Thursday, 27 August 2020

Apples and Pears: GERS

The Scottish Government's economists yesterday published their latest Government Expenditure & Revenue Scotland (GERS) figures. I'll publish a more complete analysis on this blog soon, but the bottom line is they just confirm what we already know:

  • Mainly because of Scotland's spending per head being 12% higher than the UK average, Scotland has a far higher deficit/GDP than the UK as a whole
  • The scale of Scotland's notional GERS deficit (8.6% of GDP) is such that it would be unsustainable were Scotland to be independent or fiscally autonomous within the EU
  • The net effect of UK-wide pooling and sharing remains a fiscal transfer in Scotland's favour of £10.7bn a year or roughly £2,000 for every man, woman and child in Scotland

I wrote a brief summary of what this means for the Daily Record - it's the same old story.

But there is a piece of detail in the GERS report I want to draw attention to, because it illustrates the danger of the £2,000 per head number becoming a totemic figure in debates about Scottish separation. The table I'm referring to is on page 38 and details both Scotland and the UK's net contributions to the EU budget:

Let's get the Leave campaign's "£350m on the side of a bus" lie sorted first: you'll see the last row of the table show's the UK's net contribution to the EU was around £10bn pa, so in fact just under £200m per week. Of course the genius of the Leave campaign was to quote a false number so that we all kept talking about it - who honestly thinks the man in the street cares whether it's £200m or £350m? Either way its a big number and a big net cost. 

The true £10bn pa net cost to the UK is (coincidently) very similar to the net transfer that Scotland receives from the rest of the UK. Perhaps more relevantly, it's the equivalent of about £150 per head for every person in the UK.

Scotland's figure is a roughly £0.5bn pa net contribution to the EU every year, or about £100 per head (although without the UK abatement it would be nearly double that).

Here's the problem.  When people hear the "£2,000 per head fiscal transfer from rUK" number, common responses include "so what: leaving the EU is economically damaging and it didn't stop us" or "but the cost of leaving the EU is far greater". 

This is the danger when complex economic debates become reduced to a couple of headline-grabbing figures - people intuitively response by grabbing hold of the headline numbers (or arguments) they can remember ... and often end up making false "apples-for-pears" comparisons in the process. 

Let me explain.

Putting aside the EU exit charge, the annual impact of leaving the EU for the UK is a direct, day-one saving of c.£10bn pa or £150 per head. The comparable figure for Scotland leaving the UK is a direct day-one loss of  nearly £11bn pa or £2,000 per head.

So on a like-for-like "apples-for-apples" basis, the economic arguments are not even vaguely comparable. The UK leaving the EU prevents a £150/head transfer out from the UK, Scotland leaving the UK prevents a £2,000/head transfer in to Scotland.

The important point (both for Brexit and Scexit) is that this represents only the day-one fiscal tranfer impact before the impact of separation on our broader economic performance. It assumes nothing else changes - and the one thing that Scottish separatists and those of us who believe in UK-wide solidarity can agree on is that an awful lot would change (it's just the direction and scale of that change we disagree on).

The big headline "cost of Brexit" figures (e.g "£200 billion by the end of 2020") refer to this wider economic impact - normally an estimate of a cumulative GDP impact versus an alternative Remain scenario.

So what would the equivalent "cost of Scexit" figure be?

The first thing to note is the answer to that question is most definitely not the annual £10bn+, £2,000 per head figure that has become so totemic in this debate. If you've followed the logic up to here, you will realise that is a completely different additional cost that exists with Scexit, something which in Brexit terms was in fact a benefit.

Quantifying the long term economic cost of Scotland leaving the UK is of course not easy. Indeed Sottish separatists will argue that being freed from the contraints of Westminster will lead to a flourishing of the Scottish economy - but in doing so they echo the language of the Brexiteers and are falling into the same trap.

If we agree that Brexit will be a big net economic cost (I certainly do) then logically the equivalent economic cost for Scotland leaving the UK will be so much greater. 

The main driver of the Brexit downside is the risk of introducing trade friction with the EU. Scexit risks introducing trade friction between Scotland and rUK - and Scotland exports 3x more to rUK than we do to the EU (even after over 40 years of unfettered EU market access).

But Scexit introduces additional downsides: we share a currency, a welfare state and deeply integrated machinery of state within the UK. Leaving the EU will be a cake-walk in comparison - the economic cases are not even remotely comparable.

Saturday, 18 July 2020

Fact Checking a Fact Check

The National today published a 1,000 article rather hilariously labelled as a "Fact Check" which amounted to little more than a personal attack against me. The entire piece is predicated on their view that issuing a clarification is "being forced to eat your words" - it's a sorry state of affairs when a blogger has more journalistic integrity than a publication claiming to be a national newspaper. Despite taking all those words merely to demonstrate their own failure to grasp the basic facts of the matter, they boldly conclude: "Chokkablog gets it spectacularly wrong".

Well allow me to retort.

Context

I wrote some tweets and a blog complaining about Kate Forbes' attempts to seek grievance by suggesting that Rishi Sunak's "Plan for Jobs" £30bn pandemic support was worth only £21m to Scotland.

My main complaint was that she was mithering about funds the Scottish Government was receiving, cynically expecting independence supporters to read that as being all the support that Scotland was receiving. You might be thinking only a knuckle-dragging grievance-junky would make such a mistake. Ladies and gentlemen, I present to you the National's front page splash yesterday:


For the avoidance of any doubt: the claim that "Scotland only gets £21m from '£30bn'" is absolutely and unequivocally false. Rememember: this is the paper which is claiming to be publishing a "Fact Check" on this topic!

Here is what the IFS actually said: "Of course, Scotland as a nation will receive much more – UK-wide measures like the Job Retention Bonus, Kickstart Scheme and VAT cut could amount to around £1 billion of genuinely new money for Scottish businesses, jobseekers and consumers. And the Scottish Government itself will receive over £700 million as a result of other funding confirmed in the Summer Economic Update"

I also questioned the veracity of the £21m number itself, even as the figure the Scottish Government would get "of the £30bn". As is always the way with my blog, I laid out the audit-trail of information I was able to find, explained my reasoning and was clear about what I could and could not show.

I concluded: "To be clear: I don't know what the Barnett Consequentials are on the £30bn figure, but I do know the correct denominator for the calculation is certainly not £30bn* and I would be amazed if the correct numerator was as low as £21m"

* as that includes funds spent directly in Scotland, not via the Scottish Government

I was completely clear about the basis of my judgement and - as it happens - I was right.

Again looking at what the IFS actually said: "the Scottish Government will get far more than £21 million. Because stamp duty is devolved to Scotland it will get much more than that [..] Exactly how much is not yet clear [..] but initial estimates published by the OBR this week suggest it could amount to around £120 million spread over this year and next"

So why did I apologise?

I apologised because in my blog I referenced a statement made by the IFS as support for my conclusions and - emboldended by the IFS spokeperson being quoted as saying the £21m was "not true" - I said "far fewer people will take the time to understand the complicated truth than accept the simple lie".

When the IFS issued a subsequent statement (the one I quote above) highlighting that they had - like me - not realised how much of the £30bn was recycled money, I felt it would be wrong for me not to update my blog to reflect that. I also felt, in the light of the revised IFS statement, that I had been overly harsh in suggesting that Kate Forbes' claim was a "lie" and that I should apologise for that - so I did. I also pinned the Tweet making that apology to my Twitter profile, to ensure it was widely seen.

The National "Fact Check"

They offer their readers this "Doorstep answer": "Kevin Hague was forced to eat his words when the independent Institute for Fiscal Studies did the sums again and agreed with the Cabinet Secretary. Hague was forced to apologise."

I wasn't forced to do anything - who on earth do they think did this forcing? In fact what happened is that I had the integrity to ensure that my post was updated to reflect the IFS's own updated statement and I hope the good grace to recognise that I had been overly harsh in my original wording.

I'll skip the National's ad hominem attacks on me and the organisation I chair and try and focus on the odd moments where the National attempts to deal with what I actually wrote. They say: "he accepts at face value the Chancellor’s claim that the Plan for Jobs means £30bn of new money, though there are references in the initial Treasury paper to existing cash pledges being “brought forward”.

It is patently untrue that I accepted £30bn at face value as new money. They're claiming this is a "Fact Check" remember and my exact words were: "Now some of these are described as "accelerating investment" and some are "previously announced" - so it's possible that the Barnett Consequentials relating to them have already been included in previous figures announced". 

