Summary
One of the costs of dependency is that Scotland is part of a UK economy that has been underperforming.
This has resulted in a growing economic gap between the UK and other advanced economies, particularly those small advanced economies that an independent Scotland could reasonably aim to emulate.
If the UK (and Scotland) had matched the performance of small advanced economies in 2019 (i.e. the year immediately before the Covid pandemic), the economy would have been larger, by the equivalent of more than £12,000 per person.
The growing economic gap between the UK and other advanced economies means that there is also a tax gap, making it challenging to fund good public services in the UK.
If Scotland had matched the average for small advanced economies in 2019 that would have added £26 billion in tax revenues. This matters for the quality and quantity of public services such as health and education, because these are funded from tax revenues, which are collected from money generated in the economy each year.
This is very significant in the context of Scotland’s reported Current Budget Deficit of £12 billion in 2019-20 (that is the estimate of the gap between taxes collected in the year and current public spending). Closing the tax gap would not only eliminate a budget deficit, it would provide the opportunity to increase public spending and / or cut tax rates.
Closing the tax gap would not happen overnight if Scotland became independent. However, independence for Scotland would mean realising the agency required to be more ambitious, taking control and responsibility to address economic problems and pursue opportunities. As this tax gap analysis has shown, the potential benefits for the economy and the public finances are substantial.
Introduction
The Bottom Line’s first article, published in August 2022, highlighted the importance of agency to the economy and set out how independence would stimulate a move to a society of agency. The article can be read here: https://thebottomline.scot/agency-and-helplessness-and-scotlands-future/
The agency that would be realised with independence is in contrast to Scotland’s economic helplessness as part of the UK, without the control and responsibilities to address economic problems and pursue opportunities.
The underperformance of the UK economy, of which Scotland is a part, means that as well as levels of prosperity being lower than they would have been if the UK was performing as well as the small advanced economies, the tax revenues collected by the government to fund public services and provide the infrastructure that an advanced economy needs to thrive are lower than they would have been.
This case study quantifies the size of the tax gap that arises from Scotland being tied to the UK economy.
Approach and Sources
This analysis compares the economic performance of the UK with 21 other advanced economies, including both large advanced economies (LAEs, with populations of more than 20 million) and small advanced economies (SAEs, with populations of between 1 million and 20 million). The LAEs are Australia, Canada, France, Germany, Italy, Japan, Korea, Spain and the United States. The SAEs are Austria, Belgium, Denmark, Finland, Ireland, Israel, Netherlands, New Zealand, Norway, Singapore, Sweden and Switzerland.
The main metric used in this analysis is Gross Domestic Product (GDP) per capita, which measures total economic output by person in each country and the growth of GDP per capita over time [1].
The analysis has been undertaken up to 2019, immediately before the Covid pandemic, and so does not take account of differences in how countries performed during the height of the pandemic nor how strongly they have recovered. This also means that it does not take account of the economic consequences of Brexit, which are increasingly apparent.
The Economics Performance Gap
Graph 1 below shows trends in economic growth (measured in GDP per capita) since 1980, comparing the UK to large advanced economies (LAEs), small advanced economies (SAEs) and the group of advanced economies (AEs) as a whole. This shows that economic growth in the UK lagged the average for the advanced economies.
Between 1980 and 2019, the cumulative economic growth achieved by the UK, large advanced economies and small advanced economies was as follows:
– UK: +100%
– LAEs: +144%
– SAEs: +125%
– All advanced economies: +133%
So, whilst the UK economy, measured in terms of GDP per capita (taking account of changes in the population), doubled in size between 1980 and 2019, this increase was less than achieved by both the large and small advanced economies. The gap in growth in GDP per capita has widened since the financial crisis.
Graph 1: Trends in GDP per Capita (1980=100)
The trend data does not tell the whole story since the absolute level of GDP per capita is also important.
In 2019 (the year before the Covid pandemic), the UK’s GDP per capita was $42,200 (£33,200), 16th highest of the group of 22 comparator advanced economies (see Graph 2 below).
