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


Anonymous said...

Another link with comment on Scotlands demographics going the wrong way

Mark M said...

Hi Kevin,

I'm not sure the conclusion that more immigration naturally equates to more resentment of immigration can be supported by the evidence. The experience of London suggests the opposite.

In fact the UKIP vote is strongest where there are no immigrants. See

Anonymous said...

Great article, but I think you're slightly off beam with your conclusion that independence is the key to getting more immigrants and thus keeping the wheels turning. You have got to remember that Scotland currently has the same generous benefits system and public services [in fact, somewhat better if you include all the freebies] as the rest of the UK, and has access to the same EU labour pool and, indeed, to anyone outwith the EU who qualifies; and yet we have failed to attract immigrants at the rate of England. I think there is a very simple reason for this (and, incidentally, one of the principal reasons why the great and the good of Scotland get the hell out of Dodge at the first opportunity): the weather. And, unless global warming does us a favour, no amount of 'independence' is going to change that. Best we concentrate on managing the situation as it is and cutting our cloth accordingly, rather than believing the fantasy that independence - together with its likely severe cutbacks to public services - will somehow open the floodgates to immigrants. Simply put: if they are not coming in sufficient numbers now, why on earth would they come in the future?

Anyhow, thanks for the article. Excellent stuff as usual.

Cheers, Derek Brownlee

Niall Murray said...

Kevin, am not sure your division of Scotland and rUK on migration terms works here. The rUK may indeed have had higher migration, but it can't really be looked at as a single entity. London has grabbed a huge chunk of the inward migration, and as we know voted 60-40 to remain. The are some areas (such as in rural communities) that have also had high inward migration, but the experience of locals there will be very different. There is a far greater correlation to age and education levels than to immigration in people's views.

If you want to look for explanations of Scotland's more positive view on European migration, then the answer is more likely to be cultural. When the dimwits who look at blaming other people for their problems do so in Scotland, they use the English as their "other". The English of the same mindset also look towards a bigger neighbour, in this case Europe. It is the same impulse but with a different target. It is this that is driving the views on migration, not relative levels.

Drew said...

According to Scottish Government figures, alcohol abuse in Scotland costs public services to treat, in terms of the police, the courts, health and social services to respond to and have to deal with, £3.5 billion pounds every year. This figure is replicated for drug abuse.

This additional £7 billion pounds in spending represents nearly a quarter of the devolved Scottish budget and contributes a significant proportion of Scotland's huge annual deficit, currently £15 billion pounds and rising.

Health experts are unanimous in their opinion that the fall in the price of alcohol since the 1970s has a direct correlation to a dramatic rise in the quantities people are drinking.

Scotland requires radical solutions to alcohol and drug misuse, however, alcohol duty and the Misuse of Drugs Act are both reserved to Westminster.

We need radical solutions to tackle these problems. Most doctors and health experts agree raising the price of alcohol through taxation would reduce the levels of problematic drinking.

Decriminalising the possession of drugs and treated it as a health and education issue in Portugal since 2001, according to studies, has seen the cost to society of drug misuse fall by 18%. Safe drug consumption rooms have helped reduce drug related deaths and the harm caused by drug misuse in both Canada and Australia amongst others.

These policies would be a difficult sell for the public and the media but the current approaches are failing badly.

Kevin Hague said...

do you have a source for the £3.5bn - it seems incredibly high

Drew said...

Unfortunately we only have mainly Scottish Government reports to go on and they were trying to push through their MUP for alcohol at the time.

However, very few doctors and public health experts seem to dispute the figures:

The only independent research I could find was from Stirling Uni back in 2001 which puts the cost at £1 billion for alcohol abuse

I would be surprised if the cost had tripled in 15 years so I'm prepared to accept the combined figure may be closer to £5-6 billion.

This still represents a very large cost to society.

Kevin Hague said...

very interesting - thanks