The National go on to say: "Suspiciously, despite endless laudatory quotes from Sunak’s Plan for Jobs .."

Far from being endless, there isn't a single "laudatory quote" in my blog (remember, they think this is a "Fact Check") - I merely detail what's in the Plan to explicitly separate out what would be UK-wide and so have no impact on the Scottish Government's budget.

They then rather neatly highlight my transparent honesty (don't forget they claim I'm doing this "suspiciously"): "... Hague actually avoids giving exact numbers for what he considers to be the correct Barnett consequentials. In fact, he admits: “I don’t know what the Barnett consequentials are on the £30bn figure”. How then can he criticise Kate Forbes?"

The problem here is that the author of the National's "Fact Check" clearly has no understanding of how an analytical audit trail works, or why admitting that you don't have the information to be able to calculate or recreate a specific figure is not "suspicious", it's transparent and honest. It is precisely because I am being very careful to avoid misleading readers of my blog that I feel I can criticise Kate Forbes.

The National continue: "Instead, Hague quotes an analysis written on the day of the Chancellor’s statement, by Peter Phillips of the independent Institute for Fiscal Studies (IFS). Here Philips rejects the Cabinet Secretary’s figure of £21m in Barnett consequentials as simply “not true”. Unfortunately for Hague, a week later Phillips completely reversed his judgement, explicitly exonerating Forbes."

It's not "instead" and it was an interview quote not an "an analyis", but yes I referenced an IFS quote in support of my conclusion - which is why when they issued a clarification I updated my blog.  It's also obvious to anybody who reads what the IFS actually wrote that, while mainly complaining about Sunak's misleading presentation of the figures, they were not "explicitly exonerating Forbes". They were recognising that the £21m was a valid number under a specific definition (Barnett Consequentials of newly announced spend) but also that it is not even all of the money the Scottish Government "get" as a result of newly announced spend ("Because stamp duty is devolved to Scotland it will get much more than that").

The National's Conclusion is actually - unintentionally I'm sure - rather flattering: "KEVIN Hague was quick to reword his original blog (yesterday). He also apologised for essentially calling her a liar. But in his reworked blog post, there remains the implication that Forbes was manufacturing grievance for political ends. Buried deep in the small print of the revised blog, Hague makes a grudging admission regarding his earlier erroneous criticisms of the Cabinet Secretary’s integrity: “... it’s only fair to highlight that her figure is more justifiable than my original wording implies.”

"Buried deep in the small print" amuses me, given there is no small print, it's the conclusion of the blog and I screen-capped, tweeted and pinned the apology - but whatever. Apart from that nonsense I'm pretty happy with the rest of their summary to be honest. Only a single-issue propaganda sheet with no journalisic integrity or interest in factual accuracy would see the act of clarifying and apologising as a bad thing - and my suggestion that she was manufacturing grievance for political ends is vindicated by the National's own headline on Friday, so I guess I should thank them for that!

Now, while it's always super fun to start the weekend defending yourself against a hit-piece in a national newspaper, I really do have better things to be doing with my time.

Thursday, 9 July 2020

Kate Forbes' Grievance, Dissected

At the time of writing, in the 24 hours since being posted this tweet from Scottish Finance Secretary Kate Forbes has received around 4 thousand retweets and likes Those are some big social media numbers for a bold claim - so let us dissect this grievance:

"Of the c.£30 billion announced by the Chancellor today to support the economy"

It's clear she's referring to this announcement by Chancellor Rishi Sunak and a quick browse finds us the (up to) £30bn

"the Scottish Government will receive..."

A cynic might see signs of sophistry here: by referring to what "the Scottish Government will receive" is she hoping casual readers will read that as being all the economic support Scotland will receive? Surely not.

On the off-chance that anybody might have fallen for this rather clumsy rhetorical sleight of hand: for those parts of the scheme that are UK or GB-wide, Scotland will receive money based directly on need (or take-up), it just won't come via the conduit of the Scottish Government.

So by limiting herself to funds "the Scottish Government will receive" she's able to ignore our needs-based share of the:
  • £9.4bn Job Retention Bonus
  • £2.1bn Kickstart Scheme 
  • £1.2bn of various support programmes for those seeking work
  • £1.2bn of decarbonisation initiatives
  • £0.5bn "Eat Out to Help Out" scheme
  • £0.3bn of UK-wide investment in "World Class Laboratories"
The above totals £14.7bn, of which Scotland will of course receive its fair share based on need and/or take-up. If we assume for illustrative purposes that equates to our 8.2% population share, that's £1,200m she's decided to disregard.

But the above are just the UK and GB-wide spending elements of the support package announced - the £30bn also includes £4.1bn of VAT reduction for hospitality, accomodation and attractions which Scotland will benefit from based on our share of consumption in those sectors (the Scottish tourism industry being of particular significance here). Again if we assume this translates into our 8.2% population share (my guess is it will be higher), that's another c.£330m of economic support she's disregarding.

But it doesn't stop there: the £30bn headline number also includes a £3.8bn cut to Stamp Duty Land Tax (SDLT) in England and NI. This is a tax fully devolved to Scotland (as LBTT) and there has been nothing - other than political will and/or courage - to prevent the Scottish government taking similar action. [I'll be honest: how - if at all - this cut would affect the Scottish Block Grant Adjustment is not something I've taken the time to get my head around].


**** Update 17/07/2020 ****
There will indeed be a Scottish budget increase as a direct result of this SDLT cut - according to the IFS: "Exactly how much is not yet clear – it will depend on updated forecasts and ultimately outturns for stamp duty revenues in England and Northern Ireland. But initial estimates published by the OBR this week suggest it could amount to around £120 million spread over this year and next."


So if we add together the elements above, we have identified £22.6bn of the £30bn which is not relevant to the figure that the Scottish Government should receive.


"... only £21m - less than 0.1%"

Where does the £21m come from? The implication is that this is the Barnett consequentials on the £30bn announced, but that's a hard number to calculate (and as we've seen, £30bn is the wrong denominator to use).

We've already shown that £22.6bn of the package announced wouldn't be relevant for the purposes of calculating Barnett Consequentials anyway (because those are sums being spent UK or GB-wide and/or relate to tax cuts, not spending). 

But that still leaves us with c.£7bn of spending committed to England on which we might expect Barnett consequentials to flow to the Scottish Government.

That £7bn is made up of;
  • £2.0bn of Green Homes Grant (an English initiative)
  • £1.5bn of "accelerating investment" in England's NHS
  • £0.8bn of "accelerating investment" in England's Schools
  • £0.6bn of other "accelerating investment" in English infrastructure projects
  • £0.9bn of English home building / housing fund increase
  • £0.3bn of England-only job support
  • c.£1.0bn of implied other English infrastructure investment (mainly the Affordable Homes Programme)
Now some of these are described as "accelerating investment" and some are "previously announced" - so it's possible that the Barnett Consequentials relating to them have already been included in previous figures announced.

But Kate Forbes is talking about the amount that will flow to the Scottish Government "of the £30bn announced" and is using the £30bn as the denominator for her grievance-headline grabbing "less than 0.1%" claim - so it would simply be incorrect to exclude any of the Barnett Consequentials from the above in her calculation, whenever they may have been previously announced or discussed.

To be clear: I don't know what the Barnett Consequentials are on the £30bn figure, but I do know the correct denominator for the calculation is certainly not £30bn and I would be amazed if the correct numerator was as low as £21m (the Green Homes Scheme alone would surely generate £160m of Barnett Consequentials?)

In fact as I am writing this post I see "Leading economist: £21m claim by SNP finance chief not true" in which David Phillips of the IFS reaches the same conclusion.


**** Update 17/07/2020 ****
David Phillips has subsequently posted this "Up to £10 billion of the Chancellor's 'Plan for Jobs' will be funded by underspends on previously planned projects" making this very important correction:

"But the Scottish Government won’t, as I initially presumed, get extra funding as a result of the Green Homes Grant or the full £40 million it would if all of the money for traineeships and so on were new. Instead, apart from the stamp duty money, it will receive £21 million – the figure quoted by the Scottish Finance Minister – as a result of the combination of the ‘Plan for Jobs’ and the reductions in investment spending elsewhere that the Treasury is now expecting."

