We Need To Talk About: GERS (2020-21 Edition)

“Never make predictions, especially about the future.” ― Yogi Berra

This article was previously posted on Common Weal. You can also read my previous work on GERS on this blog behind the following links: 2013-142014-152015-162016-172017-18, 2018-19 and 2019-20

In my analysis of GERS last year, I remarked that this was in a very real sense the end of an era not in the sense that it would show us anything different from the previous years but that it was the last year that wouldn’t. Covid has upended the entire world and for statisticians that means the worst possible thing that could ever happen to their data tables – a discontinuity.

The webcomic XKCD put it perfectly recently.

Every data table on any subject will now have a couple of marks on it in 2020 and 2021 that indicate that what came before was “pre-Covid”, what came in those years was “during the pandemic” and everything published later would be “post-Covid”. This year’s GERS report is very much in that middle camp and should be read as such.  Even if things somehow go completely back to normal next year (the “V-shaped, no scarring” scenario that folk were hoping for when they were also hoping that the pandemic would all be over by last Christmas) then this year will forever be a massive blip on the spreadsheets. Trying to compare GERS this year naively to the “pre-Covid” era or trying to use it to project what the world will be like “post-Covid” is as futile as trying to predict next year’s weather by staring into the hurricane raging around you right now.

As it is, the headline figures would be grim if there was any suggestion that times right now were “normal”. This year marks the third time since the start of devolution that GDP has fallen – the other two times being the 2014/15 oil price crash and the 2008 Financial Crisis – and this year’s drop of just over £17 billion or just under 10% represents the largest single year drop of that time period. The headlines will be full today of how the Scottish notional deficit has “soared” to 25% and if all you care about is the headline figure then our notional deficit has jumped from £15.8 billion to £36.3 billion.

Of that £20.5 billion deficit increase, only about £2.7 billion is explainable by a drop in onshore tax revenue and only £0.2 billion by a drop in oil revenue. The biggest drops in revenue are in VAT and non-domestic rates (because no-one went out shopping for anything but essentials and we stopped eating out etc) and fuel duties (due to the drop in travel and commuting). Air Passenger Duty, unsurprisingly, also took a big hit with the shuttering of the airports and other border closures. Few sources of revenue went up by any significant degree but the various furlough and job support schemes did have the effect of allowing direct taxes like Income tax, National insurance and suchlike to more or less maintain themselves despite the drop in economic activity (and yes, this does mean that the job support scheme had the result of the government effectively paying itself by recovering a portion of the furlough money as tax – this should be remembered when the gross costs of the scheme are promoted).

The bulk of the increased deficit comes, of course, from these Covid protection schemes which have started to feed through into the GERS report. The largest component by far is the Job Retention Scheme (furlough) which resulted in about £4.7 billion being paid to furloughed employees in Scotland. The total so far in GERS for the various other protection schemes (such as the separate one for self-employed workers) comes to £8.3 billion. Add in another £3.4 billion for increased health spending (outwith the UK’s additional £1bn health spend “for” Scotland which I assume may include vaccines, PPE or suchlike organised at a UK-wide scale) and much of the new “deficit” can be expected to disappear once we get to the post-Covid era. And just to be clear, anyone who claims that an independent Scotland that had the full fiscal and monetary powers that the UK has could not have embarked on a similar protection scheme is wrong enough to be ignorable.

This isn’t to understate the scale of the impact that the pandemic has had on the economy. The drop in GDP of £17 billion exceeds the £15 billion that we estimated would be the impact of the first twelve months of the pandemic and which formed the counter-scenario to our “Ending Lockdown” Covid strategy.

In that paper, written during the peak of the first wave of the pandemic and during my own personal recovery from the virus, we laid out a costed strategy for whole-population Covid testing and contact tracing which had it been combined with the kind of tiered Covid response and proper border controls that we called for in September (and which only got implemented incompletely later on) Scotland would have been in a much better position to avoid or suppress the second and third waves of the pandemic. Consequently, the impact to our economy would have been far less damaging, and we would have been able to keep our economy far more open as has been the case in places like Australia and New Zealand (even despite their current snap lockdowns to deal with outbreaks before they become a national problem).

Instead, we had the decision from the Scottish Government to follow the UK in its botched response and we are where we are – making a complete mockery of a report published the month before the start of the pandemic, which placed the UK as the second most likely country in the world to successfully defend itself against a global health risk in part because of its (then assumed to be) strong strategic preparedness, rapid government response rate and willingness to impose travel restrictions where required.

In previous years, I’ve dug a little deeper into GERS to try to discover the reason for the apparent “weakness” of the Scottish economy within the Union. In truth and as many folk other than us have said including now Boris Johnson of all people! (Though that may be due to his realisation that his majority is so dependent on the new “Red Wall” Tories.) It’s less that Scotland is “weak” but that the UK as a whole is pathologically dominated by London and the South East.

This continues to be the case and the “gap” in revenue between what Scotland brings in and what it would bring in if it got its “population share” of the UK’s revenue remains similar to the last few years at about £4.4 billion – largely explainable by lower salaries and lower house prices (hence lower Council Tax bills and housing transaction tax revenues) in Scotland but also significantly reduced “shares” of onshore corporation tax (Note: GERS estimates Scotland’s share of corporation tax based on economic activity and number of employees in Scotland not just where the corporate HQ is) and unearned wealth taxes like Capital Gains and inheritance tax.

The story of GERS today will likely be the same as it has been in the last several years since I’ve been watching it (and I again apologise for my own role in pushing the report to the prominence that it now has in the Scottish constitutional debate – this year’s GERS, of course, has even less to say about the state of post-independence Scotland as it has about post-pandemic Scotland). It will likely focus on the huge deficit without saying too much about the reasons why it’s there.

The real story as I see it is somewhat different though. It is a story that says that the pandemic in Scotland was needlessly damaged by both Scottish and UK Government mishandling but that through the economic support programmes that were initiated – as incomplete and as late as they often were – the people have come through this crisis better than it could have been otherwise. Unknown trials remain – which may be exacerbated by the premature withdrawal of those support programmes – but once we get into the proper post-pandemic phase we’ll see what the level of “scarring” has actually been to the economy.

The choice for the politicians will be to decide if we want to try to recover to something like that pre-pandemic economy with all of its flaws, inequalities, low pay, low value and evident weaknesses (and then to try to change it again in the few years we have left to deal with the Climate Emergency!) or to decide to build something that both permanently supports those who were failed during the pandemic and creates an economy that is resilient to the even greater global catastrophes we can already see bearing down on us. Common Weal has already published that plan. Perhaps this time someone will listen to us.

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One thought on “We Need To Talk About: GERS (2020-21 Edition)

  1. Substitute pre and post covid for pre and post independence and it raises interesting questions. One obvious one relates to the Growth Commission’s suggestion that we might pay £5Bn a year as a contribution to the costs of the rUK’s national debt. But for me the vital question on issues such as that is whether the people in Scotland will be allowed to have their say, and make their postion clear well in advance of any negotiations post independence.

    Liked by 1 person

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