What is the economic and fiscal situation in Scotland?

Yesterday brought us some new information on the economic situation in Scotland as the government there published its latest public finance data and updated us on the economic growth situation. So let us go straight to the GDP data.

In quarter 1 2016 the output of the Scottish economy was flat (0.0 per cent change), following growth of 0.3 per cent in quarter 4 2015. Equivalent UK growth was 0.4 per cent……Scottish GDP per person was also flat during the first quarter of 2016.

So an underperformance compared to the rest of the UK which in fact is something that can also be seen if we look back over the previous year.

Compared to the same period last year (i.e. quarter 1 2016 vs quarter 1 2015), the Scottish economy grew by 0.6 per cent. Equivalent UK growth was 2.0 per cent.

If we look back we see that the Scottish economy had a similar pattern to the rest of the UK in that economic growth pushed up to between 2% and 3% and in fact for a while did better. But since the beginning of 2015 economic growth has been slip-sliding away which has a cause you are probably already thinking of but please indulge me and hold your horses as there are complications.

Scotland’s economic structure

This is different to the rest of the UK as shown by the numbers below.

Scotland’s economy is broken down into four weighted industry categories. The breakdown for 2013 is services (75 per cent), production (18 per cent), construction (6 per cent), and agriculture, forestry and fishing (1 per cent).

So agriculture is a little higher but the main change compared to the UK numbers below is more production and  a smaller services sector.

The current 2013 – based weights are: services 78.8%; production 14.6%; construction 5.9%; and agriculture 0.7%.

You might be thinking that the production numbers should be even higher but the numbers we are given are on this basis.

This publication presents results for what is commonly referred to as the “onshore economy”, which means they exclude oil and gas extraction activity in the North Sea.

I have looked these up as they are in the overall UK numbers.

Within the production sub-industries, output from mining and quarrying, including oil and gas extraction, decreased by 2.3%;

However on an annual basis the picture was much brighter.

Mining and quarrying, including oil and gas extraction, increased by 5.3%,

For those wondering how this can be with the oil price where it is I have checked before and the numbers have been affected by past maintenance shut-downs.

Whilst the explicit oil and gas output numbers are removed there are still implicit effetcs from the industry as towns like Aberdeen depend to a large degree on it. Over the past year the break down of Scottish economic growth is shown below.

The growth in Scottish GDP in this period was due to the tail end of growth in the construction industry plus growth in the services industry (particularly distribution, hotels and catering), tempered by contractions in the production industry (particularly manufacturing).

I would be interested in readers thoughts and explanations of the construction boom. In terms of the numbers it seems to have been affected by the ESA 10 methodological changes which pushed it higher.

Construction output saw extremely strong growth in 2014 and 2015 and drove much of GDP growth over this period

The Fiscal Position

Yesterday saw the publication of the GERS dataset which estimates the revenue and public spending situation for Scotland. If we start with the revenue situation there is something glaring in the numbers.

Including an illustrative geographic share of North Sea, Scottish public sector revenue was estimated as £53.7 billion (7.9 per cent of UK revenue). Of this, £60 million was North Sea revenue.

As you can see the North Sea is not ignored here and the last sentence is not a misprint.

Scotland’s illustrative share of North Sea revenue fell from £1.8 billion in 2014-15 to £60 million, reflecting a decline in total UK North Sea revenue.

Ouch! This means that the individual position is as follows.

Scotland’s public sector revenue is equivalent to £10,000 per person, £400 less than the UK average, regardless of the inclusion of North Sea revenue.

Just to show how times change this is what we were told about 2011/12.

In 2011-12, oil and gas production in Scottish waters is estimated to have generated £10.6 billion in tax revenue, 94% of the UK total…….Total tax revenue (onshore and offshore) in Scotland was equivalent to £10,700 per person in 2011-12, compared to £9,000 in the UK as a whole.

Expenditure

The situation here is of higher public expenditure per person compared to the rest of the UK which is an example of regional policy in action.

Total expenditure for the benefit of Scotland by the Scottish Government, UK Government, and all other parts of the public sector was £68.6 billion. This is equivalent to 9.1 per cent of total UK public sector expenditure, and £12,800 per person, which is £1,200 per person greater than the UK average.

The Fiscal Deficit

The situation here is that Scotland is receiving the large fiscal stimulus that is being recommended by some for the rest of the UK although to be fair there have been very few suggesting one of the size below. Also at current oil prices it is noticeable how little difference North Sea Oil & Gas makes.

Excluding North Sea revenue, was a deficit of £14.9 billion (10.1 per cent of GDP)….Including an illustrative geographic share of North Sea revenue, was a deficit of £14.8 billion (9.5 per cent of GDP).

This compares to an overall UK position of.

For the UK, was a deficit of £75.3 billion (4.0 per cent of GDP).

Comment

If we stick to the economics we see an economy that is suffering from a fall in price of a natural resource that it produces. Whilst the GDP data excludes the oil & gas sector explicitly there are clear implicit effects and the fiscal position has been hit hard. However it has been shielded to some extent by its membership of the UK. This comes in various forms. Firstly the regional policy I mentioned earlier. Next we have the fact that it does not have its own currency as a Sottish Pound would presumably have been hit hard or at least a lot harder than the UK Pound has been post Brexit!Indeed there would have been very wide swings in the value of a Scottish Pound. Also a stand-alone fiscal deficit of that size would see the debt vigilantes looking to party even in these hard times for them. I do realise there are so many ironies here but as part of the UK Scotland can borrow much more cheaply than it would on its own. Oh and Bank of England policy seems much better suited to the Scottish economic situation assuming you believe that more monetary easing is a stimulus. Finally there is the size of the fiscal deficit itself which is a substantial stimulus.

