Scotland’s 2016-17 fiscal deficit falls to 8.3% from 9.3% in the previous financial year; still pretty huge

Government Expenditure & Revenue Scotland (GERS) 2016-17 was published this morning. It shows that in 2016-17 Scotland’s notional net fiscal deficit was 8.3%, down from 9.3% in 2015-16. The UK’s deficit for the same period was 2.4%.

The figures also show that non-North Sea oil and gas revenue increased by 6.1% on the previous financial year, and that public spending in Scotland is £13,175 per person, £1,437 per person greater than the UK average.

We reported back in May on experimental statistics by the ONS showing how Scotland compared with the other nations and regions of the UK in terms of public spending deficits. The Fraser of Allander Institute referred to this data in its analysis of GERS today, noting that “[t]he key reason for Scotland’s ranking behind other parts of the UK is not because of lower revenues, but higher levels of spending. Indeed only London, the South East and the East of England are estimated to raise more revenue per head than Scotland.” Scotland is second only to Northern Ireland in terms of public spending.

As for the next few years, the Fraser projects that Scotland’s deficit will be at around the 7% mark by 2020-21.

Finally, on the notion that GERS is unreliable, Dr Graeme Roy, Director of the Fraser of Allander Institute said the following1:

Some have dismissed GERS as it relies, in part, on estimating some Scottish tax revenues. This is unfair. All economic figures are subject to a degree of estimation, including GDP and unemployment statistics. So estimation is not unusual. Furthermore, radically changing the estimation techniques do not alter the headline conclusions of GERS.

It is important to remember that GERS takes the current constitutional settlement as given. If the very purpose of independence is to take different choices 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 tell us little about the *long-term* finances of an independent Scotland.

But GERS does provide a pretty accurate picture of where Scotland is in 2016-17. In doing so, it sets a useful starting point for a discussion about the immediate choices and challenges that need to be addressed by those advocating further constitutional change.

All countries face big fiscal challenges in terms of what will replace declining revenues in the face of rising spending pressures over the next few years. Changing the constitutional set-up doesn’t alter the fact that these fiscal challenges need to be addressed by all governments in all countries. But a more autonomous Scotland will be forced to meet such challenges sooner rather than later.

Fraser of Allander Institute publishes latest GVA growth predictions

The Fraser of Allander Institute has published forecasts for growth in the Scottish economy over the second and third quarters of 2017:

GVA growth in 2017 Q2 is estimated to be 0.49% which, at an annual rate, is 1.98%
GVA growth in 2017 Q3 is estimated to be 0.40% which, at an annual rate, is 1.62%

They add: “[W]e note that the UK economy — which had a surprisingly strong 2016 — has weakened in recent quarters. This will have an implication for Scottish trade with the rest of the UK and may therefore dampen growth in Scotland through 2017.”

Aberdeen “worst hit” by hard Brexit, experts predict

BBC, today:

Aberdeen could be the city worst hit by falling economic output due to a “hard” Brexit, experts have predicted.

A new report from the Centre for Cities and the Centre for Economic Performance at the London School of Economics said all cities would see a fall in output due to increasing trade costs.

Aberdeen and Edinburgh were both ranked among the ten most affected cities.

However, the study said both cities are also among the best-placed to respond to any predicted economic turbulence.

The full report can be read here.

Most and least affected cities (% change in Gross Value Added)
Most affected cities (% change in Gross Value Added). Source: Centre for Economic Performance analysis, 2017. From report Brexit, trade and the economic impacts on UK cities (figure 3, page 5)

 

House of Lords urges differentiated solution for Scotland in Brexit

From “Chapter 5: Scotland” of the UK parliament’s House of Lords European Union Committee report on Brexit and devolution, published today:

We conclude, on the basis of the weight of evidence submitted to this inquiry, that the Scottish Government’s further proposal, for continued Scottish membership of the Single Market, through the European Economic Area, while the rest of the UK leaves the Single Market, is politically impracticable, legally highly complex and economically potentially disruptive to the functioning of the UK single market.

Nevertheless, we urge the Government to respect the particular circumstances in Scotland. While we acknowledge that the referendum was a UK-wide vote, giving a UK-wide result, the Government needs to recognise the fact that the vote to remain in Scotland, at 62%, was the largest and most decisive (either in favour of remaining or leaving) in any nation of the UK.

We therefore consider that, in the event that the UK Government does not secure a UK-wide agreement that adequately reflects Scotland’s specific needs, there is a strong political and economic case for making differentiated arrangements for Scotland.

The Scottish economy has particularly pressing needs, including its reliance on access to EU labour, which is acute in sectors such as health and social care, agriculture, food and drink, and hospitality. We also note Scotland’s demographic needs, and its reliance upon EU migration to enable its population (and in particular, that of working age) to grow. Scotland’s more sparsely populated regions are disproportionately reliant both on EU migration and EU funding. Many of our witnesses argued that the most pressing case, in view of Scotland’s economic and demographic circumstances, would be for a standalone approach to immigration policy. We address this issue in the next chapter.