Revisiting my own text in the light of this, a couple of observations and corrections:

I said above "some of these are described as "accelerating investment" and some are "previously announced" - so it's possible that the Barnett Consequentials relating to them have already been included in previous figures announced" - Whilst I was right, there's no doubt that when writing I was assuming that some rather than effectively all of these figures had already been announced. So mea culpa, I fell into the same trap as the IFS

I did say "To be clear: I don't know what the Barnett Consequentials are on the £30bn figure" - and to be fair I still don't. All we know now is that the Barnett Consequentials on the proportion of the £7bn [i.e. that part of the £30bn that is not being spent UK or GB-wide] which is genuinely new money is £21m (and that there will be an additional c.£120m block grant adjustment over 2 years related to the SDLT cut).

I said above "I would be amazed if the correct numerator was as low as £21m ". Given at this stage we are past the "suggesting that what matters here is what the Scottish Government gets as opposed to what the people of Scotland get"point, we are now debating technicalities. So it's fair to point out that a/ "of the £30bn" the consequentials are indeed greater than £21m - when quoting the £21m we should be saying "of what's new in the £30bn" b/ the £21m excludes the block grant adjustment impact of the SDLT cut, worth c.£120m over 2 years

But I've thought about this and, given the incremental Barnett Consequentials from what was annouced are only £21m, I don't think it's unreasonable that Kate Forbes chose that as her headline "the Scot Gov gets" number. In an ideal world she should have said "the only new money the Scottish Government will receive is ..." and even then should have included c£120m for the likely SDLT block grant adjustment ... but it would be inconsistent of me to hold her to higher standards than HM Treasury, and it's their attempt to pass recycled money off as new that's caused the confusion and provided her with cover.

None of this changes the most important point here, the point Kate Forbes was hoping to distract from (again quoting the IFS):

Of course, Scotland as a nation will receive much more – UK-wide measures like the Job Retention Bonus, Kickstart Scheme and VAT cut could amount to around £1 billion of genuinely new money for Scottish businesses, jobseekers and consumers. And the Scottish Government itself will receive over £700 million as a result of other funding confirmed in the Summer Economic Update – mainly as a result of extra spending on public services in England such as the NHS.


There is no doubt in my mind that Forbe's tweet was intended to stoke grievance by implying that Scotland is only seeing 0.1% of the £30bn. That in itself is at best pretty disappointing, at worst downright outrageous.

But even if we grant her the semantic benefit of the doubt - if we assume she was expecting her followers to interpret this as an issue of control of spending rather than the absolute amount of support the Scottish economy is receiving - the figures she quotes make no sense. 

The Barnett Consequentials resulting from the figures annouced yesterday will clearly be greater than she claims*, and she divides this wrong figure by the wrong figure anyway to get to her 0.1% claim. This is the sort of behaviour that gives people like me headaches.


**** Update 17/07/2020 ****
* per the update above: the Barnett Consequential from that part which is new money of the figures annouced will not be greater than she claims. The italicised part above is important, but it's only fair to highlight that her figure is more justifiable than my original wording implies


It took Kate Forbes a couple of minutes to fire out that tweet, and it will have done its job for her amongst the SNP's grievance-hungry supporters. The moment I saw the tweet I, like so many others, knew instinctively it was nonsense. But it has taken me most of the day to robustly show why - and far fewer people will take the time to understand the complicated truth than accept the simple lie*. Such is the depressing reality of modern politics, I guess.


**** Update 17/07/2020 ****
* I still have issues with the tweet - the implication that £21m is all Scotland is getting, the fact she uses £30bn as the denominator ("of the £30bn") when most of the £30bn is UK-wide spend anyway and the fact that she ignore the block grant adjustment impact of the SDLT cut - but knowing what we now know about the way the treasury recycled already committed spending to make it look like new spending, I think I was wrong to label the tweet a "simple lie" and offer my apologies to Kate Forbes for doing so 


***

As an addendum: I see Andrew Wilson - Chair of the SNP's Sustainable Growth Commission (a commission on which Kate Forbes sat) - has offered his hot take:
Apparently in the world of the SNP fan-club, she is making a "self evidently truthful point" .. and to highlight the reality of the support the Scottish economy is receiving from the UK government is to somehow fail to "back devolution".

I despair.

***

For those who care about the workings, the below is the spreadsheet I used to turn the text in the "Plan for Jobs" report into something I could interpret


 












Wednesday, 5 February 2020

Deficits, Deficit Gaps and Fiscal Transfers

To understand what is going on when we talk about implied fiscal transfers between different parts of the UK (as discussed here), it's perhaps easiest to think of what happens when we split the bill in a restaurant.

To know whether or not we benefit from splitting the bill, we only need to know two things:
  1. How much of the bill are we responsible for creating?
  2. How much of the bill do we actually have to pay?
If the first figure is greater than the second, we benefit from splitting the bill (we receive an implied transfer from the others we're splitting the bill with).

In the context of the debate around Scottish independence, the first of these questions is answered by the Scottish Government's own GERS report. This tells us, based on a series of explicit assumptions, how much of the UK's deficit (the bill) Scotland is responsbile for.

The second question is more contentious, as there are no "official figures" as to how responsibility for the national debt (the cumulation of annual deficits) is shared - so how much of the bill does Scotland have to pay?

Fortunately there is broad consensus around the view that the UK's debt should (or at the very least reasonably could) be shared on a population basis.
  1. The GERS figures include a population share of the interest charge generated by the UK's debt - given that debt is merely the accumulaton of the UK's deficits over time, that is effectively a population share of the UK's (cumulative) deficit
  2. The Independence White Paper in 2014 stated "Scotland and the rest of the UK will agree a share of the national debt. This could be by reference to the historical contribution made to the UK’s public finances by Scotland. An alternative approach would be to use our population share."
  3. The SNP's own Sustainable Growth Commission danced around this question, but eventually assumed a population share of UK debt interest within their proposed "solidarity payment"
So it's really pretty simple: the difference between the share of the UK's deficit Scotland is responsible for creating (see GERS) and the share of the UK's deficit Scotland pays for (assume population share) is the implied fiscal transfer.

As we'll come on to see, you can make different assumptions about the share of the UK's deficit Scotland will ultimately have to pay, and conclude a different figure for the implied fiscal transfer.

***

At the risk of labouring the restaurant analogy, let's run through an example with some illustrative figures to help us explain the differences between three terms that often get confused: the deficit, the deficit gap and the effective fiscal transfer:
  • Group A: 18 people go for a meal, the bill comes to £1,800 so they have spent £100/head
  • Group B: 2 different people go for a meal, their bill is £300 so they have spent £150/head
If Group A and Group B decide to get together and split the bill (to "pool & share the deficit"), what happens? The total bill would be £2,100 which split equally between 20 people would be £105/head. Here's a simple summary:


The spending gap between the groups is £50/head (Group B spent £50/head more than Group A), but the benefit of pooling and sharing - the effective transfer Group B receives - is £45/head2.

The total transfer from Group A to Group B is £45x2 = £90

Now let's replace the figures in our analogy with the fiscal reality (per GERS 2018-19) - the "bill" is the deficit, Group B is Scotland and Group A is the rest of the UK.


So Scotland's GERS deficit is £12.6bn, the deficit gap is £11.6bn and the effective fiscal transfer to Scotland is £10.7bn. 

A huge amount of confusion is caused by people failing to understand the conceptual the differences between these figures - if you've followed what's going on up to here, give yourself a pat on the back.

***
So armed with this understanding, let's take a look at the most common mistake made when people debate the "£10bn fiscal transfer". To illustrate, let me use the following screen-capture which (incredibly) is taken from Stuart Campbell's own "Wings Over Scotland" blog:


If you've been following this blog post so far, you will realise who the twit is in the exchange above (hint: it's not Paul). To walk through this carefully, per the figures above:
  • Scotland's deficit is £12.6bn
  • We assume Scotland bears a population share of the UK's deficit - so in this year Scotland takes on an additional "loan" of just £1.9bn
  • The difference of £10.7bn is the effective fiscal transfer Scotland receives - it's the amount over and above the "loan" Scotland takes on
Fun Fact: this means that those who argue Scotland should assume less than our population share of the UK's debt are - whether they realise it or not - arguing that the effective fiscal transfer in Scotland's favour is in fact larger than £10.7bn.

