Sunday, January 28, 2007
Would Scots do as well on their own?
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

scot.jpg

This may not be the wisest thing for an Sassenach to do, but the question needs to be answered. Should Scotland become independent and could it survive, indeed thrive, economically, if it were no longer part of the union?

The issue has come up because the 300th anniversary of the Act of Union this month coincides with the approach of the Scottish parliament elections in May. The expectation is that the Scottish National party will do well, partly because of Labour’s unpopularity. The SNP is committed to a referendum on independence and says it will not enter a coalition with another party unless that commitment is met.

The story does not end there. The SNP may not do as well as it expects, or find itself unable to secure agreement with a coalition partner. Polling shows that a Scottish referendum on independence would not necessarily come out in favour.

Constitutionally, too, a referendum vote for independence would have plenty of moral weight but no legal effect. The potential break-up of the UK is a matter over which Scotland’s parliament has no sovereign authority. It is not even clear whether Scotland could hold a referendum without Westminster’s approval.

So there are lots of hoops. Making the Bank of England independent was a doddle compared with Scottish independence. But the issue is live; so what about the economics? Much of the debate has concentrated on the fiscal arithmetic. Public spending per head is higher in Scotland (as it is in Wales and Northern Ireland) than in the UK as a whole. Treasury figures show identifiable public spending per head is £8,265 in Scotland, 22% above the English figure of £6,762. Wales is £7,666, Northern Ireland £9,084.

Scotland, with just over 5m people, has 8.6% of the UK popu- lation but gets 10% of spending. This has led to the argument over the fiscal “black hole”. The Scottish Executive’s Government Expenditure and Revenue exercise shows that in 2004-5 Scotland’s total public spending was £47.7 billion and its tax receipts £36.4 billion, implying a deficit of more than £11 billion, or 12% of Scottish gross domestic product.

What about North Sea oil? The same exercise showed that if Scotland were allocated 100% of North Sea revenues its deficit would come down to £6 billion, or 4.8% of GDP. That is still high, although the UK’s overall budget deficit in that year was 3.3% of GDP.

The SNP, I should say, disputes these numbers, claiming Scotland has a fiscal surplus. This is partly because of oil, and the higher prices since 2004-5 (although it would be unwise to rely on these) and partly because it thinks the executive has understated the tax take in other respects.

It is an important argument but a sterile one. Would the Treasury hand Scotland 100% of future oil revenues, even if Westminster accepted the independence case? No. So there is a fiscal gap.

The economic debate on independence rests on two things. The first is the performance of the Scottish economy within the union. The second is whether that performance would improve outside it. The small-economy model works well in Europe. Could it work for Scotland? Scotland’s performance has, in many respects, been good. The proportion of “economically active” adults, 79.5%, is higher than the average for England (79.2%) and the UK as a whole (79%). Unemployment, at 5.2%, is below the national average of 5.5%.

GDP per capita hovers between 95% and 100% of a UK average that is bumped up by London and southeast England. In the 1960s, with the industrial base crumbling, Scotland slipped to 88% of the UK average. Only London, the south- east and East Anglia have higher GDP per head than Scotland.

Scotland, moreover, is propped up by the largesse of English taxpayers, and higher public spending per head translates into public-sector jobs and salaries. The comparison between Scotland and the northeast, England’s poorest region, is striking.

As to whether Scotland gets anything more than a larger public sector in return for higher spending, the jury is out. Educational performance at age 16 is better than in any English region and Wales, although not as good as in Northern Ireland. Scotland’s health outcomes are, however, generally poor, particularly its high death rates from heart disease and cancer.

The pro-independence lobby asks: Could Scotland become the new Ireland? But the Irish example is, to me, entirely inappropriate.

Ireland has pursued a low-tax policy, with revenues about 30% of GDP, and attracted international investment with ultra-low corporate tax rates. An independent Scotland that was fiscally viable would start life with a tax burden of perhaps 45% of GDP. On generous assumptions it would be 40%. Could it get down to 30%? Not without cutting public spending so that hard voters would not tolerate it, and reject politicians who proposed it. Although it would be gratifying to see Scotland as a low-tax economy, it looks impossible.

