Scotland’s balance of payments would seem to the average person a subject of interminable boredom. These people would be right.
In the parallel universe of Scottish political discourse, however, it has become the latest in a long line of fringe topics to be seized upon, mostly in error, as an anti-UK grievance with which to stoke nationalist support.
The latest ‘misunderstanding’ surrounds this excerpt from the Scottish Government’s publication on export statistics [LINK]:
The export statistics explicitly exclude oil and gas but the note here that hydrocarbon exports are assigned to an “unknown region” caused a great stir for a short time. It was wrongly assumed that this meant either the revenue or the GDP accrued from this oil and gas was not included in GERS, the now infamous publication on Scotland’s public finances.
Both of these assumptions are incorrect. You can read more about it on Kevin Hague’s blog here but it can be summarised as:
- GERS is not intended to be a record of exports and imports; nor does it offer a calculation of balance of trade
- GERS assigns oil and gas revenue to Scotland on the basis of Professor Alex Kemp and Linda Stephen’s 1999 model [LINK], calculated annually using the methodology described and strenuously checked by ScotGov against DECC (now BEIS) data and their own industry intelligence. The export data shown above is not part of this calculation, rather obviously – why would you only ascertain oil and gas production based on international exports?
- The Scottish Government does not, again painfully obviously, calculate GDP based on export statistics. GDP is calculated for the onshore economy and a geographical share of North Sea GDP separately added, as shown in ScotGov’s quarterly accounts [LINK] – extract below
So very clear. The assignation to “unknown region” does not, in any way, “hide” Scottish revenue or Scottish GDP.
There is, however, a secondary more rational consideration from these figures and that is the effect they may have on Scotland’s trade balance (exports versus imports). With the renewed focus on what currency a hypothetically independent Scotland may use, a strong balance of trade has been relied upon by some nationalist commentators to bolster the credibility of a new Scottish currency. [Some further reading on Balance of Trade – LINK and a contrasting view LINK]
The use of an “unknown region” for oil and gas exports would clearly mean that any use of the HMRC statistics as an indicator of Scotland’s trade balance would not accurately reflect reality. Of course, the Regional Trade Statistics (RTS) are not intended as a calculation of Scotland’s trade balance and, to date, I’ve yet to see anyone cite a government source which does such a thing.
It was therefore unclear to me what complaint was being made. If no-one can cite balance of trade figures, then how can we know if the “unknown region” assignation affects them? This prompted me to look further into the “unknown region” and attempt to find my own calculation of trade balance.
Leaving aside what the “unknown region” isn’t for then, what *is* it for and what does it tell us?
The HMRC website itself gives an indication of what is included [LINK]
Perhaps the first thing to mention is that it clearly is not used exclusively for oil and gas exports, there are a series of trade types which are assigned to this “unknown region”. Indeed, when you dig further into the figures you realise that the whole thing is a red herring. Of the £37.3bn assigned to the “unknown region” in 2014, only £13.5bn were “mineral fuels” (under which oil and gas is included). For 2015, they formed £8.7bn of £32bn total “unknown region” exports.
Note – I have highlighted the “Chemicals” lines in blue. Please see Note 1 below for discussion on this category.
Let’s compare that to the wording from the Scottish Government’s export release
To my reading, there is an implicit attempt to conflate the £37.3bn figure, or at least a majority of it, with the total value of Scotland’s hydrocarbon exports. Quite why a document written by the ostensibly politically neutral Scottish civil service would wish to include such potentially misleading phrasing… well you’ll have to decide that for yourself. Of course, even this section is not arguing the reporting as “unknown region” skews the Scottish Government’s export figures. This section is only included as a comparison with other government statistics and argues, quite correctly in my view, that the HMRC statistics are more or less useless as a calculation of Scotland’s trade balance.
The HMRC methodology is quite open about the issues with the report; pointing out that there are various problems with the way exports are assigned to each region. There is a head office bias towards London and the South East of England which is not completely mitigated by periodic surveys of the top traders, trade in electricity and gas cannot be assigned to any region, private individuals’ trade cannot be assigned to any region, government trade, etc etc.
For the purposes of ascertaining a trade balance for Scotland, the HMRC RTS report is even worse – which shouldn’t come as a surprise as it isn’t intended to do anything of the sort. In addition to the issues noted above, there is no attempt to record trade between regions and countries of the UK, in much the same way as the Scottish Government statistics make no effort to quantify trade between Scottish regions. Therefore crude oil “exported” to England is not recorded as an export, rather obviously, but petroleum exported to Rotterdam from the Fawley refinery near Southampton would be and assigned to England, again rather obviously. Lastly, the RTS report deals only with goods and completely ignores services.
There can be no doubt that the HMRC statistics are completely useless as a means of estimating a trade balance which is precisely why no-one ever uses them for that purpose and the reason the Scottish Government produce their own report on exports and separate, experimental, data on imports and North Sea exports.
The SNAP data [LINK] provides a very clear estimate of hydrocarbon exports not just to the rest of the world but also within the UK.
So rather than the £37.2bn alluded to above, the relevant total for Scottish oil and gas international exports for 2014 was £11.2bn.
This is clearly still a significant sum and transforms any calculation of Scotland’s balance of trade. Combining the onshore and offshore SNAP data, an estimate can be made of what this impact would be; again using 2014 figures as this is the last year for which full data is available.
Values in £m. Sources – see Note 2
The inclusion of oil and gas makes a significant difference to Scotland’s balance of trade, turning an overall balance of trade deficit of £11.6bn (-8.6%GDP) into a surplus of £4.1bn (+2.7%GDP). This is in contrast to the UK’s trade balance, a 2.0% deficit for the same year [LINK]. It is clear that, with £19.5bn of oil and gas exports, Scotland’s trade balance was in a better position than the UK’s for 2014, unfortunately that doesn’t tell the whole story.
