Lies, dammed lies and GERS

There has been much said in the press about the famous (or should that be infamous) GERS report over the last few days varying from the National’s “Deficit cut by 1.3Bn” to the Scottish Daily Express’s “Nationalists Fake-onomics exposed”, while the Herald and Scotsman both decided that bringing up (again) the figures from the referendum White Paper would portray the evil Nats in the worst possible light.  Surprisingly, both BBC and STV took a more factual approach, obviously thinking that the £13Bn deficit was enough on its own to scare the punters away from independence, without need to add the usual level of exaggeration and misinformation.

To be clear, the GERS report has nothing to do with the latest football match played by a well known Scottish team (I know it’s an old joke, but still), but it’s the annual statement of Scotland’s economic performance, Government Expenditure and Revenue Scotland.

But what about the figures themselves.  For years, certainly since the run up to the referendum, GERS, and the UK economy in so far as it affects Scotland, has been the subject of considerable public debate.

Should Scots be paying a share of “UK” projects that appear to produce little or no benefit to Scotland.  London Olympics; HS2 from London to Birmingham and, if we’re lucky (is that the right word?) to Leeds and Manchester some time later; and the London sewer upgrade come to mind, but there are many more.  You may have spotted that, in all these projects, the region which appears to benefit consistently from the spending is London, but that may just be coincidence.  My “favourite” is the English Tourist agency, which Scots pay towards because it’s considered a national organisation as it covers more than one region of the UK (all in England, of course), while the English don’t make a contribution to the Scottish Tourist agency, because it’s considered to be a regional organisation, the whole of Scotland being just a single region of the UK.

GERS has also been the subject of much discussion, mainly because so many of the figures are estimates, particularly on the income side, and because so much of the expenditure is controlled by Westminster and spent without so much as a by-your-leave, mostly outside Scotland.

But now a further possible problem with the figures has been suggested, courtesy of Richard Murphy, an accountant and economist who has previously presented evidence on GERS to the Finance Committee at Holyrood.  It should be stated at this stage, as Richard Murphy himself had said, that these are just preliminary ideas, not yet fully formed, but it may give all of us some food for thought.

In GERS, there appears to be no relationship between income and the money spent to generate that income, the expenditure.  In normal accrual accounting, the spend to achieve a particular income and the income amount are both put through the books at the same time, so you can tell how profitable an activity is, because you know how much you earned and how much you had to spend to earn it.  However, in GERS, by design, this relationship doesn’t seem to exist.  Both income and expenditure are treated separately.

But what difference does that make to the figures in GERS?

The cost of Westminster providing a particular service to Scotland is generally calculated as a proportion of the total UK cost of the service and recorded in GERS as Scottish expenditure.  However, because the fact that Scotland paid for the service is not known or not taken into account when the income is allocated, the income generated by that activity is allocated to the location where the income occurred.  As a simple example, if civil servants in the MoD in London work on an activity which a deemed to benefit the whole of the UK, Scotland will be responsible for a part share, calculated on a population basis, so about 8.5% of the cost will be allocated to Scotland and recorded in GERS.  So, if the total cost of the service is £1M, then £85,000 would be entered into GERS.

But what about the income?

This is where we seem to have a problem.  Because the income data is processed without reference to who paid the cost of generating the income, it’s not possible to allocate the income in the same way as the expenditure.  If we think of our earlier example, the civil servants employed by the MoD in London are paid a salary from which tax is deducted.  This tax, or at least 8.5% of it, should be treated as income in GERS, Scottish income, because Scotland paid for it, but because this is not known when the income data is processed, the tax is allocated to the place where it was paid, in London.

So there we have the problem in a nutshell.  Expenditure is always allocated to the Scottish account, but the income generated by that spending generally isn’t, except in the few cases where the income is actually generated in Scotland.  By failing to include in GERS much of the income that should be attributed to Scotland, the deficit is massively overstated.

In fact, the situation is much worse than that because of something called the multiplier effect.  When your civil servant in London gets paid, he will then spend his income on goods and services, probably mainly locally.  And the recipient of that spending then spends the money received, and the recipient of that spending then spends the money received, and so on, so the money spent ripples down through the economy of the region where the spend happens. If, as is suspected, GERS is not being credited with the income generated by Government spending, Scotland will be losing out, not only on that income, but also on the further impact of that revenue to the Scottish economy.

As I said at the beginning, these may be just preliminary ideas, but they do have a ring of truth about them.

For those who want more information, look at Richard Murphy’s blog, which, apart from a much more detailed explanation, also has a number of very interesting comments.
http://www.taxresearch.org.uk/Blog/2017/08/25/gers-is-this-why-it-always-says-the-scottish-deficit-is-so-large/

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