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.
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).
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.