How much is enough? Scotland puts the cart before the horse

How much is enough? Scotland puts the cart before the horse

by Ewen Stewart
article from Thursday 19, April, 2018

SCOTLAND HAS one of the highest levels of public spending, per capita, and relative to the size of the state, in the developed world. Unfortunately this is supported by a small and relatively narrowly focused private sector base. Any manner in which the data is examined shows that Scotland receives materially more, per head of population than the UK as a whole. 

 The chart below puts Scottish public spending relative to GDP in context. At a current 47.9 per cent of GDP public spending of £71.2bn in 2016/7 accounted for almost half of GDP. Of the major G20 nations only France and Italy have a higher proportion of state spending with the Scottish position materially greater than both the rest of the UK and the G20 the average. 

The cry has been ‘austerity’ but as can be seen from the second chart below identifiable public spending has risen each and every year since 1998/9 from £6,424 then to a current £13,175 spent per head today. That is an increase of 105 per cent. Over that time CPI (inflation) rose by 57.7 per cent. In other words if spending had kept pace with inflation it would be £10,130 today, some £3,000 a head lower than the actual outcome. 

Talk of austerity is thus highly misleading and selective as real spending per head is almost 30 per cent greater in real terms than 20 years ago. Not only that spending in Scotland has continued to rise each and every year.

Moreover, as demonstrated by the third chart below, the level of ‘excess’ spending over the rest of the UK has been widening. In 2016/7 according to the Scottish Government’s own statistics, the GERS survey, public spending per head was £1,437 per head higher than in the rest of the UK, or some 12.2 per cent more. To put this in context this equates to £7.9bn, which is broadly the size of the entire Scottish education budget. Scotland is treated very generously indeed from the UK Exchequer.

Including Scotland’s geographic share of oil revenues the difference between the Scottish tax take and spending is currently £2,453 per head. Scotland, as can be seen from the fourth chart below, has consistently deficit funded albeit over the last decade the fiscal deficit per capita has been consistently over £2,000pa.

To put this in financial context this deficit, including North Sea Oil revenues, is currently £13.2bn, which is some £600m more than the entire Scottish NHS budget. 

Scotland’s fiscal position is extremely weak and only supportable, without significant tax rises, spending cuts, or probably both, thanks to the larger UK balance sheet. The sixth chart below puts this in context with Scotland’s deficit, as a percentage of GDP being materially weaker than the UK as a whole.

As is demonstrated by the seventh chart below Scotland’s fiscal position is the weakest in the entre EU by a substantial margin. Global bond markets simply would not support a deficit of 8.3 per cent GDP without the UK balance sheet. 

Scotland has around 8.3 per cent of the UK’s population but accounts for 23 per cent of the annual increase in UK debt. Long term this is an unsustainable position unless Scotland can find a way to grow itself out of being weaned on state spending and debt. 

Given all this spending surely Scotland has performed well then? Unfortunately not. On almost every measure Scotland is underperforming the rest of the UK. The SNP has ‘run’ Scotland now for decade. The SNP government controls a substantial proportion of the tax raising powers and direct education, health, policing and transport policy with direct influence over large swaths of local government spending. The reality is they have been responsible for policy choices and the success, or failure, of Scotland’s economy is very largely down to them.

The results are far for encouraging, as can be seen from the eighth chart below. Scotland’s economy continues to lag the UK as a whole growing just 0.6 per cent to year end Q3 2017 (latest figures) while the UK economy grew 1.4 per cent over the same period. 

This contrasts with steady growth for the UK economy as a whole and indeed most of the EU. BREXIT is not to blame, for the UK’s economy has been strong, it is constitutional uncertainty and poor policy choices that have caused Scotland’s economy to under-perform.

Such under-performance has become acute in recent years with the UK economy growing by 15 per cent since 2009 with Scotland up by just 8.6 per cent. This may not sound much but if the Scottish economy had grown in line with the UK economy since 2010 it would be some £11bn larger than it is  today.

The lesson from this is that high public spending does not result in strong economic growth. The SNP Government is putting the cart before the horse by spending today’s treasure ever more blatantly on failed public and underperforming public sector works that is crowding out the private sector which provides the wealth to support the NHS, education, pensions and the like. The SNP is slowly killing the golden goose.

In summary the foregoing figures show Scotland receives a disproportionately high degree of the UK treasure with public spending 12 per cent higher than the UK average. Tax receipts do not remotely cover current expenditure and Scotland’s fiscal deficit is the largest in the EU. As a separated country such a deficit would be unsupportable with either significant tax increases or spending cuts being  inevitable. 

It can be seen that austerity is a myth.  Scotland already has one of the largest public sectors in the world. This has arguably ‘crowded out’ the private sector and undermined the very base that is needed to support health, education and welfare spending and the like.

It is also clear, that despite significant spending, Scotland’s public services, are not performing well in either a UK or European basis. For example, Scottish schools lag in league tables, life expectancy remains low in a UK context and police centralisation has hardly been a success. Is it likely that demands for yet more money will solve structural underperformance?

Despite this the response, after testing tax and spending consistently for two generations, is to demand even more. Income tax, land and buildings transaction tax and increasingly council tax are all rising materially, further undermining an already far too small and narrowly focused private sector. 

The Scottish Government has replaced Stamp Duty with the punitive Land and Buildings Transaction Tax that has been totally counter-productive. By levying a 5 per cent rate above £250,000, increasing to 10 per cent over £325,000 and then 12 per cent above £750,000 the SNP government has reduced transaction levels, particularly at the middle and top end of the market, resulting in lower revenues to the Scottish Government than expected. 

This has had a material knock on effect to the professional services, building and retail industries in terms of lost revenue and employment as there is a clear link between housing transaction levels and capital expenditure on property. So in an ideological drive to tax the result has been to log jam the middle and higher end of the market as the cost of transactions are so great it has acted as a major impediment to moving. This is a lose-lose scenario.

Not having learned the lessons from over taxing with Land and Buildings Transaction Tax the Scottish Government has now complicated income tax, moving from three bands to five with an additional 1 per cent levied on earnings over £24,000. Such a move sends a very loud signal to prospective employers and investors in Scotland that high tax should be expected. It is little surprise this is impacting on business investment and wealth creation.

The third leg of SNP intent is Council Tax. Not only are charges increasing by 3 per cent in the forthcoming financial year but the top four of the eight council bands are all seeing their multiplier increase. Thus those living in a top banded home in Edinburgh will see a council tax rise of £546 while the commensurate rise in Glasgow will be £546 and £553 in Aberdeen. 

The cumulative effect of all three of these policies, be they Land and Buildings Transaction Tax, Income Tax and Council Tax, is material. However such policies will prove counter-productive as they will increasingly squeeze the wealth and employment creating individuals who are often mobile.  

The tragedy of these SNP policies is they are simply killing the golden goose. Scotland already has one of the largest public sectors in the world relative to GDP, and outcomes are poor and deteriorating. Rising taxes further will not improve outcomes and in the long term will simply undermine the tax base. 

This article is based on a paper by economist Ewen Stewart and published by EH99 the new Scottish think tank. Its new website can be found here.

 

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