Much of Ireland’s success was essentially a “catch-up” process. A country that started poor became well off because it was entitled to help from European Union structural funds. Without this substantial pump-priming, the Irish miracle might never have got off the ground. But Scotland is already well off, and there are more deserving candidates for EU funds, notably the new member countries of eastern Europe.

What about the Scandinavian model? Sweden has been getting plaudits for its performance and Denmark has been getting even more favourable reviews. Both countries have tax burdens of about 50% of GDP but have been achieving strong growth alongside social cohesion. Is the answer for Scotland on the other side of the North Sea? Perhaps, although you would not want to bet on it. It would mean transforming public services, indeed society, and it would risk an outflow of business and talent to lower-tax England. Scotland’s best exports, even without higher taxes, have been its entrepreneurs and its brainiest, most motivated people. Some might stay to see if the Scandinavian experiment worked. Many would not.
There is a huge amount of political posturing about Scottish independence. The economics, cutting through the verbiage, is straightforward. Scotland has been doing well as part of the union, even if many Scots refuse to acknowledge it. There is no evidence it would do better as an independent nation, and a big risk it could do a great deal worse.

PS: Has the air cleared, or become foggier? Anybody who expected a gung-ho vote in favour of this month’s Bank rate rise from 5% to 5.25% was given a rude awakening by the minutes of the monetary policy committee’s meeting, which showed the narrowest 5-4 vote in favour of the hike. Three Bank “insiders” voted against the rise.

This was significant. Rachel Lomax, deputy governor responsible for monetary policy, voted against, as did Charlie Bean, chief economist. So did the normally hawkish Paul Tucker, executive director with responsibility for markets, although that may have been for timing reasons. The other “dove”, as expected, was David Blanchflower.

All votes are equal on the MPC so the two new boys, Tim Besley and Andrew Sentance, outvoted the Bank’s own chief economist. They were joined by Kate Barker and Sir John Gieve, deputy governor responsible for financial stability.

The casting vote was governor Mervyn King’s, getting revenge perhaps for being outvoted when the Bank cut in August 2005. In a speech in Birmingham he set out his stall — the importance of showing the Bank means business and is determined to anchor inflation expectations.

Where do we go next? The four “no” voters could become hawkish, but I would be surprised. I judge that the five, who were partly driven by “why wait?” motivations, will not want to push again next month, unless the new inflation forecast is worryingly high. So the battle should be joined in March or April. Its outcome depends, as before, mainly on what happens to pay.

From The Sunday Times, January 28 2007


Comments

Interesting piece.

It is a true pity that you, and like a good many of your own countrymen, have made a classic error is to interpret Scotland's "alleged" fiscal deficit as a measure of the subsidy from England. You actually do realise that the UK, in the fiscal year 2004-2005, had a deficit of £37.6 billion?

So if Scotland's "alleged" deficit is taken away that then leaves a total of £26 billion left. So, unless you actually think this deficit is all due to Wales and Northern Ireland, then that actually means that ENGLAND also had a deficit for that year.

So, Mr Economics Expert, pray tell why you stated above that Scotland "is propped up by the largesse of English taxpayers" when that obviously couldn't be? How can English taxpayers prop Scotland up when their own revenue is ALL used up in England?

So, if there really is a "Scottish subsidy" then it certianly ISN'T from England where it is coming from. That is where PSNB comes in. I suppose, as being the Economic Editor of a major newpaper, that you have heard of that?

Another thing: It is also pity that you have also taken GERS reports at face value. I am not a Scottish nationalist, per se, but you really have to find the GERS reports quite SINISTER as it is ONLY Scotland, of all the four home nations, that GETS this annual report. Even the Government has admitted, in B&W, that the GERS system is "unique":

http://www.parliament.the-stationery-office.co.uk/pa/cm200203/cmhansrd/vo030113/text/30113w16.htm

"GERS is unique, and there are no directly comparable publications for the English regions, or for Wales and Northern Ireland. "

So why is it that Scotland receives this report and WHY is there no corresponding report for any other part of the UK? Could it be that there is, in fact, a malevolent reason of why this is the case, especially as all these reports (since their inception in 1992) have all drummed up the same conclusion: Scotland is in deficit.

