Wednesday, 23 August 2017

GERS 2016-17

GERS 2016-17 came out today. The headline figures show what most folk will have expected, namely Scotland's deficit (net fiscal balance) is still big at 8.3% though a bit improved on last year's 9.3%. Nevertheless, that's still 6 percentage points larger than UK's deficit of 2.4%. In this post I want to draw attention to some other interesting points you may not see elsewhere. This was written fairly quickly so please excuse any typos and expect a few (hopefully minor) revisions.

The Government Expenditure & Revenue Scotland 2016-17 gives a summary of all public expenditure that benefits Scotland's residents, together with revenues raised from Scotland's people and businesses, mostly through tax. It covers the financial year from April 1 2016 to March 31 2017.

In what follows I'll refer only to figures including a geographical share of Scotland's North Sea unless otherwise stated. References to specific parts of GERS are given in brackets where relevant.

Every negative has a positive

The deficit is most usually view as a problem and it would become one if Scotland had to fund it by itself. But putting that aside, you can view it as a positive for Scottish society, at least under current arrangements.

Think of it this way. The public sector in Scotland is spending £13,175 per person into the private sector and it removes £10,722 in tax and other revenues. That's a net flow of £2453 per person. Put it another way, would you prefer if we were giving the government(s) that amount per Scottish resident? The benefit to society is mostly through government services and this benefit is greater for the less well-off who rely more on the state for support (Tables S.2 and S.4)

This flow of monies from the public to private sector can be viewed an economic boost and at 8.3% of GDP it's a considerable one too. (Table S.6)

Of course there are some caveats here. Firstly, an economy dependent on state spending may suffer from unhealthy distortions because too much economic power is wielded by one actor, in this case the government(s). Also, money that seems to be flowing into the Scottish private sector may not stay there if it, for example, goes to companies owned outside Scotland. And, of course, some of the expenditure will go directly to companies outside Scotland (e.g. a council buys a German bin lorry).

Expenditure top 3

The graph below shows the top 3 areas of expenditure adjusted for inflation using standard HM Treasury deflators to be in 2016-17 prices.

Health and education are completely devolved to the Scottish Government and councils whereas Social protection is mostly reserved to the UK Government.

Social protection, at a third of all expenditure, is the largest single area of spending and includes welfare spending which is itself dominated by the state pension.

Much of the rise in Social protection and Health can be explained by the extra demands placed on them as the post-World War 2 baby-boomers move into old age.

In contrast, until 2014 the number of children in Scotland was decreasing. Despite that, spending on Education and training, which is dominated by school spending, was rising until 2007-08 after which it plateaued and fell. Numbers of children are now rising and Education and training spending has started to rise in the last couple of years but it still sits about £0.5 billion below its peak.

(From table 3.6 and relevant population statistics are summarised here.)

What we give to the government(s)

The 'R' in GERS standard for revenue and it's mostly tax. More than half of revenue in 2016-17, and indeed in most years, was from the big 3 taxes that most of us pay: income tax and national insurance from what we earn, and VAT from what we buy.

The graph below takes revenue values from GERS and GDP from the Quarterly National Accounts Scotland 2017Q1 which were released on the same day as GERS (with much less hoo-haa). I checked that the GDP implicit in the GERS report matches that published in the National Accounts.

There's a lot going on in this graph, so look first at the solid lines which include a geographical share for the North Sea. The picture here is that both GDP and revenue peak in 2007-08 prior to the financial crisis and then plateaued or slightly decreased thereafter. GDP remained flat in the last couple of years whereas this year's GERS shows a noticeable uptick in revenues though it is still well below its 2007-08 peak.

Now turn your attention to the dashed line which excludes the North Sea, often referred to as being for the onshore economy. Unlike the solid lines, both GDP and revenue have been growing since 2010-11 and we can see that all revenue growth in 2016-17 is due to the onshore economy (the solid and red lines merge).

