The following is an article written by Michael Fry for The National newspaper and is published here with the National’s approval.
LURKING in the recesses of the internet over the past two or three weeks there has been a continuing debate about GERS, the figures for Government Expenditure and Revenue in Scotland which are published annually at the end of the summer holidays and just in time to set the new political year, I always think, off to a gloomy start. But this time to the cloud there is, in a certain kind of way, a silver lining.
Recently these statistics have consistently shown a big Scottish deficit. In 2016-7 it amounted to £13.3 billion or 8.3 per cent of gross domestic product, compared to a figure for the UK as a whole of £46.2bn or 2.4 per cent. This year’s figure for Scotland improved on last year’s but only a little. If, some way down the line, the independent nation seeks re-entry to the EU during the 2020s, it will need as a prior condition to set about cutting its deficit to three per cent of GDP – a task which in difficulty and complexity will dwarf all others the government of the day may have on its hands.
Or will it? I have been among a growing number of sceptics about the accuracy and value of GERS. It seems to me inherently unlikely that a country with only about eight per cent of the UK’s population can somehow generate nearly a quarter of its deficit. I know that, for example, the Scots’ above-average rates of lung cancer and cirrhosis of the liver devour a lot of resources, while for a handful of pupils it is awfully expensive to keep the primary school going on the Isle of Muck, etc, etc. But I’m suspicious of the way Unionists pile on the agony, implying that an independent Scotland will still have the same sort of defence bill it has now as part of the vainglorious UK, complete with nuclear weapons and aircraft carriers, or that we will still be liable for its national debt, which in law is not at all true, and so on. By themselves the absence of these two heads of expenditure – defence and debt – would knock £6bn off the £13.3bn we are supposed to be short, and bring the EU limit within hailing distance. The fact is that GERS describes and can only describe the systems set up inside the Union on the assumption of Scottish dependence. Independence will change us in numberless ways, and for the better.
Rational and valid as such points are, it has been hard to assert them against the headline figures derived from GERS that scream at us when the annual report comes out. They are echoed by a crowing and cackling chorus of Unionist commentators. But now it seems that all along these figures have been false, and do not in fact even follow from the premises the report adopts, or ought to have adopted if the economists and statisticians behind it had been doing a proper job. The complacency with which they had followed the same methodology all along, and their defence of it even now, speaks volumes about the dismissive attitude of the British establishment to anything that doesn’t suit it.
The man to whom we owe a breakthrough in our understanding of these matters is Professor Richard Murphy of the City University in London. He has made a name from the fact that Jeremy Corbyn shows a high regard for his ideas, or at least for many of them, and has adopted some into the policies of the Labour party. Regular readers will know this is unlikely to endear Murphy to me, but even men who are very wrong about a lot of little things can be very right about one big thing (the astrologer Sir Isaac Newton comes to mind). At any rate I am persuaded that this is true of Murphy and GERS.
Like me, Murphy started off wondering how such improbable figures as are reported in GERS can by any stretch of the imagination be true. When he went into it, the first thing that struck him was the makeshift and sloppy way in which they are collected. On the revenue side of the Scottish accounts, 25 of the 26 estimates making up the GERS totals are extrapolations from UK data, by population share or some other crude measure. In other words, virtually none of it comes from the reliable recording of everyday economic activity on the ground in Scotland. Murphy draws a gentle conclusion: “There is doubt about whether all the major tax revenues are fairly stated.” In any case, we know from experience in the referendum campaign of 2014 that often such figures have been deliberately distorted to Scotland’s disfavour: garbage in, garbage out.
Things get worse. On closer examination, Murphy notes that the expenditure figures in GERS are of two kinds. For one kind, we can be sure the numbers are accurate because they represent money that is spent in Scotland by the Scottish Government, in the budgets for education, health and so on. Or else they represent spending by departments of the UK Government with direct responsibilities on this side of the Border, the biggest being social security: Scotland has more pensioners, so we would expect these amounts to be proportionally larger than in England. In such cases, the totals spent in Scotland are the same as the totals spent for Scotland – an important conceptual distinction because in the case of other policies the totals of spending in Scotland and spending for Scotland are different
Defence is the obvious example. The Royal Navy’s two huge aircraft carriers – one already launched, the other just being laid down – will have been built in Scotland and during the period of construction will have raised Scottish expenditure together with the incomes of the Scots who benefit from that. But for the 50 years of their active service they will be of no such direct benefit to Scotland, because they will cause the spending of not an extra penny inside this country. The Royal Navy never bothers to defend Scottish waters and the ships will be based at Portsmouth (or Norfolk, Virginia). All the same, a share of the expenditure on their maintenance, equipment and crews will continue to be reckoned as Scottish. This will be because, according to the notes to the GERS report, it “operates on the premise that the entire UK population benefits from the provision of a national defence service. Accordingly … national defence expenditure is apportioned across the UK on a population basis.”
So far, so good, but this expenditure theoretically defined as Scottish also generates real income for people who are non-residents of Scotland, for example the 20,000 citizens of Portsmouth who have jobs in its naval dockyard or in the connected commercial activities. These workers are taxed, of course. But the taxes they pay are not defined in any way as Scottish, even though the income out of which they pay their taxes has been defined, in part and in theory, as Scottish. Their tax payments are instead treated in the national accounts as arising wholly in England.
Multiply this single instance to cover the entire range of public expenditure that might be assigned to either or both countries and it is easy to see how a Scottish deficit arises that is purely theoretical, corresponding to no actual cash flow in the real world – yet ripe for inclusion in the GERS figures. The effect is to exaggerate the deficit assigned to Scotland, and make it appear much larger in proportion than that of the UK as a whole. The numbers are not enormous in any absolute sense – Murphy reckons £10bn. But against the smaller scale on which everything operates in Scotland, they make all the difference in the fiscal debate. It is also the difference, as Murphy has exposed, between truth and falsehood.
If any readers want to pursue the arguments in this column back to their sources, please refer to Murphy’s blog posts from August 25 and September 10 on Tax Research UK. The best of British is all I can wish them.