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.

30 comments:

Anonymous said...

Kevin, the problem is that you are expressing a rational economic analysis, while what you are arguing against is unswerving romantic nationalism, straight out of the 19th century. If economics had been the only criteria then no doubt the UK would have voted to remain within the EU. For a significant number of diehard Scots nationalists the economic hit of independence is worth taking, no matter what the cost.

Those who are less committed to independence may be wary of the possibility of an economic meltdown, but against their fears are ranged a series of assertions by SNP leaders that 'it will be alright on the night'. Hence the vast array of unsubstantiated claims, about currency union, debt denial, greater economic growth, automatic membership of the EU, sharing of institutions with the UK, the endless money tree of Trident cancellation, the inaccuracy of GERS and so on. Only when an argument is overwhelmingly disproved do they move on to another.

No rational arguments will convince hardline SNP members that independence will be anything but beneficial. Every argument seems to end in an assertion that only independence will provide the solution. This is really a faith-based intellectual system and faith is difficult to defeat; it is often easier to attract adherents to a rival faith.

My concern is that Chokka blog, while rightly identifying the numerous economic shortcomings in the nationalist case, does not go far enough. Although there are solid political, social, military, educational and industrial arguments for keeping the UK united, there has been a resounding failure in all quarters to make such a case. The Tories use of Project Fear worked in 2014, but left a sullen and resentful minority in Scotland; the same approach failed in June. A negative case is just not enough, no matter how accurate, and nor is a purely economic argument enough to overcome wilful stubbornness.

But you do a damn good job.

Graham said...

This is true up to a point. However, you're wrong to dismiss the possibilities of a separate Scottish currency. It would make all this discussion of tax revenues irrelevant. The only thing that would matter would be trade deficits.
The Scottish Government could run as big a deficit in Scottish Pounds as it chose to. The readjustment towards living within our means would come from external devaluation rather than the internal devaluation that Greece has experienced.

Unknown said...

Scotland is a Great Country, but for us to be Great, I am sad to say, we can only be great if we remain part of the UK. We can control Westminster, but we cannot control the EU. I mean look what we did, we voted to remain with the UK, but then sent the SNP into Westminster,not because we wanted another referendum, but just so they are kept on their toes down there with a party that does not follow the Westminster line and whips. I think the EU do not want another weak economy joining them, Germany cannot support all the EU countries alone, when the UK leaves. As it is only Germany that pays in more that it gets out of the EU. UK paid in more than it got out of the EU, but that hold in finances will have to be filled by Germany, or the other EU countries will get less, and they will not want another country joining them that needs financial assistance. So yes, Scotland need to be Great in the UK, or poor and the people suffer alone. ( Would an independent Scotland have it's own NHS..I dunae think so, and thousands of us would die young)

Anonymous said...

Let's just face it, fish head is massaging her own ego by wanting to go down in history as the woman who gave Scotland their independence back! Lovely ideology in a story book, not when it will screw the people over.

Anonymous said...

You are forgetting one thing if Scotland goes independent then you will see no more ship building in the Clyde. The sub bases will be moved mass job losses major tax increases. Services cut standard of living down and you could end up worse than Greece.

Bill Quango MP said...

A very good post.
But will it be believed ?

Remember the £4,300 hit each household in the uk would have? No one believed it.

Alastair McIntyre said...

I do tend to agree with the first comment made in this blog. Scots do seem to want Independence and in some ways the EU vote made that more likely. We were all warned that exiting the EU would cost us lots of money but we voted to leave anyway.

I think what is needed is a clear statement from the EU about how likely or otherwise would Scotland be accepted into the EU and on what conditions.

I believe article 49 gives a possible way forward for Scotland to pursue but I still believe that Scotland really offers nothing to the EU. The recent Postugal and Spain situation tends to make this more likely as they are looking to receive fines for not progressing well enough to reduce their own debt to GDP ration. With Scotland running the highest such ration of all EU countries then I just don't see the point in letting Scotland join.

