GERS figures are stark evidence of UK mismanagement of Scottish economy

The Bottom Line, launched by economists and policy specialists Graeme Blackett, Roger Mullin and David Simpson in August 2022, published a six-page paper following the release of the latest Government Expenditure and Revenue in Scotland (GERS) statistics this week.

We told how the figures showed Scotland’s deficit continued to fall at a faster pace than the UK’s - thanks to record revenues from oil and gas and an increase in the amount of income tax collected.

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And now, The Bottom Line’s report argues that the cost of living support - necessary because of inflation in the UK that was higher than in other advanced economies - and public sector debt increases cost £8.9 billion in 2022-23.

The experts argue that this is due to UK “policy mistakes including Brexit”, its impact on inflation, more exposure to global oil and gas prices than other countries, and the decision to “index-link a much higher proportion of government debt than any other country”.

This, they say, led to the increased exposure of UK public finances to inflation.

On the impact of oil and gas revenues, the report says that there is a “significant economic opportunity” if invested in the energy transition to provide employment opportunities in renewables.

Professor Simpson, one of the group’s founders, has previously said that GERS should be scrapped as it is “generally misinterpreted” and misdirects the debate on the Scottish economy.

The paper sets out that there were two key policy mistakes that have had “substantial impacts” on Scotland’s current account balance.

The first, they argue, is the number of cost of living support schemes given to households and businesses, including the Energy Price Guarantee, the Energy Bill Support Scheme, the Energy Bill Relief Scheme and Cost of Living Payments.

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“The total cost of these schemes in Scotland was £4.5 billion in 2022-23,” the paper reads.

“Whilst that spending will have been welcomed by the households and businesses that benefited, it should not have been necessary.

“It was necessary because the UK had higher inflation than other large advanced economies.”

In March 2023, the UK had the highest inflation of the G7 countries when it hit 8.8%, caused by numerous factors, many of which are associated with Brexit and UK energy policy.

Graeme Blackett is one of the founders of The Bottom Line

The second change, the paper sets out, is the increased cost of debt interest, with the share allocated to Scotland in 2022-23 increasing by 68% compared to the previous year. A total increase costing £4.4bn.

“The cost of servicing UK debt has increased substantially relative to other countries, due to UK policy decisions, which left the UK finances exposed to the risks of inflation,” the report says.

“Borrowing requirements are met by issuing government bonds or gilts.

“These pay interest to the borrower and include two main types: one has fixed interest rates and the other is index linked, meaning that the interest paid increases with inflation.

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“In the UK, index linked gilts make up 25% of the total gilt portfolio, which is the highest among G7 countries and more than double that of Italy, the country with the next highest share.”

The cost of the two combined policy errors, the report says, totals £8.9bn - accounting for two-thirds of the Scottish current account deficit.

The Bottom Line argues that if these two “examples of UK economic mismanagement” were removed from GERS, Scottish current account deficit would fall from 6.4% of GDP to 2.2%.

This would be well below the current account deficit of the UK and “well within the 3% that is generally regarded as sustainable”, the report says.

The report also argues that the £9.4bn collected in oil and gas revenues, representing 11% of all taxation collected in Scotland, may represent a “peak” due to higher prices and the long term trend of reducing production in the North Sea.

However, it adds that Office for Budget Responsibility (OBR) figures set out an additional £40bn over the next five years, £35bn of which would come from Scotland.

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“Scotland is, therefore, in a position to capture a very large share of this investment, perhaps the biggest opportunity to transform the Scottish economy since the industrial revolution,” the report says.

Investing in the energy transition would not only generate employment opportunities but would increase the “competitiveness and growth rate” of the Scottish economy in the long term, improving public finances stability, the paper concludes.

The Scotland Office declined to comment but pointed to Alister Jack's comments when the figures were released.

The Scottish Secretary claimed they showed "yet again how people in Scotland benefit hugely from being part of a strong United Kingdom".