Scotland is used to being routinely assured that everything about it is and will be ‘world class’. Now there is a less welcome addition to that eminence – a genuinely ‘world class’ budget deficit, one of the highest in the developed world.
The figures issued earlier this week by Government Expenditure and Revenue Scotland [GERS] showed Scotland in a near record budgetary deficit of £14.9Bn for 2014-15 – including its geographic share of offshore tax revenues.
This deficit is 9.7% of Scotland’s GDP – twice that of the UK whose deficit of £89Bn is 4.9% of its GDP.
The deficit is 17% of that of the UK – where Scotland’s GDP is around 8% of the UK’s – something of a negative double whammy.
Were Scotland to have been independent in this performance, it would have been in the red by £2,800 per person in Scotland, raising £10,000 per person in tax revenues and spending £12,800 per person.
This is a deficit per head of 28% between earning and spending.
What Scottish household could fail to understand the impact of such a deficit on their own domestic finances?
Where now is the credibility of the always obviously irresponsible White Paper on Scotland’s Future, the indy prospectus authored by the current First Minister, Nicola Sturgeon – in which she promised that every Scot would be £500 better off in an independent Scotland?
Were we today thirteen days away from the SNP’s planned Independence Day of 24th March 2016, how would this economic position have felt to those who supported indy?
The spend per person in Scotland was £1,400 per head higher than the UK average. There is no evidence that the economy of an independent Scotland could continue to afford such a high per capita spend – yet Alex Neil, the Social Justice Secretary, has just promised that Scotland will use its new powers coming from the Scotland Bill to spend even more, with ‘additional’ money to come for those whose health makes it impossible for them to work.
It is only the shelter of membership of an uncommonly indulgent United Kingdom that allows Scotland this level of cushion against the consequences of overspending. How long will that tolerance last in the current global downturn and in the context of a fiscal framework for the new powers which allows Scotland’s Finance Secretary to make expensive mistakes with impunity in the exercise of his new and greatly expanded management of Scotland’s taxation and spending?
The Scotland Bill has also not devolved pensions to Holyrood – a matter deserving of some reflection.
With the Scottish Government and the SNP cohort of MPs at Westminster incessantly shrill at anything Scotland does not get in this Bill, it is nevertheless no surprise that there has been not one single complaint at not being given power over Scottish pensions. This was the last thing they wanted.
During the interminable campaign for indyref 1, it was leaked that Finance Secretary John Swinney had informed his ministerial colleagues that an independent Scotland could not afford its pensions bill. And that was when the SNP were calibrating their future budgets as an independent county on a level of tax revenues from the oil sector that we will not see again.
The clear lack of interest in the SNP Government in taking responsibility for Scotland’s pensions tells that they accept that Scotland could not indeed stand alone. Yet they lack the grace to give credit to the UK government and its taxpayers outside Scotland for accepting a substantial financial burden as the price for a union in which they and the majority in Scotland believe.
It gets worse
On 15th December 2015, Finance Secretary Swinney was revealed by a Guardian investigation to have borrowed billions from pension funds, international banks and the UK Treasury.
The paper’s revelation was of an: ‘SNP government spending spree’ to build schools, roads, railway stations, colleges and hospitals – under repeated borrowing which could reach £50bn in 2019 – two years before the 2021 Scottish Election.
The Guardian notes that the scale of this quietly acquired debt, whose stress on public finances can be understood by the fact that Holyrood’s annual budget is £30bn – has never been set out by ministers or investigated by the Scottish parliament.
This essentially secret debt burden is central to the fact that Scotland’s Auditor General, Lorna Gardner, has formally expressed the need for full transparency in public finance, pointing out that this is even more urgent with Holyrood about to get far greater tax-raising powers – and with public spending commitments putting it under significant pressure.
Ms Gardner wants to see Mr Swinney publish what she has described as ‘whole government accounts that would set out in a single document the full details of all Scotland’s devolved public spending, borrowing and assets’.
She said: ‘It is critically important that the Scottish parliament and the people of Scotland have got a very clear picture of what both those assets and those long-term liabilities look like.’
Thanks to the GERS figures on the depth of the Scottish deficit and the Guardian’s revelation of publicly unacknowledged heavy borrowing, Scotland has no excuse for remaining ignorant of this picture and these long term liabilities.
Irresponsible financial management
The fall in the price of oil is a convenient scapegoat for Scotland’s serious budgetary deficit in 2014-2015, but this is a handy spin.
This external event would have been serious in any case but what is worrying is the way in which its impact was aggravated by irresponsibility in the financial management of Scotland over the period. Specifically:
- calibrating spending on the basis of tax revenues dependent upon the price of a commodity [oil] known to be fickle and easily affected by global events – and during a period of increasing global instability in which the UK played a not insignificant part;
- continuing to spend throughout 2014-2015 in the face of the marked fluctuation in the price of that same commodity – from the summer of 2013 onwards – and with a progressively clear downward trend. From 1st January 2014 to 18 December 2014, the price of a barrel of Bent fell by 40%.
The pressure to keep on spending regardless was heavily political in that year and in its immediate aftermath.
Over the approaches to the Scottish Independence Referendum on 18th September the Scottish Government spent heavily on all sorts of measures, supports and new initiatives, some markedly expensive, designed to create a ‘feel good bubble’ to try to swing a positive vote for indy.
One example is the fact revealed in the GERS figures – that spending on benefits rose to a record £17.5 Billion, a hike of £253Mn – or over £600,000 per day.
After the failure of the referendum, Mr Swinney then deployed as a buttress to morale the second phase war chest he had intended to use to reinforce the wisdom of the anticipated pro-indy decision.
At no point in this entire period was there any focus on what was happening to Scotland’s earnings, then and to come; or on the obvious need for prudent retrenchment against unavoidable hard times.
What we had instead was the reckless funding of the fiction that a world class Scotland could afford pretty well anything.
No one outside the very small inner clique in government can know whether this behaviour was born of dangerously limited economic intelligence, knowing deception deployed in cynical political manipulation – or the bunker mentality of the self-deluded who grow to believe their own romances.
What is certain is that everything to do with the financial management of Scotland in the last few years give no reason to conceive of a country capable of standing on its own two feet at the level of spending promised – and at the level of taxation achievable against market forces and from political imperatives.
The next chapter
It is likely that the grimmer shock will come in the 2015-16 GERS figures:
- with the greatest weight of impact of the fall in oil prices to be felt then;
- with the costs of ‘feel good bubbles’ to support no fewer than two major elections and one major referendum in that period;
- and with disappointing returns expected from Mr Swinney’s first foray in setting his own taxes – in the Land and Buildings Transactions Tax which appears to have done more damage to the housing market than produce success in revenue raising.
In the light of the EU Membership Referendum on 23rd June 2016 and the hypothetical possibility of a majority exit vote with a Scottish vote to remain – followed by Nicola Sturgeon giving way to the pressue of SNP calls for indeyef 2 [and yes, that was a brace of Landraces flying past your window], Scotland might care to note that the eurozone [which wojld be a condition of Eu membeship]requires member states to have a maximum deficit of 3% of GDP. 9.7%, inclusing a geograohic shate pf offshore evenues, is rather alg wsay form that ceikng.