Whilst this is close to the average for the LAEs, the UK’s economic output per person was well behind that achieved by the SAEs.
The graph below also shows that in 2019 the average GDP per capita for the SAEs was higher than the average GDP per capita for the LAEs. The previous graph showed that the growth rate of the LAEs was higher than the SAEs between 1980 and 2019. This is because the average GDP per capita of the SAEs was already ahead of the LAEs in 1980. Whilst the LAEs closed the gap a little over the last 40 years, the SAEs still have a notably higher average GDP per capita.
Graph 2: GDP per Capita Comparisons, 2019
As per Graph 3 below, if the UK had matched the average for the LAEs in 2019, GDP per capita would have been an additional $1,000 (£800, that is £34,000 instead of £33,200).
If the UK had matched the average of the SAEs, it would have been an additional $16,200 (£12,700, that is £45,900 instead of £33,200).
Graph 3: GDP per Capita Comparisons, 2019
UK and Scottish Economic Performance
Whilst international comparison data is published only for independent states, some insight on the relative economic performance of Scotland as part of the UK can be made based on Scottish and UK GDP per capita figures [2].
In the two decades prior to the Covid pandemic, the trends in GDP per capita for Scotland’s onshore economy (excluding North Sea oil and gas) tracked the UK economy (see graph below). If the offshore economy is included, Scotland’s GDP per capita was ahead of the UK in years where higher oil prices boosted production and lower in years where there were lower oil prices and production.
In 2019-20, GDP per capita in Scotland was £30,800 (93% of the UK level of £33,200) if the offshore economy is excluded and £32,200 (97% of the UK level) including the offshore economy as per Graph 4.
Graph 4: UK and Scottish GDP per Capita
The Economic Gap (GDP)
If the UK and Scottish economies were to close the economic gap with other advanced economies, that would require significant increases in economic output.
If Scotland had matched the average for advanced economies (including both LAEs and SAEs) in 2019 that would have added £40 billion to the Scottish economy (an extra £7,400 per person) and onshore Scottish GDP would have been £208 billion instead of £168 billion [2].
If Scotland had matched the average for SAEs in 2019 that would have added more than £67 billion to the Scottish economy (an extra £12,300 per person) and onshore Scottish GDP would have been £236 billion instead of £168 billion (Graph 5).
Graph 5: Economic Gap (GDP)
The Tax Gap
The additional GDP would also have generated additional taxes. The size of the tax gap can be estimated by assuming that the overall tax take in the economy did not change. Taxes raised in Scotland in 2019-20 were equivalent to 38.7% of GDP.
If Scotland had matched the average for advanced economies (including both LAEs and SAEs) in 2019 that could have added £16 billion tax revenues, so total taxes collected would have been £78 billion instead of £62 billion [3].
If Scotland had matched the average for SAEs in 2019 that would have added £26 billion tax revenues, so total taxes collected would have been £88 billion instead of £62 billion (Graph 6).
Graph 6: Tax Gap
The Tax Gap in Context
The tax gap in the Scottish economy that arises from the economic gap between Scotland’s performance as part of the UK and other advanced economies has been estimated to be as much as £26 billion (compared with the average SAE).
This is very significant in the context of Scotland’s reported Current Budget Deficit of £12 billion in 2019-20 [3] (that is the estimate of the gap between taxes collected in the year and current public spending). Closing the tax gap would not only eliminate a budget deficit, but would provide the opportunity to increase public spending and / or cut tax rates.
Closing the tax gap would not happen overnight if Scotland became independent. However, independence for Scotland would mean realising the agency required to be more ambitious, taking control and responsibility to address economic problems and pursue opportunities. As this tax gap analysis has shown, the potential benefits for the economy and the public finances are substantial.
[1] Sourced from the International Monetary Fund’s (IMF) World Economic Outlook Database
[2] Source of GDP figures: Office for National Statistics
[3] Source: Scottish Government, Government Expenditure and Revenue in Scotland 2019-20
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