Margaret Cuthbert: What the GERS and Brexit reports tell us about Scotland's economy

Economist Margaret Cuthbert warns that the Scottish Government must become more transparent about its data

SO now we have the annual GERS figures (Government Expenditure and Revenues, Scotland), and we have a paper by the Scottish Government on the 'Potential Implications of the UK Leaving the EU on Scotland’s Long Run Economic Performance Scottish Government August 2016'.

This note gives a brief summary of what was produced in these papers, followed by a criticism of the quality of the data and a fairly damning indictment of what is fed to the public.

GERS

GERS shows an increased government deficit for Scotland. According to GERS, Scotland had a deficit in 2015/16 of £14.8bn (9.5 per cent of its GDP). For the UK, the deficit was £75.3bn (four per cent of GDP).

The figures in GERS are estimated as the difference between estimates of total expenditure for the benefit of Scotland by the Scottish Government, UK Government, and all other parts of the public sector (£68.6bn), and estimates of Scottish public sector revenue, £53.7bn, of which £60m was North Sea revenue: this was a big drop from £1.8bn in the previous year. 

Public sector revenue in Scotland was 7.9 per cent of UK public sector revenue. In contrast, public sector expenditure in Scotland was 9.1 per cent of total UK public sector expenditure. All told, the current balance figures show Scotland with a public sector deficit of 8.15 per cent of Scottish GDP, while the figures for the UK show it to have a deficit of £41.5bn (2.2 per cent of its GDP).

Without doubt, the information that is given in GERS is not good news.

Without doubt, the information that is given in GERS is not good news, and it is far from enough for the first minister to say: "I accept Scotland faces, whatever our constitutional arrangements, a very challenging fiscal position, [but] the fundamentals of our economy are strong." (Guardian, 24 August, 2016). 

To justify such a statement on our economy - "the fundamentals of our economy are strong" - we need some detailed data and analysis that stands up to scrutiny.

But GERS does not give the whole of the rather nasty picture. The two biggest items that the public sector spends money on are social protection and health. The first, social protection, is responsible for over a third of total spending. Much more attention needs to be paid as to why there is such a need (and there is such a need, if not more of a need) to spend so much on health and welfare in Scotland. 

How much of the health and social spending has resulted from years of poor employment opportunities, low wages, poor qualifications, poor housing? In that examination, the long term management of the Scottish economy must be considered: was that management in the interests of those who live in Scotland? 

The need for so much of the budget to be spent on social protection and health is not of today’s making. It exists and has to be dealt with. What is at the door of the present government is whether it is doing enough to tackle the underlying problems so that young people today and future generations will have improved health and improved employment opportunities in Scotland.

It is far from enough for the first minister to say: "I accept Scotland faces, whatever our constitutional arrangements, a very challenging fiscal position, [but] the fundamentals of our economy are strong."

It is up to the government to publish the detail on which the first minister’s statement is based. Anything short, and we have every right to be sceptical. 

But once published, we are in the hands of our representatives, our academics, independent researchers, and the media to analyse the information thoroughly. The important word being thoroughly which, as you can imagine, is not going to happen on the television or the main media the day government papers are published.

Worryingly, GERS gives just part of the story of Scotland’s debt position, and this is because the Scottish Government has yet to allow the publication of Whole of Government Accounts (WGA) – accounts which are available for the UK. 

What this means is that while an estimate in GERS has been made of our current deficit, we do not have an estimate of the build up of debt that is going on due to the capital spend - and it is large. Estimates of WGA could be done for Scotland but those in power would seem to be dragging their feet.

Why is the government in Scotland dragging its feet on producing whole of government accounts?

In order to fund an ongoing deficit a country has to borrow. The Scottish Government has a very restricted ability to borrow. Particularly under Gordon Brown’s time as chancellor of the exchequer, PFI became virtually the only way forward for local authorities, health boards and prison authorities to embark on a much-needed modernisation of schools, hospitals and prisons. 

It is up to the government to publish the detail on which the first minister’s statement is based. Anything short, and we have every right to be sceptical. 