***

A common reaction to these figures is "how can Scotland's 8% of the UK population possibly be responsible for a third of the UK's deficit - that seems unbelievable". This is what is technically known as an "argument from incredulity" and is perhaps best summarised by this quote from Professor Richard Murphy:
"I have been continually bemused by the fact that GERS says that Scotland runs a deficit so  much larger in proportionate terms than that for the UK as a whole."
Here our restaurant bill analogy falls short, because what we're dealing with when we're sharing the deficit is not how much we've spent but the net effect of how much revenue we've generated less the amount we've spent. I've explained the dynamics involved here in this brief video (with apologies for my exasperated tone and the figures being a year out-of-date)




Another way to help understand this point is to look at fiscal transfers across the UK (including the English regions) as this blog has recently done here. There is nothing surprising or hard to fathom going on here - it's just simple fiscal arithemetic.


As I've pointed out before: it's not hard to imagine a situation where Scotland runs a small deficit while the the UK overall is in fiscal balance - in that scenario Scotland would be responsible for an infinite (or more accurately: a "divide by zero error") share of the UK's deficit. It's just maths.

***

When we use the GERS figures to scale the effective fiscal transfer, we have to recognise that these are only pro-forma figures, they represent what Scotland's stand-alone defict would be if we kept generating revenues and incurring spending as shown in GERS.


In case it's not already dead, let me flog the restaurant analogy one more time: "if we weren't sharing the bill, maybe we wouldn't have tipped the waiter 15% and perhaps we wouldn't have ordered the bottled water for the table."


This is a fair point. Even before we consider the likely economic shock impacts on revenue or spending that separation from the UK would cause (see Brexit), the scale of deficit that the GERS figures reveal means that current levels of spending would be unsustainable for a newly independent Scotland, particularly if trying to launch a new currency.

It's true that some of that spending in GERS is costs allocated from the rest of the UK on a simple population basis (defence, debt interest and international aid being the vast majority of these), so any case for independence needs to start by working out what an independent Scotland would replace these costs with. For reference: relative to that £10.7bn fiscal transfer, the notoriously optimistic White Paper on independence assumed a net saving of £0.6bn.

What typically happens at this point is that some of the more blindly-committed supporters of independence start suggesting that the GERS figures are all made up anyway as part of some vast conspiracy by which Westminster has managed to get the Scottish Government's own economists to pull the wool over the eyes of the SNP (and their Sustainable Growth Commission, their Fiscal Commission Working Group, the IFS, Fraser of Allandar, NIESR, UK Statistics Authority, etc. etc.).

This is of course a ridiculous position to adopt (which, to be fair, is why only those flakier members of the independence movement attempt to adopt it). Alex Salmond was certainly very clear about what the GERS figures told us when he thought he could spin them in his favour:



Salmond is the man who once proudly boasted of his ability to put “a gloss on statistics or any economic figure” to build a political case, and he certainly did his best to do that with the 2010-11 GERS figures. He made the highly dubious claim that they showed an independent Scotland could have been spending £2.7bn more and therefore should have been running an even higher deficit than that shown in GERS!




Still: desite the fact that he used a different method for "splitting the bill" (based on a GDP share not a population share), he was recognising the principle of the fiscal transfer3.

Unfortunately for independence supporters, taking the logic Salmond applied to the 2011-12 figures and applying them to the 2018-19 figures produces a massive fiscal transfer now in Scotland's favour - so by his own logic, an independent Scotland should now be spending £10bn less4.

At this point, most of those arguing for independence ignore how wedded they used to be to the figures and return to straight-froward "GERS denial" - fortunately this blog has already comprehensively dealt with those denials here > GERS Deniers.

Ah but wait: what about "this is just a snapshot"?

OK, well we can do this analysis over time and plot the size of the deficit gap5 for the last 21 years:


You can see why Alex Salmond was so excited about the 2008/09 to 2010/11 figures6.

The reason for the dramatic reversal and growth in that gap will be familiar to regular readers of Chokkablog - they are most easily summarised by this graph:


  • The gap closed when North Sea revenues boomed, but has grown massively as North Sea revenues have plummeted
  • Scotland has not only continued to spend more per head than the rest of the UK, that spending gap itself has actually grown (thanks to the Barnett Formula and low levels of absolute spending growth7
  • Scotland's onshore revenue performance has declined relative to rUK8
For completeness, we can plot the onshore deficit gap over time (i.e. to see what happens if we strip out North Sea revenue effects from these figures):



Without oil revenues, there would never have been a prime facie economic case for Scottish independence - and the vagaries of the Barnett Formula (plus perhaps the impact of the SNP's tax rises) have led to the scale of the fiscal transfer that Scotland benefits from within the UK actually increasing in recent years.

/Ends/



Notes




1. This very carefully worded FoI response is sometimes in debates around the fiscal transfer:
"Official figures for any fiscal transfer are not available.
The reason this information is not available is that such a figure requires a number of assumptions to be made. For example, as the UK as a whole spends more than is raised in revenue, an assumption would need to be made about which parts of the UK borrowing is undertaken for, or which types of public spending are financed by borrowing as opposed to taxation. This information is not available as, for example, some taxes are ringfenced to fund particular services; for example, some national insurance contributions are ring-fenced to fund the NHS. As such, any figure for a fiscal transfer from the rest of the UK to Scotland would rely on a number of assumptions."
this is entirely consistent with what this blog (and others) have always said - to calculate the implied fiscal transfer, we have to make some assumptions. In fact, argue we can calculate and implied fiscal transfer by only making one assumption: that the burden of the UK's deficit (and associated debt) is borne on a population share basis

2. People used to dealing with numbers will have spotted that the transfer = [(1-population share) x the gap] - something easily proved if you care for such things


This matters only insofar as we need to understand that, in the case of Scotland in the UK, the fiscal transfer is 92% of the deficit gap

3. The IFS implicitly use that same assumption when referring to the fiscal tranfer here
The most recent figures (2016–17) imply a budget deficit for Scotland of 8.3% of GDP. Managing this is the UK Government’s responsibility as it is part of the UK’s deficit, which was 2.3% of UK-wide GDP in the same year. Therefore there was a fiscal transfer from the rest of the UK to Scotland of about 6% of Scotland’s GDP (equivalent to around £1,750 per person in Scotland).
Because GDP/Capita is now about the same for Scotland and rUK, allocating the deficit on a per capita basis or per GDP basis makes no material difference - but I would still argue that per capta is the right way to do the analysis as long as GERS uses per capita allocations for all shared UK-wide costs
4. To be completely accurate: if we used his GDP share rather than population share method then the figure would be £9.8bn (rather than the £10.7bn we get using population share) - but the broader point stands

5. Remember: the implied fiscal transfer = [(1-population share) x the gap] = 92% of this figure

6. These are the latest available restated historical figures - when first released the figures showed a significantly more favourable position for Scotland, but later revisions lowered Scotland's apparent fiscal advantage vs rUK - covered in some here: The SNP: Living in the Past

7. A dynamic most easily understood if you imagine a scenario where UK spend (and therefore Scotland's spend) doesn't change, but Scotland's population grows more slowly than rUK's - under that scenario it is inevitable that the gap between Scotland's spend/head and rUK's must increase

8. Due to some combination of historically over-estimating the number of top-rate tax payers in Scotland and/or the increase in the Scotttish Rate of Income Tax causing some of those tax payers to redomicile

Sunday, 2 February 2020

Pooling and Sharing: The English Regions

In a few weeks time I'll be chairing a conference in Newcastle - These Islands: Our Past, Present & Future

The conference will feature an impressive array of speakers and panelists including: Douglas Alexander, Philippe Auclair, Gordon Brown, Andy Burnham, Frances Coppola, Sir John Curtice, Simon Evans, Sophia Gaston, Ayesha Hazarika, Gerry Hassan, Fiona Hill, Henry Hill, Colin Kidd, Carwyn Jones, David Lidington, Ian Murray, Baronesss Quin, Mark Reckless, Willie Rennie, Lord Salisbury and many, many more. If you're interested in coming along, you can find more details and ticket booking information here > eventbrite page.

Needless to say: just as Bob Geldof wasn't going to go to all the trouble of organising Live Aid and not get on stage to perform with the Boomtown Rats, so I will not be passing up the opportunity to put some graphs in front of this captive audience1 .

We're holding the conference in Newcastle to highlight the importance of the English regions in any debate about the future of the UK. To this end I've been doing fresh analysis on the fiscal economics of the English regions and - because I won't have time to present detailed analysis at the conference - I though I'd quickly blog about it here.

Chokkablog regulars will be familiar with the concept of the implied fiscal transfer, but to recap: if a devolved nation runs a deficit per head (aka "per capita deficit") higher than the UK average, then that nation is benefitting from an implied fiscal transfer from the rest of the UK2.