Another thing you need to know is that it has been known for quite a while now that GERS was and still is a party politically motivated document, as evidenced in the following quote from a leaked Ministerial correspondence from Ian Lang, the then Secretary of State for Scotland, in a letter to the then Prime Minister, John Major, on March 3rd 1992:

“I am disappointed that both you and the Chancellor have reservations about publishing the booklet I have had prepared and printed, setting out the details of the government’s expenditure and revenue in Scotland. I judge that it is just what is needed at present in our campaign to maintain the initiative and undermine the other parties. This initiative could score against all of them”.

Even though the GERS Reports were originally initiated by the Tories in 1992, New Labour, since the date of coming into power, have since embraced this tactic as a way of attacking the SNP’s economic arguments, thus, this spin is annually trotted out by them to attack the Scottish nationalists and, ergo, the self-confidence of the Scottish people as well, by basically sending the message that Scotland cannot afford to be independent.

Just think about it: Why was the latest report brought out in such glowing terms by the Scottish Executive and why do you think that they even have the gall to gloat about the size of the figures, which would actually illustrate that Scotland‘s net borrowing position was 12% of her GDP (compared to the UK average of 3.6%)? Under such figures, this, as you must admit, is really gross mismanagement of a colossal scale!

Pray tell, what government in the right mind and in the whole wide world, would even dare to joyously announce that they had totally mismanaged their own economy (also of which they had previously stated was actually growing!), as the GERS figures indicate, unless their true agenda is to really score a major blow against their main political enemies, the SNP, who as you know have always stated that Scotland is, and has always been, a net contributor to the UK?

Herein, this is real reason why for the GERS Reports and why they were initiated in the very first place. The really amusing thing is that any professional economist could point out the serious flaws in the GERS authors methodology as they omit so much important data and that so much of their “estimates” are so misleading that the whole basis for their report is called into question.

Here is an enlightened extract of the recent GERS document, of which the GERS authors have happily admitted:

"For public receipts, GERS relies on numerous sources. Many taxes are collected centrally and their distribution by region is often unavailable. Consequently, GERS uses appropriate survey data to estimate Scotland's share of the various revenue sources. For details on the methodology see Appendix B of the publication.

Net borrowing (NB) is the difference between expenditure and receipts, defined to exclude North Sea oil revenues. The NB figure is an estimate for Scotland, based on expenditure and receipts calculations that by necessity include some estimation. Therefore, the NB estimate should be used with some caution."

So, in other words it seems therefore that we are being asked to accept something based on estimates, of which, should be treated with some caution.

The amazing thing is that there are so many holes in the whole report that which can be easily pointed out. Here are some examples:

The report totally excludes excludes North Sea revenues and it's effects on overall GDP/GVA. Corporation Tax and Capital Gains Tax for example.

Insurance Premium Tax revenue is calculated on a pro-rata basis when it should be based on where those policies are sold from. The Scottish financial sector is quite significant.

The Climate Change Levy and Spirit Revenue are calculated as if they are consumption taxes when, in fact, they are production taxes. This completely avoids things like Scotland's advantage in distilleries and energy production.

Landfill Tax on a pro-rata basis when (and the GERS authors even stated this), "data indicates that Scotland has more landfill per head than the rest of the UK". So, if they actually have data why don't they do an estimate?

It only calculates VAT on household expenditure alone. Small businesses and sole traders pay VAT but can fall outside the repayment turnover threshold.

Also, did you also know that the GERS report counts TWICE certain types of expenditure for Scotland because "identifiable expenditure" north of the border is classified as "unidentifiable" south of the border, hence another reason why Scotland "appear" on paper as having slightly higher public spending than the UK average as Scotland has more money classed as being "identifiable". So Scotland ends up, on paper, paying a proportion of services for England and Wales, which amounts to over £400 million. This fact was actually proven just the other day and was admitted (grudgingly) by the Scottish Executive:

http://news.bbc.co.uk/1/hi/scotland/6267881.stm

Also in terms of procurement and personnel spending, parliamentary answers have shown that Scotland ACTUALLY receives £750 million less than her 8.5% share of UK's population suggests that she gets i.e. The GERS estimation.

