We Need To Talk About: GERS (2017-18 Edition)

“Facts are stubborn things, but statistics are pliable.” – Mark Twain

There’s no day that’s guaranteed to set the heather alight amongst Scottish political social media sects like the release day of the annual Government Expenditure and Revenue Scotland report – also known as GERS.

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I want to make one thing clear up front. No serious commentator now suggests that GERS can be used as is as a projection of the finances of an independent Scotland. My 2016 paper “Beyond GERS” shows some of the changes that would need to be made for this to be the case. But as a set of accounts for Scotland, the region of the UK, I’m content to use GERS as it is. Maybe improvements can and should still be made, but this is true for all statistical publications and the team behind the report do the best they can within their remit.

So what does this year’s publication tell us about Scotland, the region? Continue reading

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We (Still) Need To Talk About: Budget Underspends

“Journalism is what we need to make democracy work.” – Walter Cronkite

It’s that time of year again. Amazingly, despite the looming catastrophe that is Brexit, this week has been one of those “slow news” weeks. Of the kind that manage to get pages out of very minor things like essentially reprinting old stories with the numbers slightly updated.

I am, of course, talking about the perennial “Scottish Government Underspend” story.

A screengrab of the Herald article on the budget underspend. Headline "SNP government budget underspend almost £500 million"

I covered this before back in the early days of this blog (it remains the most read article on here so far – even excluding the annual reposts). Others, like Wings Over Scotland, have covered it pretty much every year since.

Here’s the short version though.

  1. Opponents are complaining that the Scottish Government aren’t spending everything they’ve been given in the Block Grant or raised through taxes and are claiming that the Government are starving services of resources.
  2. This year the “underspend” is “almost £500 million” (actually, the article later says that it’s £453 million).
  3. But the Scottish Budget is pretty much fixed annually.
  4. And the Scottish Government has extremely limited borrowing powers for revenue – £600 million per year, £1.75 million maximum.
  5. If it DID try to use them, you can bet that the same opponents would be raging at the thought of the Scottish Government going into debt.
  6. The solution to avoid debt is to budget conservatively – if you had to set an ice-cream cone budget at the start of the year but your ice-cream purchases varied between 800 and 1,200 cones depending on weather – you’d need to budget for 1,200. If you only bought 800, then you’d have a 400 ice-cream cone underspend.

Without borrowing powers or an independent currency, budget underspends are an inevitable feature of the annual budget.

Though complicating the above point is that until 2006-07, Scottish Executive underspends were, in great part, retained by the UK Government. This was corrected after a negotiation between the UK Government and the then new SNP Scottish Government and the accumulated £1.5 billion was gradually fed into the budgets of the next several years.

An excerpt from an Audit Scotland report detailing the

Since then, underspend money gets carried over to next year’s budget (though, as that budget will have an underspend too it’s a bit of a moot point).

One thing often missed in the “Budget Underspend” headlines is the actual nature of the sum involved. It’s not all cash sitting in the bank. Some of it will be due to underspending due to less-than-projected spending items (like the ice-cream cone budget issue). Some of it will be due to projects coming in underbudget possibly due to good management, possibly due to currency or price fluctuations (if your ice-cream cones cost £1 in January but drop to £0.80 by June, you might underspend even if you still buy 1,200 cones).

But a good chunk of the underspend could be from things like depreciation of assets which can’t be spent on other things at all – even if the asset is sold (The metaphor gets a little strained here, but if your ice-cream cone is worth less as a half-eaten, melted pile than it was when you bought it fresh, it’s not as if you can sell the cone and pocket the difference in price).

Another thing often missing from these headlines is the inevitable revision afterwards – calculating National budgets down to the penny turns out to be quite tricky. If you remember last year’s headline that the government had underspent by £191 million, you probably missed the reporting that that figure was later revised down to only £85 million after final accounting adjustments were made.

Indeed, this year’s figures have ALREADY been revised downwards. Stripping out the non-cash items and money already budgeted for but not yet spent then it only leaves around £66 million to be spent on something else.

But £66 million is still a fair bit of money though isn’t it? Surely, the government could just, you know, budget better?

To answer that question we’d be best to do another thing that doesn’t really come across in reporting if one looks at the situation one headline at a time. Examine the trend.

To that end, I’ve spend a fair bit of time trawling through annual Consolidated Accounts to pull together the underspends from this and previous years. I managed to get back to the accounts for the year 2005-2006 before the trail gets fragmented. Before this point, the Scottish Executive accounts operated in a substantially different way (see the segment on Resource Accounting and Budgeting here). Underspends still happened, but comparing them like-for-like with years after 2004 may not be strictly fair. I also haven’t been able to locate the 2002-03 underspend at all.

As far as I can tell though and if the revision mentioned stands, this year’s underspend may well be the lowest since the start of devolution.

A bar chart of Scottish budget underspends since devolution. There is a clear trend downwards from the 2000-2001 high of £718 million down to the 2017-18 low of £66 million.

