Sunday, 31 July 2016

GERS Deniers

Anybody who ventures onto social media and attempts to engage in rational economic debate about the case for Scottish Independence will quickly encounter "GERS deniers".

The primary source of data for Scottish finances is the Government Expenditure & Revenue Scotland (GERS) report. GERS deniers are people who, when faced with the uncomfortable economic reality of Scotland's finances, choose to try and rubbish the data rather than address the issues highlighted by the figures.

GERS deniers typically employ one of two generic arguments which are sometimes "supported" by a variety of specific misunderstandings, misdirections or myths.

This blog post is an attempt to provide answers to the more common confusions - I'll try to keep it up-to-date and as always will correct if any factual errors are pointed out to me.

For ease of navigation, the following is a list of the specific points addressed in this post: if you're interested in that specific question simply click on "answer" to be taken there

The Two Generic Arguments
  • The GERS numbers only show how our economy performs under Westminster rule, they tell us nothing about how an independent Scotland's finances would look: Answer
  • The GERS numbers can't be trusted because they were established by the Tories as a "political tool" to make Scotland look bad: Answer

Specific Misunderstandings, Misdirections and Myths
  1. Taxes are not attributed correctly because they're based on companies' head-office locations: Answer
  2. We don't get allocated all of our Whisky duty because of  exports that go via English ports: Answer
  3. Defence assumptions are wrong because not all of that money is spent in Scotland: Answer
  4. Scotland pays for things that we get no benefit from, like the Olympics, Crossrail, London Sewers, HS2, etc.:Answer
  5. The figures for the Scottish economy are understated because of  exports assigned to "unknown region": Answer
  6. The GERS figures are not facts, they're based on estimations and guesswork: Answer

Generic Arguments

The GERS numbers only show how our economy performs under Westminster rule, they tell us nothing about how an independent Scotland's finances would look

This blog has been very consistent about this: the GERS figures can be used to explain Scotland’s past economic performance (as an integral part of the UK) so as to inform our understanding of the future choices a possible independent Scotland would face.

The figures only tell us how an independent Scotland’s finances would have looked if we had already been independent but were still raising taxes and incurring public spending (including reserved expenditure) as we have been as an integral part of the UK. We are looking at what in financial accounting terms would be considered pro-forma accounts.

The figures do not tell us what the future accounts of an independent Scotland would look like. They do however describe the starting point (the “run-rate”) from where we can start to consider the possible impact and fiscal implications of independence.

Precisely how independence would change Scotland’s economy is of course a hugely complicated subject that would require us to consider, among other factors;
  • The outcomes of uncertain negotiations around issues such as currency, inherited share of debt and EU membership
  • The explicit tax and spend choices that the government of an independent Scotland might make. Although inevitably constrained by the result of the negotiations above, these would include decisions around wealth redistribution, defence, industrial and economic policy, international affairs, debt and deficit management, social policy priorities and much more
  • The impact of factors outside the Scottish Government’s direct control such as how businesses and the labour force would respond, international energy prices, international credit ratings and Scotland’s cost of debt
  • The cumulative effect of all of the above on Scotland’s economic growth
The GERS figures provide the foundations on top of which any credible economic case for independence must be built.

To illustrate. According to 2014-15 GERS our pro-forma accounts show Scotland running a £14.9bn deficit. If - as the White Paper suggested - an independent Scotland were to spend £0.6bn less on defence and other costs (compared to the amount allocated to us in GERS) then our deficit would become £14.4bn. 

Here are two examples of this particular type of GERS denial in use;
“the GERS figures tells (sic) us almost nothing that can be related to the finances of an independent Scotland” (Gordon MacIntyre-Kemp in the National)
"the total expenditure in GERS says nothing about the total public expenditure resource which a Scottish Government might choose to deploy [..] the GERS revenue figures say relatively little about the tax revenues that could be available to a Scottish government" (The Cuthberts, as quoted by Paul Kavanagh using this meme)
To suggest that how our fiscal balance would look based on the taxes we're used to raising and the public spending we're used to receiving tells us "nothing", "almost nothing" or only "relatively little" about an independent Scotland's potential finances is frankly insulting to the intelligence of the reader.

The figures tell us a great deal about where we start from and the scale of the challenge we'd face.

