Sunday, 18 January 2015

Time for SOBR Reflection

In today's Scotland on Sunday Jackie Baillie has called for the establishment of a Scottish Office for Budget Responsibility (SOBR) (Jackie Baillie: Weed out parties’ financial fantasy)

Back in December I wrote a blog post highlighting the cavalier approach the Scottish Government had taken towards oil & gas forecasting (Oil & Gas: will we ever learn?) and at the time I suggested:

  • This [...] is surely a compelling illustration of the need for an OBR equivalent independent fiscal watchdog in Scotland. Maybe we could call it the Scottish Office for Budget and Economic responsibility and task it with providing SOBER assessments to inform policy makers and voters?

It will therefore come as no surprise to readers of this blog that I support the idea of a Scottish OBR - even if I think including the word "Economic" so we could call it "SOBER" would be slightly funnier.

There have been numerous examples during recent political debate in Scotland where politicians have appeared to purposely mislead voters:  use of outdated and dubiously interpreted GERS figures on the economy, White Paper promises that simply didn't add up and the use of forecasts on oil & gas revenues that chose to ignore the OBR figures that existed at the time are just three obvious examples.

Respected think tanks (the IFS and NIESR deserve special mention), enthusiastic bloggers like me and (all too infrequently) the Main Stream Media have attempted to highlight some of these issues - but are routinely dismissed with accusations of bias or drowned out by the noise of campaign rhetoric.

I whole-heartedly supporting this call for an impartial, respected and trusted body to hold our politicians to account - in fact I would suggest it's remit should include fact-checking of assertions made during political speeches and debates, thereby helping voters make informed choices confident in the knowledge that they haven’t been misled on points of fact.  It would also save me a lot of work.

Maybe then we wouldn't have had some people voting based on economic forecasts in the White Paper that were based on scenarios of oil & gas revenue that could be generously described at the time as "optimistic" and "hopelessly optimistic" (A point I hope I illustrate simply and clearly here).

Maybe then a large proportion of the electorate would not still believe Alex Salmond's oft repeated and frankly ridiculous assertion that "we'd have been £8bn better off" over the last 5 years if we'd have been independent (I explain why that's simply untrue here).

Maybe then we wouldn't have elected MSP's such as Stewart Stevenson Tweeting such nonsense as this as recently as last night:

As I patiently point out to him in that thread

  • The most recent GERS figures (published almost a year ago) cover 2012-13 and show Scotland running a worse per capita deficit than the rest of the UK - £512 per person worse to be precise (and yes that's assuming we get to keep "our oil").  
  • Given these published figures are for the period before the oil slump, the deficit gap between Scotland and the rest of the UK is likely to have widened in 2013-14
  • It's hard to imagine 2014-15 showing anything other than further deterioration.

If we had a SOBER (oh alright then SOBR) in place, hopefully elected representatives would be a little less fast and loose with simple facts.

Surely - whatever political party you favour - that can only be seen as a good thing?

Apparently not.  According to STV News John Swinney has responded by claiming the Scottish Fiscal Commission (SFC) will fulfill this role.  The SFC was established in July 2014 and their first report was published in October - just too late to cover any indyref promises. Their website states they are meant to provide "impartial and expert public scrutiny of the Scottish Government’s tax forecasts" - but limited to cover only existing devolved taxes.  As demonstrated during the indyref, that leaves politicians free to make incredible claims about the value to our economy of further tax devolution without scrutiny.  That's not good enough.

He also defends the oil & gas forecasts used by the Scottish Government in their White Paper by saying their predictions "were indeed lower than those predicted by UK Department of Energy and Climate Change (DECC)"

  • As I never tire of pointing out: the lowest scenario they used assumed oil tax receipts 60% higher than the OBR forecast that existed at the time. If you show two scenarios they should surely show a realistic range of possible outcomes - ignoring the OBR forecasts that existed at the time is simply indefensible.
  • When he says their predictions were lower than DECC I presume he is referring to the price projections.  As I covered in detail here it's true that the Scottish Government's price projections were consistent with the DECC price forecast range (and indeed the futures market) at the time of publication - but you need to predict volumes and taxation levels to get to actual tax take and DECC don't (as far as I've seen) do that.  The OBR do of course, but the Scottish Government ignored them.  Its disingenuous to suggest that the only assumption required to forecast North Sea oil tax revenues is the future oil price.
  • By the end of the indyref debate - in the months before votes were cast - it was clear that the White Paper forecasts were hopelessly optimistic.  Independent scrutiny of campaign rhetoric used during that period would have surely highlighted this fact.
With the SNP apparently hell-bent on pushing for full fiscal autonomy, the need for a wide ranging SOBR body is clear. It would make a refreshing change if we could eliminate the political game-playing around known numbers and actually have a well-informed debate about the issues.

Sunday, 11 January 2015

Let it go

Q: What do you get if you cross a Will Smith sci-fi blockbuster with a whimsical Bill Murray comedy?

A: Independence Groundhog Day.

And we appear to be living it.

