GERS Report Shows Scotland subsidises UK, says Professor Andrew Hughes Hallett

From Newsnet Scotland

EXCLUSIVE: Newsnet Scotland has interviewed Professor Andrew Hughes Hallet about the latest GERS report on Scottish public spending, which covers financial year 2009-10.

Professor Andrew Hughes Hallett is a world class economist who divides his time between George Mason University in Virginia and St Andrews.

From 2001 to 2006, he was Professor of Economics at Vanderbilt University (Nashville) and before then at the University of Strathclyde in Scotland. He has been Visiting Professor in Economics at Princeton University, Bundesbank Professor at the Free University of Berlin, and has held visiting positions at the Universities of Warwick, Frankfurt, Rome, Paris X, Cardiff and at the Copenhagen Business School.

PROFESSOR HUGHES HALLET, COULD YOU SUM UP YOUR IMPRESSION OF WHAT THE NEW GERS REPORT TELLS US ABOUT THE SCOTTISH ECONOMY DURING THE DEEPEST PART OF THE GLOBAL RECESSION IN 2009-10?

The things that stand out are that it has been a rough couple of years, but Scotland had weathered the storm better than the UK as a whole. She has a budget deficit for the first time in half a dozen years but it is a smaller deficit than the UK. So the implicit subsidy to the rest of the UK (RUK) is still there.

What’s more, this has been happening in a period when oil prices were low. This is of course a backwards looking exercise (up to April 2010). Those low prices were reversed a year ago, so the implicit subsidy will have increased markedly since then.

Note: all my remarks take the revenues/spending actually raised in Scotland, as opposed to those allocated to Scotland by the accounts (which are often quite different). You will appreciate the significance of that difference.

IN WHAT WAY IS SCOTLAND SUBSIDISING THE REST OF THE UK?

Public spending has fallen as a percentage of UK total each year since 07-08, so Scotland is being squeezed more than RUK. That seems unfair, and it goes back to when Gordon Brown took over as PM.

However the share of Scottish public spending in the UK total has risen
when oil revenues are included, so RUK is relying more and more on Scotland’s share of oil revenues for its spending.

The deficit on the current budget is 6.8 per cent of GDP, whereas for the UK as a whole it is 7.6 per cent. Again you see the implicit subsidy to RUK - equivalent to about one per cent of our GDP being sent south (adjusting to get RUK figures, rather than all UK figures).

Adding in capital spending, the figures become 10.6 per cent (Scotland) versus 11.1 per cent (all UK). Same story.

Note capital spending in Scotland is rising fast (unlike RUK) as it should be to power the way out of a recession. Correctly: any recession is too good to waste!

WHAT ABOUT THE VOLATILITY OF OIL INCOME?

Non-oil GDP is down 3.0 per cent, but with oil it fell 7.5 per cent. As I said, oil was a damaging factor in this period, but will have improved now. Hence Scotland is actually doing better than it appears from these figures.

However, UK GDP is down only 1.8 per cent. So Scotland's performance has been weaker than UK, presumably because she is subsidising the latter and because she has been allowed to run a smaller "counter cyclical" deficit.

IS THERE ANYTHING IN GERS THAT THROWS LIGHT ON THE SNP GOVERNMENT’S DEMAND FOR MORE TAX POWERS?

Income tax revenues are down 2.8 per cent overall, implying a significant deflation bias under the current Scotland Bill proposals - as many had argued when the Bill came to the Scottish Parliament last year.

But more significantly many of the other tax revenues are now rising as a share of total revenues: I note here national insurance contributions, fuel, and particularly excise taxes (tobacco, alcohol, vehicles).

So income taxes are a poor source of revenue to rely on. Think what you could have done with a wider spread of tax revenues to power the spending to get out of recession and to use as levers to grow the economy.

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