The GERS numbers can't be trusted because they were established by the Tories as a "political tool" to make Scotland look bad

The GERS methodology has been developed and refined continuously since it was introduced. With each publication of GERS any improvements made are applied to past figures so the most recent publication always includes historical data restated on a consistent basis.

Any quotes that pre-date 2008 are frankly irrelevant because the GERS reports have been produced by an SNP controlled Scottish Government since then. As nationalist cheerleaders Jim and Margaret Cuthbert (previously strident critics of the GERS figures) themselves volunteered in 2008;
"This GERS follows a major review, which has been carried out by officials after consulting widely with users of GERS, (including economists and statisticians like ourselves) [..]
HM Treasury data, which is the basic source for the expenditure figures in GERS, and which until recently was a black box to all outside the Treasury, has been vetted thoroughly by statisticians in Scotland, and they have shown themselves willing to override the Treasury's figures [..]
In presentational terms, the report is now supported by very much more detail: this not only gives it increased credibility, but also makes it a very much more useful document"
A further eight years have passed since then, eight years of ongoing improvement and refinement by an SNP controlled Scottish Government. That's why the SNP now take confident ownership of these figures;
  • The Scottish Government's Independence White Paper (page 67) states: "GERS is the authoritative publication on Scotland’s public finances"
  • They are the responsibility of the Scottish Government's Chief Statistician
  • As the GERS report itself explains: "The United Kingdom Statistics Authority has designated these statistics as National Statistics, in accordance with the Statistics and Registration Service Act 2007 and signifying compliance with the Code of Practice for Official Statistics"
  • The Independence White paper cites GERS figures on no less than 15 occasions and used them as the basis for the economic case presented
  • "Alistair, You know that, because its in the GERS figures" - Alex Salmond

Apart from anything else, to deny the validity of the GERS data would be to deny the source of the data that gave rise to following partial truths so beloved of the YES campaign (all outdated now as made on the basis of 2011-12 figures which included £9.6bn of N Sea oil revenue):

Specific Misunderstandings, Misdirections and Myths

[Frankly all of these could be answered with a simple rhetorical question: "do you honestly believe the SNP controlled Scottish Government are so stupid that they would have missed this?"]

1.  Taxes are not attributed correctly because they're based on companies' head-office locations

This myth is summed up by a document written by pro-independence group Business for Scotland. This document has since been deleted but can still be found on the web and some of the assertions made within it are regularly repeated as fact on social media.

Take this direct quote
"For many companies, VAT and Corporation tax for the whole of UK operations are paid at company headquarters which is most often in London or the South East of England. It doesn’t count as Scottish revenue, despite the fact it’s a tax paid on sales / profit generated in Scotland."
The GERS Detailed Revenue Methodology states very clearly (page 13): “GERS apportions a share of UK corporation tax revenues based on the economic activity undertaken in Scotland and not the location of companies’ headquarters”.

Similarly for VAT, the same GERS methodology document (page 19) makes it clear that VAT is allocated based on consumption survey data and has nothing to do with where companies report figures.

This isn’t something that’s changed recently. The same statements exist on the same pages of the 2011-12 GERS Methodology Statement .

The Business for Scotland document goes on to say:
"Put simply, if you buy a packet of Walkers shortbread in Tesco in Edinburgh, the VAT you pay is taken to be generated at Tesco’s head office in Hertfordshire."
Apart from being fundamentally wrong about how VAT is allocated in GERS, they're also amusingly wrong about which products incur VAT.  Shortbread is zero-rated for VAT purposes (unless it's chocolate coated).

2. We don't get allocated all of our Whisky duty because of  exports that go via English ports

This myth appears in many forms. Take this example written by Paul Kavanagh and (still) published on the crowd-funded Nationalist campaigning website “Wings Over Scotland”:
"There are other ways in which Scottish revenues are invisible in GERS. Much of the alcohol duty paid by the whisky industry is not counted as revenue from Scotland. Alcohol produced in the UK which is exported abroad becomes subject to UK alcohol duty at the point of export, and a large proportion of Scotland’s multibillion whisky exports gets shipped out from ports in England. The UK Treasury counts the duty levied on this whisky as income from the tax region in which the port is situated.
Billions of pounds of Scottish revenue is magicked away in the official statistics, and doesn’t count as Scottish revenue. It masquerades as revenue from other parts of the UK, most commonly as revenue from London. In total, the extra revenues which don’t currently figure in the GERS stats, but would accrue to an independent Scottish Treasury, would likely be larger than the entire annual income from the North Sea" 
That article states: “The original version of this piece appeared on the splendid ‘Wee Ginger Dug’” and the first paragraph appears in precisely the same form in this Business for Scotland document. It also includes completely incorrect assertions about the effect of "head-office" reporting (see 1. above) on reported Scottish revenue figures. This is how myths are spread.

