Monday, 4 May 2015

Guest Blog: Neil Lovatt on N56


Guest blog written by Neil Lovatt who can be found on Twitter @neiledwardlovatt


N56 Analysis of Fiscal Autonomy: Spun for Social Media

Today we received two publications from the SNP leaning “think tank” N56, one on growth the other on Fiscal Autonomy. [KH: N56 was founded by Dan MacDonald, a board member of the pro-independence Yes Scotland organisation]

This post concerns itself with the second of these publications rather then the former. However I would say that growth strategy publication is a generic collection of good wishes such as investing in infrastructure where it has a positive value, encouraging exports and innovation as well as paying more in welfare. That’s what anyone in industry would call a “fairy dust solution” as it simply states policies that sound wonderful but actually have as much chance of failure as success.

However let me be clear: if there are obvious self funding policies that could be pursued that will help the UK or Scotland then I’m all for them, but who wouldn't be? Unfortunately the N56 growth report doesn't contain any such free and obvious policies.

But let’s turn to the Fiscal Autonomy paper.

Where’s Full?
The sharp eyed among you will have noticed that the title doesn't include the word “Full” - we might ask ourselves why. I suspect it’s because as the author worked their way through the proposal they realised that what they were proposing wasn't “Full”.  In fact it isn't “Autonomous” either as I’ll demonstrate. It appears that may have led to a rewriting of the title without editing the copy correctly. See here for instance:


Full Financial (not Fiscal) Responsibility is (or at least used to be) the Scottish Government’s position as set out here. The Scottish Government don’t like to be reminded of this as it was produced by them in 2011 when they had a very different view of the Scottish public finances.

However the N56 "Fiscal Autonomy" is not "full" - it differs from DevoMax or the Scottish Government’s proposals in two very important ways.

Firstly the report assumes that fiscal transfers (pooling and sharing) will continue under the arrangement.


This doesn't explicitly mean Barnett but it’s as close to a dog whistle as you are going to get. The idea that Scotland becomes fiscally independent from the UK but they receive fiscal transfers from the UK when it ends up below some needs based formula is de facto a continuation of our current pooling and sharing  arrangements with different accountancy treatment.

Also note the second paragraph about the principles to be agreed on how the proposal would work. This effectively says that the UK as a whole would need to agree on levels of spending, tax levels, benefits etc. In other words the Scottish Government would not be free to do whatever it wants, so neither “Full” nor “Autonomous” in any meaningful sense of either term.

This proposal is actually a good idea in my view, indeed I’ve been in favour of such an accountancy change whilst keeping something akin to Barnett as proposed by the Welsh Assembly (although that will still leave Scotland worse off than Barnett). However let’s be clear this is not Full Fiscal Autonomy or DevoMax - it’s Smith with the transparency of GERS put on a statutory basis.

Secondly, and quite outrageously, the N56 proposal flies in the face of the Scottish Government’s proposal for borrowing powers by arguing that borrowing should be granted to the Scottish Government but the UK should be the guarantor.



This proposal means that the Scottish Government would have the right to borrow at UK government interest rates despite having a higher credit risk (see Moodys analysis below) and have their borrowing guaranteed by the UK taxpayer.




You have to question what sane British Chancellor would accede to such a request. Allow the Scottish Government to borrow as it requires putting potential strain on the UK currency and UK interest rates on the understanding that the UK government would bail out the Scottish Government if they got into hot water?

That means that the Scottish Government will expect an explicit credit guarantee from the UK, effectively having its borrowing subsidised. Again that is neither “Full” or “Autonomous”.

If the Scottish Government wants borrowing powers it would need to either match the UK deficit (something that would cost us dearly as Kevin Hague demonstrates e.g here > The Great Escape) or it would have to borrow on the open market in its own name without a UK credit guarantee (as the Scottish Government proposed in the Full Financial Responsibility model). The consequences of this would be a sharp increase in Scottish borrowing costs as this would have to include servicing of its historic population share of UK debt at the higher Scottish interest rates.


The Debt Dodge
This brings me to probably the most intellectually insulting part of the N56 paper, on historic debt.

N56 shamelessly attempt to argue that Scotland should not take a population share of UK debt liabilities. This is based on a strange assumption that debt seems to start in 1980.