So please think again if you actually do give credence to the GERS figures as they are extremely flawed and, as I have shown, are actually politically motivated in the first place.

P.S. Lastly, you do realise that your figures based on Scotland having a GDP between 95 to 100% of the UK average is actually minus the oil revenues. I expect that you got these figures from the Office of National Statistics?

If you did then you would realise that the official Scottish GDP figures TOTALLY exclude North Sea revenues, which get hived off into a seperate ‘extra-regio’ category by the government statisticians. As such, Scotland's REAL GDP index relative to the UK average would be much higher than your "between 95 to 100%" figure. But, I suppose you did know that?

The point is that about oil relative to GDP is that the Government, by excluding this resource from Scotland (even though over 90% of the oil fields lie in territory under Scottish legal jurisdiction) it makes the Scottish GDP figure look far lower than it actually is while ALSO exaggerating the proportion of state spending which takes place too.

Isn't THAT something?

Posted by: Steve at January 29, 2007 09:13 AM

Phew! Yes, of course I'm aware that the UK as a whole had a fiscal deficit in 2004-5 and I'm also aware that the SNP has been attacking the basis of the GERS exercise for a very long time. Both of these points were mentioned in the piece. The point is that the UK deficit was 3% of GDP, the Scottish deficit between 4.8% and 12%, depending on the allocation of North Sea revenues. Had it not been for the Scottish deficit, the England, Wales and Northern Ireland deficit would have been nearer 2% of GDP. And yes, English taxpayers subsidised their Scottish counterparts when the UK had a budget surplus not so long ago; and they subsidise them now - the shift in the national fiscal position hasn't changed that.

Your suggestion that "true" Scottish GDP per capita is even higher in relation to the UK average than the figures I quoted is debateable but merely reinforces my point. Scotland has been doing very well out of the Union.

Posted by: David Smith at January 29, 2007 09:48 AM

All the more reason to kick the Scotch out of the union. Let them eat gruts.

Posted by: Rob Spear at January 30, 2007 08:54 PM

Apologies for the very belated reply. I was on an oil platform for the past three weeks and have not really had the time to formulate a proper response to your last post.

***"Phew! Yes, of course I'm aware that the UK as a whole had a fiscal deficit in 2004-5 and I'm also aware that the SNP has been attacking the basis of the GERS exercise for a very long time. Both of these points were mentioned in the piece."***

That you did. The trouble is that after pointing this out about the 2004-2005 GERS you basically implied that that you were being impartial, but you later compounded this by actually QUOTING figures throughout your above article which could ONLY have stemmed from the GERS figures!

Even your own response to my post suggests that YOU are still taking the GERS figures at face value, despite the whole report being VERY flawed in its very application.

***"The point is that the UK deficit was 3% of GDP, the Scottish deficit between 4.8% and 12%, depending on the allocation of North Sea revenues. Had it not been for the Scottish deficit, the England, Wales and Northern Ireland deficit would have been nearer 2% of GDP."***

No. This "evidence" of the high Scottish "deficit", of which you are talking about, is solely based on taking the figures in the GERS Report seriously and why should you? The whole report can be easily shown to be unreliable (as I have shown above). If you really want I can quote other examples on the dubiousness of much of the other estimated figures in GERS as well.

***"And yes, English taxpayers subsidised their Scottish counterparts when the UK had a budget surplus not so long ago; and they subsidise them now - the shift in the national fiscal position hasn't changed that."***

You are really changing the goalposts here by making this point. The figures which you have quoted in your above article are from the fiscal year 2004-2005, which as I have shown that the UK (as a whole) was in a fiscal deficit. This is the year in question which the above figures (in your article) apply to.

So the fact that England was RECENTLY (and that would have been during that small period during the late 1990s) in a surplus means squat, as the GERS system has been in place since 1992 onwards i.e. Scotland's deficit is solely based on these highly flawed reports.