To be absolutely clear: the whisky export duty statement is quite simply, unequivocally, demonstrably nonsense. We can go all the way back to GERS 2006-07 to get an explanation on this one
"In GERS, VAT and excise duty estimates for Scotland are based on the consumption approach.
This is appropriate as the burden of the duty is borne by the final consumer rather than the producer. This is considered best practice as within a system of regional fiscal accounts, the VAT liability 'sticks' when the item is purchased by the final consumer. The location of production is of no relevance.
Tobacco and alcohol duties are only collected if the product is consumed in the UK. If the product is exported, the producer receives export relief. For example, while duty is levied on Scotch Whisky when it leaves a bonded warehouse, in reality it is only collected if the whisky is consumed in the UK. Consequently, the ultimate payer of the duty is the UK consumer of the product.
Therefore, GERS estimates duty collected from Scotch Whisky based upon the level of whisky consumption in Scotland, even though Scotch Whisky is only produced in Scotland. Similarly, the estimate of tobacco duty collected in Scotland is based upon the level of consumption of tobacco products in Scotland, even though most tobacco goods are produced outside Scotland"
A senior industry insider with decades of experience working at the highest level in the industry offered the following quote for Chokkablog :
"No alcohol duty is levied on Scotch Whisky exported from the UK to the EU or third countries, whether from Scottish ports or from ports elsewhere in the UK. UK alcohol duty (excise duty) is only levied on Scotch Whisky when released from bond for consumption in the UK. Under EU law, the rate of excise duty has to be consistent across the territory of a member state. If Scotland were an independent country, the rate of excise duty on Scotch Whisky would be set by a Scottish Government within the parameters for excise duty on alcoholic drinks set by the European Union. The excise duty revenue accruing to a Scottish exchequer would only be the amount raised on the release from bond of Scotch Whisky for consumption in Scotland."
This has also been confirmed by the Scotch Whisky Association, but the myth has gained so much traction that the Scottish Government posted the following “response to GERS query” relating to whisky Export duty:
Exports, including exports of whisky, do not attract UK duty. Therefore, no 'whisky export duty' revenue is allocated to Scotland in GERS.” 

There's a version of this myth that combines confusion over export data (see 5. below) and goes something like this:
"£2.8bn of whisky revenue counted as English export (because it goes out through English ports)"
This takes a bit of unpicking;
  • The £2.8bn is never sourced - it certainly doesn't appear in any data I've yet seen and the ever diligent @fraserWhyte (you should follow him by the way) checked and it's nonsense

  • As shown below (point 5) the Scottish Government Export stats don't use port of export data (they use survey returns)
  • Even if the assertion were true (it definitely isn't) it would have no impact on our GERS reported deficit anyway. Whisky exports generate no duty - neither GDP or fiscal deficit is influenced by the whisky export figure (which is correctly assigned to Scotland anyway)

3. Defence assumptions are wrong because not all of that money is spent in Scotland

To answer this one simply has to read what the GERS report itself says:
“Public sector expenditure is estimated on the basis of spending incurred for the benefit of residents of Scotland. That is, a particular public sector expenditure is apportioned to a region if the benefit of the expenditure is thought to accrue to residents of that region.
This is a different measure from total public expenditure in Scotland. For most expenditure, spending for or in Scotland will be similar. For example, the vast majority of health expenditure by NHS Scotland occurs in Scotland and is for patients resident in Scotland. Therefore, the in and for approaches should yield virtually identical assessments of expenditure. However, for expenditure where the final impact is more widespread, such as defence, an assessment of 'who benefits' depends upon the nature of the benefit being assessed. Where there are differences between the for and in approaches, GERS estimates Scottish expenditure using a set of apportionment methodologies, refined over a number of years following consultation with and feedback from users.
The for approach considers the location of the recipients of services or transfers that government expenditure finances, irrespective of where the expenditure takes place. For example, with respect to defence expenditure, as the service provided is a national 'public good', the for methodology operates on the premise that the entire UK population benefits from the provision of a national defence service. Accordingly, under the for methodology, national defence expenditure is apportioned across the UK on a population basis.”
Needless to say, not all of the money spent "for but not in" Scotland would be replaced by money spent "for but in" Scotland were we independent: international services and debt interest being the main obvious examples.