Our witnesses have also suggested that differentiated arrangements could be reached in fields such as energy policy, justice and home affairs cooperation, participation in Europol, access to EU structural or research funds, participation in such programmes as Horizon 2020 or Erasmus, reciprocal healthcare provision, workers’ rights and working hours, and agriculture and fisheries.

Finally, we reiterate that maintenance of the integrity and efficient operation of the UK single market must be an over-arching objective for the whole United Kingdom. But that objective does not preclude differentiated arrangements for Scotland in some areas, and nor does it justify excluding the Scottish Government from the Brexit process. […]

Scottish economic growth outperforms expectations in the first quarter of 2017

Scottish GDP grew by 0.8% in the first quarter of 2017, averting recession following a 0.2% contraction in Q4 2016. Scotland’s 0.8% growth compares with 0.2% in the UK as a whole, 0.4% in the United States, and 0.6% in the euro area1.

Scottish GDP, quarter-on-quarter and annual percentage change

The other main points from the government’s latest GDP publication:

  • Scottish GDP per person grew by 0.7% during the first quarter of 2017.
  • In the first quarter of 2017 services in Scotland grew by 0.3% and production grew by 3.1%, while construction contracted by 0.7%.
  • Compared to the same period last year (i.e. 2017Q1 vs 2016Q4), the Scottish economy grew by 0.7%. Equivalent UK growth was 2.0%.

Contribution of industries to Scottish and UK GDP growth, 2017 Q1

The Fraser of Allander Institute (FAI) offered some key reasons for the significant growth in the production sector:

  • Firstly, the figures show a substantial rise of over 7% in metals manufacturing, driven in part by the re-opening of the Dalziel steel plant.
  • Secondly, as our latest Oil and Gas survey highlighted, there has been a growing return to confidence in the oil and gas supply chain. The data published today appears to indicate that this has actually now translated into a welcome degree of bounce-back in actual activity within the sector.
  • Thirdly, the figures report massive growth of over 12% in refined petroleum output which is largely output from Grangemouth. We’d urge caution with this series as it’s especially volatile […]
  • Finally, other sectors of manufacturing have also bounced back from a weak 2016. Food and drink for example, also grew strongly by historical standards.

The FAI on longer-term performance:

[…] [I]f Scotland can — over the remaining three quarters of 2017 — secure its average quarterly growth rate of 0.35% then this will bring in 4Q-on-4Q growth over 2017 of 1.2%. Identical to our June forecast.

July Fraser of Allander Institute nowcast suggests recession may have been averted

The latest Fraser of Allander Institute nowcast suggests that a recession in the Scottish economy, following a 0.2% contraction in GDP in Q4 of 2016, may have been averted (caveats—described in the FAI post—apply):

Looking forward, our model currently estimates growth in 2017 Q1 of between 0.2% and 0.3% and a similar rate for Q2.

The information that we have therefore — and comparing such data to historical trends — suggests that the economy has been growing during the first six months of 2017 (albeit below trend).

The latest estimates from the ONS indicate that the UK economy as a whole grew by 0.3% in Q1 of 2017.

Official figures for Scotland will be published on Wednesday.

Update

The FAI has also published its latest Royal Bank of Scotland Scottish Business Monitor results. In summary:

The results from the Royal Bank of Scotland Business Monitor suggest that the Scottish economy grew in the 3 month period to the end of June. This offers some signs that Scottish businesses are remaining relatively resilient in the face of challenging trading conditions.

More encouraging is the outlook, with a greater proportion of businesses expecting higher levels of activity in the second half of the year. Inflationary pressures remain strong however, and this will act as a drag on some sectors. Others, particularly tourism and exporters will continue to see opportunities from the low value of Sterling.

The JMC on EU negotiations: what a total farce

According to the UK government’s Secretary of State for Scotland David Mundell “[t]he Joint Ministerial Committee (EU Negotiations) was established to facilitate engagement between the UK Government and devolved Administrations” in “seeking the best deal for all parts of the UK” in EU negotiations.

John MacDonald, writing in issue one of Cable magazine:

The JMCs seems designed to leave representatives of the devolved nations under no illusions as to who is in charge. JMC meetings have only once been held outside of London. A single meeting was held in Wales. On that occasion, the Welsh government was not permitted to organise the event — it seems that only the UK government has the capacity to undertake that Herculean task.

JMC meetings are always chaired by a UK Minister and are always heavily populated by UK government officials, something which does much to colour the dynamic of meetings. Meetings are scheduled for just one hour. This is surely a ludicrously short time to allocate to a ‘monthly’ meeting on an issue as serious as how we leave the European Union.

Scottish representatives report typically having only around ten to fifteen minutes to articulate Edinburgh’s position during these meetings. They also express concerns over how receptive UK government officials are to discussing areas where there appears to be a divergence of view between Edinburgh and London. Indeed, Scotland’s Brexit Minister Mike Russell is on record as saying that such divergences are not necessarily acknowledged by London; key substantive issues which have been raised during the JMCs have been ‘simply taken away after discussion for UK officials to consider, and they have never re-emerged.’

Mike Russell responded on Twitter: “Correct — but we still need to find a way forward[.]”