PFI deals were considered for many years as being 'off the books', so all that showed up in expenditure in any year was the amount spent in payments to the private sector in that year. Forget tomorrow and the payment commitments that still had to be met.

Scottish governments, local authorities and quangos have therefore turned to private sector financial initiatives such as PFI, where we 'live now pay later'. Nevertheless, these debts will have to be met, despite the totals of these debts not showing in GERS. 

It is imperative, for reasons of transparency, that the Scottish Government starts the production of Whole of Government Accounts, and the first minister surely agrees, having said: "I believe that transparency is not an optional add-on but an integral part of policy making." (Nicola Sturgeon, Scottish Parliament, November 2012.)

That way, we can see better where real problems in decision making lie, and begin to correct them, hopefully before we end up in the same boat as Greece, Ireland, Spain, Italy and some other smaller EU countries which are slowly being strangled by austerity programmes, imposed by the EU on them, in an effort to reduce their debt.

Brexit

Turning now to the government’s latest statement on Brexit, a paper that also got a lot of attention in the media, it states that "applying the results of a range of UK level studies to Scotland, suggests that if the UK adopted an alternative trading relationship with the EU, it could potentially reduce Scottish GDP by up to £11.2bn per year by 2030, compared to what it could be if Brexit does not take place".

The Scottish Government Brexit report also states: "Membership of the EU has made an important contribution to the economic growth of both Scotland and the UK as a whole. It has removed barriers to trade for Scottish based companies seeking to export to other EU members – a market of 500 million people. 

"As a result, Scotland’s exports to the EU are now worth more than £11.6bn a year – 42 per cent of the country’s international exports." (Note that in this statement the word "now" refers to 2014.)

While the report quotes academic institutions for some of the data, it is more than worrying that there is no detail given whatsoever on how it has arrived at its estimates. 

Because all of the data in the tables referred to is in money terms so that, given inflation, it is difficult to judge whether any increases in the money value of sales is a real improvement in sales. As the data does not go back beyond 2002, it is impossible to say from the document whether there has been a real improvement in trade with EU countries since our joining the Common Market. 

However, using the Consumer Price Index (equal to 100 in 2014) as a deflator, what we can say is that from 2002 to 2014, exports to Europe fell in real terms by just over £3bn; that is, a fall in real terms of 26.4 per cent.

Over the same period, again using Scottish Government export statistics, international exports from Scotland to the rest of the world grew in real terms by 23 per cent. Exports to the rest of the world outside the EU are now greater than exports to the EU (excluding other UK countries).

It goes on to say that EU membership also helps to facilitate some of Scotland’s trade with the rest of the world through the trade agreements that the EU has secured. Again, no evidence is given, or referred to, to back this statement.

This report follows, unfortunately, a technique that is becoming increasingly common in government economic-related papers. While the report quotes academic institutions for some of the data, such as information on Gross Domestic Product, it is more than worrying that there is no detail given whatsoever on how it has arrived at its estimates. 

It is becoming a trademark of Scottish Government reports that important statements are not backed up by relevant data or by references to where relevant data can be found.

In this instance, the Fraser of Allander Institute came to the conclusion, with which I heartily agree: "Most economists agree that Brexit will pose challenges. But what is disappointing from the Scottish Government is the lack of analysis to understand the distinct implications for Scotland." 

It is becoming a trademark of Scottish Government reports that important statements are not backed up by relevant data or by references to where relevant data can be found.

The Scottish Government Brexit paper does not give information on what we are selling to the EU. Is it, for example, computer, electronic and optical products, industries where Scotland and its research base could, like Ireland, help to develop our own businesses and our own economy, or is it whisky, primarily owned by foreign multinationals? 

The data would suggest that whisky is one of our largest exports. Will drink exported to the rest of the EU help to grow our economy and add sufficiently to our ability to provide useful employment to all the young engineers, science graduates, etc? 

The information provided by reports, such as the Scottish Government’s latest on exports, steers well clear of information that would enable the public to form an informed view.