So this really boils down to a defence spending argument - how much would we spend and where would we spend it? The White Paper had a stab at this and ended up with a £0.5bn net saving.

4. Scotland pays for things that we get no benefit from, like the Olympics, Crossrail, London Sewers, HS2, etc

This comes up a lot from people who haven’t bothered to understand how the GERS figures work. At its simplest, the GERS methodology works to include only expenditure in Scotland or Scotland’s share of value from expenditure outside Scotland. This is clearly explained in the GERS detailed expenditure methodology paper.

Let’s take Olympic Games costs as an example. To quote the current GERS detailed expenditure methodology paper (page 3):
“as discussed in previous editions of GERS, all capital expenditure associated with the Olympics has been assigned to the rest of the UK, primarily London and surrounding area, on the basis that Scotland will not receive a lasting benefit from the infrastructure and regeneration associated with the games. Current expenditure on the Olympics has been assigned across the countries and regions of the UK using the estimated regional distribution of the associated increase in tourism expenditure.”
Another widely quoted example is HS2. Because Scotland’s share of the economic value of HS2 is assessed to be 2%, this is the figure used in GERS (page 77).
“Within GERS, the expenditure has been apportioned to Scotland in line with the regional breakdown of the benefits of High Speed 2 reported within The Economic Case for HS2, published by the Department for Transport. This assigns Scotland 2% of the total expenditure.”  
The same page of the GERS report explains the more general point which would apply to the likes of London's Crossrail project
“As discussed in previous editions of GERS, railways expenditure, alongside expenditure on roads, is apportioned to Scotland on an 'in' basis. This means that expenditure 'in' Scotland on railways is apportioned to Scottish public sector expenditure while, where possible, a zero share is allocated to Scotland for all expenditure on rail across the rest of the UK. This required a number of modifications to the underlying CRA data which affected the expenditure by London and Continental Railways, the Channel Tunnel Rail link, and Network Rail.”  
Obviously London sewers costs and the like are not allocated to Scotland in GERS as they are clearly examples of "Identifiable expenditure" (that is expenditure that can be clearly allocated to a country or region in terms of having been spent for the benefit of that country or region).

as @fraserWhyte quite correctly points in a comment below this blog:
it's worth noting that the London sewers aren't a public spend at all, it's all private sector investment with Thames Water customers and some foreign investment paying for it. There's some government underwriting of risk (overruns etc) but no direct money. It really is a stonker of a myth.
Also worth noting that we actually *benefit* from Westminster spend on Crossrail and HS2 as they qualify for Barnett consequentials, see Table C16 here for source 
*** ENDS *** 

5. The figures for the Scottish economy are understated because of  exports assigned to "unknown region"

This tweet illustrated how this myth become propagated: an out-of-context extract of a report being used to question the validity of our GDP figures
If we go to the source document (Export Statistics Scotland 2014) we can see it has nothing to do with GERS figures or GDP calculations and in fact it explicitly excludes North sea oil and gas

The graph in question is included only within the context of comparing these Scottish Government export statistics with HMRC regional export stats

So the Scottish Export Statistics explicitly exclude Oil & Gas anyway and as the document states clearly:  "The estimates in this publication are based on the completed survey returns from 1,664 businesses in Scotland to the 2014 Global Connections Survey". I've filled in these forms; the data is provided on the basis of where the customer is, not which port you ship from.

So this "unknown region" issue has no impact on the Scottish Government's published export statistics.

Needless to say, HMRC regional export figures are not used when calculation our GDP (see Scottish Government "How is GDP calculated"). You can view the full list of data sources here and regional export data is not among them. 

What about our fiscal balance? Well similarly the way oil tax revenues are allocated in GERS has nothing to do with the HMRC regional data (see GERS Revenue Methodology)

6. The GERS figures are not facts, they're based on estimations and guesswork

Statements like this are often made by people who simply don't understand how statistics are compiled and who ignore that the data are accurate enough to be designated as National Statistics.