All of that said Scotland is totally unprepared to run as an Independent country as we have no diplomats or trade negotiators. That is why Nicola is desperate to remain in the EU as they would then look after all that for us. I mean look at all the International organisations we'd need to join never mind the diplomatic people we'd need to represent us around the world. We just don't have these people.

I've always said that Scotland could be a successful Independent country but we need to build up the skill sets to achieve that and there is no sign of us doing anything towards that goal.

And the fact that 64% of our total exports go the rUK should tell people that the EU is by no means our largest market but Nicola always says the EU is Scotland's largest export market and of course it is as the rUK are still part of the EU.

So she lies by omission as the SNP usually do as they never tell us the full story and are masters at spin.

Also if Nicola wants us to be present as the top table of Brexit talks who is she going to send there as we really don't seem to have any knowledgable people to send to these meetings. I remember they sent 2 representives to NATO to discuss what would be needed to join them. However the people that were sent had no military experience.

So I think we need to get much more clarity on whether Scotland could obtain membership of the EU. And we also need more clarity on how Scotland would be represented on the world stage.

I also note with amusement that Nicola always said that Scotland's position must be respected but I see no signs that Scotland is respecting the decisions of the rUK.

Edward Witney said...

Remember Bill that Kevin's figures are based on us growing at the same rate as the UK (IFS) and suffering no detriment. Our deficit is already twice that of the UK and getting relatively worse. We do as well as we do because we feed the UK economically. That would diminish under independence. If you think just how damaging Brexit negotiations will be multiply that to get Scexit. The UK would treat us as a competitor country first and foremost.

Anonymous said...

Once again a clear coherent explanation of the current relative positions, many thanks for sharing your analysis, always enjoy reading them as an Englishman interested in the mood and thoughts north of the border.

You have referred to relative populations before but I wonder how many know the actual comparisons from the 2011 census, according to Wiki UK ave. is 259 people per sq, Km and the individual nation league table is :
England 406
Wales 147
NI 130
Scotland 67

You would assume the English figures would have increased as a % now based on inward migration patterns, but whatever, obviously their are positives and negatives from these differences but cost wise it is the nub of the differentials... some method of explaining the subject as mundane as calculating the 4 different costs of posting first class mail with 4 separate national post office's as opposed to the current Royal mail pooled system would be both illustrative and digestible, but I am buggered if I know how to do it !

Kim Ward

Wildgoose said...

As the commenter "Unknown" says above: "We can control Westminster, but we cannot control the EU."

Exactly. And that is why the most vehement oposition to the establishment of a devolved English Parliament and a federal constitutional settlement almost always has a Scottish accent.

The English saw the Union as a marriage, "for better or worse".

Scots see the Union as "until the moment something better comes along".

In human relationship terms, Scotland is just a "gold-digger wife", and it is high time more people recognised this.

Start by scrapping the Barnett Formula. Let's see what Scottish commitment to the Union is like when the money runs out....

Anonymous said...

How about a crowd fund to produce a book/pamphlet that debunks some of the Nationalist myths. I do not think a day goes by without someone telling me that Scotland subsidises England, the fabled lost whiskey export tax revenue or that Scotland contributes massive amounts of money to HS2/ London infrastructure etc etc etc.

One of the problems for the Union side is that it has always been on the back foot having to try and swipe away a tsunami of lies, assertions and misinformation that makes Canute's disagreement with the sea look like child's play. Surely it is time to get on the offense. I appreciate that you are a busy man but you might be surprised at how much money would be raised and maybe call it the 'Wee Blue Book of facts'.

Anonymous said...

I do agree that we are effectively fighting a flight of whimsy. A quick jog through the SNP facebook page confirms this in glorious technicolour.This said, I also believe we are fighting a minority of hardcore supporters -many of whom want nothing to do with the EU.Any gains from Brexit will be nullified by this.In her usual arrogant manner, Sturgeon will march ahead to another doomed Referendum. She has lost 2 already so this defeat will finish her and her 'dream' off.

Drew said...

Can anyone explain to me why Scotland's trade links with the rest of the UK would be put at risk post-independence?