And if we compare the underspends to the budget as a whole we begin to see just how small a story this all becomes. The Scottish Government’s devolved budget is on the order of £32 billion. A £66 million underspend is about 0.21% of that budget – or about 18 hours worth of spending across the year.

The underspend bar chart converted to percentages of the total budget. From 4% in 2000-2001 to 0.21% in 2017-18

Even the initial estimate of £453 million was about 1.4% of  the total budget – if it really was all spendable cash, it’d be the equivalent of about five days worth of spending.

This is not to say that the budget underspend won’t become an issue. It was simplier back in the days when the bulk of the Scottish budget came from the block grant and tax powers were both limited and largely unused. Now, with divergent income tax rates and bands and an impossibly complex Fiscal Framework, there is a risk that the devolution settlement gets strained to breaking point. The David Hume institute has described it as an “interesting cocktail” of arrangements.

I don’t know what the future holds for this story. I could see a time, possibly as soon as next year, where the Scottish Government revenue budget slips from “underspend” to “overspend”. I already know what the reaction of the opponents will be if that happens.

I could hope that the media will up its game here and try to explain these issue in more detail than an attention grabbing headline.

Sadly, I can see my 2015 article just being reposted again in 2019.

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We Need To Talk About: The Growth Commission Report

If this is a discussion document – It’s time to start discussing it.

The Growth Commission’s long-awaited report is finally out and will surely take some time to fully digest. It has been described as a discussion document and a starting point for the revitalised case for independence; not the final word on SNP policy or national trajectory.

In many ways, the report covers ground now very familiar to campaigners in the independence debate. We’re all now quite familiar with the deep and systemic flaws of the UK’s economic system especially its regional inequality which, quite frankly, is embarrassing when compared to neighbouring countries in Europe.

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(Source: Eurostat)

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We Need To Talk About: Hypothecated Taxes

Hypothecated taxes are designed to undermine the NHS – Prof. Richard Murphy

There’s been an idea floating around recently – mostly pushed by the Lib Dems but floated elsewhere too – that the solution to NHS England’s current, catastrophic crisis is an additional income-linked tax (either a new tax or an addition to income tax or National Insurance) which would raise money specifically for health spending.

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Queuing for bedspace in an English hospital

Other schemes have been suggested, like an addition to income tax to be spent on education. This idea of having a dedicated tax which raises revenue for a specific purpose is known as ‘hypothecation‘ and here is why it is a terrible idea.

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We Need To Talk About: The Deficit

Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may make you feel like you’re flying high at first, but it won’t take long before you feel the impact. – Barack Obama

Whenever we talk about national budgets, it doesn’t take long before someone mentions the “national deficit” and the “national debt”. Indeed, as I’ve noted in some of my commentary on GERS, sometimes it can seem like this is the only thing that makes it to the headlines at all. The almost unchallenged “wisdom” is that a government spending more than it raises in taxes is a terribly bad thing. It’ll leave future generations burdened with debt and, anyway, you wouldn’t run a household’s finances that way, would you?

This is a wisdom that has led us to Austerity and there is barely a politician out there who speaks for any other ideology. It’s not just the Tories. Corbyn’s team is at it, at least  by degrees and even Nicola Sturgeon often speaks the same language when defending Scotland’s finances. (And, yes, I’ve used that same language in the past too. Life is about learning.)

Of course, the root of the obsession lies with the fact that the “national deficit” is something that seems quite close to the politicians and therefore it’s something that they should be “sorting out”. But maybe the economy is a bit less simple than this. Maybe, like the fable of the blind men appraising the elephant, one can get a false impression of the whole by getting too close to one detail.

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We Need To Talk About: Central Bank Independence

“The Treasury…may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances” – Section 19, Bank of England Act 1998.

Theresa May is getting nervous. She’s seen the polls slip away from her. She’s seen the abject rejection of conservative politics first in Scotland and now in England too. She has just admitted that she jumped into her personal snap election whilst her party was completely unprepared to fight it. She is far from “strong and stable.

And now she’s getting worried by the growing pull towards the more interventionist economic policy advocated by Jeremy Corbyn and has responded with a speech defending Austerity and celebrating free market economics on the day of the 20th anniversary of the independence of the Bank of England. And so has begun fairly vapid tirades warning against the “dangers” of nationalism and populism.

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We Need To Talk About: GERS (2016-17 Edition)

“The GERS figures are not meant to be anything other than a way of showing the current position under the present arrangements.” – The BBC 

The annual Government Expenditure and Revenue report is out and, as with previous years, I’ve written an analysis of the report and what it means for Scotland. The GERS report itself can be downloaded here.

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A more detailed analysis I have prepared for Common Weal can also be read here.

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The UK is a deeply unequal union and London continues to capture a greater and greater proportion of the wealth of the state to the detriment of everywhere else. This single fact has to frame everything we think and say about the finances of Scotland.

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