The information provided by reports, such as the Scottish Government’s latest on exports, steers well clear of information that would enable the public to form an informed view.

And, yes, poverty of accurate information matters. The massive decline in some of our manufacturing industries was a clear indication that, at that time, the economic quangos in Scotland, as opposed to those in the Republic of Ireland, were just not on the ball, and today their masters in the Scottish Parliament are either not able to meet the terms that Ireland can offer, or are still not on the ball. 

The upshot is that Ireland has a vibrant industrial base, albeit led by multinationals, where young engineers and science-based professionals can find work. The decline in the manufacturing sector in Scotland had little to do with the EU, but with the UK’s ineptitude in meeting the challenge. 

We need evidence that, today, the Scottish Government and its quangos, in particular Scottish Enterprise, Highlands and Islands Enterprise and Scottish Development International are up to that challenge.

No need to weep, if public interest can be focused - and it is up to you

But good news is possible, although it would mean a very active, informed public demanding better information and better participation in policy formulation.

One area is tackling quangoland and the increasing difficulty of getting information from these groups who are in charge of major economic decisions. The money that has been spent by the Scottish Government through quangos and local authorities on construction and services procurement has gone to major contractors outside Scotland. The policy has meant that big firms like Serco dominate the provision of school, prison and hospital services.

Bye-bye the small local butchers etc. that used to be involved. Welcome the potential of horsemeat and chicken sourced from the far east. Welcome service contracts lasting many years. Welcome the bundling of projects such that very few Scottish firms are big enough to afford the costs of putting in bids, and paying the fees of the large financial bodies and lawyers needed in preparing large contracts.

We need a turnaround in economic development strategy, in bringing decision making back into government, and in public procurement.

We need a turnaround in economic development strategy, in bringing decision making back into government, and in public procurement.

Another area we need to tackle is what the higher and further education sectors in Scotland are doing to help the Scottish economy. Their promotional papers suggest a lot. So it should not be too difficult for them to give hard information on how much of higher education research and development is focused on improving the products and services of firms based in Scotland. 

Unfortunately, much of the published data on Scottish domiciled graduate destinations on leaving Scottish higher education institutions tell us little. Are they finding jobs as junior managers in retail, distribution, electronics or science-based businesses? 

And yes, this matters for Scotland’s future well-being and for young people making their subject choices. We need some research and a public debate on this subject. 

All told, we need much more interest shown by the public on demanding detail about how the government spends our money, and then, most likely, demanding change.

All told, we need much more interest shown by the public on demanding detail about how the government spends our money, and then, most likely, demanding change.

We are all busy but there is clear evidence that many in Scotland care deeply about major and, importantly, minor, issues about what is happening to the Scottish economy. 

We need to play an active part in decision making and evaluation.

Picture courtesy of First Minister of Scotland

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Comments

Peter Dow

Fri, 08/26/2016 - 15:03

The £15 billion deficit is purely notional as far as its zero actual effect on the Scottish government's finances, so regrettably there will be no political pressure on the SNP Government (as there should be) to slash the bloated £2+ billion a year budget of the police state, whose incompetent officers run amok under Sturgeon's nose, abusing the human rights of Scotland's scientists and innovators, with arrests and equipment seizures which obstruct the most vital contribution to growing Scotland's knowledge economy.

http://peter-dow.blogspot.co.uk/

Scotland needs to grow its economy, not counter-productively grow the political prisoner population.

Scotland's economy will thrive with academic freedom and civil liberties but is now being crushed as the police state threatens to lock up our brightest and best educated as political prisoners.

I urge readers not to deny the truth about Nicola Sturgeon's police state. She means well but she has no grasp of the details of the abuses that the police state is getting away with under her nose.

David W

Fri, 08/26/2016 - 17:25

"tackle the underlying problems so that young people today and future generations will have improved health"
------

The success of GB athletes at the Olympics is due to millions in funding for elite sports.
Would it not make sense given Scotland's health problems, to provide every small to mid-sized town in Scotland with a modern sports / community centre, that far more people could benefit from.

