A Fiscal Dividend: UK Union or Scottish Independence?

The publication today of Government Expenditure and Revenue Scotland 2014 (GERS) provides information on Scotland's fiscal position in 2012-13 with revisions for earlier years. The document is obviously important since it is the last one in the series before the independence referendum on 18 September.

What is the prospective voter in the referendum to make of the figures contained in it?

Danny Alexander, Chief Secretary to the UK Treasury states:

The Scottish government's argument for independence has been undermined by their own figures. It shows that in 2012-13, the Scottish deficit per person was almost £500 worse than that of the UK.

While Alex Salmond, First Minister of Scotland argues:

Today's Gers report confirms what independent commentators and analysts have been making clear - Scotland is one of the wealthiest countries in the world. The figures show that tax revenues generated in 2012-13 were £800 higher per head in Scotland compared with the UK, meaning that now for every one of the last 33 years, tax receipts have been higher in Scotland than the UK

So who is correct?

Well, in a sense, they both are!

The problem is that these statements do not really give much of a guide about the fiscal position in an independent Scotland compared to the position within the UK union. This is of course a complete unknown because economic conditions and policies will be likely to be different in both a future UK union and a future independent Scotland.

However, what might be of help is to conduct a form of thought experiment. In this experiment we can ask has Scotland over the past five years enjoyed a fiscal dividend in the UK union or has it suffered a fiscal cost compared to independence?

Clearly, such an analysis cannot change policies or economic conditions but I still think it is an illuminating exercise none the less.

We know from GERS what Total Managed Expenditure (TME) has been in Scotland over the last five years. We also know the GERS estimate of total tax revenue. We can proxy tax revenues under independence by adding in a geographical share of North Sea oil revenues. We can proxy public spending under independence by taking a Scottish population share of UK TME, so that the Scottish people are no worse off in terms of public services than their rUK counterparts.

That done, we can then compare with the estimated spending and revenues in GERS published today, which is what the table below shows:

	(£ million)
Fiscal   Year	2008-09	2009-10	2010-11	2011-12	2012-13
Spending
Total   Managed Expenditure for Scotland	59,440	62,087	64,095	64,869	65,205
Scots per capita share of UK   TME	53,393	55,219	56,271	56,934	57,538
Excess spending	6,047	6,868	7,824	7,935	7,667
Tax Revenues
With Geographical share of oil revenues	55,349	47,733	51,773	56,315	53,147
Scots tax revs plus Per   capita share of oil revenues	44,820	42,557	45,023	47,264	48,118
Excess revenues	10,529	5,176	6,750	9,051	5,029

 

Excess spending shows the gain to the Scottish people in the UK union - loss under independence - of the spend on public services compared to the rest of the UK, which is the assumed counterfactual minimum that would be expected under independence.

Excess revenues shows the gain in tax revenue under independence - loss under the UK union.

The figure below charts the two and the figure after that the difference between the two:

So there is a fiscal dividend from independence in two of the five years and a fiscal dividend from the UK union in three of the five years. Taking the five years together there is a net dividend in favour of independence of £193 million. This amounts to 0.3% of average TME in Scotland over the five years, or £39 per person or roughly £8 per year.

The following points can be made:

• The fiscal dividend to independence can therefore be considered to be very small and appears likely to be negative in the near future.

• There is no estimate of the economic and fiscal transition costs of Scotland becoming an independent state, which if included would additionally make the dividend negative.
• In the fiscal year 2008-09 oil prices and oil revenues were high. In the future, oil revenues are likely to decline as the volume of production falls considerably from the position in 2008-09.
• During the last five years the Scottish people have had returned to them in higher public spending almost all of the oil tax revenues that went to the UK Treasury.
• We cannot determine the fiscal position of an independent Scotland in the long-term because different economic conditions and policies in both rUK and Scotland will determine whether there is a fiscal dividend, or a fiscal cost to independence.

Comments

[Alan Weir]

As you indicate, the GERS figures cannot be used directly to predict differences between a 'future UK union and a future independent Scotland' .. 'because economic conditions and policies will be likely to be different'. At best they can be used to estimate fiscal transfers within the current set-up. Your thought experiment certainly can't be used to measure that, it seems to me.

Thus if I was a partner in an enterprise which was losing money and having to borrow, and if each partner's rewards and the income each generated for the business could be fairly accurately separated out and, finally, if I was both receiving more and generating more than average, how could I tell if I was being subsidised, or subsidising? I suppose an economist would say it would depend on whether my income per unit time was equal to my marginal productivity. But that’s not really applicable here, the different parts of the UK aren’t factors contributing to a single product. But assuming relative independence of the income streams in the firm example, I can look at the difference between the money I bring in, as a percentage of total revenue, and my income, as a percentage of total income. If it is positive, then I am a subsidiser to the tune of the amount it would cost to bring these into line, by bumping up my rewards, or by my bringing in that amount less money. (True the total income or revenue pies wouldn’t stay the same given changes in the pattern of input or reward among the partners but if I am only a fairly small cog, that should give a fairly accurate measure should it not?)

Furthermore, if my income from client X was very significant, I would not think that my additional input, if I was a net contributor, could be measured by the difference between this income and the result of sharing out my income from X among all the partners, which seems to be roughly what is going on when you compare (Scottish non-oil revenues + Scottish oil) to (Scottish non-oil revenues + oil revenues times our population share.) The contribution of tax revenue T from the City of London to the UK is not the same as (T times (1 minus population of London/UK population)).

So with ‘a’ non-oil Scottish revenue, ‘b’ UK oil revenue, ‘T’ total UK tax, ‘e’ Scottish TME, ‘E’ UK TME, ‘p’ our population share, ‘g’ our geographic oil share I am suggesting the Scottish subsidy to UK (or vice versa) is [(a+gb)/T - e/E]*GDP. Your formula is [(a+gb) - (a+ pb)] - [e - pE] = (g-p)b - [e - pE]. But that then completely neglects the non-oil component, changes in it make no difference to the figure unless they change oil revenues or public spending decisions. And of course oil/non-oil is arbitrary. It could have been a = non-whisky revenues and b = whisky duty. And it neglects T and GDP. If expenditure rises faster (but remains proportionately higher and to the same degree in Scotland) than tax revenues, including oil (because rising faster than GDP perhaps, say in a recession) then on your account the Scottish subsidy to UK goes down, or the rUK subsidy to Scotland goes up, even if Scotland continues to contribute the same proportion more in tax than it spends.

If we look at the percentage gap between Scottish/UK revenue on the one hand (including all of Scottish tax revenues, not excluding arbitrarily e.g. the whisky, or else the oil) and Scottish/UK TME on the other, the figures for the last five years are:

0.90%, 0.00%, 0.10%, 0.50%, -0.20%.

When you calculate the percentages of Scottish GDP in each case and sum, the answer is a £1,926 million transfer from Scotland to rUK, not £193 million. Of course your estimate is not for internal fiscal transfers but a counterfactual 'dividend' or 'loss' from union. But since the alleged subsidy has featured very heavily in the debate, and the difference is a factor of ten, isn’t it important to be clear about exactly is being measured here?

Moreover I am having trouble seeing how your calculation does give an estimate of how we would likely have fared had we been independent. For example, I don't see why one should assume our public spending would be down at the UK level (even if total tax revenues were the same as estimated by GERS). But I'll pause for breath there and try to put together a comment on that.

[lwarence]

Fascinating read .Was just wondering if the gap in 2012/13 would have been so large if the threat of independence was not there or would the trend from the previous year not have continued because of Westminster`s austerity cuts, therefore creating excess revenues.