The same principle can be applied to the English regions. Fortunately the data now exists to allow us to calculate and understand these regional fiscal transfers just as the (notorious?) Government Expenditure and Revenue Scotland (aka GERS) figures do for Scotland3.

The source data is Country and Region Public Sector Finances analysis as produced by the ONS4. All the figures we use here are those that allocate a "geographical share" of oil & gas revenues (i.e. Scotland gets to keep the oil & gas revenues generated by oil in Scottish waters).

The only other thing we have to remember before diving into this analysis is that the per capita deficit difference to the UK average is made up of two distinct parts: the per capita revenue difference and the per capita spending difference. The former reflects the economic performance of the region in terms of tax revenue generation, the latter reflects the cost of delivering public services to that region5.

So let's look first at per capita revenue generation differences by region:

Remember that what we're seeing here is how well these regions generate tax revenue versus the UK average. There has been a lot of talk in recent weeks of "levelling up" - that's basically about getting these bars to shrink back towards zero, so the size of the red bars is a decent guide to which areas are in greatest need of "levelling up".

It should come as no surprise that London and the South East are the areas which "out-perform" and - unless you've been deceived by the SNP's grievance rehetoric - it should also be no surprise to see Scotland (like the East of England) performing as per the UK average and significantly out-performing Wales, Northern Ireland and all other English regions.

So what's Scotland's problem?

Well let's look at per capita spending per region4:

Here's where we see the areas that enjoy (or require) higher spending per capita: Northern Ireland and Scotland most significantly, with London, Wales and the North East as the other "relatively high spend" areas. The extent to which this is based on greater need (e.g. to deliver equivalent services in areas of lower population density and/or with remote/island communities and/or to reflecting higher social costs driven by demographic factors and/or due to areas of endemic poverty) or greater investment (for better services than the UK average or to stimulate economic development) is the subject of some debate.

If we combine the per capita revenue difference with the per capita spending difference, we get to the per capita fiscal balance difference (and hence the implied fiscal transfer):

It's quite a striking picture isn't it? The Devolved Administrations in Wales and Northern Ireland receive far greater per capita fiscal transfers than Scotland, as does the North East.  London, the South East and the East of England are responsible for generating fiscal transfers that go to the rest of the UK.

It's perhaps helpful to summarise all of this data on one exhibit:

What this shows us is the extent to which the fiscal transfer to Scotland (caused by the much debated higher notional Scottish deficit) is a function of higher spending, not lower revenue generation (i.e. not "weaker economic performance"). This contrasts dramatically with Wales the Midlands and the North of England, where relatively poor fiscal performance is explained by weaker revenue generation (i.e. "weaker economic performance") far more than by any spending differences.

It's clear that any debate about the future of the UK has to grapple with these two related questons
  • How are resources most fairly and efficiently distributed between and administered in the devolved nations and English regions?
  • What practical steps can be taken to "level up" economic performance across the UK?
***

For those who like to see the figures behind the pictures:


For those who wonder about regional difference within Scotland, I offer the following GDP/capita chart - suffice to say we could expect there to be similar fiscal transfers happening within Scotland, and the variance of economic performance within Scotland appears not dissimilar to the variance across the UK (or indeed in continental Europe):






Notes


1. Yes, I'm aware how ridiculous it is to imply that this conference is some sort of constitutional Live Aid

2. We share the burden of the UK's deficit UK-wide - both in these analyses (i.e. the cost of the total UK debt is allocated to the regions and devolved administrations on a per capita basis) and as widely assumed and accepted in the case of inherited liabilities (i.e. were Scotland to separate from the UK, it would inherit a population share of he UK's debt, as accepted by the Independence White Paper and the SNP's more recent Sustainable Growth Commission)

3. This figures differ from GERS, but not materially so at the deficit per head level - comparing 2018-19 ONS and GERS, it looks like there is a different approach to what is taken as revenue vs what is netted off against cost (but I'm guessing here) - all that really matters is that the figures used for the exhibits on this blog post are all compiled on a comparable basis
  • Spend/head: ONS = £14.5k; GERS = £13.9k
  • Revenue/head: ONS = £12.0k; GERS = £11.5k
  • Deficit per head: ONS = £2.5k; GERS = £2.6k
4. It is worth noting that these are not qualified as National Statistics, but rather Experimental Statistics

5. It's worth noting that those costs which are shared on a population basis (mainly debt interest, defence and international aid) have no impact on this analysis - there is by definition zero difference between per capita costs allocated on a per capita basis!

Sunday, 29 December 2019

What GERS can and cannot tell us


This meme is frequently shared by independence supporters as if it's some kind of "gotcha!". The quote comes from a radio interview I did with the perpetually confused Richard Murphy. He was indulging in his usual schtick of dismissing the GERS figures as "made up" and criticising them for presenting actual historical figures instead of hypothesising some imagined future scenario of Scottish independence.

Here is the verbatim extract, you can check for yourself

Murphy: "[...] let's not pretend GERS gives any useful information to a politician in Scotland, because it doesn't, it's literally made up information from the the rest of the UK, we have no idea if it's accurate [...] GERS cannot tell us [...] whether Scotland can survive independently or not, this data is not fit for purpose"1
Hague: "Well,  I mean first of all, the key thing is they are fit for purpose - the most important thing is understanding what that purpose is. So Richard finished his piece there by saying they can't tell us what an independent Scotland's finances would look like - that is of course absolutely true; what the GERS figures do tell us is, historically, how do Scotland's revenue and expenditure figures look as an integral part of the UK [...] as long as you understand the data, as long as you understand what the data can and cannot be used for, it is good data [...] But Richard is right on one point, which is all it tells is is where we start from, it tells us how the Scottish economy currently performs as an integral part of the UK - and that is all it can do, that is all it is expected to do"

The fact that the GERS figures are historical actuals that describe Scotland's economy as an integral part of the UK should hardly be a revelation to anybody, but the nature of online debate is such that this observation is somehow considered meme-worthy.

If it needs spelling out any further2, then let me do so again here:
The GERS figures describe Scotland’s historical finances, with Scotland raising taxes and incurring public spending (including reserved expenditure) as an integral part of the UK. From the perspective of hypothesising a possible future independent Scotland, we are looking at what in financial accounting terms would be considered pro-forma accounts.
So of course the figures do not tell us what the future accounts of an independent Scotland would look like - how could they? 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 require us to consider, amongst other factors;
  • The outcomes of uncertain negotiations around inherited share of UK debt and potential EU membership
  • The challenges of either sustaining money-supply under Sterlingisation or of building the reserves requires to support a new independent Scottish currency [see here]
  • The explicit tax and spend choices that the government of an independent Scotland might make (inevitably constrained by the outcomes and decisions above) which would include choices around wealth redistribution, defence spending, industrial and economic policy, international affairs, debt and deficit management, social policy priorities and much more
  • The costs involved in replicating the delivery of services that currently rely on shared infrastructure with the rest of the UK (e.g DWP and HMRC functions)
  • Depending on the outcome of EU membership negotiations, the possible impact of trade friction between Scotland and  the rest of the UK (the destination for 60% of Scotland's exports)
  • The impact of factors outside the Scottish Government’s direct control such as how businesses and the labour force would respond (e.g. possible capital flight), the global oil price, international credit ratings and the cost of Scotland’s debt
  • The cumulative effect of all of the above (positive or negative) on Scotland’s economic growth

Now look again at the beginning of the Murphy quote above: when he says “let's not pretend GERS gives any useful information to a politician in Scotland, because it doesn't, it's literally made up information from the the rest of the UK, we have no idea if it's accurate" he is insulting: the Scottish Government’s own economists who compile them; the National Statistics Authority who award them National Statistics accreditation; the authors of both the Independence White paper and the SNP's own Sustainable Growth Commission who used the GERS figures as the basis for all of their analysis.

