Revenue at record £66bn; ‘notional deficit’ tops £15bn

The Scottish Government said on Wednesday that Scotland’s revenues rose to a record £66 billion in 2019-20, although they were impacted “by the initial effects” of the coronavirus pandemic.

However, it said Scotland’s 2019-20 “net fiscal balance” including North Sea revenue was a “notional overall deficit” of 8.6% of GDP — equivalent to £15.1 billion.

The latest Government Expenditure and Revenue Scotland (GERS) publication shows total expenditure in 2019-20 “for the benefit of Scotland by the Scottish Government, UK Government, and all other parts of the public sector” was £81 billion, an increase of 3.1%.

The report shows that Scotland’s overall revenues, including North Sea receipts, increased to a record £65.9 billion.

“These increases came despite the pandemic depressing public finances,” said the Scottish Government.

“Corporation and VAT receipts fell compared to the previous year and both the Scottish and UK Governments increased spending to tackle the virus.”

It said that “as a result of this and an increase in UK Government spending” on reserved matters Scotland’s “notional onshore deficit” – the difference between income and expenditure – rose 0.6% to 9.4% of GDP.

Adding North Sea revenues which totalled £724 million — £642 million less than in 2018-19 — it said the “notional overall deficit” for Scotland stood at 8.6% of GDP. The UK deficit was 2.5% of GDP.

The report itself shows the 2019-20 net fiscal balance, including an illustrative geographic share of North Sea revenue, was a deficit of 8.6% of GDP — equivalent to £15.1 billion.

The £81 billion expenditure on Scotland is equivalent to 9.2% of total UK public sector expenditure, or £14,829 per person, which is £1,633 per person greater than the UK average.

The London-based Institute for Fiscal Studies (IFS) said: ” … the UK’s actual and Scotland’s implicit budget deficit this year could spike at almost 19% and 26-28% of GDP respectively, based on Office for Budget Responsibility projections …”

Leading Scottish think tank Fraser of Allander Institute (FAI) said: “GERS takes the current structure of UK Government reserved taxation and spending as given.

“If the very purpose of independence is to take different choices (good or bad) about the type of economy and society that we live in, then a set of accounts based upon the current constitutional settlement and policy priorities will look different to the long-term finances of an independent Scotland.

“Put simply, it’s not possible to run structural deficits of this scale over the long-run …

“But GERS does provide an accurate picture of where Scotland is in 2020.

“So, in doing so, today’s numbers set the starting point for a discussion about the choices and challenges that need to be addressed by those advocating independence or new fiscal arrangements.

“It’s not enough to say ‘everything will be fine’ or ‘look at this country, they can run a sensible fiscal balance so why can’t Scotland?’. Concrete proposals and ideas are needed.

“The UK too faces significant budgetary pressures in the long-run.

“And this will impact upon Scotland inside or outside the Union.

“An honest debate about managing these pressure, including in a post-Brexit world, is needed too.

“With COVID-19 making everyone’s public sector deficits that much bigger, the challenge of building a model of fiscal sustainability just got harder.”

Finance Secretary Kate Forbes said: “Scotland, unlike most other countries around the world, large and small, does not currently have the full financial powers needed to chart a way to sustainable recovery from the economic impact of the pandemic.

“The current situation, with the looming withdrawal of furlough support by the UK Government, means it is now more urgent than ever that we gain those powers …

“We continue to invest to protect and create jobs, support businesses and strengthen communities, but our ability to do that is constrained by our lack of borrowing powers.

“It is important to stress that 40% of spending and 70% of revenue income in GERS, combined with key powers over the economy, are reserved to the UK Government and outside the control of the Scottish Government.

“An independent Scotland would have the power to make different choices, with different economic budgetary results.”

The London-based Institute for Fiscal Studies (IFS) said Scotland’s “implicit budget deficit” is 6 percentage points higher than the UK as a whole “largely reflecting higher government spending.”

The IFS said the Covid-19 crisis means that figures for the current and next few years are likely to differ massively.

“Indeed, the UK’s actual and Scotland’s implicit budget deficit this year could spike at almost 19% and 26-28% of GDP respectively, based on Office for Budget Responsibility projections …” said the IFS in a statement.

“Both the overall UK deficit and the implicit Scottish deficit are, under current fiscal and constitutional arrangements, almost entirely the responsibility of the UK government.

“The Scottish Government’s borrowing powers are limited to £450 million for capital investment and either £300 million or £600 million, depending on circumstances, to address volatility and forecast errors for devolved taxes, such as income tax and land and buildings transactions tax.

“As highlighted previously, there is a case for granting additional borrowing powers, at least temporarily.

“And figures for income tax revenues in 2018-19 to be published next month are likely to show existing limits can be constraining even in more benign times, so longer-term reform may also be warranted.

“If the OBR’s central scenario is correct, the UK government will almost certainly have to increase taxes or hold down spending in order to reduce its budget deficit and halt the rise in government debt.

“These measures would inevitably impact on Scotland, although the Scottish Government’s devolved tax powers would allow it some flexibility to vary the mix of tax rises and spending restraint if it so wished, as it has done in recent years.

“Under full fiscal autonomy or independence, the deficit would be the Scottish Government’s responsibility, and the need for tax rises or spending cuts would be starker.

“The SNP’s Sustainable Growth Commission proposed holding down overall growth in public spending to 0.5% for a decade – implying cuts to areas other than health, social care and pensions – to reduce Scotland’s budget deficit to less than 3% of GDP.

“The likely long-run hit to the public finances as a result of the Covid-19 crisis would mean that spending restraint would have to be even more stringent and/or long lasting, or be accompanied by tax increases. 

“That does not mean Scotland cannot afford to be independent, nor that there aren’t opportunities for better policy to improve performance and better address Scottish needs and preferences.

“If such policies can be developed and implemented, this could ultimately allow more to be spent on public services and more to be kept in Scottish people’s pockets in the longer term.

“It is just that the Covid-19 crisis has made the immediate public finance situation more challenging …”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.