I can't be alone in being wearied by Scottish political discussions that rapidly segue into reruns of well-worn independence referendum arguments.  I'm as guilty as anyone of this. I started out keen to get a handle on the true numbers behind the debate but quickly became so irritated by the misrepresentation of economic facts that I turned into someone who leaps on any statements that demonstrate a failure to understand the actual data.  I'm not proud of that; I doubt it achieves anything much.

The frustrating thing is that there is an interesting debate to be had about the pros and cons of further devolution, of fiscal autonomy and even - whisper it - of independence. But any attempt at sensible debate quickly flounders on widely held misconceptions about the realities of Scotland's economy. This is arguably the independence referendum's most cancerous legacy - too many passionately held opinions have been built on the dodgy foundations of political campaign rhetoric.

So if we're to have a sensible debate about further devolution and possible fiscal autonomy, let's see if we can start with some agreed figures.

I'm continually staggered by the ignorance exhibited on social media about the nature of GERS figures so let me quote the Scottish Government's own summary of the GERS methodology

  • The headline estimates of Scottish public sector expenditure and revenue in GERS embrace two key principles:
    1. Public sector revenue is estimated for taxes where a financial burden is imposed on residents and enterprises in Scotland
    2. Public sector expenditure is estimated on the basis of spending incurred for the benefit of residents and enterprises in Scotland
What this means in practice is we get to keep all "oor oil" - these figures are those of an hypothecated fiscally autonomous Scotland (before - of course - any changes to taxation or expenditure policy).

[It's worth mentioning that Treasury estimates show figures that look slightly worse for Scotland - mainly due to a £0.5bn lower assumption about how much corporation tax would fall to an independent Scotland.- but for simplicity we'll stick with widely accepted GERS figures]

Now let's look at two simple graphs showing the per capita deficit figures (the amount by whcih public expenditure exceeds tax revenues generated) taken directly from the GERS figures for that last 5 years.

This first graph includes oil revenues and assumes we Scotland get to keep "our" oil revenues. Scotland's deficit is shown in blue, the UK's in grey (the last columns show the 5 year average).

As I never tire of pointing, out this shows that the current Union arrangement has been remarkably balanced - over the last five years an hypothecated independent Scotland would have been running a per capita deficit of only £49 per person per annum lower than the whole UK.  To put that another way: we receive almost exactly as much back in additional public spending as we contribute in additional tax if you attribute Scotland its geographic share of oil.

I've discussed in some detail the Scottish Government's dodgy approach to choosing oil and gas revenue forecasts to include the White Paper (> When will we ever learn) but we don't need to linger on that - what's clear is that the volatility of oil & gas revenues is being starkly illustrated by current market conditions.  It seems that some are comforted by the campaign rhetoric which assured us that "oil is just a bonus".  OK, let's check that.

The following graph simply removes oil & gas revenues from the tax revenues and recalculates the per capita deficits.  Scotland is now shown in green, UK in light green.

So this graph shows that without this "bonus" Scotland would be running a deficit about £1,300 worse than the UK as a whole.  Some bonus.

[This figure shouldn't come as a surprise: that Scotland receives about £1,200 more public spending per capita than the UK as a whole is a well known number; without oil and gas our tax revenue generation is similar to the rest of the UK.]

So when Alex Salmond (who Nicola Sturgeon must be delighted to see still defining SNP party policy) calls for full fiscal autonomy we have to question what that would mean for the people of Scotland.

Let's be clear: there are good arguments for fiscal autonomy.

  • If you're directly responsible for raising your own tax revenues you can't blame others for difficult decisions - you have to take responsibility
  • If you've had to make those difficult (and unpopular) decisions you're likely to take a more responsible attitude to spending
  • If you believe in social justice - in shifting the balance of who bears the bigger burden for tax raising and who benefits most from public spending - fiscal autonomy facilitates that

Those benefits have to be balanced against what is lost - to gain fiscal autonomy you have to lose (at least some of) the benefits of pooling and sharing (the Barnett formula, the block grant, all that jazz). If we're sharing a currency we would have to work within certain financial constraints - running a consistently higher deficit than the rest of the UK would surely not be a sustainable position.  So without the "bonus" of oil & gas, the first thing we'd have to achieve with that fiscal autonomy would be to raise an additional £1,300 tax every year for every man woman and child in Scotland and/or to reduce public spending by a similar amount.  I'm not convinced that the majority of Scots would have the appetite for that if it's honestly presented to them.

So in the spirit of moving on, here''s something on which we can maybe all agree: Scotland needs to develop its economy to the point where we are less dependent on the benefits of pooling & sharing.  We need our stand-alone economics to consistently match or better those of the rest of the UK - and that means we either need to get lucky again with oil & gas (it could happen) or we need to strengthen and broaden the Scottish economy.

Some will argue we need fiscal autonomy to get there, some will argue it's impossible without full independence.  I'm yet to be convinced.

With the powers we have (and those that are coming) there are plenty of steps we can and should be taking now to encourage and develop more good businesses in Scotland.  It strikes me that asking how the Scottish Government could support businesses (and therefore generate higher, better rewarded employment as well as improved economic growth) would be a somewhat more fruitful use of energy than rerunning the tired independence referendum arguments.

Let's wave goodbye to Punxsutawney Phil.