IT’S clear from the evidence presented in our last Open Minds article that Scotland has everything it takes to be an extremely prosperous and successful independent nation.
Which prompts the question; how did an oil-rich nation with a strong, resilient onshore economy, booming exports, a highly educated population, low unemployment and strong key economic sectors end up with a set of accounts that suggest Scotland has a financially weak economy?
In fact the accounts don’t suggest that at all. People just don’t understand how to analyse the UK Government Expenditure and Revenue Scotland report (GERS).
We explained on Wednesday that if Scotland didn’t have to pay off the rest of the UK’s debt it would have no debt and no deficit. We call this debt loading and it damages Scotland’s accounts, creating an overly negative economic picture that is used to scare voters into worrying about the economy of an independent Scotland.
There is a line in GERS called Public Sector Debt Interest (PDSI). It’s Scotland’s fifth largest expenditure. Historical analysis of GERS demonstrates that every year since records began, Scotland has paid interest on a population share of the UK’s debts; in the last five years (2015-2020) PSDI has added £18bn – an average of £3.607bn per year – to the cost of running Scotland.
Scotland has recently been granted very limited borrowing powers, but while the UK’s debt was being built up it had no borrowing powers. Scotland’s economy was either in surplus or had a lower deficit than the UK, so Scotland did not contribute to the creation of the debt.
How does a nation without the ability to borrow end up paying billions in interest on debt every year? Looking at 40 years of GERS, Scotland’s share of UK debt interest amounted to £133bn. Had Scotland been independent, its entire borrowing requirement over that time would have been zero.
Scotland’s accounts had £133bn of interest on debts that Scotland did not generate, nor benefit from, removed from them. Without that £133bn cost, Scotland’s finances would be in surplus today.
If we look back as far as reliable historical figures go we can see that in 1980/81, before UK debt started to spiral, Scotland was charged £3bn to service UK debt. But despite that, it managed to record a surplus of more than £1bn.
Indeed Scotland’s finances showed a surplus until 1990 when the cumulative surplus amounted to £38.8bn (£74bn surplus without debt loading).
Scotland was part of the UK and so Scottish surpluses went to the UK Treasury. Scotland was actually subsidising the UK. As a result the burden of UK debt payments on Scotland’s economy started to weigh it down. This meant the surpluses gave the false impression that they declined during the 1990s and the cumulative surpluses were eaten up by UK debt-related deficits.
The UK’s debts have grown steadily over those 40 years. Any budget allocated to Scotland in that time that is of a higher value than Scotland’s revenues is not a subsidy, it is a loan on which Scotland has to pay interest – a loan that Scotland only seemed to need because it was subsidising the rest of the UK.
It is a fact that as an independent nation Scotland would have possessed those cumulative surpluses of £74bn and could have chosen to re-invest in Scotland’s economy, which would have grown the economy faster. An independent Scotland would have retained the £133bn of debt interest charges as it wouldn’t have needed any debt of its own.
That is why you can’t use GERS as an argument against independence.
This is one of the massive flaws in the way GERS works – allocating interest charges on debt Scotland did not generate allows GERS to show a deficit, as it assumes those surpluses disappeared into thin air and that could not have happened. It is undeniable that in an independent Scotland those surpluses would have been invested to grow Scotland’s economy or possibly put into a sovereign wealth fund such as Norway’s.
What’s the daftest thing Scotland could have done?
Assuming that an independent Scotland would not have gifted its massive surpluses to another country so it could pay down its debts, what is the lowest rate of return an independent Scotland could have received on those 1980s surpluses? What if an independent Scotland’s government had been so incompetent that it could not figure how to invest those massive surpluses but simply stuffed them in a bank to gain interest at the standard market rate? Then what if we had simply copied Norway’s wealth fund idea? How would Scotland’s finances look today?
Well, those cumulative surpluses, plus standard bank rates of interest, would have topped out at £412bn cash reserves in the bank in 2009/10 and then started to fall until we had £330.4bn in the bank today.
Yes, that’s right. The daftest thing Scotland could have done as an independent nation would have left Scotland at least £523bn better off today. However, had the government of an independent Scotland copied Norway, then Scotland would be £932.395bn better off now than we are today. Almost one trillion pounds is missing from Scotland’s economy from the practice of debt loading alone and upon that accounting trick rests the entire economic case for the Union.
In the 1970s, Scottish oil revenues stopped the UK from going bust but they were not enough to stop the UK debt mountain from growing. Scotland was then allocated a population percentage share of the costs of servicing that debt as well. Despite this double bailout of the UK, Scotland’s economy and its finances still managed to show a higher GDP per head and lower illustrative deficits than the UK until 2015. At that point, the UK’s mishandling of Scotland’s oil and gas wealth caught up with it and Westminster decided to slash Scotland’s oil revenues to bail out the big oil companies, which finally made Scotland’s finances look worse than the rest of the UK’s.
In 2014 many people simply didn’t understand that Westminster was completely economically incompetent, that it truly didn’t care about the impact of its policies on Scotland and was deliberately acting against Scotland’s best interests. Now, however, Brexit and the total mismanagement of its COVID-19 response is waking people up to the reality that Westminster really is holding Scotland back.
The evidence is clear. The UK Government has created a situation where Scotland’s finances show a false deficit, one that is not related to the economic performance of Scotland.
GERS when properly analysed actually proves emphatically that Scotland’s economy is remarkably resilient and resistant to oil price fluctuations and that it is underperforming due to carrying the weight of years of Westminster economic incompetence and wrong-headed thinking on its back.