The economic case – the case against GERS

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by Calum Cashley

OK, let’s take a wee glance under the skirts of the economic case before we put it back in its bath chair with a wee tartan rug over its knees and send it out for a sleep in the sunshine out in the garden.

It has to start, really, with that old warhorse GERS. Not the Ibrox team, I wouldn’t want to intrude, but the report known as Government Expenditure and Revenue Scotland. I think Ian Lang must still be chuckling about his cunning plan, conceived in 1992 while he was Scottish Secretary.

by Calum Cashley

OK, let’s take a wee glance under the skirts of the economic case before we put it back in its bath chair with a wee tartan rug over its knees and send it out for a sleep in the sunshine out in the garden.

It has to start, really, with that old warhorse GERS. Not the Ibrox team, I wouldn’t want to intrude, but the report known as Government Expenditure and Revenue Scotland. I think Ian Lang must still be chuckling about his cunning plan, conceived in 1992 while he was Scottish Secretary. Not only did the numbers, maladjusted as they were before the recent review, create confusion, it fed the conceit that Scotland might not be paying its way in the world. It was a political exercise in undermining, as he wrote to his Prime Minister and Chancellor;

“The booklet I have had prepared and printed, setting out the details of the Government’s expenditure and revenue in Scotland, I judge that it is just what is needed at present in our campaign to maintain our initiative and undermine the other parties.”

His greatest triumph, though, might be said to be that nationalist politicians ended up being sucked into the maelstrom of argument over what is, essentially, a partial cashflow statement. GERS is the spindoctor that has become the story, it’s a statistical report that has become a unionist shibboleth and a nationalist tripwire, and it means nothing.

The political points of GERS had to be addressed and its insufficiencies pointed out, the disingenuity of basing a political economics argument on a tally sheet which contains estimates and best-fits challenged, but we’ve ended with the daft position where we’re arguing about which years Scotland was in surplus and by how much rather than on how we make Scotland a better country. For surplus to have been the position in as many years as it has is nigh on miraculous, it is not the normal position for a country to have. If I may quote Professor Gavin McCrone in his 1974 paper on Scotland’s oil:

“In the first place it is not necessary to balance the budget. To finance loans and various items of capital investment, particularly those which yield a return by borrowing is quite reasonable; other items too may be covered by borrowing from time to time particularly if an expansionary budget is necessary to generate a higher level of economic activity in the economy. For these various reasons the United Kingdom budget normally involves a net borrowing requirement and whilst this will normally be fairly small this is not always so; in the present year, for example, the borrowing requirement reached the record figure of £4,000m.”

Governments borrow, nations run deficits. The UK Treasury’s website has a few fascinating items on it including the history of the national debt.

The origins of public debt
6. Historically when the state had budgetary deficits, particularly those arising from wars, it funded them from taxation.
The financing needed for the War of the League of Augsburg led to the creation of the Bank of England in 1694 and the first types of state public financing debt in England.
7. The early 1700s saw the emergence of banking and financial markets. The ability to raise money by creating debt through the issue of bills and bonds heralded the beginning of the National Debt. This rose from £12m in 1700 to £850m by the end of the Napoléonic Wars in 1815. The two world wars of the twentieth century caused debt levels to rise, from £650m in 1914 to £7.4bn by 1919 and from £7.1bn in 1939 to £24.7bn in 1946.
8. The period of relatively high inflation in the 1970s and 1980s saw debt rise from £33.1bn in 1970 to £197.4bn in 1988. Debt measures are usually presented as a percentage of GDP since comparisons over time need to allow for effects such as inflation. Dividing by GDP is the conventional way of doing this.

As an aside, one of the interesting things about this, for me, is the fact that the UK national debt started accruing a few years before the UK came into being and it would appear that there is a bit of historical revisionism going on about the events that surrounded 1707. We are often told that the Darien scheme had brought Scotland’s finances to their knees and we were saved by integration with a larger and richer neighbour. It appears, however, that England had just become the first nation ever to get into debt. Interesting but little more than that in discussing Scotland’s future.

What is far more pertinent to the case against GERS is the attitude of the UK Government to managing the debt. The Public Sector Net Debt is £816.2 billion and there is some publically stated intention on the part of the current Conservative Chancellor to reduce that but supporting documentation for the June 2010 budget points to a slightly different set of priorities:

The Government aims to finance its net cash requirement plus maturing debt and any financing required for additional net foreign currency reserves through the issuance of debt.

In other words, the Government intends to borrow to cover its cash requirements this year and next year and the year after – and to borrow in order to pay off the bonds that are maturing; borrowing money to cover the costs of the money already borrowed. I haven’t looked to see when the UK last ran a surplus but I would imagine that it would take some looking. A little perspective is a wonderful thing – the UK still services the debt from the Napoleonic wars rather than paying it off, reasoning that servicing it is cheaper and therefore better value for the public purse. Not only do governments borrow money, they keep on going, relying on inflation to take the long-term costs down and make it affordable.

This may not be a bad thing – sovereign bonds are purchased by organisations like pension funds because the reliability and the guaranteed, if low, return serve their purposes well. Krugman and others have argued that we should actually be borrowing more in order to stimulate the economy and soothe the nerves of fund managers – the theory goes

High levels of borrowing increase demand and are therefore generally held to stimulate economic activity; low levels of borrowing (or, on occasion, actual repayment of debt) decrease demand, and so are generally thought to depress economic activity.

Whether Scotland has the economic ability to thrive after independence has very little to do with the figures that are in the GERS report and an awful lot more to do with what Scotland can do to earn a crust in the world. There is a political ping-pong that goes back and forth with equally sterile arguments on each side – Scotland’s ability to pay her own way is questioned followed by an accusation of mismanagement of our economy from London, there’s a union dividend or we pay all the bills. I don’t subscribe to the idea that malevolent politicians sitting beside the Thames design policies to harm Scotland. I do, however, reason that their calculations have to be about what’s best for the overall UK economy and that is skewed incredibly towards London and the South-East of England, even to the detriment of large areas of England. Scotland suffers as an unintended consequence of decisions made in the best interests of the UK economy.

Even if we had the figures to hand – the actual corporate and personal taxation take from Scotland, the actual spend in Scotland, the oil revenues, the backlog of capital works, the share of duties and so on – it would mean little in terms of the independence debate. A change of policy on the part of an independent government would move the numbers and a range of policy alterations will create a new landscape. Additionally, forces will come to bear which change those figures over which governments have little control, as we have seen recently. The real question to answer is ‘How can we make our country more robust to withstand the buffeting of bad weather, flexible enough to accommodate different strands of enterprise, and agile enough to take advantage of opportunities?’ The independence question in there is ‘can we do it?’ That’s what we should be looking at in the economic debate, how do we make this country resilient in the face of challenges, forward-looking in opportunity harvesting and capable of sustaining and improving her people’s standard of living?

It’s only partially a numbers exercise, the current figures only hint at what tomorrow may bring – it’s more an exercise in imaging a new landscape and about how to deliver it. That journey should take us away from the barren lands of GERS and into the more fertile lands of positive human interaction. The numbers may be fascinating and deliver us a cracking good argument from time to time but we’d best take a look at what we could win should we dare to try. That’s a field to poke my nose into next.

Reproduced with kind permission from Calum Cashley.

Read Mr. Cashley’s blog here.