Anyway, if you still want to go down the "English are benefactors" route we might as well point out that throughout the 1980s that England suffered very high fiscal deficits and it was really Scotland, by remaining in the union, that was propping the whole UK up (as even politicians as far apart as Michael Portillo and Tony Banks have even acknowledged this was the case). What I mean is illustrated in the following Hansard link below:

http://www.publications.parliament.uk/pa/cm199697/cmhansrd/vo970113/text/70113w07.htm#70113w07.html_sbhd0

The above publication shows the parliamentary answer from William Waldegrave - the then Tory Treasury minister - which gives figures of a net flow of cash from Scotland to the UK over the period of £26.7 Billion (or £34 billion in today's prices) from the years 1978 to 1996.

They are the more truer figures of the whole period as they show a better picture when all taxes and the revenues for Scotland’s natural resources are apportioned fairly. You should check the rest of the UK’s figures (which is namely England’s) over that whole period, as it will show that England didn’t have the money to support herself, never mind “subsidise” anybody.

Another thing: How can you STILL say that there is a subvention from England to Scotland when it is shown that England MUST be in deficit herself? How can a country in deficit be in position to subsidise another? Call me dim but how is that really possible?

The fiscal deficit of England refers to the difference between public expenditure IN England and the tax revenue raised IN England. So, England CAN'T be subsidising Scotland when the amount required for public sector expenditure in England is shown to be HIGHER from the taxes raised in England.

Also, the last time I checked the recent English PESA figures there wasn't anything in it which says "English subsidy to the Celtic Fringe" in the English fiscal accounts. So where is your REAL evidence that there is, in fact, English taxpayers money flowing north of the border?

***"Your suggestion that "true" Scottish GDP per capita is even higher in relation to the UK average than the figures I quoted is debateable but merely reinforces my point. Scotland has been doing very well out of the Union."***

What's debateable about it? As you can see on the first page in the following link, which is showing the most recent PESA figures, you can see that the extra regio revenues are NOT allocated to any set country/region in the UK:

http://www.statistics.gov.uk/downloads/theme_economy/RegionalGVA_Dec06.pdf

A question relating to this was also answered in the Scottish Parliament:

http://www.scottish.parliament.uk/business/pqa/wa-04/wa0309.htm

Mr Jim Wallace: “The UK weight for the oil and gas sector covers the whole sector, including extraction. The Scottish weight for oil and gas only covers the part of the sector related to "service activities incidental to oil and gas extraction excluding surveying".

As the extraction of oil and gas occurs on the continental shelf, under EU directions it is classified as extra regio and treated as a separate region of the UK. Extraction of oil and gas is therefore included in the UK GDP figures but not in the GDP figures for any of the 12 regions of the UK.”

So, to really spell it out, in the GDP accounts (or the GVA accounts if you prefer as Scotland doesn’t really have a GDP figure anyway) North Sea Oil is NOT allocated to Scotland but to the UK, even though over 90% or the oil is in Scottish jurisdictional waters.

As even the ONS has pointed out this is really because it is “off-shore GVA that cannot be assigned to any region”. Only service activities related to oil/gas are allocated to the appropriate country. Scotland's GVA/GDP is, thus, understated by some 90% of the value of North Sea oil/gas.

As the UK saved something like £28 BILLION in her import bill in 2005 due to being able to PRODUCE her own oil and gas this really shows the importance of the UK oil/gas fields. To illustrate this, do you realise that 73% of the UK’s primary energy demand was MET by oil and gas produced from the UK Continental Shelf?

Did you also know that the UK had satisfied domestic oil demand for the year, producing 645 million barrels of oil which compared with UK domestic consumption of 610 million barrels of oil? Added to this the UK met 93% of gas demand, producing 85 billion cubic metres of gas; the remaining 7% being met by withdrawals from storage and foreign imports.

As something like 90% of the oil and 50% of the gas are actually produced from the Scottish sector of the UK's Continental Shelf, would it not be far more realistic to say that England is ALSO doing well from the Union?

Posted by: Steve at February 21, 2007 02:48 PM

Let me try to keep it concise.