As GERS data goes back to this date it provides an interesting starting point. It also coincides with the North Sea oil boom when for a relatively brief but important period Scotland contributed substantially more to the UK Exchequer than it received in spending. Again this has been comprehensively discussed by Kevin eg here > Explaining the £7.6bn FFA Black-hole



KH: note that this graph uses 12-13 data instead of more current 13-14 data ... and of course this is a misleading way to present the data.  To illustrate: if we are responsible for 10% of tax revenue and 10% of spending we are responsible for 10% of the deficit ... but we are 8.3% of the population so our deficit per capita is higher.  This is why I favour per capita analysis (consistent with the default assumption of Scotland assuming per capita share of debt). See for example Full Fiscal Autonomy for Dummies]


But let’s accept the "the world started in 1980" claim for the purposes of this argument. The authors then attempt to propose that had Scotland held on to their surplus from the 1980s it would not have any debt. However I’ve calculated the effect of reinvesting the GERS surplus at 4% (a Business for Scotland assumption) to project the size of an oil fund. This shows that the effect of higher public spending in Scotland negate any effect of a "start the clock in 1980" surplus.


But let’s deal with the start in 1980 debt dodge. You have to ask the question why start there? Why not 15 years ago for example where GERS shows that on a per head basis Scotland has only had three years where it had a lower deficit or better surplus than the UK.

My own view is that you should start in 1888.

That was the year that the Goschen formula started, which was the forerunner to Barnett. It guaranteed a level of public spending for Scotland which turned out to be far greater than its population share. Something that the the Taxpayers Alliance have been at pains to point out.



Of course whilst we know that Scottish spending was higher than the UK on a population basis (and rightly so due to our relatively sparse population which makes providing services more expensive) we don't have equivalent data on income. However it is reasonable to assume that the Scottish contribution to taxation would be broadly in line with its population share largely because that’s what the GERS data shows if you exclude oil. [KH: if we're being fussy I'd note that in fact the figure is consistently about 6% lower over the last 15 years]

On that basis from 1888 up to the advent of North Sea oil Scotland contributed a population share on taxation but received a higher than population share of public spending. It therefore received a subsidy from the UK, again which was reasonable due to the wider dispersal of the Scottish population.

On this basis a population share of the current debt is an entirely realistic arrangement and if offered on independence or real Full Fiscal Autonomy Scotland should grab it with both hands.


Not so hidden Spending
N56 then follow the debt doge with another social media dog whistle: apparently the UK is actually hiding spending and GERS does not accurately reflect the position Scotland under Full Fiscal Autonomy or independence.

Again let’s start with the bleeding obvious: GERS is produced by the Scottish Government. To argue that GERS is disguising the real position of the Scottish public finances would be to imply that the Scottish Government are involved in a conspiracy against themselves!

Taking the actual N56 claims:

The first implication is that Scotland “only” receives £40.8bn in public spending and not the £66.4bn as allocated by GERS. Social media is full of graphics showing this without the remaining paragraphs and it’s quite clear that N56 has written this to allow this to be pulled out of context.

Unfortunately what follows is rather important! The other £25bn is almost entirely made up of £22.3bn welfare (which I expect no one is proposing that the Scottish Government cuts) and £3bn debt servicing (which I’ve argued is entirely reasonable).

This then leaves the hidden spending as little more than a rounding error - and yet N56 seem to imply that there are elements of saving which could be made here on culture (BBC?) and the old chestnut of public administration.

Given the numbers no consultant worth their salt would put this section into a serious report. I can only conclude that it has deliberately been designed to be taken out of context and plastered all over social media.

Spun for social media
That leads to my rather depressing conclusion about this report. It potentially contained some interesting ideas such as the kernel of a new approach to devolution where Scotland accounts for all of its taxation, and annual flows of transfers between Scotland and the UK are openly recognised within a new needs based formula.

However the authors have clearly sought to produce a report for quick headlines and social media. The attacks on the IFS are there to provide comfort to anyone who is unsettled by the conclusions of their analysis on DevoMax. However the N56 criticism does stand up under any reasonable analysis.

The debt dodge is designed to try to underline a myth put out by the SNP that Scotland doesn't need to take on a population share of debt - it does.

Finally the entire paper is designed to be digitally waved about by anyone posting "Full Fiscal Autonomy can work for Scotland".

Unfortunately the proposals outlined are neither “Full” or “Autonomous” - they are a continuation of the best parts of the UK. In other words the dirty little secret behind this report is another pro-SNP organisation has quietly concluded that DevoMax or independence is not something that Scotland should contemplate. I wonder how many SNP supporters will tweet or post that?


Guest blog written by Neil Lovatt who can be found on Twitter @neiledwardlovatt

12 comments:

Ron Sturrock said...

Congrats Kevin for this.
Neil was quick off the blocks on this one.
I see BfS have jumped on this wagon.
www.businessforscotland.co.uk/scottish-economy-could-double-with-fiscal-autonomy/
Ron

Graeme Blackett said...

