Scotland's ledger lands with a thud

Tax form and coins

Fifteen billion quid. It's a very big number. So as the deficit calculated for government spending on and in Scotland last year, rounded up a bit, does it have much meaning?

Politically, yes. The big figure that leaps out of GERS - Government Expenditure and Revenue Scotland - fuels the debate about Scotland's constitutional future.

To one side, it makes Scotland's public spending habit look reliant on transfers within the UK. It needs that "pooling and sharing". To the other, it speaks of a failure to get the Scottish economy growing faster, and is a reminder of the failure to put oil revenues aside from the boom years.

While the numbers show how Scotland would have been placed if Alex Salmond had achieved his goal of independence by last March, it is not likely to be the deficit if Scotland were to use its powers over tax, spending and borrowing.

How might things be different with all the levers of economic power located in Edinburgh? That depends on how they're deployed, and whether the levers have the expected effect.

To rely on spending cuts if the gap is to be narrowed to a sustainable level would make Osborne austerity look like a picnic. To raise taxes would risk choking off growth. And the scale of tax rise would be impossible. To illustrate: if tax alone were used to cut the deficit from 9.5% of GDP to the recommended ceiling of 3%, it would mean nearly doubling the take from income tax, and that's before the loss from high earners exiting the country.

Alternatively, to raise the growth rate, and thus taxes, requires explanation of how that is to be achieved, in ways that aren't already being attempted.

White paper slippage

If the Scottish government is heading towards another independence referendum, these latest figures underline the need to re-visit the independence white paper. It is not just the currency question that needs to be re-thought. The case for the resilience of Scotland's public finances is looking very different now. John McLaren, the public finance expert at Scottish Trends, has contrasted the claims made in that 2013 document with the more recent numbers in GERS 2015-16.

He points to the white paper's highlighting of tax receipts per head being £1,700 higher than the UK equivalent in 2011-12. The position last year was that Scottish tax per head was £400 lower.

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It was claimed that the five years to 2011-12 saw Scotland's public finances stronger than the UK's by nearly £2,400 per head (since then, revised down sharply by St Andrew's House statisticians). In the five years to 2015-16, Scotland's public finances were weaker than the UK's by almost £4,300, says McLaren.

And while Scotland was ranked eighth out of 34 countries in the league table of output per head in the Organisation for Economic Co-operation and Development, it has slipped to around number 14.

Scotland's premium

Another debate that GERS fuels is whether that £1,200 per head premium for Scottish spending - on top of £11,600 per head across the UK - is justified by Scotland's special needs, such as rural transport and smaller rural schools.

If it's true that English consumers are now objecting to their strawberries being packaged with a Saltire flag, there may be something assertive afoot in England that might just take these GERS figures and challenge the Scottish spending premium more robustly, at a time of Brexit uncertainty and with a new Prime Minister.

Whether the £1,200 is justified or not, there's also the question for Holyrood MSPs of whether money is making £1,200-worth of difference in the outcomes we see from public services?

Devo Plus and Minus

As more powers come to Holyrood, over the rest of this decade, the volatility of these numbers will surely increase. Until now, the GERS figures have relied on quite rough estimates of how much is paid in income tax and VAT in Scotland. In future, all of income tax will have to be identified as Scottish or not, and a share of VAT will be calculated in a more sophisticated way, in order to be assigned to Holyrood.

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With some reverse engineering of these figures, the statisticians have calculated how much would have been raised last year under the devolved powers introduced in April this year and more in future years. With power over some of income tax (the Scotland Act 2012), Holyrood would have raised £8.9 billion of the total last year.

With the powers included in the Scotland Act 2016, that goes up to £16.1bn, and a further £5.6bn of VAT assigned to the Scottish Parliament. That makes for 30% of the budget being set through taxes controlled at Holyrood, and 40% when VAT is assigned.

Oil goes negative

Until now, volatility has been the main feature of oil and gas taxation. That offshore revenue is by far the most volatile element of UK tax accounts. In Scotland, its importance to the numbers is magnified.

And it's been worsened by a falling share of the UK total, to 78%. That's because the profits on oil have fallen relative to gas, because the oil price has fallen relative to gas, and English offshore production is weighted towards gas output.

So when the numbers fell from £10bn-plus to £1.8bn last year, and only £60m this year - a drop of 97% on already low revenues in 2014-15 - that indicates that hydrocarbons will no longer compensate for the Scottish spending premium.

Yes, the oil price can bounce back. But even if it does so, it is unlikely that tax revenue will bounce as fast. Offshore tax rates have been cut. High costs in the North Sea have also been reduced by the industry, but they continue to weigh on profitability.

Allowances have been increased to incentivise investment. The 2015-16 figure for Petroleum Revenue Tax includes allowances and comes to £562m in reverse revenue. Next year and for the rest of this decade, the GERS figures could include a negative total for oil and gas.

Add to that the factor of clever corporate accountants. A trade union report has been published this week looking into the tax practices of North Sea producers, and alleging a lot of imaginative and opaque ways of transferring prices out of the UK jurisdiction and into a more attractive one for tax liability.

Fags and bookies

Delving into the figures, GERS goes on to give some insights that miss the main headlines. It shows tax revenue rose in the onshore economy, but at a slightly slower rate than the rest of the UK.

Income tax rose to more than £12bn, or 24% of the total. VAT brought in £11.2 billion - a 21% share.

Scots continue to contribute less than their population share in wealth-related taxes, such as those levied on capital gains, dividends, savings interest and property transactions.

But Scots also continue to spend more than their population share on tobacco, gambling and alcohol. The amount contributed from Scotland through tobacco tax has fallen for the past three years, but it was still nearly £1.2bn in 2015-16, and 13% of the UK total.

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Air Passenger Duty is thought to raise £275m, or 0.5% of the Scottish government spend. That shows the scale of the challenge if APD is to be halved and then removed, as the Scottish government wants.

On the spending side of the ledger, more than a third goes on pensions and benefits. The state pension now costs more than £7.5bn in Scotland. Most non-pension payments have been stalled for four years.

Housing spend fell sharply last year, from £1,700m to £1,363m, while transport was up by more, from £2,805m to £3,226m. Health spending was up by more than £500m to top £12bn for the first time, representing 18% of total spend.

Brussels give and take

Light is also shed on the cost of those private finance deals, amassed down the years as either the Private Finance Initiative or, more recently, the Non-Profit Distributing model. The cost of servicing those contractual arrangements to build and run schools, hospitals and water works came to £1,078m in the financial year, with that amount rising each year as more projects are added.

And following the controversial claims made, in the European Union referendum, about money sent to Brussels by the UK government, GERS estimates how much the European Union has been costing Scotland. The gross figure has returned to the level it was at in 2011-12, of £1,138m.

But the net figure is well under half that. Public sector receipts from EU budgets amounted to £610m. Although outside of the GERS figures, a further £94m is calculated as coming to Scottish universities from EU budgets and EU-based charities.

That's the scale of what academics, farmers and many others will seek from UK and Scottish governments if or when European funding is withdrawn. And if the forecasts about Brexit prove anything close to reality, a lower path for economic growth will make it significantly more difficult for ministers to meet those expectations.

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