GERS and the continuing myth of the ‘fiscal deficit’ in Scotland

Everywhere else in the world, ­including the UK, the term ­“fiscal ­­deficit” means a shortfall in the ­revenue of a Government compared to its expenditure. If Scotland’s ­fiscal balance was compiled according to recognised standards of ­national ­accounting, then the ­expenditure side of the balance would show ­expenditure by the ­Scottish ­Government. Since the ­Scottish ­Government is obliged by the ­devolution settlement always to balance its budget, Scotland’s fiscal deficit in the proper sense of that term is zero every year.

But the expenditure side of the “fiscal balance” printed annually in GERS purports to show the value of expenditure by both the Scottish and UK Governments “for the benefit of” Scotland.

So far as I’m aware, no ­other ­country in the world publishes ­statistics that attempt to ­measure expenditures ­according to their ­supposed ­“benefit”, for the ­simple reason that such ­measures are ­necessarily arbitrary and ­subjective.

In Scotland’s case, the “benefits” include items like an apportionment of MoD spending in support of the Trident submarine base on the Clyde, as well as Saudi Arabia’s activities in Yemen.

Other examples of ­unwanted ­expenditure by Whitehall Departments include payments of benefits for unemployment created by UK Government policies, and expenditure incurred in pursuit of external trade treaties that disadvantage Scottish economic interests.

Not surprisingly, the meaning of this so-called “fiscal deficit” ­continues to be widely misunderstood.

In media discourse, it is frequently compared to the budget deficit of the UK and other governments. But, as we have seen, the Scottish ­Government ­cannot have a budget deficit.

Another misinter­pretation is that the “deficit” is a reflection of poor management of the Scottish ­economy by the Scottish ­Government. This interpretation is assisted whenever a Scottish Minister either ­implicitly or explicitly accepts Scottish ­Government responsibility for the ­performance of that economy. The fact is that ­responsibility for the ­behaviour of the Scottish ­economy is a function reserved to the ­Westminster Government, and it is they who should be held accountable.

A further misunderstanding is that the deficit is a measure of the ­political generosity of the UK Government. The well-known imbalances in ­expenditure per head on ­particular public services like Health and ­Education between Scotland and the rest of GB are frequently cited by Unionists. But these imbalances have come about in large part as the result of the peculiarly distorting political incentives arising from the Union.

Under that political arrangement, identical economic policies have ­operated throughout the UK. Unable to implement the different policies that were necessary and ­desirable for the growth and development of the Scottish economy, ­successive ­(Unionist) Secretaries of State and their ­senior civil servants saw it as their job instead to ­maximise ­transfers of public funds from ­Whitehall to Scotland. Throughout the post-War period the personal ­political ­success of Scottish ­Secretaries has been measured by the amount of money they could screw out of the Treasury.

READ MORE: Richard Murphy: GERS is a con-trick intended to make Scotland look bad

But neither the ­political will nor the economic framework existed to ensure that the large sums of public expenditure that have been poured into Scotland in various forms over recent decades have been an efficient investment in the productive capacity of the country that would ultimately increase the long run rate of growth and development.

Yet another common misinterpretation of the “fiscal deficit” that appears in GERS is that it shows that political independence is “unaffordable”. While most informed commentators understand that a future independent Scottish Government will have very different patterns of spending and revenue than those shown in the “net fiscal balance” of today, this remains the most widespread misinterpretation of the “fiscal deficit”, enthusiastically disseminated by the Unionist media.

It is not an accident that this should have happened, since the idea of ­publishing a “net fiscal ­balance” was dreamed up by the UK ­Government 50 years ago with the specific ­intention of rubbishing ­Scottish ­independence.

It was drawn up and published by the Treasury in the wake of the 1967 Hamilton by-election to show the Scottish people that they were being subsidised by England. ­Andrew Hargreaves, then the FT’s man in Scotland, described to me how the Chancellor Denis Healey (below) gave an “off-the-record” briefing to ­reporters, spoon-feeding them statements like: “This means that income tax would have to rise by 25% if Scotland became independent."

Since in those days the Scottish ­media were far too deferential to ­query anything the Treasury told them, and most of them didn’t ­understand the numbers anyway, Healey’s words duly appeared verbatim in next morning’s headlines. It worked: ­Labour took Hamilton back at the 1970 ­General Election.

The economic cost to Scotland of our ­dependency on England is of course not measured in the so-called “net fiscal balance”. It is to be measured by the incomes, jobs and tax revenues that have been foregone as a result of the slower rate of growth of the economy because of its mismanagement under the Union.

This has happened as a consequence of Scotland being unable to choose those economic policies that suited its needs, but has had to rely instead on periodic hand-outs. As the old Chinese metaphor has it, it’s ­better for a man to learn how to fish than to be given a fish every day.

Meanwhile, it makes no sense for the Scottish Government to assist our Unionist opponents by continuing to confer political legitimacy upon a scientifically illegitimate statistic. It should cease its publication.

David Simpson is a former Professor of Economics at Strathclyde University and founding director of the Fraser of Allander Institute. He is currently working on an economic project aimed at identifying the “Price of Dependence”