In fact, there are no respected economists who dimiss the GERS figures as "bad data"



I've dealt with the details of Murphy's publicity-seeking confusion over GERS before here but- for completeness - let's remind ourselves what happened when a well-briefed politician challenged Murphy on some of his more extreme assertions in front of a Holyrood committee:



/ends/

Notes

1. His opening ramble is over 2 minutes long - this is very much his style: he chucks out so many daft assertions in one go that it becomes impossible to refute them all in response without descending into a similarly lengthy and confusing statement. His objective is obfuscation and - give him his due - that's one thing he is good at it

2. I really have been very consistent about this - the following from 2016 alone
"Nobody is arguing that things would remain the same. Those of us who argue for rational debate simply ask for those making the case for independence to actually explain coherently what the different "economic strategy" would actually be and provide a realistic assessment of how (and by how much) it would change the figures compared to those of Scotland being within the UK." - Chokkablog August 2016
"We should be very clear about what this analysis of historical fiscal data can and cannot tell us. 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." - Chokkablog March 2016
"All I have been attempting to do is ensure we have clarity around our starting point. Were we to be independent or fiscally autonomous now, what would our pro-forma accounts look like? What is our economy's run-rate? This frames the debate, shows the size of the challenge. If we are all honest about this starting point then maybe we can have an interesting and constructive debate" - Chokkablog June 2016
"This onshore deficit gap matters because it is revealed - it becomes real - as oil revenues decline. This is not to say that were Scotland to be independent this gap would remain; it might narrow, it might widen. It merely gives us an idea of the run-rate relative disadvantage we would be starting with if we sacrificed the benefits of UK-wide pooling and sharing (assuming the days of significant oil revenues are indeed behind us). If you like, it's the head-start we'd be giving to the rest of the UK." - Chokkablog February 2016 

Saturday, 21 December 2019

How Much of Scotland's Tax Revenue Does Westminster Keep?

tl;dr 

More spending occurs in Scotland than tax revenues raised by Scotland.

In fact, more money is spent in Scotland than the sum of tax revenues raised by Scotland plus Scotland's per capita share of the UK's overall deficit (i.e. there is a fiscal transfer in Scotland's favour after allowing for Scotland's share of the increase in UK debt).

Both the statements above are true even before taking into consideration Scotland's share of defence costs, international aid and debt interest.

It is simply not true to argue that Westminster "keeps" any of Scotland's tax revenues



A grievance persistently pushed by nationalists on social media is that "Westminster keeps" a chunk of Scotland's tax revenues - if you've been directed to this blog post, you may even have joined this merry gang yourself


The numbers tend to differ because the people who make such claims tend not to be too interested in actual figures or data audit-trails, but the theme is consistent. For the purposes of illustration let me take one example that appeared in my timeline yesterday and quickly garnered over 1,000 likes1



I'll use the format of the above tweet to walk through the actual figures, always with reference to Scottish Government's GERS figures for 2018/19 . These are figures compiled by Scottish Government economists in St Andrews House and which qualify as National Statistics. In all cases I will reference page and table numbers from this latest GERS report.

"We raise £63bn"This is correct

Scotland (including a full geographic share of oil revenues) raised £62.7bn of revenue in 2018/19 [p4. Table S.3]

"We keep £35bn" - This is incorrect

It's clear this figure is meant to be spending Scotland controls, because the other figures are money Westminster "keeps" or "Spends [..] on our behalf".

The correct figure is therefore £44.7bn, 
this being money spent by "Scottish Government, LAs and Public Corporations" [p33, Table 3.8]

"Westminster keeps £28bn [and] spends a further £12bn on our behalf" - This is also incorrect

The balance of spending allocated to Scotland that is spent by "Other UK Government" (aka Reserved spending) is in fact £30.6bn [p33, Table 3.8]



Sanity check opportunity: above we've accounted for £62.7bn of revenue and £75.3bn [£44.7bn + £30.6bn] of expenditure - that explains a deficit of  £12.6bn which was indeed the GERS deficit in 2018/19 [p2. Table S.1]


So we now have the correct figure for the attempted grievance: the £12.6bn GERS deficit includes £30.6bn spent by "other UK Government" on Scotland's behalf (aka "Reserved Expenditure").


Sanity check opportunity: "Devolved expenditure including housing benefit" [p45, Table 4.8] is shown as £44.7bn "before Scotland Acts 2012 and 2016" - this is consistent with our £44.7bn figure above, hence our £30.6bn "Other UK Government Spending" is what is also referred to as "Reserved Spending" (being that spending which is not devolved). Table 4.8 shows that, of currently Reserved expenditure, an additional £3.1bn will be devolved once these Acts are fully enforced - all of this £3.1bn is related to additional powers over Social protection, as detailed on p43, Table 4.6


All we need to do now is understand how that £30.6bn is spent and we can decide how aggrieved to feel.

I'll run through the detail at the foot of this blog, but of that £30.6bn Reserved Expenditure:

£20.0bn is spent in and for Scotland, largely on Social Protection, but also Transport, Research Grants, Tax Credits etc.

£2.9bn is spent for Scotland on things like DWP, HMRC, the BBC and Nuclear decommissioning costs which also involve spending in Scotland. While £0.1bn less than BBC expenditure allocated for Scotland is actually spent in Scotland, the reverse is true in the case of Nuclear Decommissioning costs and very likely the case for DWP and HMRC costs as well. Scotland gets the "fiscal multiplier" benefit of this spending already and would still need to fund delivery of these services if independent.


Pause for breath: At this point we have explained Scotland raising £62.7bn, having £44.7bn of Devolved Spending and receiving a further £22.9bn of Reserved Spending spent in Scotland - so that's £4.9bn more spent in Scotland than raised in Scotland. Scotland's population share of the UK's deficit is just £1.9bn, so we're already receiving an effective fiscal transfer of £3.0bn by this point


£3.6bn is Public Sector Debt Interest - the SNP's own Sustainable Growth Commission accepted the principle that an independent Scotland would need to service this debt

£3.2bn is Defence Spending - in the most recent year this was 1.8% of Scottish GDP, compared with the NATO member target of 2.0%. Trident is likely to be responsible for just £0.2bn of this figure and of course some of that £3.2bn is spent in Scotland.

£0.9bn is International Services (basically Foreign Aid) and again: the SNP's own Sustainable Growth Commission accepted the principle of maintaining this expenditure.


Check this all adds up: we'd got to a £4.9bn deficit, now we've explained the remaining £7.7bn that gets us to the correct £12.6bn GERS deficit


So people can have a bun-fight about what these figures would look like for an independent Scotland, but it's simply nonsensical to suggest that under current arrangements Westminster in any way "keeps" any of the tax money Scotland raises.

More is spent in Scotland than Scotland raises in taxes and the big sums that are spent for but not in Scotland are (with the possible exception of some defence spending) costs that an independent Scotland would still expect to incur.

****

The Painful Detail, for the super-keen

The Bad News
To do this properly you need to go through the GERS Supplementary Data: Detailed Expenditure Database. For each of the line-items in Table 3.8 you can see there the detail broken down as per the UK Government Country and Regional Analysis (CRA) Categories - you'll be surfing a database with 4,225 rows. In each case you can then see which items of expenditure are considered "Identifiable" (that is expenditure that can be clearly allocated to Scotland as having been spent for the benefit of Scotland) and which are not (aka "ID" vs "Non-ID"). Just because expenditure is considered "Identifiable" doesn't mean that expenditure is necessarily spent in Scotland - but you can then email the Chief Economic Adviser to the Scottish Government and ask for some help.

The Good News
I've already done this so can now summarise it for you.



The full audit-trail is only available for 2017-18 (because of the timing of CRA data and GERS data publications) - but fortunately Reserved Expenditure in 2017-18 was £30.7bn, so almost identical to the most recent year.

Of that £30.7bn, £20.1bn is considered Identifiable (spent for the benefit of Scotland):

£17.4bn = Social Protection (Pensions, Tax Credits, Allowances and Benefits)
£1.1bn   = Transport (mainly Network Rail expenditure in Scotland)
£0.5bn   = Science & Technology (Renewable Heat Incentive and various Research Council grants)
£0.4bn   = Enterprise & Economic Development (mainly Tax Reliefs & Tax Credits)
£0.2m    = Employment Policies (Department of Work & Pensions)
£0.5bn   = Other (Lottery Grants, Medical Research Council, NERC, etc. etc.)

But what about expenses that are included in this £20.1bn of "Indentifiable" expenditure that people might challenge as being "fair" or "appropriate" to allocate to Scotland?  Well I've been through the detail and I'm used to the examples most often raised, so let's cover them off here. Of that £20.1bn considered "Identifiable" expenditure for Scotland, the following costs are not spent in Scotland:

£57m = High Speed 2 (based on Scotland's expected share of the economic benefit)
£35m = House of Commons and House of Lords

That's it - if you don't believe me go and look for yourself. So frankly those costs are no more than a rounding error: we can say with confidence that £20bn of Reserved Expenditure is considered as Identifable expenditure for Scotland and is money spent directly in Scotland.

