The publication of the annual GERS report has sparked the usual ill-tempered debate, but what can we reasonably take from GERS? David Eiser of the Fraser of Allander Institute reflects on the report and its implications on Scotland's constitutional debates.
The publication of the annual GERS report has sparked the usual ill-tempered debate about its implications.
Although to call it a debate is perhaps disingenuous. There is an increasing tendency for the supporters of the two ‘sides’ (for unfortunately, polarisation into ‘sides’ is what GERS tends to create) to cheer the disingenuous proclamations of their own ringleaders, whilst dismissing any vaguely dissenting view.
‘Scotland’s deficit reflects economic mismanagement’ say some. This is disingenuous at best – Scotland’s deficit largely reflects higher spending coming through the Barnett formula and is nothing to do with economic growth – which in any case has matched the UK for most of the past 20 years.
‘The GERS figures are absurd as they imply Scotland accounts for 60% of the UK deficit’ say others, apparently ignorant of the simple mathematical basis for this – that some UK regions generate a fiscal surplus.
So what can we reasonably take from GERS?
The headline is of course about Scotland’s ‘notional’ fiscal deficit, estimated to be 7% of GDP in 2018/19. The deficit is notional because it reflects what the fiscal position of Scotland would be, taking the structure of reserved UK taxation and spending as given.
Most people would agree that a deficit of this scale would be unsustainable for an independent country to run for any length of time. Indeed this was recognised explicitly by the Sustainable Growth Commission, set up by Nicola Sturgeon in 2016 to advise on the economic and fiscal implications of independence.
Debates about GERS and its findings tend to focus on two broad issues. First, to what extent is this measure of Scotland’s notional deficit at all meaningful or robust? Second, assuming that the estimate gives a reasonable approximation of Scotland’s notional fiscal deficit, what does this notional deficit tell us anything about the economic case for independence?
On the first issue, the reliability of the deficit figure as a whole, it is true that some of the Scottish revenue figures are estimated from surveys and are associated with some uncertainty. But the level of uncertainty is not sufficient to undermine or explain away the key headline. Furthermore there are no grounds to believe that the existing approaches are biased in one direction more than another – yesterday’s release for example revises up the estimate of VAT raised in Scotland in 17/18, but this is more than offset by larger proportionate downward revisions to estimates of Scottish income tax – reflecting the availability of more robust tax data.
Beyond the issues of statistical robustness, the methodological basis of GERS is also criticised more broadly. Here the main argument is basically that, whilst some reserved UK Government spending is attributed to Scotland, some of the public revenues associated with this spending are allocated to the UK (e.g. where the civil servants delivering such activity are based in other parts of the UK). The basis of this argument is not unreasonable, but the idea that accounting for this would fundamentally reduce the notional deficit figure by a substantial amount is not.
On the second question, there is no doubt that GERS is relevant to the independence debate. As we approach the five-year anniversary of the 2014 referendum, it is worth remembering that the independence prospectus ‘Scotland’s Future’, projected that Scotland’s notional deficit would have fallen to around 3% of GDP (or lower) by 2016/17. This was taken of evidence that an independent Scotland’s public finances would be robust.
But what does a high notional fiscal deficit mean? It does not mean that Scotland could not afford to be independent. But it is a reminder that things would have to be different. To use the clichéd phrase, some ‘difficult choices’ would be faced in the initial years of independence.
To supporters of the union, the imposition of these choices is seen as an unwarranted downside of independence, as the choices would ultimate boil down to one of how the burden of further austerity should be distributed. To independence supporters, such choices provide a welcome opportunity to reconsider spending priorities or to rethink how we tax particular bases, and might not be so difficult – Scotland can spend less on various things for which there is limited public support, the argument goes, whilst debt interest payments might be somewhat lower than implied by GERS depending on how the UK’s historic debt is shared. Revenues can be raised by taxing more efficiently – broadening tax bases and narrowing scope for avoidance – with limited impact on economic activity.
There is some truth to both these positions, but both are guilty of focussing too much on the here and now. For whether you are talking about Scotland or the UK as a whole, government budgets face some major fiscal challenges in coming years. Spending pressures are growing as our populations age, whilst growth in some of our major revenue sources is slowing due to factors such as lifestyle change (alcohol and tobacco duties), technological change (improved vehicle fuel efficiency), and challenges of taxing some types of globally footloose economic activity.
Fiscal policy in decades to come will have to change to reflect these challenges. This might mean taxing things that we don’t tax now, or at least taxing them differently (wealth? Carbon?) and it might mean changes in the way we fund particular public services.
GERS doesn’t provide any insight into these issues (it is not intended to), but it does show that an independent Scotland might need to consider them more urgently than the UK will. Perhaps that is no bad thing.
We can hope that any future constitutional debate considers these long-term issues more seriously, preferably in an open and respectful way – although evidence from the annual GERS furore suggests that this may be a little too much to ask for.