What's interesting here is that in 2016-17 the onshore economy's revenue increased in real terms by 4.0% whereas GDP increased by only 1.0%. Something similar is true for 2015-16 with its figures being 2.7% and 0.5% respectively. This is unusual though not unprecedented, but it's perhaps concerning that the last time this happened was in 2007-08. Without looking at other data it's hard to be sure what's going on here, or what its implications are, but it does make me wonder if it's a signal that the economy is in a peculiar state. That said, if we take a longer view and average over the last five years then the difference is much smaller: GDP grew on by 1.5% per year and revenue by 2.3%.

(Data from GERS Table S.1 and see this post for more on how the GDP of the North Sea and the onshore economy are linked.)


For these year's figures, devolution can be rather glibly summarised in percentage terms as
  • 42.1% of revenue is devolved or assigned to Scottish Government control (latter is because EU doesn't permit VAT variation within a member state)
  • 63% of expenditure is under devolved control, either Scottish Government or councils
(Pie charts in Chapter 4)

What has the EU ever done for us? Or us for it?

GERS contains estimates of Scotland's share of the UK's contribution to the EU, and also its share of what the UK receives from the EU. Overall, Scotland makes a net contribution to the EU budget of £1.0bn, and a net contribution to EU institutions of £0.3bn. The UK as a whole also makes net positive contributions and, by proportion of the population, they are larger, being £12.2 bn and £8.1bn respectively. (Box 3.2)

By many measures, Scotland is relatively well-off compared to much of the EU and most of the rest of the UK, e.g. by poverty rates Scotland is on a par with the southeast and east regions of England. This is why Scotland and the UK as a whole make net contributions to the EU. There are of course significant non-financial aspects of EU membership, but that's an issue for another blog post and not something that is the remit of GERS either.


Hindsight is a marvellous thing, and one indication of the quality or uncertainty of annual statistics is whether they need substantial revision in subsequent years. Sometimes an error is uncovered, but more commonly improved data becomes available; gathering and processing data takes time. The third reason for changes is that accounting conventions change, and that is the dominant reason for revisions in this year's GERS.

In what follows I refer to figures for 2012-13 to 2015-16 compared to figures given in last year's GERS report (2015-16).

GERS figures for revenue have risen by about £0.75 bn (1.4%). Three reasons, each causing a revision upwards:
  • housing associations now classed in public sector*
  • corp tax changed from cash to accruals*
  • correction to NDR (Scotland up 35%, UK 1.9%)
*Affects UK as a whole too.
(Tables B.1 and B.2)

Cash vs accruals crops up a lot in GERS, especially within the "Accounting adjustments" category. With a cash accounting basis you date amounts according to when the cash moved from one account to another. With accruals you date it by when the reason for moving the cash was agreed. It is like the difference between the date an invoice was paid and when it was issued.

North Sea revenues were revised down for past years by about £0.5 bn, except 2015-16 which went down by only £4 million. (Table B.3)

Expenditure has been revised up by approx £0.5 bn each year, mainly due to housing association reclassification into the public sector, but also due to revisions to network rail, student loans and Scottish Water. (Table B.4)

Impact on net fiscal balances for each year is tiny, by about -0.1% of GDP or less. (Table B.10)

International comparisons

You might be tempted to see how Scotland is doing relative to other countries. To account for economies of different sizes, this is usually done by comparing public expenditure and revenue as percentages of GDP using datasets such as those from the OECD.

However, a word of warning. GERS is a rather unique report in that it's trying to give a fiscal picture of a country within a state (Scotland in the UK). As such it is likely to be difficult to compare it to other countries directly. In addition to that, different definitions of "public sector" and differing accounting conventions (cash vs accrual being one such example) can make comparison very tricky.

If you really want to compare Scotland with other countries, then you can get some clues as to likely differences by comparing UK values first. For example, according to GERS the UK's 2015-16 (tax) revenue is 36.2% of GDP whereas the OECD 2015 figure is 32.5%. Notice that GERS uses the financial year whereas the OECD uses the calendar year.

(See note at end of this page in GERS.)

Edited 23/8/17 at 16.03 to fix a typo and tidy up wording of EU section.

Edited  23/8/17 at 17.10 to correct garbled bit of spend and tax per person (thanks to @FraserWhyte for spotting it), and to add Expenditure top 3 section and graph.

Edited 24/8/17 12.15 to add revenue section and graph and fix a couple more typos.

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