The assumption seems to be that the UK and Scotland would somehow be far less likely to trade with each other if Scotland was independent but I've never fully understood why.

Ireland and the UK have shared a deeply troubled history that has only very recently stabalised through the Good Friday Agreement and yet the economic links between Ireland and the UK have never been stronger. I can't honestly believe small and medium sized businesses in the rest of the UK would put their future at risk because of some kind of negative emotional response to Scottish independence.

In 2011 Ireland was the UK's 5th largest export market and in the top ten of countries the UK imports from. This is despite having a different currency and not sharing a landmass with 2/3rds of the UK and not being able to access the main cities like London, Birmingham and Manchester by road or rail.

According to the Irish Government's Department for Foreign Affairs and Trade, over 200,000 UK jobs are directly linked to UK exports to Ireland and the UK is the 3rd largest investor in Ireland, after the US and Germany.


Like the situation with the EU and the UK, where the UK is a net importer from the EU and EU firms rely on the UK to sell their goods and services, Scotland currently has a trade deficit with the rest of the UK. In 2013, the rest of the UK sold £62.7 billion in goods and services to Scotland. That's a lot of jobs and small and medium sized businesses relying on trade with Scotland.

Granted the current landscape is about to change dramatically when the UK leaves the EU and we'll have to see whether the UK accepts some agreement for freedom of movement in exchange for access to the EU single market.

But most businesses, or at least the successful ones, adapt to change and some of the most successful companies in the UK operate globally in some of the most unstable regions of the world, where corruption, poverty or conflict is rife. In my experience, if there is money to be made, companies will operate and trade virtually anywhere in the world and they don't care who is in charge.

Anonymous said...

Your solution of a Scottish currency ignores the cost of establishing a central bank and maintaining cash reserves. You cannot run as big a deficit in Scottish pounds as you choose to because that would devalue the currency, the strength of which you need to trade outside of Scotland. You have effectively suggested the Mugabe option.

Ross said...

Hello, I supported and still do support independence but I'm interested in your analysis and want to hear all sides respectfully.

From your graph Scotland, over the period, created more money than the UK and spent more on itself accordingly. Do you agree with that?

Yes, we have a higher fiscal balance currently. I'm not downplaying that for one second. However, is it really fair to imply Scotland is as poor as Greece? Do you agree that is fair?

I don't think ranking countries by fiscal deficit really helps frame the debate. On that basis Serbia and Malawi are richer than the United Kingdom. Can we have a fuller more realistic debate, please. I was drawn to your blog by the Greek headlines and that's fair enough. But the reason I was drawn was because it it just doesn't "sound right". Do you agree it's a bit of a stretch?

Does your graph take into account that Scottish expenditure above revenue can't be coming from a UK pot of money when the UK itself is spending more than it earns?

Thanks,
Ross



Paul Reid said...

Erm, what about all the money saved when Scotland leaves the Uk? Where does that feature in your account? I'm talking about interest on the huge UK debt, "our" portion of HS2 and HS3, "our" portion of London Crossrail and the London sewers, the House of Lords, repairs to the House of Commons, and of course Trident. To name but a few.

Kevin Hague said...

Erm ... I refer to that as the £0.6bn mainly from defence (inc Trident) and including HoL (a very small figure) as per the White Paper

There is precisely zero cost allocated to Scotland in GERS for London Crossrail or London Sewers and only 2% of HS2 which is Scot Gov's assumption of our share of value.

So all you have left is debt interest which is £2.8bn as our population share - even *if* we had zero debt (we wouldn't) you've still got £7bn to find.

Keep looking ...

Kevin Hague said...

Ross


Appreciate you engaging intelligently with this - thank you

Yes in the last 15 years we both generated more tax (because oil) and spent more on a per capita basis than the rest of the UK - your read is correct. The point is the net effect of those (red vs black lines) was to cumulatively incur a higher per capita deficit than the rest of the UK.

Look at Scotland in EU context graphs here Price of Independence and you'll see our 10% deficit as %age of GDP in historical EU context. It's really bad.