1. If I am a borrower but then help a relative out I'm still subsidising my relative. That the UK had a budget deficit does not alter the fact that English taxpayers subsidise higher levels of Scottish spending. I've heard this argument from SNP spokespeople but I'm afraid it is completely dumb.

2. I fear the oil boat has left port. Perhaps if it had been Scotland's oil from the 1970s things would have been different. North Sea revenues are now only £10 billion a year, 0.7% of UK GDP. This is a fraction of where they were at the peak.


Posted by: David Smith at February 22, 2007 06:13 PM

****1. If I am a borrower but then help a relative out I'm still subsidising my relative. That the UK had a budget deficit does not alter the fact that English taxpayers subsidise higher levels of Scottish spending. I've heard this argument from SNP spokespeople but I'm afraid it is completely dumb.****

Sorry, but unless you actually have EVIDENCE that this is really the case, I will have to beg to differ. As I have said, there is no “English subsidy to Celtic Fringe” documentation about that actually suggests this.

Also, please enough with the “higher levels of Scottish spending”. The GERS Government Expenditure figures have nothing to do with whether Scotland is 'subsidised' or not, since it ONLY deals with spending levels NOT the amount of tax revenues raised in Scotland to cover it. As has been shown, the GERS system is really an inadequate way of showing how MUCH that Scotland raises to the UK’s pot.

By basing the amount of tax raised in Scotland from GERS and applying this to the amount of Scottish public spending is pretty dumb as well.

****2. I fear the oil boat has left port. Perhaps if it had been Scotland's oil from the 1970s things would have been different. North Sea revenues are now only £10 billion a year, 0.7% of UK GDP. This is a fraction of where they were at the peak.****

That’s true if you ONLY apply it to a UK context, but for a SCOTTISH context it is a far different story.

If you actually did, this would certainly make SCOTLAND’S GDP position higher than what has been ‘stated’ by the Scottish Executive. You do realise the Scottish Executive actually claimed recently that Scotland has a total GDP of £76 bn! Which is quite remarkable as even the Office of National Statistics have suggested that this is not the case.

As the ONS have pointed out for 2004, (source: http://www.statistics.gov.uk/downloads/theme_economy/RegionalGVA_Dec06.pdf) their estimation of the “total” Scottish GVA amounted to £82.952 billion.

With a GVA per head of £16,334 this then placed Scotland, as a country, with having the 2nd highest GVA per head in the UK, as England (when all her regions are taken into consideration) had an average GVA per head of £17,532 for the year 2004.

As has been pointed out by myself in my last post, these figures totally omit the “extra regio” GVA, which amounted to a total of £20.077 bn in 2004. If we were to apply a 50-50 split of the GVA from this area (as you must know this would be VERY generous towards England) and apportion each of these percentages to both Scotland and England, then this really changes things.

Under this application this would then mean that the Scottish GVA would then change from £82.952 bn to being around £92.992 bn. As Scotland, in 2004, was estimated to have a population of 5,078,400 (source: http://www.woodlands-junior.kent.sch.uk/customs/questions/population.html) that then mean that the new Scottish GVA, per capita, would have been at around £18,311.

As England was estimated to have had a total GVA of £878.247 bn. So, by including 50% of the extra regio GVA, this would make England’s new GVA figure as being around £888.287 bn.

Using the same source as above, England is shown to have had a population of 50,093,800 in 2004. So by applying this England would have then have had a new GVA per head of around… £17,732.

So, if the Office of National Statistics are a good indicator, that means that Scotland - with even a quite conservative amount of the extra regio GVA, I must add! - was, proportionally, doing more for the UK economy than even England in 2004...

If you care to peruse the above link from the ONS and actually get your calculator out, you will actually see a similar picture for all the other included years as well. Isn’t that REALLY something?

As you must be aware GDP is certainly not GVA. So instead of Scotland having an GVA of at least £92.992 bn in 2004, if Scotland was apportioned a more realistic 80% of the extra regio GVA, then Scotland’s GVA would actually climb to being around £99.01 bn. So what would that have made Scotland’s “hypothetical” total GDP for 2004?

