Trading Places

“GDP is increasingly a poor measure of prosperity. It is not even a reliable gauge of production” – The Economist

There’s a bit of a story happening around Scotland’s oil trade since Wings Over Scotland highlighted an otherwise completely unreported change in the way the UK measures how much oil it trades with the world and where in the UK it comes from.

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The story stems from the way that the UK calculates its balance of trade with the rest of the world and specifically how it then decides which region of the UK is responsible for that trade. To do this, the UK is split into 12 regions based on the Government Office Regions of England plus Scotland, Wales and Northern Ireland. (These boundaries are also used by Eurostat for their NUTS 1 statistics)

Fig-4-NUTS-1-regions-of-the-UK

There’s another “region” of the UK not displayed on the map. Not all trade can be firmly allocated to a single region and not all trade can be allocated to a region at all. This is the “Unknown Regions” of the UK. Most prominent amongst this kind of trade, at least within Scottish political circles, is trade generated by offshore activities.

There are many different ways one could approach this allocation – the methodology – and the way you do it can result in very different results. Now, if you’re the UK and are looking at UK stats these figures don’t really matter so much but they do become very relevant if you’re looking at one part of the UK and what its economy might look like if it decided to, say, discuss holding a vote for independence. Suddenly, even UK government departments start getting very interested in Scottish trade.

The particular story here concerns a change in the trade methodology around offshore oil in Scotland waters. Particularly, oil which is exported out of the UK directly from the rigs without it ever touching the UK land boundaries. Previously, much of this oil has been allocated to the Unknown Region but the change now meant that it would be allocated to Scotland. This has led to an increase in the recorded value of Scottish minerals exports for 2015 from £588 million to £6,825 million. Quite a substantial jump and one which has spread around social media. Time for a wee breakdown of what it means and take the chance to clear up a few misunderstandings I’ve seen along the way.
(This is a complex topic, after all)

Does this close Scotland’s deficit?

No. Trade figures and national budget figures are different things entirely. If you export a barrel of oil worth, say, £50 then you increase your value of exports by £50. If there is a production tax of £30 on that barrel, then your tax revenue increases by £30 but this happens whether you export the barrel or use it domestically.

So if the amount of oil you export over the year increases then the volume of export will increase and so will your tax revenue BUT in this case the change in methodology doesn’t increase the volume of oil. It just changes where it has been exported “from”.

Further, Scotland’s budget accounts, GERS, already provides figures for a “geographic share” of oil which accounts for the “unknown regions” in Scotland so the change in methodology shouldn’t be expected to affect the GERS budget at all. (For info, GERS 2016-17 is out on the 23rd of August)

Does this improve Scotland’s balance of trade then?

Surprisingly, no. Whilst adding £6.3 billion to the export accounts might be expected to do just that, the change in methodology also added a substantial amount to Scotland’s import figures. The 2017 revision saw Scotland’s 2015 total export figures over all categories increase from £17,490 million to £25,480 million and imports increase from £13,030 million to £21,356 million. This actually reduces Scotland’s overall trade surplus slightly from £4,460 million to £4,124 million. (The UK’s overall trade deficit is recorded as £119,103 million. Scotland is the only region in 2015 with a trade surplus.)

Balance of Trade

What’s this about “employee allocation” vs HQ allocation?

There’s an obvious difficulty with deciding if a business is “Scottish” or not if it has business across the UK (or even internationally). The simplest way to do this is by counting the location of the HQ and assuming that all business eventually runs through that but this leads to severe anomalies as many company HQ’s in the UK are based in London even when a majority of their business activities aren’t (London isn’t very well known for its vast oil and gas reserves though there apparently are some like this potential fracking site less than two miles from Wembley Stadium).

This is becoming a common problem in international trade too where companies can set up nominal “HQ’s” in low corporation tax countries even through they do very little actual work there. Ireland has recently decided to downplay its GDP reports and seek alternative economic metrics because of a high profile case last year where some company nameplate changes caused Ireland’s GDP growth figures to be artificially inflated. And this is without even going into all of the problems with GDP as a measurement at all (see opening quote).

As one alternative, the UK and Scotland estimate and disaggregate activity by dividing by employee number (so if 10% of the employees of the company are based in Scotland then 10% of its tax revenue and trade value are allocated to respective Scottish accounts). This works well for companies which are fairly decentralised and the “value added” to a company by an employee or a group of employees is about the same no matter where they are. Supermarkets are a good example of this as a Tesco in Glasgow looks about the same as a Tesco anywhere else. It doesn’t work so well for companies which have a very large regional disparity – for a hypothetical example, maybe an oil company does its extracting in Scotland but all of the marketing and trading happens in London. The “value” of the oil might be a bit harder to split in this case.

Metrics such as this are an active area of research within statistics circles and further improvements and innovations may come along in the future. This is another reason that these year-to-year statistics often end up being revised and adjusted years or sometimes even decades into the future (and why folk should be just a little cautious about making too much of the latest numbers as soon as they come out).

So what will Scotland’s trade balance look like after independence?

This is the 50-ish billion £Scot question, isn’t it?

The absolutely truthful answer is “nobody knows”. It’s dependent on so many things, from policy direction to the state of international agreements to the shape of the economy (will we even be using nearly as much oil by the time we’re independent?) that a picture built up now for Scotland within the UK really cannot and should not be projected beyond independence.

One thing which can absolutely be said is that it’ll be much easier to get a picture of Scotland’s economy once we’re actually gathering the data for and about Scotland ourselves rather than trying to disaggregate sometimes limited data from UK statistics. Even if we take as given that the UK figures are accurate (and, for the record, we should. Interpretation of the data for political ends is where things get a little more muddy) then we have to remember that, ultimately, the UK’s concern about things like trade between Scotland and the rest of the UK is about as relevant to policymaking as the trade between Northern Ireland and the East Midlands.

And one final thought to end on though is that whenever someone does find an apparent “lag” between Scotland and the “UK average” is that the UK itself has some very deep economic inequalities. Maybe we should be talking about them a bit more too.

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2 thoughts on “Trading Places

  1. The simple question I ask people when they drone on about scotland’s deficit is..
    Where can I buy scottish bonds.?
    Well of course you can’t!
    Also we seem unique in that there is only a flow analysis – not a stock-flow analysis taking place (deficit but no debt). It’s a ridiculous setup and desperate obfuscation.
    It’s intesting when commentators compare the tax revenue from scotland with the city of london whilst omitting a mention of the trillion bailouts furnishing their over-inflated salaries
    Spending creates income. Income yields tax..

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    • Very good points.
      I would actually quite like the Scottish Government to use its new powers to issue some actual Scottish bonds. More to get it used to the idea of doing so and to try and build some sense of credit rating to neutralise the argument that we don’t have one (Yes, the CR of a region within a country is different from the CR of an independent country with its own currency but still).
      I also suspect that the near inevitable premium it would attract compared to UK’s bonds (as I write, a UK 10 year is trading at 1.06% compared to inflation of ~2.6%) would very quickly lead to the phrase “over-subscribed”.

      Like

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