100 such centres at £2 million each would seem to be a great investment in communities and fitness, and such centres could be self-funding afterwards. Indoor 5-a-side football, exercise and yoga classes, plays, birthday parties etc

"Funded by the Scottish Government" plaques on the entrances would be appropriate now that income tax is going to Holyrood,

Too often small towns only have old fashioned village halls that are cold and damp, and not really suitable for any indoor sports.

Loulabelle

Fri, 08/26/2016 - 22:20

I completely agree with Margaret Cuthbert. The Scottish Government need to make available verifiable data, be it favourable or not. When we can have some real clarity on the economic and financial status of Scotland we can really start to plan the future.

Our independence may not be easy to achieve or perfect when we get it but I firmly believe it will be worth it. The more confidence we can have in our planning for the future the more convincing we can be with those people who have yet to be convinced. In addition it means that we will be starting off as a newly independent nation with a realistic economic plan. This will be essential to ease trade and commerce with the rest of the world.

daes0707

Sat, 08/27/2016 - 19:16

Great article Margaret. The lack of evidenced based policy making is visible in pretty much all Scottish public service organisations therefore it is not surprising that there is little in the way of evidence backing up the latest bombastic media coverage relating to the GERS figures and effects of BREXIT.

This lack of evidence, integrity and transparency just continues to feed the publics disgust of the political classes, irrelevant of whether they have a Saltire draped over their shoulders or a Union Jack.

For the Scottish Government who is trying to inspire others to beleive in an alternative way of doing politics this all smacks of business as usual. Westminster or Holyrood the lack of evidence, integrity and transparency in politics and policy making is a blot on our society.

The mainstream media needs to up its game, stand up to the parties (esp. SNP) and start putting the pressure on these politicians to provide jusifiable answers, not hollow talk (anyone guess the Noridc connection?). :)

OrangeCat

Mon, 08/29/2016 - 09:00

Do we really spend such a large amount on health and social protection? So we spend more per head than the rest of the UK but the UK has significantly lower public sector spending than almost any comparable EU country. The UK is down in the basement with Bulgaria and Romania on public spending levels.

Consider too that we have had, for many years, a UK government intent on cutting spending on health and social protection and a Scottish Government intent on mitigating those cuts in Scotland. In those circumstances it is hardly surprising that we are now spending a larger share of GDP on those things than the UK. The costs of delivering such services, especially health care, are inevitably higher anyway due to the geography and population distribution of large parts of the country. Add in that the same UK government that has been cutting spending elsewhere has also been in control of raising revenues throughout the whole of the UK and has been cutting taxes intentionally and then failing to meet its own tax revenue targets and you can see where a significant slice of the supposed deficit comes from.

Scotland does need to have a comprehensive review of tis economy but it needs to stop making the comparison with the rUK. Whether we spend 9.1% of GDP on health and social provision compared to whatever it is they spend is neither here nor there. There are other countries which spend far more on public services and do not have deficits anything close to that of the UK much less that attributed to Scotland. We need to look beyond "How do we compare with the UK" and develop an economic model that meets the needs of Scotland. To do that we need to look at how other comparable countries arrange their economic affairs and also at models other than pursuit of private sector growth.

wappergeely

Mon, 08/29/2016 - 20:21

We are giving GERS far too much credibility. It says in the executive summary it relates to Scotland "under the current constitutional framework". NOT independence. There is only a deficit because of the £68 billion charged against Scotland over £28 billion relates to "other uk expenditure". Within that number we get charged £3 billion for defence but only £1.3 billion is spent in Scotland, If the rest are as skewed we don't have a deficit at all. Then there's the issue of Scotland's books getting charged a share of thousands of civil servants and their costs whilst England's books get the tax and nics revenue, the vat, and the spend. As to the SG providing other numbers I understand the civil servants can only use numbers that have gone through the approved treasury way of doing things. And given the treasury is up there when it comes to taking "partisan" decisions there's not much of chance of the truth

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