Meanwhile as a sign of ch-ch-changes I would like you to join me in a journey in Doctor Who’s TARDIS back to March 2013 when we were told “the balance of risk being on the upside” for oil prices by the Scottish Government leading to this.

analysis published by the OECD in March 2013 suggests that rising demand in East Asia and continued tight supply could result in oil prices rising above $150 by 2020…….could result in oil and gas production in Scottish waters generating £57 billion in tax revenue between 2012-13 and 2017-18

Let me remind you of the words of the late and great Yogi Berra.

The future ain’t what it used to be.

 

 

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29 thoughts on “What is the economic and fiscal situation in Scotland?

      • You have also pointed out how ineffective these other policies have been outwith London.

        The real position of Scotland, vis-à-vis most of the UK, could be better gauged if London was removed from the equation altogether, since policy is concentrated on benefitting that area.
        For example, 44% of Scotland’s university graduates go on to work in London, and I’d bet it’s not the poorest.

  1. Hello Shaun,

    Economics? Scottish independence ?

    the bluff was all politics , eco wise the fishface knew he had to leave one union and join another
    to make ends meet. Scotland needs high oil prices like Venezuela does, for the same reasons – they can’t budget !

    so cheap oil means more from the partner in which ever union they ended up in – ours now .

    Frankly I think they should pay their own way but we have them , and we love them , if not their leaders …

    Forbin

    • Forbin, Forbin, this “we” that so evidently excludes the Scots (who are immediately identified as “them”) is exactly the what rightly infuriates Scots and drives Scottish nationalism. Who, exactly, in your mind, are “we”?

      • Well Jamie, we’re all British but its those north of the border who wanted the referendum , their elected representavies

        and for the record the likes of certain Londoners after another vote wanted to be a “we” of there own ( like Passport to Pimlico , really ? well really actually)

        we ? who ever thinks their Sassenach ……and who ponder the West Lothian question

        so are ye a true highlander ?

        Forbin

        • Forbin, you seem to be jumping to tribalistic conclusions. It hardly matters to the argument, but for the record, I’m an elderly despairing Englishman who has come to believe that we the English will not be redeemed from our history until the applecart is kicked over and a reset of values and assumptions forced on us. I had hopes that Scottish independence might do the job. Now I have hopes that Brexit may do it. (I didn’t vote for it, btw.)

  2. The SNP are a one trick pony. One day their voters will realise this fact and also the fact that the EU doesn’t want another Greece.

    • Hi Bez

      I will steer clear of the politics. But as to EU accession Scotland is a long way away from the 3% annual fiscal deficit of the Growth and Stability Pact rules. Either Irish style GDP growth or Euro area style austerity awaits on that road.

  3. I think you’ll find that many of those in favour of Scottish independence don’t think much of the SNP and weren’t impressed by their performance during or since the referendum. OTOH they are the only vaguely socialistic party in the UK, so maybe a better fit for Scotland as a whole.
    I think Brexit has shown that economic issues don’t override “taking back control” (whatever that means).

    • Right. The SNP is more than ‘vaguely socialistic’, it is the UK’s only social democratic party, and that is Salmond’s achievement. (It was Celtic fringe loonies before he tookhold of it.) Democratic socialism runs deep in Scots culture.

  4. Shaun,

    Completely off topic but I was interested to here from Bloomberg today that Mark Mobius is predicting that Japan will initiate helicopter money at some point in the near future. I read, whether from you or someone else, that the BoJ has officially denied they will start helicopter money (never believe anything until it’s been officially denied), but I have now read from two different industry people that the BoJ could or should start this policy. They’ve tried everything else but I’m not convinced that giving the money directly to companies would work but giving vouchers to consumers could work. Your thoughts?

    Thanks.

    Robert

  5. Hi Shaun thanks for laying this out so clearly I shall forward to my sister in law although patriotism seems to trump logic or the facts.
    We had the same sort of thing with Brexit but I’ll believe it when it happens and if it does there is no land of milk and honey.
    The question of Scottish independence is due to a democratic deficit,if we did not have a morally indefensible voting system,the debate would have remained a fringe issue.
    The voting system is the problem changing it is the solution a government with a working majority that only 24% of the electorate support is not democracy.
    Scotland could be independent if it had taken that option 40 years ago there are plenty of small countries in the world,however we had a very lucky escape,thank goodness 55 % f the population made the right decision.
    This all comes down to the currency you are not independent if you don’t have your own and would 50% of Scottish people vote for that…no chance

    • 55% of the population of Scotland! Talking to a lot of people in…Croydon…had the English been included in the vote Scotland would be long gone. I think them wrong but no matter. Perhaps next time the SNP will push for the English to vote as well. We will all be the poorer for it and a long period of bloddy-mindedness will ensue.

      • Yes chrisrick but that is no surprise following the Brexit vote sadly it appears that a large number of English people are quite insular perhaps they take their cue from Marlene Dietrich “I want to be alone”

  6. And there I/we were looking at an English potential win win – net surplus from leaving the EU say £10B and prospect of Scotland going independent – saving say £15B – However cant see Scotland going Independent now as they need the UK subsidy even more.

  7. “Next we have the fact that it does not have its own currency as a Sottish Pound would presumably have been hit hard or at least a lot harder than the UK Pound has been post Brexit!”

    Brexit? What Brexit? Neither you or I have any data relating to what has happened to the UK pound following Brexit.

    What we DO have, is data demonstrating what has happened to the pound following the uncertainty caused by the Brexit vote which was then followed by the non Brexit.

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