According to An Independent Scotland’s Currency Options Redux: Assessing the Costs and Benefits of Currency Choice [LINK], a pre-indyref article from world-renowned economics professor, currency expert and IMF Monetary Advisor Ronald MacDonald, the relevant consideration is the current account balance – a calculation of the trade balance and “net factor payments”.
Net factor payments are essentially non-trade capital leaving the country – dividends to overseas investors, for example. Citing research from Armstrong and McCarthy (Scotland’s Lender of Last Resort Options) of the National Institute for Economic and Social Research [LINK] , Professor MacDonald estimates that, including the net factor payments, the “current account deficit, for 2014, of around 2% of GDP”. This matches the trade balance calculation I’ve made above minus the £7.4bn net factor payments identified by the Scottish Government in Table 1 here [LINK].
The question is… so what? And will this continue to be the case in future?
Of course, the elephant in the room is the oil price. The figures cited above are all from 2014 and based on oil over $100 a barrel, something of which those of us who rely on the industry to put food on our kids’ table can now only dream. For the past 18 months, prices have plummeted, dipping briefly below $30 before recovering slightly and bouncing around between $40 and $50 over the summer. Unlike tax revenues from the North Sea which are based on profit and therefore heavily influenced by the high cost of UKCS extraction, export values will be more or less directly proportionate to the sale price ($boe) and volume. Although production is up slightly it is clearly nowhere near enough to mitigate the enormous drop in price.
How much will the value of exports have fallen? Who knows? But given 2014 saw a £4.1bn trade surplus including £19.5bn oil and gas exports; it’s safe to say that Scotland’s trade balance and, consequentially, the current account deficit are, like so much else, heavily influenced by oil and gas.
Faced with similar statistics from GERS, supporters of independence will often respond “so what, this is only the position within the UK, it tells us nothing about an independent Scotland” and of course we should attempt to take into account what may change were we to leave the union.
Would cross-border trade with the rest of the UK, representing 64% of our exports, suffer? In the independence referendum campaign, the SNP’s White Paper argued that it wouldn’t because both rUK and Scotland would be part of the EU’s single market.
Post-Brexit this may no longer be the case, indeed the SNP’s current line of attack seems to be that Scotland will need independence precisely because the UK will not have access to the single market. In which case, their own defence of the trade potential with our biggest market simply no longer applies.
Of course this impact, for the purposes of the current account deficit at least, would be unclear. Would imports suffer more than exports? What about our financial sector? Currently Scotland exports £7.4bn worth of financial services to the rest of the UK (ScotGov Export Statistics 2014, Table 6 [LINK]) and just £1.1bn to the rest of the world (Table 2, same source). What effect would trading across an EU border with a country outside the single market, with no financial passporting and in different currencies have on this vital industry? Well maybe we could ask the Scottish Government…
It’s simply illogical to argue that being on one side of an EU-UK border would be bad for trade but being on the other side would be inconsequential. The proposed impact must surely apply equally, whatever the outcome of the UK’s Brexit negotiations.
Of course loss of trade has far wider implications than simply an academic calculation of current account balance – what about the thousands of Scottish jobs reliant on these exporting businesses? Again, as the Scottish Government have themselves pointed out, loss of trade affects growth… growth affects public finances… public finances affect public services…
In contrast to our position vis-à-vis the EU, Scotland is a net beneficiary from the UK – to the tune of £9bn a year. So we’d be losing that fiscal transfer on top of the negative impact ScotGov describe above.
Summing up, it is clear that the “unknown region” is a red herring. The conspiracy theories of missing revenue / GDP are so wide of the mark they’re laughable, whilst the numbers were never intended to be used as a measure of trade balance and hence are never used in that manner.
Using the Scottish Government’s own export and SNAP data we can estimate a current account deficit of around 2% for 2014 but heavily reliant on the value of oil and we all know what’s happened to that since.
How independence would impact upon the trade balance is clearly uncertain but applying the Scottish Government’s own logic to the border effect, particularly across an EU border, implies a significantly negative impact to what is, by some distance, our most important market – accounting for 64% of our onshore exports.
Disclaimer – I am not, nor would I ever claim to be, an “economist”. Therefore I do not attempt to make any original claims or conduct any original analysis. My aim here is simply to cite and summarise available data from reliable sources and trusted experts to debunk myths and bring some clarity to fantastical claims. If I have over-looked something that should be included, mis-used some jargon or otherwise made an error then I’d welcome any corrections or input in the comments below.
NOTE 1 – “Chemicals”
I’ve seen others include this line as North Sea output but I’ve excluded it for the following reason. “Chemicals” within the RTS methodology include the following categories:
These are definitions taken from the United Nations Statistics Division and can be found here [LINK], none of which lead me to believe they should be included in offshore processing. Anything which is processed onshore is assigned a regional code and is therefore, by definition, not included in “unknown region”. Further, the values given in the “Mineral Fuels” category and the Scottish Government SNAP statistics given above were very similar and so supported the exclusion of chemicals as UKCS output.
NOTE 2 – sources: export / import excluding oil and gas – Scottish Government Quarterly National Accounts Quarter 4 2015, Table G – http://www.gov.scot/topics/statistics/browse/economy/QNA2015Q4; export / import oil and gas – Scottish Government Commodity Balances, Export and Imports of Oil, Gas & Petroleum 27th January 2016, Table 5.1 – http://www.gov.scot/Topics/Statistics/Browse/Economy/SNAP/expstats/oilandgas