Disposable Income in Scotland: How does it compare?

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Disposable Income in Scotland: How does it compare?
David Bell
Introduction
The OECD has recently been putting its considerable statistical muscle behind collecting consistent
measures not only for its member states, but also for the sub-central governments (provinces,
regions, territories etc) that make up its members. It has produced a dataset which provides
information on household disposable income per capita (HDIPC) for 362 sub-central governments
within the OECD, covering 1.2billion inhabitants. This is an important indicator of the ability of
households to meet their consumption needs.
Household Disposable Income Per Capita (HDIPC)
Household disposable income is the amount of money left with a household to spend on goods and
services after taxes on income have been deducted and state benefits (e.g. housing benefit, the
state pension) added. HDIPC is this measure expressed on a per capita basis. Dividing household
disposable income by the average household size to give a per capita measure ensures comparability
at the individual level because it corrects for country differences in the average size of a household.
The OECD’s estimates of HDIPC therefore provide a useful comparator for the spending power of the
average Scot relative to residents in other parts of the OECD.
Other comparisons are available. Scottish Government estimates place Scotland 14th in the ranking
of GDP per capita among OECD countries. This is based on Scotland being an independent state and
therefore receiving a geographically based share of North Sea oil revenues. Disposable income is
strongly correlated with GDP and with Gross National Income (GNI)12. But the correlation is by no
means perfect. GDP includes elements, such as profits, which have no direct effect on the spending
power of households.
The linkage to Gross National Income is even more indirect, because, for example, profits generated
in Scotland are repatriated to the owners of capital – the ultimate beneficiaries – wherever they are
based. Thus, for example, profits generated in the North Sea or in the whisky industry benefit mainly
foreign companies who return these profits to their largely foreign shareholders. The direct benefits
to Scottish households come from the incomes earned by employees working in these industries and
from the taxes levied on their profits or turnover. Both influence HDIPC. Wages increase household
income directly, while taxes on oil and whisky may reduce taxes on income and so indirectly boost
disposable income. Arguably HDIPC is more relevant to the understanding of the circumstances
facing the average Scottish household than is either GDP per capita or GNI per capita.
The great advantage of the OECD data on disposable income is that they are collected on the same
basis in all of OECD members, allowing comparisons to be made across 300 separate territories. No
1
The Centre for Public Policy for Regions (CPPR) has done useful work on Scotland’s Gross National Income
See, for example, Boarini, R., Å. Johansson and M. Mira d'Ercole (2006),“Alternative Measures of Well-Being”,
OECD Economics Department Working Papers, No. 476, http://dx.doi.org/10.1787/832614168015
2
such breakdown exists for either GDP or GNI. Not only is the HDIPC data adjusted to US dollars by
applying the appropriate exchange rate, they are further adjusted to take account of differences in
purchasing power across countries. Variations in purchasing power are often illustrated by the Big
Mac index, which is calculated by the Economist magazine, and which shows how the cost of a Big
Mac varies across countries, even after its price has been converted to dollars at the correct
exchange rate. Some countries are systematically more expensive than others.
Turning now to the estimates of HDIPC, the estimate for Scotland from the most recently available
data is $19,365 after adjustment for purchasing power and after adjustment to constant 2005
dollars. However, the absolute amount of disposable income is of less interest than the comparisons
that can be drawn between Scotland and other parts of the OECD. So how does Scotland compare?
We group the data in four ways for comparison purposes. Specifically, our comparisons are between
Scotland and:
(1)
(2)
(3)
(4)
OECD sub-central governments
Sub-central governments in Scandinavia and Ireland
OECD member states
Other parts of the UK
We deal with these in turn.
(1) Other OECD Sub-Central Governments
Scotland comes 114th out of the 367 sub-central governments for which the OECD has compiled
data. This places it at the 69th percentile of the distribution – 69 per cent of the states and territories
in OECD countries have lower HDIPC than Scotland on average. Figure 1 shows the household
disposable income per capita for all states/regions ordered by size of HDIPC. It shows where
Scotland is positioned within this list and also shows its position relative to the overall average for
OECD sub-central governments, which is $16,493 per annum. Scottish households have more
purchasing power than most other parts of the OECD, but average HDIPC in Scotland is well below
that of the most affluent parts of the OECD.
Figure 1: Household disposable income per capita for states/territories/regions within the OECD
(2) Sub-central governments in Scandinavia and Ireland
The OECD includes countries such as Turkey, Mexico and Chile, which are much less developed than
Scotland. They do not form part of the set of the usual comparators for Scotland. Given the
prominence of other small northern European states in the referendum campaign, a more
appropriate comparator group currently may be the Scandinavian states and Ireland. Figure 2 shows
HDIPC values for Denmark, Finland, Ireland, Norway and Sweden. Scotland ranks 8th of the 28th areas
on this list, being surpassed by several Norwegian regions but only by Stockholm among the other
countries: None of the regions of Denmark, Finland or Ireland have as high HDIPC as Scotland.
High productivity economies, such as those in Scandinavia may be characterised by relatively high
prices3. One way to check this out is to look at the Big Mac index. According to the Economist4,
compared with the UK, Big Macs are overvalued by 69 per cent in Norway, 36 per cent in Sweden
and 12 per cent in Denmark. Although disposable income in Scotland (and the UK as a whole) may
appear relatively low when measured at market exchange rates, the gap narrows (or disappears)
when purchasing power is taken into account. For the same reason, almost all US states have higher
HDIPC than Scotland: this is one reason why Scotland comes relatively far down the overall ranking
of HDIPC within OECD territories – almost all of the 50 US states have higher HDIPC than Scotland.
