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Public spending and taxation

Summary

  • Public spending in Scotland is substantial compared with other regions in the UK and compared with the size of the domestic economy. It has been consistently greater than in the UK as a whole. In 2012/13 public spending accounted for just over half of Scottish GDP compared with 44.6% for the UK.
  • According to Scottish government data, average spending per head was £12,250 in 2012/13 compared with £11,000 for the UK as a whole. This equates to £1250 a head more spent in Scotland than in the rest of the UK, or £2800 per household.
  • In 2013, total spending in Scotland was just over £65bn. Almost two-thirds of that spending went to just three departments: health, education and social protection, all of which are rapidly becoming costlier.
  • As a member of the United Kingdom, Scotland has been able to increase spending unhindered, in stark contrast to the public spending trends in many similar-sized independent EU nations, like Ireland, Iceland, Portugal and Spain, where public spending has been sharply cut.
  • Because public spending in Scotland is disproportionately high, Scotland’s wealth-generating private sector is only middle of the pack in UK terms. It is Scotland’s small, private sector, dominated by oil and financial services, that would be called upon to finance state spending.
  • In 2012/13, Scotland raised £48bn in tax receipts, including £550m as its per-capita share of oil revenues, and spent £65bn, running a fiscal deficit of £17bn, or £3250 for every man, woman and child, or more than £7000 per household. Even if Scotland had a geographic share of oil revenues, the deficit would have still been £12bn, or £2300 for each inhabitant, or £5000 per household. Scotland’s per– capita deficit is one of the most serious in the EU. It is not sustainable.
  • Even if Scotland were to get its geographical share of North Sea oil revenues, to run a budget in line with the Maastricht annual-deficit limit of 3% of GDP would require tax rises or spending cuts of £10bn, or £4200 per household. With only a per-capita oil split, the tax rises or spending cuts would be more like £17bn – £2500 per head, or £5400 per household, and more than Scotland’s 2012/13 health budget.
  • Scotland’s GDP is amongst the most volatile in the EU, because it depends on oil prices. It is not credible to start life with fiscal deficits of this scale when the revenue-stream is so uncertain. Those who propose leaving the Union have not thought through the risks involved or the necessary tax increases and spending cuts. It is impossible for a separated Scotland to grow its way out of deficits this big. 

Too little revenue, too much spending

Public spending in Scotland is substantial compared with other regions in the UK and also substantial compared with the size of the domestic economy. The chart below shows that public spending in Scotland, relative to the size of the economy, has been consistently and significantly greater than in the UK as a whole.

It is this high public spending that creates one of the major problems for a separated Scotland. A private sector that constitutes less than half the economy must pay not only for itself but also for a public sector that is more than half the economy. That is a dangerous position for a new nation to find itself in, particularly when there is a large accumulated share of national debt and a large projected annual deficit.

Public spending in the 60.0% 55.0% 50.0% 45.0% 40.0% 35.0% 30.0% UK and Scotland (% GDP) 

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Indeed, in fiscal year 2012/13 public spending accounted for just over half the entire Scottish GDP compared with 44.6% for the UK as a whole. The latest data are demonstrated by the table below.

Scottish government spending (% GDP)

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In absolute terms, too, public spending is considerably higher than the UK average. According to Scottish government data, average spending per head was £12,265 in 2012/13 compared with £10,998 for the UK as a whole. This equates to £1267 a head more spent in Scotland than in the rest of the UK. 

Total managed expenditure per head, 2008/09 to 2012/13 (£)

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In 2013, total spending in Scotland was just over £65bn, with 63% of that spending accounted for by just three departments: health, education and social protection. Spending increased by £336m over the year and was £5.7bn higher than 5 years before (equivalent to an increase of £1087 for each man, woman and child). The three charts below highlight increases in total public spending in Scotland from 2008/9, the year-on-year change and total spending by department.

Scottish total managed expenditure, 2008/09 to 2012/13 (£bn) 

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Scottish total managed expenditure (% change year on year) 

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Scottish total managed expenditure 2012-13 (£bn) 

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Despite the global recession, which has seen significant spending cuts in a number of other European countries, public spending in Scotland has risen each and every year. Although the popular perception may be one of public-sector austerity, overall spending growth has continued unabated. As a member of the United Kingdom, Scotland has been able to increase spending unhindered during a very difficult global macroeconomic environment. This is in stark contrast to the public spending trends in many similar-sized independent EU nations, like Ireland, Iceland, Portugal and Spain, where public spending has been materially reduced. 