Of course its funded by UK debt - the whole point is we only pay a per capita share of that not a "deficit share" - that's why we get an effective subsidy. So yes my graph does take that into account.

Cheers

Drew said...

We should be clear, Scotland faces a huge financial blackhole whether we are independent or part of the UK.

As UK taxpayers, we are all liable for debt repayment which a proportion of our tax goes towards paying off.

Having an annual £15 billion deficit means it will take the UK much longer to return to surplus and reduce this burden on taxpayers.

The solution that both Unionists and Nationalists must accept is we either raise taxes or lower public spending.

Sitting back and saying 'it's okay, the rest of the UK picks up the tab' is fine if your only goal in life is to argue with Nationalists.

But there has to be an acceptance that the Barnett formula might not last forever and we need a Plan B if Scotland's current levels of public spending is reduced.

We have to cut our cloth accordingly and it will benefit everyone in the UK.

Andrew Illius said...

I'd find your main graph [the tree lines] easier to grasp if it presented absolute values instead of the differences between Scotland and rUK, ie Scottish per capita expenditure and revenue and [separately] rUK per capita expenditure and revenue. OK that's six lines, but simpler lines.

On currency, it is obvious that an independent Scotland would need its own currency - that way it can print as much as it wants....

Kevin Hague said...

It's not as easy as it sounds Andrew - I've played with various ways of presenting the data before settling on this version - if you want to have a go yourself I'd love to see it (I'm not being sarcastic)

Ross said...

Kevin

Thanks for responding. Seems to me the UK has been poorer than Scotland but has cut its cloth to suit. While we've spent around about the same amount as our revenue has fallen to UK levels. Out of interest, how does that work when we're told we've been getting real terms cuts in funding? The graph doesn't seem to highlight Osborne's cuts at all.

On the debt point, I guess you're correct for the most recent year (and who knows the future) if deficit rather than per capita. I don't believe that analsyis works over the period of the actual debt accumulation historically, however. If you ran an analysis on "deficit share" accumulation of the UK debt that may be quite interesting. Still though, don't know how the negotiation would go.

Pro independence people need to accept that the higher level of spending affects our fiscal balance. This seems to be more important than the oil price as we've more control over that.

Unionists need to accept Scotland has produced more money per head than the UK over a long period and even in a bad year produces as much as the UK. We're not a poor country, we're simply spending more than we should (on a purely dispassionate economic sense).

I think your graph could maybe do with the 3% Eurozone benchmark. I don't think it's fair to assume Scotland should expect to run an economy on a surplus.

Thanks, though. Interesting points of view.

Ross

Arbo regular said...

What really annoys me is that, each time that Scotland has an independence referendum, the UK as a whole pays for it. I wouldn't mind this so much if the whole of the UK got a vote.
Much more Sturgeon on our news programmes might result in a resounding yes vote.

Kevin Hague said...

Ross

First re the use of the term "poorer". If you mean poorer in terms of tax revenues generated (assuming Scotland gets the oil) then yes that has been true in recent years (athough not now) - when you say "cut their cloth to suit" I presume you mean relatively spent less per capita. But as I've pointed out before Scotland has expensive cost to serve (low population density, remote communities and demographic problems relating to population age mix and health) ... so to deliver (broadly speaking) the same standards of public services simply costs more. So receiving the same standards of public services even with our oil income we run a higher deficit - it could be argued that means we are in fact "poorer"

I fear you misunderstand the graph:

it's the relative difference in spend between Scotland and rUK on a per capita basis - so "Osborne's cuts" would only move these lines if one or other was disproportionately hit. In fact because of the vagaries of Barnett Scotland is slightly protected, hence the (slight) upward trend on the red line.

See the "price of independence" report which I wrote and is linked to here Price of Independence

You'll see I take the analysis back to 1980 (which is of course the point at which oil really starts so is the most flattering to Scotland) and it does show we are net contributors since then. That's the whole point of pooling and sharing over time I would argue - we get pay-back for that now which is one of the reasons why it would be nuts to leave!