As the GERS authors have apportioned Scotland a estimated total of £47.7 billion of government expenditure, thus, claiming that public spending was 51.0% of Scotland’s GDP, would that not mean that the GERS authors are actually talking a load of nonsense and that there is something really “fishy” about their very own estimation?

Lastly: The curious thing to me is why did you actually write your original article without taking into consideration the resources from the “extra regio” region? As you actually dared to hypothesise a GDP for an independent Scotland without factoring this in, doesn’t this not mean that your article was, well, a little flawed in its very assessment?

P.S. Staying on this topic, I certainly recommend that you read this article from the Scotsman newspaper, which was written last month. I would just posted a link to the article but it is now currently in the archives and would actually require you to subscribe to the site to see it all:

The author of the article, Peter Jones - who was once the Scottish and Northern England Correspondent for The Economist - certainly believes that by assessing the ONS figures for 2004, and by including Scotland’s share of the extra regio GVA in 2004, then the Scottish GDP can be hypothesized to around £118 billion for 2004. So, I believe that you will find the article very interesting:

“SNP scorn over labour's ‘missing’ £44bn reflects paucity of true figures.”

by Peter Jones

A spat this week between the Scottish National and Labour parties caught my eye. It was not the subject - defence and what would happen if Scotland went independent - but statistics about the Scottish economy exchanged in the crossfire that were interesting. The defence analyst, Francis Tusa, cited by Labour, apparently said that Scottish gross domestic product (GDP) was £76 billion. Rubbish, stormed the SNP, Scottish GDP is £120bn.

Now £44bn is quite a discrepancy, serious money in anyone's book. Given the interest that many businesses are taking in the SNP, it is worth finding out what the facts are.

It turns out that the SNP is more in the ballpark than Tusa. The fact is that, under independence, the Scottish economy would be much bigger, but this is more a matter of statistical juggling than economic management.

Tusa's mistake is understandable, because the argument is essentially about the size of the Scottish economy if it was an independent country. On this subject, there are no facts. There are only educated guesses. So here's my guess, which you may care to use as a yardstick to judge the nonsense quotient the next time you hear a political argument about the subject.

The problem here is that both sides are talking about different things. When economists discuss a country's economy and such matters as defence spending, they usually express such spending as a percentage of GDP. Unfortunately for us, there are no official figures for Scottish GDP. We only have Scottish gross value added (GVA) figures.

Many people - including myself, I have to ruefully note - casually confuse GVA with GDP. GVA is a measure of wealth produced. Essentially it adds up company profits and individuals' wages. GDP is the same sum, but with the effects of taxes (minus any subsidies) included. GDP is generally higher than GVA, but GDP figures only exist for the whole of Britain and not its constituent parts.

We can estimate Scottish GDP by comparing UK GVA and GDP and applying the difference between these figures to Scottish GVA statistics, in 2005, Scottish GVA was £86.3bn. British GDP was 14 per cent higher than British GVA, so using that multiplier gives Scottish GDP of £98bn.

That's not the end of the story. The GVA figures exclude North Sea oil. It is reasonable to assume that an independent Scotland could lay claim to some of this resource, its tax revenues, and, for statistical purposes, its GDP. But how much?

A few years ago, Alex Kemp and Linda Stephen, of the economics department at Aberdeen University, estimated what share of the tax revenues Scotland might get under independence. The answer was surprising. There was no fixed percentage. When the price of oil was high, and the value of the dollar (in which currency oil is traded) is high, Scotland's share can be as high as 98 per cent. But under low oil prices and low dollar values, Scotland's share could fall as low as 70 per cent.

Since tax revenues come from company profits, and as oil profits account for nearly all of what is termed "extra-regio GVA" by National Statistics, we can use the Kemp and Stephen shares of tax revenues as a reasonable approximation for what might be Scotland's share of offshore GDP (estimated by using the same multiplier used in estimating non-oil Scottish GDP). Then we can add this figure to the Scottish non-oil GDP estimate and come up with an educated guess at what total Scottish GDP might be.

The results are shown in the chart below. Including oil GDP of £25bn, Scottish GDP turns out in 2005 to be £123bn. For 2006, although the oil price was high, the dollar value was low, so I reckon there would have been modest GDP growth to £127bn. For comparison, Irish GDP in 2005 was about £105bn.

