%. (as at early April 2013).

In other words, to borrow £10 million for 10 years would cost Norway £220,000 - but only costs the UK £170,000.

Norway - as a small, oil rich country of a similar size to Scotland (and the Norwegian government is regarded as trustworthy) - is probably a good comparator for Scotland when looking at borrowing costs.

The size of a country matters a lot when it comes to borrowing money.

(Also this is partly down to the marketability of UK debt vs. Norwegian debt - there is more UK debt and it is traded more widely, so people are keener to buy it knowing that they can sell it.)

Final point - The rUK would only lose the tax from the sale of oil (NB - it would not 'lose' oil revenue - as it never had oil revenue - it only ever received the taxes). Given the overall scale of the UK economy, ther net overall impact is relatively small (bear in mind that the loss of 'Scottish' assets - like oil - will also be linked to the loss of 'Scottish' costs - such as a social welfare net etc).