I 100% agree with you when you say the following (and it's something not only that I accept but that I spend an inordinate amount of time pointing out) ...

"Unionists need to accept Scotland has produced more money per head than the UK over a long period and even in a bad year produces as much as the UK. We're not a poor country, we're simply spending more than we should (on a purely dispassionate economic sense)."

... but I'd add important caveats.

That assumes you attribute the oil to Scotland but we were in a union and remain so. If shale gas wealth was discovered in the South East I'm sure you would agree the benefits of that should be shared nationwide.

You say "a bad year" which is to miss the big point here: oil tax revenues are not going to return to historic levels even if the oil price recovers (see the report I've already linked to) - even if you disagree with that it's one hell of a gamble to assume they will.

"we're simply spending more than we should" should really say "... than we could if we were independent" because the nature of pooling and sharing means it's not inappropriate that we spend this amount if we're in the UK

At no point in this analysis do I assume we'd run a surplus - the £10m just takes us to the same deficit level as UK which is currently >3% (again see Eurozone deficit comparison graphs in the report I've linked to).

To summarise: my frustration with the independence debate is that those arguing for indy on the whole deny or ignore the point that you rightly have grasped - if we were independent we would have to reduce our spending (and in my analysis, by a fairly dramatic amount - certainly an amount that would dwarf "Osborne's cuts")

Cheers

Kevin

astropoet said...

As time goes on, I'm caring less about actual independence, but more about fiscal independence. How do we get Scotland into the black in the Union? I want that more than Indy. So I'd like to see less blog posts like this, reiterating what a basket case Scotland is, and more blog posts with ideas about what to do about it please.

Kevin Hague said...

dear astropet

if you think we should be fiscally independent within a generation or two we simply need to spend less and scrap freebies that aren't enjoyed by the rest of the U.K.

No need to thank me

Andrew Veitch said...

I'm afraid I disagree that a deficit of 9.7% of GDP is sustainable as part of the UK. Particularly given the background of the UK economy; it looks likely that Westminster are going to have to cut pensions from 2020, cut spending on the NHS and probably make some tax increases in the medium term.

It's very hard to see a Chancellor standing up in Parliament and announcing all of this and then putting income tax up by 2% in England in order to fund Scotland's deficit.

If you take a glance at ConservativeHome or read some of the opinion in the pieces in The Telegraph you can see a lot of Conservative opinion is already moving in this direction.

Whatever your views are on Scottish independence we are going to have to get the deficit down.

Anonymous said...

It's a pity Mrs Sturgeon does not have the honesty or openness to tell her voters the plain truth. That in the event of Scotland going independent, there would be no money for benefits.
But then since their voters comprise largely people on the dole, single mothers, former prisoners and social workers off on stress-related illnesses, the truth would wipe out the 90% of the SNP's votes.

david alexander said...

i just got blocked from kevin on twitter for correctly pointing out the above analysis takes no account of time value of money.

he says he will change anything if its pointed out to him but clearly not.

i mean that really changes everything . i mean everything. push any reasonable discount rate in there and the above analysis are toast . he knows he wont take it !

kevin over to you

Kevin Hague said...

David - I didn't block you I muted you for being obstinately dense - I publish this comment so others can see that.

1. The cash figures I use are real (inflation adjusted) as is standard practice see OECD, IFS, NIESR, IPPR, HMT, etc. etc.

2. % GDP figures don't require deflating as has no affect (numerator and denominator both see the same adjustment so cancel out)

3. The SG present GERS in nominal terms (not even inflation adjusted let alone "discounted")

4. I'm very familiar with concepts of discounted cash flow, net present value, weighted average cost of capital and the capital asset pricing model (my day job involves quite a lot of corporate finance, I have been an investor and advisor on many venture capital deals, I have carried out several large-scale project and business valuations) - you have yet to make any coherent argument as to how these concepts should be applied when comparing and explaining fiscal balances between countries

If you make a coherent argument and/or offer some analysis to show what on earth you're talking about I will of course share it and/or offer comment.