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.


Anonymous said...

Hmmm...good article but these figures only go back 5 years?

Kevin Hague said...

Re "only going back 5 years" - per otehr posts we net contributed to UK in 80's and roughly equal for last 25 years - either way it's irrelevant to the future outlook unless you're expecting a repeat of the 80's oil boom - we need to understand the pro-forma economics of an iScotland and how they are affected by oil price fluctuations and/or extent to which oil is a bonus. There is no need to go back further to answer that question.

Terry Summers said...

Once again, Logical, well evidenced and clearly argued case study which debunks a number of mis-directions and grievances commonly used by separatists to excuse their lack of economic credibility.

Kevin Hague said...

Thanks Terry

Anonymous said...

I have heard many Nationalists in recent weeks blame "Westminster" for creating the conditions where Scotland is so very dependent on the oil and banking sectors. But I've never heard any serious explanation of what policy tools are available to any government to restructure a modern economy. Putting bureaucrats or worse yet MPs on the commanding heights is pretty definitely out of fashion, is it not? So, when you allude for the same need - Scotland has to change the nature of its economy - I wonder what you have in mind?

Anonymous said...

One of the key arguments for the nationalists of the currency union was the balance of payments.

Anyone any idea what the plummeting oil prices would have meant to that argument bearing in mind such negotiations would have been going on now(assuming the UK guv had even the remotist inclination of going into them)?

Ron Sturrock said...

Initial comment, one of the way I broke these figures down was to separate into 3 parts, UK, GERS, RUK.
As we know there are those who dispute the GERS figures, and it is true there a caveat contained in GERS, but, as they are frequently referred to by the SG it is only right that these form the basis of any discussion.
I have also noted that later editions of GERS sometimes contain corrections to earlier GERS editions as more information becomes available.

Kevin Hague said...

Thanks Ron

That's right - you'll see elsewhere on this blog (e.g here that I break out rUK vs UK and I have always use most recent year's figures for historic years (I.e. Up to date restatements). I have discussed elsewhere on here the biggest difference between Treasury and SG estimates is on how corp tax would fall - nobody knows of course because none of us report Scot vs rUK profit and there is a degree of discretion in how we would

Anonymous said...

I see one big problem with analysing Scotland's finances

These are the figures while scotland is NOT independent.

Take all reserved powers. Give them to Holyrood.
Then what do the figures say.

Anonymous said...

You first

Kevin Hague said...
This comment has been removed by the author.
Kevin Hague said...

Here's the numbers we'd start with as an independent Scotland - find £6bn to be no worse off than being in the UK ... find another £10bn to eliminate the deficit. Good Luck > Scotland's Economy

Anonymous said...

Ah bless I see you have upset the 'Goebbels of Bath'...

However he does have previous form for making inaccurate statements and losing his temper when challenged about it, see;!/page23

He also managed to lose a court case where he was representing himself, so he is not the sharpest tool in the box...

Keep up the good work!