The confusion arises because in some cases GERS apportions revenues based on survey data. The GERS report (page 36, Table A.12) includes confidence interval analysis that shows we can have 95% certainty that those figures are accurate to within +/- £0.5bn.

There is one figure worth highlighting as being an heroic estimate and that is the assumption around (non-North Sea) corporation tax allocation. On this figure HMRC and GERS make very similar assumptions, basically assigning £2.9bn or 7.3% of corporation taxes to Scotland. As a sanity check, Scotland account for 8.3% of the UK's population. The simple truth is that given companies are not currently required to report profit split between Scotland and the rest of the UK, nobody knows what these figures would be were Scotland to be independent - changes to tax rates and corporates' decisions around where to base activities and how to report profits make this figure a moving feast anyway.


Rather magnificently, the day after I posted the above blog I had this tweet drawn to my attention.

This combines confusion over export data (which is compiled by Scottish Government based on survey data, is completely unaffected by which port goods are shipped from & has no impact on our fiscal deficit figure), hints at lost whisky export duty (which doesn't exist), mentions the "unknown origin" HMRC data (which isn't used by Scottish Government and has no impact on our fiscal deficit figure) ... and somehow attempts to equate these with the "£15 billion black hole" (by which I assume he means the total fiscal deficit as opposed to the £10bn onshore deficit gap).

So the examples he gives of "misappropriation of revenue" have precisely zero impact on our reported deficit or indeed any figures published by the Scottish Government - so they don't affect "my graphs" at all, thanks for asking.

You have to laugh.

Wednesday, 27 July 2016

Unknown Region Exports & Hidden GDP

A very quick post to clear up the latest "the statisticians are hiding Scotland's true wealth" myth.

This stems from the likes of these tweets;

There are loads more along similar lines (many from people who've blocked me funnily enough) which all suggest that the issue of "unknown region" in  HMRC regional export stats must be hiding the true extent of Scottish GDP and/or by implication exaggerating our deficit.

Frankly the idea that the Scottish Government might have missed such an obvious trick when calculating the value of Scotland's GDP is ridiculousness enough to let us know this is highly likely to be yet another calculated attempt at spreading misinformation - something independence supporters are very adept at.

Sure enough as we'll see it's very similar to the "whisky export duty" and "VAT revenue attributed at head office" myths already covered by this blog (see "Stop Getting GERS wrong" or Appendix A of "The Price of Independence")

So the source of that graph is this publication: Export Statistics Scotland 2014

That document has nothing to do with GERS figures or GDP calculations and in fact it explicitly excludes North sea oil and gas

The graph in question is included only within the context of comparing these Scottish Government export statistics with HMRC regional export stats

So the Scottish Export Statistics explicitly exclude Oil & gas anyway and as the document states clearly:  "The estimates in this publication are based on the completed survey returns from 1,664 businesses in Scotland to the 2014 Global Connections Survey".

So this "unknown region" issue has no impact on the Scottish Government's published export statistics.

But surely it means our GDP is understated?  Well no, because the HMRC regional export figures are not used in our GDP calculation (see Scottish Government "How is GDP calculated"). You can view the full list of data sources here and regional export data is not among them. 

What about our fiscal balance? Well similarly the way oil tax revenues are allocated in GERS has nothing to do with the HMRC regional data (see GERS Revenue Methodology)

I could go on but this just gets silly. Some idiots on Twitter and Facebook have found a graph and leapt to a ridiculous conclusion in an effort to stoke a grievance.

Plus ca change.

Tuesday, 26 July 2016

The Certainty of Independence

Earlier this week First Minister Nicola Sturgeon suggested: “it may well be that the option that offers us the greatest certainty, stability and maximum control of our own destiny is that of independence”.

Her uncharacteristic coyness in only saying independence “may well be” the best option in those terms betrays the fact that she knows it would in fact offer just one certainty: greater uncertainty and even more instability.

Take the issue of trade. 64% of Scotland’s exports go to the rest of the UK whereas just 15% go to the EU. We won’t know until Brexit negotiations are completed whether leaving the EU might jeopardise 15% of our exports, but if it does then leaving the UK would be placing four times as much of our trade at risk.

As for stability, latest figures show Scotland running a deficit of 9.7% of GDP, a level that would be unsustainable without the support we receive from being an integral part of the UK.