This reflects the USA’s relatively low price level compared with other parts of the OECD.
3
This is known as the Balassa-Samuelson effect. See:
http://en.wikipedia.org/wiki/Balassa%E2%80%93Samuelson_effect
4
The Economist Big Mac Index (July 9th 2014) : http://www.economist.com/content/big-mac-index
An analogous argument can be used to explain why prices are relatively low in Scotland compared
with, say, Scandinavia. Melitz and Ottaviano (2008) 5 suggest that “competition is tougher in larger
markets as more firms compete and average prices are lower” (p 7). They also suggest that trade
liberalisation increases competition and drives down prices. Scotland is part of a more
comprehensive free trade zone than are the Scandinavian countries or Ireland. The EU single market
is not yet complete, and its currency arrangements are complex. On the other hand, Scotland’s trade
with rUK is facilitated by the absence of any trade barriers and a shared currency. Competition with
producers in rUK may keep prices relatively low in Scotland. Norway is outside the EU and therefore
its domestic producers are less open to external competition than is the case with EU member
states, which may explain its high prices, even within Scandinavia.
Figure 2: Household Disposable Income Per Capita for Scandinavia and Ireland
Oslo and Akershus
Agder and Rogaland
Western Norway
Stockholm
South-Eastern Norway
Trøndelag
Northern Norway
Scotland
Hedmark and Oppland
Åland
Southern and Eastern
Helsinki-Uusimaa
West Sweden
East Middle Sweden
Border, Midland and Western
South Sweden
Småland with Islands
Upper Norrland
Central Norrland
North Middle Sweden
Southern Finland
Capital (DK)
Western Finland
Eastern and Northern Finland
Zealand
Central Jutland
Southern Denmark
Northern Jutland
$0
$5,000
$10,000
$15,000
$20,000
$25,000
Household Disposable Income Per Capita (US$, PPP, 2005 Prices)
Next consider how Scottish disposable income per head compares with other countries within the
OECD rather than with the OECD regions. Figure 3 shows Scotland would come 10th in this list. This
compares favourably with the 14th place which Scotland reaches in terms of GDP per head (adjusted
for purchasing power) according to the Scottish Government. Why the discrepancy? Again, it must
reflect differences in the share of GDP that finds its way into household spending in different
countries. This depends on taxes on income, on benefits and on the size of those parts of GDP that
do not help boost household’s spending power.
Interestingly, while Sweden, Ireland and Denmark rank higher than Scotland on the GDP per capita
measure, while the UK is lower, these rankings are reversed for HDIPC. The UK as a whole has
marginally higher HDIPC than Scotland, but lower GDP per head if Scottish GDP includes a
5
Melitz, Marc J., and Gianmarco IP Ottaviano. "Market size, trade, and productivity." The review of
economic studies 75.1 (2008): 295-316.
geographic share of North Sea oil. This may seem paradoxical, but there is a straightforward
explanation. The main way in which North Sea oil affects average spending by Scottish households is
through the incomes received by oil workers. This would not necessarily change substantially if
Scotland were to become independent, since with an unchanged taxation regime, the flow of
income to government, to the owners of capital and to workers would remain largely unchanged.
(3) OECD Countries
Figure 3: Household Disposable Income Per Capita by Country
United States
Luxembourg
Switzerland
Australia
Canada
Austria
Norway
Germany
United Kingdom
Scotland
France
Belgium
Ireland
Japan
Sweden
Italy
Netherlands
Spain
Finland
Greece
Iceland
New Zealand
Denmark
Slovenia
Korea
Portugal
Turkey
Czech Republic
Slovak Republic
Poland
Israel
Hungary
Estonia
Mexico
Chile
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
Household Disposable Income Per Capita (US$, PPP, 2005 Prices)
(4) Other Parts of the UK
Comparison of HDIPC levels with other parts of the UK is shown in Table 1. Scotland is in the middle
of the pack: four areas having higher HDIPC, while the remaining five have less. This is largely in line
with the ranking of average weekly or annual incomes across the UK, which typically find that
average incomes in Scotland are greater those in most of the rest of the UK other than the South of
England, including London.
Table 1: Household Disposable Income Per Capita in the UK
Area
Greater London
South East England
East of England
South West England
Scotland
East Midlands
North West England
West Midlands
Wales
Northern Ireland (UK)
Disposable
Income
$25,576
$22,339
$20,699
$19,790
$19,365
$18,026
$17,908
$17,726
$17,400
$17,291
Conclusion
HDIPC is an important measure of the ability of households to purchase goods and services to meet
their needs. The data for Scotland suggest that it has a relatively high HDIPC, but so too is the UK as
a whole. Differences in purchasing power, in the tax and benefit system, and in the share of GDP
that is allocated to household incomes mean that the ranking of HDIPC is somewhat different from
those of GDP per head. It is not clear whether independence would influence Scottish HDIPC in the
short run, since the inclusion of North Sea oil in Scottish GDP would have little effect on incomes
available to households.
Does this data have relevance for the constitutional change debate? It clearly adds some useful new
information which suggests that the arguments about Scotland’s prosperity have to be more
nuanced. But it is impossible to construct the counterfactual – where would Scotland’s income be
had it opted for independence at some time in the past? One issue that this discussion does throw
up, however, is the extent to which a smaller, less integrated, market will generate sufficient
competition to keep prices in Scotland comparable to those in the rest of the UK.
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