GVA a reasonable backdrop 

Using ONS data, the GVA (Gross Value Added a measure of economic activity) for the UK in 2012 was £21,674. On this measure, Scotland was the richest region outside London and the South East, with a GVA of £20,013, or 93% of the UK average. The chart below examines the GVA by region in 2012. 

Regional GVA per head, 2012 (£ per capita) 

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However, Scotland also has one of the highest levels of public spending, relative to regional GVA, of any UK region (the absolute numbers are even higher). This high public spending flatters the overall productive position of the Scottish economy. The chart below highlights regional public spending as a percentage of GVA in the UK. 

Regional public expenditure, 2012 (% regional GVA) 

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The chart below examines the scale of the private sector by region, by subtracting public spending from GVA. On this measure, Scotland’s wealth-generating sector is in the middle of the pack when compared with other UK regions. Thus, commentators who argue that a Scotland separated from the UK would be one of the wealthiest countries in the world need to be careful: in terms of the productive, wealth-generating sectors, Scotland fares less well. Ultimately it is Scotland’s private sector that would be called upon to finance state spending. That private sector is neither particularly large nor broadly based. It is biased towards a small number of industries, notably oil and financial services. 

VA per head, 2012 (£) 

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There is a strong inverse correlation between the size of the state and regional GVA, as demonstrated in the chart below. The smaller the public sector, all other things being equal, the more prosperous the region. While the scale of public spending is a matter for the electorate, Scotland’s starting position is not particularly encouraging in terms of wealth generation. Scottish State spending accounts for more than 50% GDP. 

Regional GVA (£/head) and public spending (% GVA), 2011/12 

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Taxation

Public spending is one side of the state fiscal equation. The other is taxation and borrowing. In 2012/13, Scotland raised £48.11bn in tax receipts, including £552m as its per-capita share of oil revenues, and spent £65.2bn, running a fiscal deficit of £17.1bn, or £3226 for every man, woman and child. 

Net fiscal balance with and without oil (£bn and % of £129 bn GDP) 

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Even if Scotland negotiated the most optimistic scenario of a geographic share of oil revenues, the deficit would have still been £12.1bn, or £5000 for each household. As we discuss under the section on national debt, Scotland’s per-capita deficit is one of the most serious in the EU, and not sustainable in anything other than the short term. The fiscal deficit on even the best case scenario, in terms of oil share, is also unsustainable on a long-term basis.

For reference, the EU’s Maastricht economic-convergence criteria state that countries should not run deficits of more than 3% GDP or, in Scotland, £3.9bn a year. Applicants for membership are expected to adhere to these criteria. In a separated Scotland, tax will rise, spending will fall, or both.

To put the Scottish deficit in context, in 2012/13 the entire income tax take in Scotland was £10.86bn. Even if Scotland were to get its geographical share of North Sea oil revenues, to run a budget in line with the Maastricht annual-deficit limit of 3% of GDP would require tax rises or spending cuts of £8.2bn, or £3400 per household. If a separated Scotland got its per-capita share of oil revenues, the tax raises or spending cuts would be more like £13.3bn, or £5500 per household, and more than Scotland’s entire health budget in 2012/13.

In short, each Scottish household would be £3400-5500 a year worse off as a result of separation, with a further £500-1000 a year per £100,000 borrowed on mortgage. Separation will be costly for all.

Scotland’s GDP is amongst the most volatile in the EU, given the importance of oil. It is not credible to start life with fiscal deficits of this scale when the revenue-stream is so uncertain. Those who propose leaving the Union have not thought through the risks or costs. It is simply not possible for a separated Scotland with so small a balance sheet to grow its way out of deficits of this magnitude. A table of all taxes levied in Scotland and the UK in fiscal year 2012/13 is below. 

Scottish and UK tax revenues, 2012/13 (£ bn) 

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As an independent country, Scotland would quickly need to address its fiscal deficit. How this was achieved would be a matter for the electorate. However, unpalatable choices would need to be made quickly.

If Scotland received a geographic share of oil revenues, the deficit would be uncomfortable, so long as the price of oil, outwith the Scottish Government’s control, remained high. It would be necessary to pare back spending or raise taxes in the medium term.

If Scotland negotiated no more than a per-capita share of oil revenues, immediate action would be required to balance the nation’s books. Annual deficits of 13% of GDP are simply not sustainable. 

on August 18 | by

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