Establishing our own currency and/or being a stand-alone member of the EU would inevitably require a level of fiscal discipline that might not translate into having “maximum control of our own destiny” – just ask Greece.

Which brings us to the biggest source of instability that independence would create. We would be certain to lose the effective fiscal transfer (the cash) we receive from the rest of the UK. This issue is hugely important but so poorly understood that it’s worth taking time to explain it (with apologies to regular readers of Chokkablog).

This graph covers the last 17 years and has just three lines on it. When you know what these lines mean you will realise the simple truth that the SNP seem determined to avoid people understanding.

Look at the black line. This shows us how much more tax per person Scotland contributes than the rest of the UK when you include all of “our oil”. This line shows that it was quite correct to say “Scotland contributes more in tax per head than the rest of the UK” all the way through the independence referendum and up until March 2016 when the most recent figures were published. Unfortunately that’s no longer the case and it was only ever half the picture anyway.

The green line shows how much less tax per person Scotland contributes before including oil. This shows that our onshore economy underperforms relative to the rest of the UK by about £350 per person. Frankly that's not very much in the grand scheme of things.

The red line shows how much more spending we receive than the rest of the UK - consistently about £1,500 per person more, a somewhat more significant issue than the relative lower onshore tax revenue generation.

The relative difference between Scotland and the rest of the UK's deficit performance is far more to do with the fact that we spend more than the fact that our onshore economy generates slightly less tax income. This is why I have little patience for those who claim the scale of Scotland's notional deficit shows how badly "Westminster" handles our economy. By that logic if Westminster slashed our budget by scrapping the Barnett Formula and reneging on the fiscal framework these same people would presumably applaud them for managing our economy more responsibly?

Moving on. Because we share the cost of the UK’s deficit, when the red line is above the black line the difference between them is the amount of cash we effectively receive from the rest of the UK. In 2014-15 that amount was over £8bn.

We can plot the difference between the red and black lines to show the historical scale of our net contribution to (above the line) or benefit from (below the line) UK wide pooling and sharing.

In only three of the last 17 years has Scotland been a net contributor on this basis - and only materially so when oil peaked in 2008-09.

The Independence White Paper was written when the most recent figures available were those for 2011-12, coincidentally the last year we could say we "paid our way". This is why despite more up-to-date figures for 2012-13 being published 6 months before the referendum, these were studiously ignored by the Yes campaign. Since then we've had another two years worth of figures published and yet SNP politicians still frequently make assertions based on the ridiculously out-dated 2011-12 figures. You can clearly see why. You can also clearly see why anybody suggesting oil was "just a bonus"(as Alex Salmond did) was either badly misinformed or simply attempting to deceive their audience.

For those who thinks it might make a material difference, here's the same analysis versus total UK and on a percentage of GDP basis - the picture barely changes

But this is all in the past. We’re interested in the future and – because we know oil tax revenues have effectively declined to zero - going forwards it’s the gap between the red and green lines we’re looking at.

The current fiscal settlement allows us to maintain the relatively higher public spending we’re used to, so the red line will remain roughly where it is. The same is true for the green line if our onshore economy maintains its performance relative to the rest of the UK.

This means that under the status quo we will effectively go on to receive about £1,900 per person annually from the rest of the UK. Multiply by our population and you find the £10bn “black hole” in Scotland’s finances. This £10bn is the amount we’d need to find just to maintain our deficit at UK levels if we left; it shouldn’t be confused with our total Scottish deficit which was actually £14.9bn in 2014-15.

Of course this only shows us what happens if we continue raising taxes and spending money as we’ve become used to and if we were independent that wouldn’t be possible. So what would we do?

There are plenty of reasons to believe that independence may slow the growth of the Scottish economy (not least by creating a border with the market where 64% of our exports go), but even if you believe independence would deliver superior economic growth it would realistically take several generations to close the gap through lifting that green line alone. [See: Let's Talk About Growth]

So to close the gap we’d need to lower the red line by cutting public spending. Now of course some of the figures allocated to us as spending in GERS are sums of money spent for us or on us but not by us. This causes a crazy amount of confusion with people believing we're being charged for things like infrastructure projects in London (we're not) and other unfair costs. This blog has debunked many of those myths (see; Stop Getting GERS Wrong and Appendix A of The Price of Independence) but all you really need to know is that the Scottish Government is responsible for these figures and that the SNP's own White Paper could only find £0.6bn of savings versus the spending allocated to us in GERS (primarily from defence spending).

