Monday, 4 April 2016

Deficit? What deficit?

The fact that there is a budget deficit — public spending exceeds revenue — has been centre-stage in the UK political debate since the 2008 financial crisis. The collapse in the oil price over the last two years has brought Scotland's "notional" deficit into the limelight of politics. This post looks at Scotland's deficit using a graph and some numbers from chapter 5. I know this post is rather number-laden, but I promise to make up for that in subsequent posts...

The graph below shows the total revenue from taxes and other fees raised in Scotland. The amount from North Sea revenue is the geographical share attributed to Scotland, which is about 80% of the UK total. Public spending, or Total Managed Expenditure to be precise, is shown by the line. All figures are adjusted for inflation to be in 2014-15 prices.


Revenue including the North Sea grew somewhat unevenly from £44.8 billion in 1998-99 to reach a peak of £62.1 billion in 2008-09. It dropped by £8.4 billion (14%) the following year and although there was a recovery for several years due to North Sea revenue increasing, total revenue suffered another drop in 2012-13 of £4.0 billion (7%) due to a sharp fall in North Sea revenue. The fall has continued so that by 2014-15 public revenues were at £53.4 billion, slightly below the low point of 2009-10.

The picture if North Sea revenues are excluded is different. The growth in revenue is more gradual but less variable. Onshore revenue in 1998-99 was £42.0 billion and it increased to a peak of £53.0 billion a year earlier than the total revenue peak in 2007-08. It then suffers a smaller drop of £5.5 billion (10%) but spread over two years. From 2009-10 onwards, onshore revenue grew with an average annual rate of 1.5% to reach £51.6 billion in 2014-15 which is well above the 2009-10 low but still short of the 2007-08 peak.

Public spending was larger than revenue in every year shown in the graph, but the gap has been larger since the financial crisis of 2008. From 1998-99 to 2006-07, spending grew by 37% and so did total revenue, whereas onshore revenue grew by 23%. In contrast, the growth in spending measured from 1998-99 to 2014-15 was 43% whereas for total revenue it was only 23%, and 19% for onshore revenue.

The deficit in 2014-15
Scotland's deficit is its spending of £68.4 billion less its revenues of £53.4 billion which comes to £15 billion (technically this is the net fiscal balance which is not quite the same thing, but the difference is not worth bothering with for our purposes).

To compare deficits, it's usual to express them as a percentage of GDP. Scotland's deficit is about 10% of its GDP whereas the UK's deficit, which includes Scotland's, is 5% of its GDP. The UK's deficit is one of the largest in the European Union and Scotland's would be the largest except for one vital fact: Scotland doesn't have a deficit.

Scotland's deficit is in fact notional because it doesn't have to balance its spending against the revenues raised in Scotland. Instead, this balance is done at the UK level and so it is only the UK's overall deficit that has practical implications.

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