Most of the points made in the post are about how others may chose to interpret the analysis. It also seems to say that N-56 is both close to the SNP and diverging from SNP-led Scottish Government policy. I don't think there is any point in responding to such claims - the reader can reach their own conclusions.

However, it does say that the report is "intellectually insulting" in terms of the discussion of historic debt and the extent to which Scotland has contributed to UK debt. This sort of language is unhelpful if we are to have an intelligent debate on these matters, and we would have been happy to respond to the points made had the author contacted us in advance of publishing the blog.

The reason that the analysis covers the period from 1980-81 to 2012-13 is quite simple - this is the period for which data is available. However, this does not undermine the analysis, since the vast majority of current UK debt, some 93% of it, has been since 1980.

The purpose of publishing the report was to contribute to the debate on the future of the Scottish economy and how fiscal autonomy could facilitate a different approach to economic strategy. We would welcome such a debate - and if anyone disagrees with our proposals it would be interesting to hear alternative ideas.

The IFS analysis has highlighted what the additional Scottish deficit could be over the next five years, not under fiscal autonomy, but under the current system. Surely this indicates the need for change?

One approach is fiscal autonomy, with a new comprehensive economic strategy to generate additional growth, which would address that deficit.

The alternatives would be big cuts in the Scottish Budget and/or expecting the rest of the UK to make a net contribution to Scottish public finances. Does the author favour one of these alternatives? Or are there other ideas out there?

Regards, Graeme Blackett, Author of the N-56 Fiscal Autonomy: An Opportunity Not A Threat (available for download here: http://n-56.org/sites/default/files/N-56%20Report%20on%20Fiscal%20Autonomy.pdf)

Graeme Blackett said...
This comment has been removed by a blog administrator.
Neil Lovatt said...
This comment has been removed by the author.
Neil Lovatt said...

Thanks Graeme.

Let me explain my “intellectually insulting” label. You may think it is not helpful but it is, in my view, entirely justified

Firstly whilst it is true to say that the data is only available from 1980-81 for GERS that does not give any grounds for using that as a starting point.

You could clearly start later, or in my case you could recognise the position before 1980.

Starting at 1980 is in my view either lazy or simply selecting the optimal point to start your analysis.

My argument remains that a suitable point to start would be 1888 with the Goschen formula and to at least not recognise the pre oil tax and deficit position of Scotland is to treat your readers with contempt.

Alternatively why not start in an earlier year, as I’ve noted why not 15 years where the position of Scotland in comparison to the UK is extremely unflattering to your point of view.

Secondly I’ve heard the 93% figure banded around, again here I think you are being at best disingenuous with its application. On a nominal basis that is the case but on real basis (discounting at the 4% Business for Scotland assumption I use in the article) that figure changes to 73%. More to the point when one considers the shape of the development of debt on a real basis the actual substantive rise in real debt started in 2002. In which case then 2002 would be a suitable starting point.

I fully understand why you would not want to present those figures as it would underline my conclusion that a population basis allocation of debt is favourable to Scotland.

On that basis given your use of a single data set which just happens to be one of a narrow subset that backs your case I stand by my comment that it is intellectually insulting.

Had this been presented to me by a paid consultant I would be asking for my money back unless I specifically told you to search for the facts that would back up a weak proposition.

I agree that the IFS analysis presents a difficult financial picture for Scotland, however again I would note that the main issue which you have singularly failed to recognise in either of your papers is our relatively sparse population.

My first part of addressing the issue would be to remain in the UK with an at need formula which can be an evolution of Barnet. As you may have noticed from the blog I actually support your comment about the continuation of pooling and sharing. It seems that your solution then would be to continue with the UK making a net contribution to Scottish public finances, that is something I agree with.

It brings me back to my point that the report reads as if it is the presentation of Full Fiscal Autonomy, and your own comments here appear to betray that, but has been edited at the last minute to drop “Full” and add back in a form of Barnett.

As I say your effective proposal is Smith plus GERS on a statutory basis, you asked me for my solution that would be it. I think it’s your solution as well but for some reason you to want to present it as closer to Full Fiscal Autonomy, the trouble is I have no doubt you have analysed Full Fiscal Autonomy and backed well away. What I’m struggling with is why you couldn't say that.

ndcalvert27 said...

Hi Neil, and Kevin

As someone who is not the most economic literate person in the world, I've found your blogs and tweets helpful. HOWEVER, have just been sent a link to this vid from Steve Keen, Prof at Kingston Uni, which "explains" that by focussing on public debt, UK Govt is wrong and endangering economic recovery...

http://everyinvestor.co.uk/2015/05/05/video-steve-keen-criticises-naive-austerity-politics/

this has me more confused than ever.