So we'd still be looking to find a further £9bn of annual savings or £1,700 a year for every man, woman and child in Scotland. That’s 13% of our total spending - it’s more than Scotland’s entire education budget.

Maybe our First Minister’s coyness comes from knowing that the option of independence offers only one certainty: spending cuts that would make the austerity we’ve experienced to date pale into insignificance.

Friday, 22 July 2016

Two Types of People

There are two types of people in this world: those who believe you can divide the world into two types of people and those who don't.

Let me start again. There are two types of people in this world: those who contribute to the state and those who benefit from it. Which category any of us fall into is likely to change over the course of our lives.

Those who contribute pay more in taxes than they receive in public spending; those who benefit don't.

We pay taxes when we're employed and when we consume or transact. These include income and wealth taxes, VAT, fuel & "sin tax" duties, council tax and business taxes1. We typically generate the highest amount of tax during our adult working lives.

Some of the public spending we benefit from is indirect in the form of public order & safety, transport, international services, defence and debt interest spending; but the majority we benefit from is direct in the form of social protection (including pensions), health and education spending2. This means we typically receive the highest amount of direct public spending outside of our adult working lives.

So broadly speaking we start our lives as beneficiaries while we're educated, we become contributors as we work and consume most heavily and we return to being beneficiaries when we retire and have higher health and care needs.

This matters because the ratio of contributors to beneficiaries is an important determinant of the health of our public finances.

The main factor working against the public finances in this regard is our increasing life expectancy - something that proposed increases in the state pension age are of course designed to at least partially offset, by extending our tax-productive lives.

Which brings us to one of the challenges that Scotland faces: despite the fact that compared to the rest of the UK we die younger, on average Scots are older.

Let me unpick that.

Scots Die Younger

According to Scottish Government Statistics"Scottish males and females have the lowest life expectancy at birth in the UK. Male life expectancy is 2.0 years lower than the UK average and female life expectancy is 1.7 years lower". This is consistent with ONS statistics.

As an aside: life expectancy is very strongly correlated with levels of deprivation

[Data from The National Records of Scotland's Annual Review of  Demographic Trends]

Who to blame for this and (most importantly) how it should be addressed might be dominating our political discourse were it not for the distraction of constitutional wrangling. I'm aware of course that some consider independence to be the answer to this problem. Quite why the inevitable public spending cuts and economic shock that separation from the UK would cause would be expected to do anything other than exacerbate this problem (at least in the short-term), I've yet to hear satisfactorily explained

On Average Scots Are Older

According to Scottish Government Statistics the median age (the age at which half the population is older and half is younger) in Scotland in 2015 was 41, whereas ONS statistics show the median age for the UK overall as 40. The only data I've so far found showing comparable data from the same source is this ONS data which appears to reinforce the view that this is not just a rounding error

Alternatively if you download the data from the ONS mid-2015 dataset it's easy to calculate the %age of population aged 65 or over: for England this figure is 17.7% but for Scotland the figure is 18.3% .

So Scots are on average older than the rest of the UK despite having lower life expectancy.

The explanation for this is of course the impact of migration: the rest of the UK has a higher net influx of younger people than Scotland. We'll come back to the implications of this but first let's consider the compounding issue of "Healthy Life Expectancy".

Healthy Life Expectancy

When it comes to the public health spending implications of an ageing population the issue is really how healthy we are rather than how old we are. There are various measures of "Healthy Life Expectancy" published by the ONS - the following is a quick and crude illustrative analysis3;
  • According to the ONS, Scottish males born in 2009-11 have a disability-free life expectancy (DFLE) of 60.6 years whereas those born in England can expect a DFLE of 64.5 years.
  • Taking those ages rounded-up: 23.0% of Scotland's population is over 61 years old; 17.7% of England's population is over 65 years old
So the proportion of Scotland's population that is (by this definition) at the age where higher health and care spending is needed is 23.0%/17.7% = 34% higher than that in England.

So What?

In the past this blog has often highlighted that Scotland is a "high cost-to-serve" country and that this is the main reason why (as oil revenues decline) there's an onshore deficit gap of about £10bn between Scotland and the rest of the UK4.

