Here is this month's Scotonomics, we hope you will enjoy. This month the newsletter comes from William Thomson (follow me on X/Twitter!)
This year's GERS figures put Scotland’s public sector deficit figure at £26.2bn, up from £21.4bn the previous year. Maybe there is no one to thank for this situation, but there is certainly no need to blame anyone. Government deficits are normal, and when the real economy is in such a mess, we need them.
There’s one day in August every year when everyone is expected to comment on Scotland’s macro-economic position as outlined by the Scottish Government report, Government Expenditure and Revenue Scotland (GERS). For the second year in a row, I kept my head low.
GERS is summed up nicely for me by a classic moment in the 80s film Crocodile Dundee. Sue helps Mick settle into his fancy suite in New York. Mick spots a TV. “Oh, yeah. I remember television from way back. I saw it at a buddy's house one time.” Mike cranks up the TV to see a rerun of I Love Lucy. “Yup. That’s what I saw that time”.
GERS is like a box of chocolates. There is something in there for everyone.
Indy supporters will highlight that GERS shows the mess that is created in Scotland’s economy when it is part of the UK (there is truth in that).
The Scottish Government will tell us that GERS is an exercise in calculating Scotland’s current position as part of the UK and makes no attempt to predict Scotland’s independent economy (this is absolutely true). However, there are things that you are able to strongly infer about independence from the figures in GERS.
The National will run a "good news" story on GERS day. This year, they ran with Shona Robinson, highlighting that the Scottish Government is heading towards an effective budget surplus as “revenues are in fact increasing at a higher level than expenditure for those devolved areas of expenditure”.
Various Unionist politicians will focus on the concept of a "union dividend" that allows Scots to bask in the benefits of around £2500 more per person in public expenditure than the rest of the UK (there is some truth in that). By extension, they insist that this shows that Scotland can not afford to be independent (which, of course, is nonsense), but it does allow them to make nice, catchy social media graphics.
And of course, my good friend Richard Murphy will call GERS "CRAP".
This annual stooshie around GERS – which has played out every year since 2013 – enabled the heads of the Fraser of Allander Institute and the Scottish Fiscal Commission to write in 2021 that GERS “remains a controversial statistical publication on Scotland’s public finances”. Or as Mick Dundee would say: “Yup. That’s what I saw that time."
Four years after those wise words, we are still stuck with GERS, and by focusing almost exclusively on the size of the government deficit, the paper grabs all the headlines for all the wrong reasons.
Who is to blame?
Despite the disagreements around GERS, everyone seems to agree that somebody, as Richard Murphy put it this year, is “to blame” for Scotland’s fiscal deficit. This year's GERS put that figure at £26.2bn, up from £21.4bn the previous year.
I am writing this piece to stop the blame game and embrace fiscal deficits because if Scotland were to become independent again, we would need our government to deficit spend (and spend big) every single year.
A government deficit is normal
As Scotland’s foreign sector (including rUK) runs a surplus and assuming that we want to have a private sector surplus to be enjoyed by Scottish households and businesses, this is generally agreed to be a good idea; we need a government deficit. This is explained by a macro-economic framework called Sectoral Balances, which I have covered before in our newsletter.
Sectoral Balances help us see both sides of a government deficit. As every financial liability is an asset, Sectoral Balances show both sides of a country’s balance sheet. The St. Louis Fed records the US "sectoral balances".
Balancing the budget
In Scotland, every year since at least 1998, the government deficit has reduced the private sector deficit or has put the private sector into surplus. There would only be someone “to blame” if there were no government deficit in Scotland.
Assume for one moment that our three levels of government ran a balanced budget in Scotland (something that I think you would get every mainstream politician to agree would be a good idea, including the SNP leadership), this would likely mean a 10% fall in government spending. You could remove the deficit by increasing taxes, but you can’t control that figure in the same way you can control what you spend. Either way, this means austerity.
At the height of Tory austerity between 2010 and 2015, overall government spending shrank by around 2%. So imagine what five times UK austerity would look like. That would mean a massive austerity programme of the size that was forced on Greece in the early 2010s.
Let's look at Scotland again. Without government deficits – considering that the foreign sector runs a surplus – it would be the Scottish private sector (that’s you and me) that would have to fill that gap: It would be more financial wealth from the non-government sector that heads abroad.
The Sectoral Balance is an accounting identity, which means it is not an economic opinion but an accounting fact, and it looks like this:
Government Balance + Foreign Balance + Private Sector (also known as the Domestic Non-government Sector) = 0.
In short, owing to the makeup of the Scottish economy, we need that public deficit to be close to 10% to allow us to net save some of our income and pay the surplus to the foreign sector.
There are certainly people and institutions to blame for the macro-economic conditions that led to this large government deficit, but there is no one to blame for the existence of a government deficit.
Scotland’s Sectoral Balances
Richard Murphy takes a very interesting, nuanced view of the public deficit. As a Professor of Accountancy and a supporter of MMT, Richard understands the public deficit is “our” surplus. But with a specific focus on tax avoidance and evasion, the deficit takes a different shape. With all other things being equal, if we collected more taxes from the wealthy, we would have a smaller deficit. There are, of course, other areas where we could reduce spending or increase taxes to reduce the deficit. However, Sectoral Balances have one specific purpose: to show the flows of financial wealth. It is a policy-neutral framework.
Tracking sectoral balances helps policymakers understand how different parts of the economy – households/businesses, government, and the rest of the world – interact, making it easier to design policies that support a sustainable and balanced economy. It pushes every government away from crazy fiscal rules. It also enables us all to see the clear relationship between government deficits/surpluses and our own private financial wealth. It tells a story that GERS avoids.
For this reason, along with German Economist Dirk Ehnts, I have recommended that the Scottish Government publish and maintain Scotland’s sectoral balances statistics.
The recommendation forms part of our new paper: The Economic Impact of Adopting the European Union’s Stability and Growth Pact in an Independent Scotland. The paper will also, for the first time, show Scotland’s Sectoral Balances. And they show a fascinating story. It is released on September 15.
GERS, by using a neoliberal, mainstream lens, portrays Scotland’s fiscal deficit as a concern for the present and future. Sectoral Balances provide a broader picture. It is time we move beyond GERS and tell the full story.
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