I can see that levels of private debt would potentially endanger the economy/recovery, but the unspoken message from the good prof seems to be that we actually don't have to worry about public debt. This seems counter-intuitive, given how Greece et al have fared by ignoring levels of public debt. Can you please help a poor lost soul (that's me, not Prof Keen)?

Neil Lovatt said...

ndcalvert27 Thanks for your comment. It's clearly the case that private debt is a concern as much as public debt. Indeed some of the major issues in some Eurozone economies is that they effectively took private debt onto the public debt balance sheet.

Debt in any form when it is out of control is a problem however the difference between private and public debt is the consequences of default. Public debt is broadly not expected to default and and priced accordingly. Private debt on the other hand is priced to be expected to have some level of default.

Therefore the effects of private debt defaults are as nothing compared public sector defaults which can have systematic effects on the whole financial system.


So we turn to our friend Steve Keen. His prescription for the private debt issue is a debt Jubilee (look it up in the bible) that effectively means the wiping out of many forms of existing private debt at a stroke! You can see the immediate benefit of such a move but hopefully you can see the effect it would have on the economy, not withstanding the inflationary effects.

A debt jubilee would have similar effects to a public debt default it would send systematic shocks throughout the financial system and it would effectively cease up if not collapse. In many ways that is what Steve Keen would want (but in a managed fashion). However I don't think it's a realistic solution for what it a very difficult long term issue for all advanced Western economies.

ndcalvert27 said...

thanks Neil.

In that vid, he also talks about the paternalistic view of public debt, and how a Govt that wants to run a surplus is effectively taking money out of people's bank accounts. Leaving aside the rather hyperbolic nature of his language, is that a realistic view of a Govt that wants to pay down public debt? It seems to me that it is a view that only holds water if the number of jobs and the amount being earned in those jobs remains static. Surely if the number of jobs increases, then the tax take increases without the Govt dipping its hand into anyone's pockets to a greater degree? Isn't that the basis for a country growing it's way out of debt/deficit, and is this what has been happening with the jobs boom the UK is currently seeing?

Apologies for all the questions, when I debate these things with friends it's like the blind leading the blind...

Nigel

Terry Summers said...

Kevin,
This has been a display of prestidigitation that David Copperfield would be proud of, a false prospectus knowing sold to the gullible minority (1.45m voters our of possible 4.0m).
Now the hammer will fall as Cameron offers FFA in return for EVEL

How do 56 SNP opposition backbenchers influence a Parliament of 650 with a conservative government of 331?
The Lib/Dems were in a coalition with the Tories with 50+ MP's, Deputy PM, Chief Secretary to the Treasury, etc. and barely had any influence on Government policy. All they will be able to do is foment division between Scotland and rUK.
The real winner here is Rupert Murdoch who backed Conservatives in England and SNP in Scotland.
Will the SBC stand for Sky Broadcasting Corportion?
Indyref 2 = Darien 2
Cheers
Terry

RFE said...

However the authors have clearly sought to produce a report for quick headlines and social media. The attacks on the IFS are there to provide comfort to anyone who is unsettled by the conclusions of their analysis on DevoMax. However the N56 criticism does stand up under any reasonable analysis.

Should that be 'does not stand up'?

Anonymous said...
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Anonymous said...

Kevin

I have found your blog relatively recently. Thank you for your careful and precise analysis of Scotland's public finances. I also\o admire your patience in answering politely those who either misunderstand fairly simple national accounts concepts or don't want to accept the answers as they don't fit the narrative (myth) they want to believe. Especially those spread by a few pro-independence sites.

As a retired professional economist (country risk analyst for a global bank) I've been unable to find any serious flaws in your analysis. There are things I could perhaps add from an economists' perspective and I'd be happy to do so. Especially on prospects for future growth, how sovereign ratings are assigned by agencies (and banks!) and, an area where you've been asked, the state of the UK/rUK economy. Possible the last in comparison to EU peers. It might actually be worth my while doing some analysis of an "iScotland' (FFA or independent) versus its claimed peer group of Scandinavian and other smallish (population wise) EU economies.

Anyway, Keep up the good work

CanaryattheWharf

(This is my Id on the Guardian and Disqus. I'd be happy to give you my real name, career history and e-mail privately but as my daughter is likely to attend a Scottish University from September I'd rather not risk any of the (rare I'm sure) extreme Nats identifying her and hassling her for her father's views. Or indeed misidentifying someone else with the same surname)