We've also seen that we consistently receive more spend per capita than the rest of the UK in almost every spending category

One of the obvious explanations for this is our geographically dispersed population, but the "demographic challenges" explained above are less intuitively obvious and therefore perhaps less well understood.

We can't expect politicians to do much about the geography of Scotland, but the demography of Scotland is something that can be influenced with political will.

We can probably all agree that increasing life expectancy is a "good thing", not least because this should be a natural by-product of reducing levels of deprivation. But increasing life-expectancy of course increases the proportion of our population who are net beneficiaries of the state, exacerbating our fiscal balance problems unless we can increase the working (tax generating) population at an even faster rate.

Which bring us to the vexed question of migration and the differences in perspective between Scotland and the rest of the UK.

Scotland's Migration Challenge
[unless otherwise stated, all of the following data is drawn from The Registrar General’s Annual Review of Demographic Trends, 2014]

Scotland has only relatively recently (the last 15 years or so) seen a consistent net influx from migration

This net inwards migration has largely come from overseas

The net influx of migrants is focused around those of student and working ages5 who are on average contributors to the state6.

UK Government immigration statistics show the UK being a consistent net recipient of migrants since 1994

The Scottish and UK graphs have different timelines and the relative scale of the figures is hard to digest - so using these sources I've done a quick calculation of cumulative net overseas migration over the last 20 years expressed as a percentage of 2014 populations;
  • Scotland; 1994 - 2014 net overseas migration was 3.2% of 2014 population
  • Rest of UK: 1994 - 2014 net overseas migration was 5.5% of rUK's 2014 population
So in relative terms the rest of the UK has experienced 5.5/3.2 = 72% higher net overseas migration

This may go to explain at least in part why there appears to be a greater resentment of migration in the rest of the UK than in Scotland (clearly an important factor for many in the recent Brexit vote);
  • At a macro level: the SNP know we need a continued influx of working age migrants to act as net contributors to the state and help alleviate the economic stresses caused by our relative higher proportion of older citizens who are (at this stage of their lives) net burdens on the state.
  • At a micro level: Scottish citizens are less likely than those in the rest of the UK to have experienced some of the practical impacts of immigration that can cause resentment (immigrants "taking our jobs" or depressing wages)
This differential need for and perspective on migration is for me the strongest argument in favour of Scottish independence - but it's an argument that has to be balanced against a realistic assessment of the other economic implications.

The SNP have been honest about Scotland's need for migration, but they have yet to present an honest economic case for independence that provides a realistic assessment of the pain that would be caused by launching our own currency (or joining the Euro), stopping the effective fiscal transfer from the rest of the UK and separating ourselves from our largest export market.

It seems that there are two types of people in this world: those who believe in presenting an honest economic case, and those who don't.


Historical real-terms Scottish onshore tax generation by category

Historical real-terms Scottish public spending by category

We'd need to know the DFLE of people born 60+ years ago (or the projected population mixes in 60 years) to do more robust analysis

If Scotland is to address the deficit gap we need to find some combination of relative revenue increase and/or relative spend decrease versus the rest of the UK. This blog has highlighted before that to close the gap through revenue growth (or per capita productivity) alone would require us to out-grow the rest of the UK by 16%. Even under the most optimistic realistic assumptions this would take decades to achieve. This doesn't mean we can't afford to be independent, merely that we'd inevitably have to dramatically cut our public spending. Although the sheer scale of this challenge is still not being fully admitted to, we're seeing signs that the Nationalists are starting to face-up to this unavoidable truth
  • "would require independent Scotland to cut its budget coat to fit its fiscal means" - SNP MP George Kerevan, Citya.m.)
  • "After 18 months of being told I was wrong to question the economics of the Indy White paper, the SNP now admits the same [..] George Kerevan has admitted that in the short term after independence, Scotland would have to cut spending." -  Alex Salmond's former policy adviser Alex Bell, The Courier
Looking at the most recent year for which data is available, Scotland sees a net influx as a result of overseas migration among those of student and working ages. With the possible exception of EU students taking advantage of free tuition, it's fair to assume that (consistent with the vast majority of analysis on the economic impacts of migration6) these are net contributors to the state

Looking at net migration between Scotland and the rest of the UK we see a net influx of those of student age (unlike other EU students, having to pay tuition fees) and then a net outflow on graduation before then returning to a modest net inflow.
See Immigration and the EU referendum