So where does that get us to?

Revenue Raised  = £62.7bn
Devolved Expenditure = £44.7bn
Reserved Expenditure For and In Scotland = £20.1bn

So at this point Scotland has a deficit of £2.1bn - so where does the other £10.5bn of deficit come from?

The big figures are well known - these are UK costs that are allocated to Scotland on the basis of Scotland's population share:

Public Sector Debt Interest = £3.6bn
International Services = £0.9bn (almost entirely Foreign Aid)
Defence Expenditure = £3.2bn

The first two figures were accepted by the SNP's own Sustainable Growth Commission, who proposed an annual "Solidarity Payment" to be paid to rUK by an independent Scotland of £5bn pa. They explained this £5bn pa as being: "debt servicing contributions, 0.7% of GNP for Foreign Aid and a further £1bn set aside for shared services"2.

The defence expenditure figure works out as 1.9% of GDP (1.8% in 2018-19) which should be compared with the 2.0% target expenditure level for NATO members. A common refrain at this point is "but Nukes" or "what about Trident" - well there are plenty of debates to be had there, but focusing purely on the economics: the annual cost of Trident included in this defence expenditure figure for Scotland is likely to be just £0.2bn3.

Of course Scotland could choose to spend less on defence - maybe choose not be a NATO member - those arguing the case for independence are free to make their case for what that £3.2bn cost would be replaced by in an iScotland.

The SNP's Growth Commission was clear that an iScotland would service its population share of UK debt (while trying to build credibility on the international stage and preparing to launch its own currency) and would continue to be a provider of foreign aid. But again: those arguing the case for independenec are free to make alternative arguments.

So what are we left to make up the "other" £2.8bn of non-identifiable expenditure allocated to Scotland in GERS?

£0.5bn = Social Protection: This is DWP benefit delivery and what appears to be some legacy pension costs - as my colleague @staylorish has pointed out before, 12.4% of DWP employees are in Scotland, so there is probably more DWP benefit delivery cost spent in Scotland than allocated to Scotland (based on population share in GERS)

£0.5bn = Public and Common Services: this includes £299m of HMRC costs and - again as @staylorish points out - 14.2% of HMRC employees are in Scotland so again probably more HMRC cost is spent in Scotland than allocated to Scotland (based on population share in GERS). The £0.5bn figure also includes c.£0.2bn of Cabinet Office, DfID etc. costs.


** Correction / Clarification **

Mea culpa: the 12.4% and 14.2% figures above are incorrect. They form no part of the analytical audit trail, but were wrongly used to illustrate my point that "probably more is spent in Scotland than allocated to scotland" in those areas. This is hardly a material issue, but I care about getting things right, so here we go:

As Sam Taylor points out in the thread I link to above, he made a (quickly corrected) error in his intitial calculation which I mistakenly quoted - he has subsequently updated the analysis anyway (see here) and the correct figures for share of employees are DWP 10.3% and HMRC 11.7%.

In both cases these percentatge are still materially greater than 8.2% (the population share of the non-Identifiable elements of these costs allocated to Scotland in GERS) so I think my "probably more is spent in Scotland than allocated to scotland" point still stands - but I'm happy to hold my hands up, admit to the error on those specifc figures and offer the correct figures here - it's what I've always said I'll do if an error is spotted on Chokkablog,

In addition, some confusion seems to have arisen because at this point I am discussing the non-identifable element of DWP benefit delivery costs, which are as I correctly say allocated on a population share basis.  In GERS there are also identifiable DWP benefit delivery costs (as shown in the first of the back-up tables below) of which 10.3% are allocated to Scotland in GERS. This means that of all DWP benefit delivery costs (ID and non-ID), Scotland is allocated an 8.98% share.

I accept that my slip above did overstate the share of DWP and HMRC FTEs in Scotland and could have led a careless reader to believe that all DWP delivery costs are allocated on a population share basis.

Somebody got very excited on Twitter about this, claiming that spotting this slip was "sufficient to defeat your point". This is like dancing on the head of a pin while steel girders are falling about your ears, but for those who might not have grasped the materiality here;
  • The difference between 8.2% (the non-ID allocation) and the 9.0% (the total of ID and non-ID allocation) for DWP delivery costs being discussed here is just £21m
  • The point still stands that a greater proportion of HMRC and DWP employees are in Scotland than the share of HMRC and DWP costs allocated to Scotland in GERS
  • Before considering any of these non-ID costs, per the audit-trail above Scotland is already receiving £2.0bn more in expenditure than it "sends to Westminster"
  • The "we send more to Westminster than we get back" nonsense involves ignoring £20.0bn of Identifiable expenditure and all non-identifiable expenditure - even if the above observations don't convince you that "there is probably more DWP benefit delivery cost spent in Scotland than allocated to Scotland", nobody can credibly argue that none of these cost are spent in Scotland



£0.3bn = Recreation, Culture and Religion: this includes £0.3bn for BBC of which £0.2bn is spent in Scoltand

£0.2bn = Environment Protection: mainly £197m allocated Nuclear decommissioning costs - in fact £57m more than that is spent in Scotland [GERS Table A.6]

£0.7bn = Accounting adjustments - this is just technical stuff to get the figures in comparable format with other National Statistics

£0.2bn = EU Transactions - let's not go there

£0.4bn = "Other" - I'm getting tired and bored of this, so see the tables below if you have the enthusiasm to chase this detail down futher (I have and can assure you there's nothing exciting to see)


The following tables back-up each rows of the table above based on querying the GERS supplementary expenditure database - column headings are Total, ID and non-ID:





NOTES

1. I replied with a brief thread explaining why that tweet (which had been retweeted by high profile campaigners for Scottish independence including at least 1 SNP MP) was wrong - it has since been deleted so I am not including the twitter handle in the screen cap

2. Sustainable Growth Commission report, p37, 3.139

3. According to Full Fact, the annual running cost of Trident is c.£2bn, of which Scotland's population share would be just £0.2bn

Thursday, 5 December 2019

Dissecting a Deception


tl;dr
Nicola Sturgeon keeps trying to mislead people by repeating a demonstrably false assertion. The truth is that if the SNP's Growth Commission recommendations had been applied to the conditions as they actually were a decade ago, Scotland would have suffered far greater austerity over the last 10 years - and we can prove it

***

That Ming-bearded mind-bothererTM Derren Brown1 is fond of telling his audiences that he achieves the seemingly impossible via a combination of "suggestion, psychology, misdirection and showmanship".


There's an assertion being repeated so often by Nicola Sturgeon that I'm amazed none of the mainstream fact-checking organisations have bothered to check it. It goes like this:
"if the [SNP] Growth Commission recommendations on spending in an independent Scotland had been applied over the past 10 years, Scotland wouldn't have suffered the austerity cuts to our budget that we have suffered." - Nicola Sturgeon
That quote is lifted directly from her recent interview with Andrew Neil on BBC1 - she made the same asssertion to ITV's Robert Peston2 as well repeating it during the STV leaders' debate3 and, although I didn't listen to her call-in with Nicky Campbell on BBC Radio 5 Live, I'm told she repeated it there as well.

To understand the history of this assertion and how the SNP have tried to defend it is to understand how confident they are that "misdirection and showmanship" can allow them to claim the seemingly impossible.

The first time I heard this claim being made was by SNP MSP Kate Forbes (a member of the Growth Commission) on Question Time back in May 2018:
"Over the last 10 years the Scottish Budget has been cut by 8.5%; in contrast, this report predicts that if we had been an independent country our spending could have increased by 5% over those 10 years. Minus 8 to plus 5." - Kate Forbes
I then discovered that on the same day, during FMQ's in Holyrood, Nicola Sturgeon had told the chamber:
"I've got some analysis here which I'm going to share with the chamber, and hopefully it'll be ... it'll be of embarrassment to the Tories, hopefully it'll be of interest to Labour. If the spending recommendations of the Growth Commission had been applied over the past ten years, the £2.6bn real-terms cuts imposed on the budget of the Scottish government by Tory governments at Westminster would have been completely wiped out, it would have eradicated austerity in Scotland. That is the reality." - Nicola Sturgeon
Then the report's author, Andrew Wilson, used his column in the National a few days later to repeat the claim again:
"If the model we have suggested for reducing the deficit was applied to the last 10 years, it would have eliminated the Tory austerity cuts to the Scottish Budget." - Andrew Wilson
I think we can safely say that the SNP have been committed to this line for some time now - and they've decided that this general election campaign is the right time to crank up the volume.

