AS WE HAVE MOVED into a new political season, we think it worth reminding taxpayers just how much our public sector has over-traded. The snapshot of GERS gave us all another view of the last year’s current account, but it is equally as important for us to look at the balance sheet.
For all the heat over GERS, there is very little light on the wider situation that our government has found itself in with respect to its finances – shared as they are at present with the UK as a whole.
It seems to us important for Scottish taxpayers who are now paying 2.8 billion pounds annually on debt interest (4.1 per cent of all spending) that the collateral that backs these loans exists. There was a slight frisson of excitement in the City two weeks ago when a tranche of debt refinancing using UK gilts actually failed on the first auction.
We should not underestimate the economic damage that a government, faced with a refusal to fund its debt needs, could do if it had to raise interest rates substantially in order to fund its activities. For Scotland, with less taxation capacity to pay such interest, outcomes could be extremely serious.
Governments fund their activities in an particular way. They split their spending into Annually Managed Expenditure and Departmental Expenditure. The first involves costs on spending promises made that cannot be broken; things like pensions, welfare benefits, and other programmes that are considered to be entitlements and will be spent come what may. The second element involves discretionary spending by government departments choosing to spend on initiatives that can be cut, adjusted or increased by the government of the day. The present Scottish Government’s Departmental Expenditure Limits are £30.4 billion – less than half of the total £68 billion budget. It is worth noting that the £12.6 billion shortfall on the current budget balance is 42 percent of this figure.
There is a reality here; should a new economic shock hit Scotland, and the government of the day wishes to stick with its plans on annually managed spending entitlements, the discretionary portion of its budget is going to be shocked more than twice as hard if it has to take up the shortfall. That is essentially what George Osborne had to do over the past five years – chopping lumps out of government departments’ discretionary budgets to pay for other entitlements. While described as “austerity” such budget cutting is highly skewed away from the funding that most of the howling anti-austerity brigade consider to be important. GERS tells us that the cash budget for state pensions has gone up by £272 million and of Work and Pension social security cash spending has risen £59 million.
UK Public sector debt, as reported to the EU – what is called Maastricht debt – is more than £1.6 trillion. A recent publication by the Office of National Statistics suggested that the market value of UK debt – what is called “general government unconsolidated total financial liabilities” – is £2.134 billion with a negative net worth of the public sector of £1,620. What these negatives consist of are the unfunded public sector pensions schemes, PFI legacy schemes, network rail and nuclear decommissioning among other mistakes made by public policy makers.
However much politicians try to spin these figures, the situation is pretty dire, not just in the UK, but all over the developed world – even the USA has set a path towards a trillion pound deficit with its present spending plans.
And for Scotland? Well, a smaller country digs a smaller hole, and if that hole is less deep in proportion (it isn’t) to other countries then it would be easier to get out of. So, again, when we start a new season of state spending promises, with new welfare powers becoming the responsibility of the Scottish Government from now on, we would urge that offering more spending promises that result in yet higher debt is foolhardy. It is quite likely that Scotland along with other nations is in fact technically bankrupt. Should anything go badly agley in the next decade, it is relying only on its authority to tax us to hell and beyond, probably through inflation, to save itself from disaster.
You have been warned.