(Source for David Mundell quote here.)

Scotland’s economy edges close to recession — but growth forecast to return in the coming months

The Fraser of Allander Institute (FAI) published its latest Economic Commentary yesterday. You can read it here. The main points from the press release:

  • With the Scottish economy shrinking in the final three months of 2016, Scotland is just one data release away from re-entering recession (defined as two consecutive quarters of falling output) […].
  • However, the Institute forecasts that the Scottish economy will pick-up in 2017, although its central forecasts for growth of 1.2% in 2017, 1.4% in 2018 and 1.6% in 2019 are below trend with Scotland likely to continue to lag behind the UK as a whole.
  • The Institute’s new analysis finds that Scotland’s recent economic woes can no longer be explained just by the downturn in the North Sea or indeed by Brexit. Instead, Scotland’s economy seems to be stuck in a cycle of weak growth, declining confidence and poor investment and net export figures.
  • With Holyrood’s Budget now much more dependent upon the relative performance of Scottish tax revenues, getting the economy moving again must be a priority for everyone with a stake in Scotland’s long-term prosperity.

FAI director Graeme Roy added:

“What has been surprising is how little the economy has featured in recent policy debates in Scotland — including in the General Election. With Holyrood now responsible for over £11bn of income tax revenues, it is vital that politicians from all sides come forward with practical policy initiatives that will support businesses, secure new investment and create jobs whatever the constitutional settlement.”

In the “Economic Perspectives” section of the Commentary, David Eiser looks in detail at the new fiscal powers being devolved to the Scottish Parliament as part of the Fiscal Framework agreed in 2016. These include, since April of this year, responsibility for a large proportion of income tax revenues (with some exclusions, such as the personal allowance), and from 2018 complete control over Air Passenger Duty. Then in 2019 the Scottish Government will start receiving half of VAT revenues raised in Scotland.

The report includes a nice summary of the various devolved taxes:

Fraser of Allander Institute: Devolved, shared and assigned tax revenues in Scotland
Source: Fraser of Allander Institute Economic Commentary Vol 41 No 2, June 2017 — Table 1, page 27.

Growth figures for the first three months of 2017 are due to be published on 5 July.

Backing Scotland’s Currency — Foreign exchange reserves for an Independent Scotland

Common Weal has published a new white paper, “Backing Scotland’s Currency — Foreign exchange reserves for an Independent Scotland”, authored by Peter Ryan. From the preface:

The successful management of an independent country’s currency is often tied to its ability to raise and maintain an adequate level of foreign currency reserves. These reserves would be used to stabilise the currency’s exchange rate, protect against speculative attacks on the currency and service debt obligations, amongst other uses. In the case of Scottish independence, it will be important to show that sufficient reserves can be established quickly enough after the launch of a new currency to ensure its stability. It is the purpose of this paper to demonstrate that this proposal is viable.

Ryan reckons that approximately $40 billion (20% of GDP) could be raised to support an independent Scottish currency. Denmark similarly holds in the region of 20% of GDP in foreign exchange reserves1. He estimates that the costs of servicing the debt would be around $70.2 million annually, which is “substantially less than the current annual contribution by Scotland to the UK’s foreign reserves (£500 million per year) which are being built up by the UK government to bail out the City of London in the event of another crash.”

From The National’s reporting of the paper:

Dr Jim Walker, chief economist of Asianomics, said while it was “absolutely correct” that an independent Scotland could raise $40bn in foreign reserves, it was also “absolutely unnecessary”. He described the Common Weal report as a “well-thought-out contribution”, but said many successful independent countries had levels of reserves considerably smaller than 20 per cent of GDP.

“The Czech Republic, until the last two years, had historically a substantial current account deficit making the currency much more vulnerable,” he said. “For Bulgaria that was also historically true but not in the last decade. However, these reserve levels [at 40 per cent GDP] are a result of past deficits. Scotland would run a large surplus.

“Two ‘small’ non-European players with open capital accounts and free-floating currencies, Australia and New Zealand, maintained reserves of 4.5 per cent of GDP and 10 per cent of GDP, respectively, for 2016.

“There is absolutely no need [for an independent Scotland] to be aiming at a 20 per cent of GDP reserve level.”

Peter Ryan’s previous paper, “How to make a Currency — A Practical Guide”, may also be of interest.

Tory campaign strategist Lynton Crosby pushed for Scottish independence vote before Brexit

Politics Home, 26 June:

Conservative election strategist Lynton Crosby urged Theresa May to hold a fresh Scottish independence referendum ahead of Brexit, it has been revealed.

“While it may seem sensible to delay a referendum until after Brexit negotiations are complete this is not necessarily the best strategic position to adopt,” he wrote [in a leaked memo].

“Holding a referendum on independence before Brexit is complete will mean that voters have to grapple with the uncertainty of the outcome of Brexit in addition to the uncertainty of their choice in the referendum.

“Delaying the referendum until after Brexit is complete removes one of these unknowns.”

He said a Brexit outcome that dissatisfied Scots could “easily result in Scotland voting for independence”.