These are impressive numbers. The astute chart reader, however, will notice some troubling things. Instead of the usual steady, if slow, growth of the Scottish economy we are used to, this shows a bumpier ride.

In 1998, Scottish GDP would have contracted by 23 per cent, although in 2000 it would have grown by a whopping 14 per cent. This is because the oil component is highly volatile, growing and contracting rapidly as oil prices and dollar values rise and fall. It means that an independent Scotland would need some extremely clever economic management it there is not to be a boom and bust economy. The next time the SNP's Jim Mather calls, you might like to ask him about that.

• Over the next few weeks I intend to look at business and economic issues being raised by the political parties. All suggestions for topics gratefully received at: pjones@ednet.co.uk.

******

Sorry, but I was unable to copy the table quoted in the article. In his article, the table shown was from the years 1995 to 2006. As such, I'll quote the last 4 years:

******

YEAR 2003 2004 2005 2006

GDP WITH OIL 115.1 118.2 123.9 127.1

GDP WITHOUT OIL 93.8 96.1 98.5 100.4

All figures £bn

Posted by: Steve at February 23, 2007 02:28 PM

Apologies, the following tract of mine, above, should have actually read as:

Also, please enough with the “higher levels of Scottish spending” AS IF IT IS A MEASURE OF ENGLISH SUBSIDY. The GERS Government Expenditure figures have nothing to do with whether Scotland is 'subsidised' BY ENGLAND OR NOT, since it AS IT ONLY deals with SCOTTISH spending levels AND the amount of tax revenues raised in Scotland to cover it. As has been shown, the GERS system is really an inadequate way of showing how MUCH that Scotland raises to the UK’s pot.

Posted by: Steve at February 23, 2007 02:35 PM

I admire your doggedness on this, but I fear we're never going to see eye to eye. I would not allocate 50% of extra regio GVA to Scotland, for the same reason that I would not allocate it 50%, or 90%, of oil revenues. Oil is produced from the UK Continental Shelf, so the appropriate treatment for extra regio GVA is to add it proportionately to every region and every country of the UK. Take out all the statistical detail and it comes down to a simple question. You say it is Scotland's oil - or a significant proportion is - I say it isn't.

As for spending, it may be that a few hundred million has been wrongly allocated to Scotland but it remains the case, even allowing for that, that public spending per head is significantly higher in Scotland (and even higher in Northern Ireland) than in England. On the basis of the figures in PESA 2006, the Treasury's public expenditure analyses, public spending per head in Scotland is more than 22% above the English average. Allocating the whole of the £400m to England would leave it more than 21% above,

Without wishing to open up a new front, it surprises me that there isn't more comment about the fact that a referendum on independence isn't in the SNP's, or the Scottish Executive's, gift. It is a matter for Westminster.

Posted by: David Smith at February 24, 2007 02:41 PM

***Oil is produced from the UK Continental Shelf, so the appropriate treatment for extra regio GVA is to add it proportionately to every region and every country of the UK. Take out all the statistical detail and it comes down to a simple question. You say it is Scotland's oil - or a significant proportion is - I say it isn't.***

The SNP claim that, following International convention, 90 to 95% of the oil is Scottish. Even the most generous interpretation of International conventions on these things, in England's favour, would give Scotland at least 55%.

***On the basis of the figures in PESA 2006, the Treasury's public expenditure analyses, public spending per head in Scotland is more than 22% above the English average.***

Those figures leave excludes £74bn of 'unidentified' expenditure, most of which actually gets spent in London and the South East rather than Scotland.

***Without wishing to open up a new front, it surprises me that there isn't more comment about the fact that a referendum on independence isn't in the SNP's, or the Scottish Executive's, gift. It is a matter for Westminster.***

I don't think there would be much Westminster could do about it unless England wanted to use force. It would be just too big a can of worms for Westminster to even consider refusing to recognise any Scottish unilateral declaration of independence and then trying to enforce it.

Posted by: Steven McMath at May 10, 2007 04:23 PM