SCOTLAND'S economy is not quite the Albanian-style basket case it has sometimes been portrayed as. Thanks to some recent statistical revisions, it can be argued to be in rather better shape than the British economy.
But with this discovery comes a message: if the SNP is really serious about improving Scotland's economic growth rate, rather more radical action is needed than it has so far been prepared to contemplate.
The different big picture of the Scottish
economy comes from the revisions that have been made by government statisticians to the figures on public spending and tax revenues in Scotland – figures known as GERS.
Readers will recall that the number-crunchers crawled through all the Treasury databases used to compile GERS. They then came to the rather startling conclusion that they had been over-stating spending and under-estimating revenues to such an extent that the balance – the gap between spending and revenues – was about £2 billion bigger than it ought to have been, an astounding 20 per cent error.
Ah well, at least we have some reasonably accurate figures now. We now know that in 2006-7, total public spending in Scotland was just short of £50bn. This figure is often expressed as a percentage of the total wealth produced – gross domestic product – and is used as a guide to economic health. The bigger the percentage, the more the economy is dominated by the state and is likely to be stodgy; the smaller the percentage, the more enterprising and dynamic it is likely to be.
Under the old GERS figures, the percentage had crept above 50 per cent according to the last official estimation. And on some other estimates, it was well above 50 per cent, leading some commentators to aver Scotland was more like Communist-era Albania than enterprising and dynamic Ireland.
The new GERS figures deny that. Not only is public spending less than had been supposed, but the latest statistics have also usefully provided some reasonably accurate GDP figures. And as a percentage of non-oil GDP, public spending in Scotland now turns out to be less than 50 per cent. In 2002-3, it was 45.8 per cent, rising to 47.4 per cent in 2006-7.
We can go further than that. The new GERS figures also provide an estimate of what GDP would be in an independent Scotland, which, of course, would have a substantial proportion of North Sea oil wealth. This is currently excluded from statistics of the Scottish economy. But if we use the division of the North Sea suggested by academic research, Scottish GDP obviously rises. In 2006-7, for example, it would go up from £105.3bn to £127.3bn. Consequently, public spending as a proportion of GDP falls to less than 40 per cent. In 2002-3 it was 38.6 per cent and since than it has risen only marginally to 39.2 per cent.
When we compare this to Britain as a whole (see below), we discover that spending as a proportion of non-oil GDP is higher than in Britain (which is still a bad thing), but when you include a due share of offshore oil and gas activity, it is lower. Total British government spending as a proportion of GDP has been greater than 40 per cent since 2003-4. On that basis, it is reasonable to argue that Scotland is a little bit more dynamic than Britain.
That's good news for anybody interested in the Scottish economy, but why do I reckon that the SNP has to be more radical?
The reason is: faster growth is associated with small government and by international standards and even with oil GDP, Scotland's government is still too big to generate the kind of growth to which the SNP aspires.
For example, a recent study by the International Monetary Fund (IMF) analysed the link between the size of a country and its government, debt, and economic performance.* Although small countries were defined as those with populations smaller than two million of a population, and Scotland's population is bigger than that, there is no reason to suppose that the general lesson does not apply to the Scottish case. The IMF study found that small countries with small governments (i.e. low public spending as a percentage of GDP) had faster growth and were less vulnerable to external and economically damaging shocks.
The case of Ireland, to whose economic performance the SNP aspires, proves the point. One of the reasons for Ireland's success that is not often mentioned by the SNP is that one of the corollaries of having a relatively low tax economy is that the government has less to spend. Ireland's public spending is only about 34 per cent of GDP. To reach that level, an independent Scotland's public spending would have to be cut by about £6bn.
It could be done, but the SNP shows no sign of wanting to move in that direction. If anything, it seems to want to increase public spending. It wins votes but it's not a formula for long-term economic success.
*Big Government, High Debt, and Fiscal Performance in Small States. By Stephanie Medina Cas and Rui Ota. February 2008.
Debate and discussion welcome at:
pjones@ednet.co.uk.
The full article contains 892 words and appears in The Scotsman newspaper.