Back in June 2018 I pointed out that those assertions were completely at odds with the Growth Commission's actual recommendations (I blogged on the subject here and here). This matters, because as a direct result we know how the SNP seek to justify themselves on this.

First of all let's be clear about what the Growth Commission actually recommended. I covered this in great detail in a report that was reviewed and endorsed by senior economists at the time [These Islands Growth Commission Response: The Truth About Austerity], but in essence their recommendation is simple (emphasis mine):
"real increases in public spending should be limited to sufficiently less than GDP growth over the business cycle to reduce the deficit to below 3% within 5 to 10 years" - Growth Commission 3.187
This isn't a selective quote - the recommendation is repeated four times4 in the report and every time it's made clear that spending growth must be sufficently less than GDP growth to reduce the deficit to 3% within 10 years5.

Even before we look at how the SNP attempt to justify their "we'd have escaped Tory austerity2"claim, it should already be obvious that their assertion is false: the Commission's recommendation is to get the deficit under control within a 10 year period entirely through spending restraint6  - so if the current deficit is still above 3%, then over the last 10 years their recommendations would have required Scotland to have reduced spending by more than has been the case.

Scotland's deficit in 2018-19 was in fact £12.6bn or 7.0% of GDP7. For that to have been reduced to 3.0% through spending constraint alone over the prior decade, annual spending now would have to be £7.2bn less - that implies a 9.6% reduction to Scotland's current Total Managed Expenditure8.

It's patently obvious that applying the Growth Commission's rules over the past decade would have led to far deeper austerity than "Tory austerity".

So let's see how the SNP try to justify their transparently indefensible claim.


Justification Attempt No. 1

The first justification was offered directly by Kate Forbes herself, who had the good grace to reply to me when I challenged her about what she'd said on BBC's Question Time. She DM'd me the following 9  (remember: she was a member of the Growth Commission):
"its v simplistically based on what the GC recommends in terms of increasing public spending in Scotland over a 10 year period (by 0.5% per year (5.1% compounded))."
The obvious problem here is that the 0.5% figure is arrived at based on two key assumptions
  1. The starting deficit position - to determine by how much less than GDP growth spending would need to grow to get the deficit to 3% within 10 years (let's call it the "spending lag")
  2. Real annual GDP growth - to determine what real spending growth would be if it was suffciently less than GDP growth
To get to the 0.5% figure the Growth Commission assumed
  1. An onshore deficit starting position of 5.9%10 which - as they modelled it11 - meant that spending growth would have to lag GDP growth by 1.0% to get to the 3% target after 10 years.
  2. Real GDP growth at a "long-term trend" rate of 1.5% - so spending lagging this by 1.0% would mean real spending growth of 0.5% pa.
Now it's surely obvious that you can't apply the 0.5% figure to the last 10 years, because the starting position 10 years ago was a worse deficit and GDP growth was of course slower than "long-term trend" - that's why austerity was deemed necessary in the first place.

So Justification Attempt No. 1 is clearly nonsense - and although it's not really our job, for fun let's try and see what happens if we apply the actual figures
  1. 10 years ago, Scotland's onshore defict was 8.8%12. Using a recreated version of the GC's model suggests that spending growth would have to lag GDP growth by 1.5 - 1.9% to get to the 3% deficit target after 10 years13.
  2. Actual real GDP growth for Scotland over that 10 year period was 1.0%14 - so spending lagging this by 1.5 - 1.9% would mean a real spending decline of (0.5) - (0.9)% pa

Depending how you choose to define "the last 10 years", average annual real spending growth (TME8) for Scotland within the UK has been 0.9% (06/07 to 16/17), 0.6% (07/08 to 17/19) or 0.4% (08/09 to 18/19).

So however you cut it, the reality of the last 10 years hasn't been anything like as bad as a 0.5 - 0.9% real annual spending decline. Of course it hasn't - if it had been Scotland's deficit would now already have been reduced to below 3%.


Justification Attempt No. 2

Freedom of Information requests are funny things. I stumbled across this one a while back and it is extremely revealing. It includes emails that were being exchanged with the SNP on the same day that our These Islands response to the Growth Commission was released. The following caught my eye:


It's nice to know that "Special Adviser to the First Minister" Callum McCaig was paying attention (*waves*) - I wonder who the redacted recipient of this email could possibly have been?

But what should interest us most here is what this tells us about the analysis they used (internally) to justify their claim - presumably this is the "I've got some analysis" that Sturgeon referred to in the Chamber.

First of all, we have the familiar SNP trick of playing fast and loose with the concept time.

We've recently (November 2019) seen Ian Blackford referring to "the last 40 years" when he's actually talking about a 32 year period up to 2011-12. Now we discover that in July 2018 when Sturgeon referred to "the last 10 years" she was actually referring to a period that included 2 years into the future!

But the SpAd is right when he says that the starting year makes a difference - what they've done is ignore 3 years of generous spending increases which, needless to say, had they been applying the Growth Commission's recommendations then Scotland wouldn't have seen. Over the three years they conveniently ignore, average real expenditure (TME) increased by 2.4% pa which was an average of 3.4% pa more than GDP growth (because recession)

["bailing out the banks" is a red-herring - GERS only sees a per capita share of the "P&L" impact of the bail-outs (see here) - the impact in 2010 GERS was just £0.7bn or 0.5% of GDP, hardly significant in the context of the numbers we're considering]

What they apparently have now done is applied the 1.0% "spending lag" to the actual GDP growth rates over their "last 7 years plus the next 3 years forecast" definition of the last 10 years (i.e. instead of blindly applying the 0.5% real growth as per Justification Attempt No. 1) .

But there's a huge problem here - they've applied that spending lag of 1.0% which was calculated based on starting deficit of 5.5%. The actual onshore deficit in their chosen base year of 2010/11  - precisely because of those years of spending growth they've conveniently ignored - was 13.2% 14

If you're following what's going on here the issue is obvious: with that starting deficit, to get the deficit down to 3% within a decade (the Growth Commission's First Fiscal Rule) would require a "spending lag" of far greater than 1.0%.

So we've shown that Justification Attempt No. 2 is also nonsense - and again, althought it's not really  our job, for fun we can have a quick go at estimating the "spending lag" required to get from a 13.2% deficit to a 3.0% deficit in 10 years. I have had a go (using the Growth Commission's modelling methodology) and I reckon the figure becomes something like a 3.0% spending lag required.

So even taking the "long-term trend" GDP growth rate of 1.5% pa, I estimate that applying the Growth Commission's model to the 2010/11 starting conditions would imply real terms spending cuts of 1.5% pa for a decade. Even allowing for "through the business cycle" caveats, it's clear that this would have been far more extreme austerity than Scotland has actually suffered.

Now whether my quick attempts to correct the SNP's assertions are right or not could be open to debate, but that's not really the point - what is clear is that the justifications they've offered (or that we've found out they're using internally) are clearly nonsense.

Nicola Sturgeon is frequently repeating the same false assertion - in the Chamber; on BBC1 and ITV; in interviews and in debates - and she should be held to account.

No amount of suggestion, psychology, misdirection, showmanship (or even bending of the concept of time) should be allowed to distract from this simple fact: Sturgeon's claim that applying the Growth Commission's recommendations on spending over the last decade would have spared Scotland from austerity is as shonky* as hell.


*shonky: dishonest, unreliable, especially in a devious way.

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Notes

1. I'm a fan - that description is his own from the dust-jacket of "Tricks of the Mind" (which I highly recommend)

2. "If [the Growth Commission's] recommendations had been implemented retrospectively we'd have escaped Tory austerity over the last decade"

3. See exchange with Richard Leonard at 47:20: "In fact if we'd had the Growth Commission's recommendations implemented over the past decade, we wouldn't have had the austerity that we've suffered under the Tories, that's the reality"

4. Directly from the Sustainable Growth Commission report:

page 42
Page 45
Page 92
Page 101


5. The report used the phrase "within 5 to 10 years" which is just the same as saying "within 10 years" (unless anybody is going to suggest that they're implying they wouldn't want to have the deficit below 3% of GDP in less than 5 years?)

6. It's important to note that when modelling deficit reduction over a 10 year period, the Growth Commission simply use "trend GDP growth" (which given the inevitable economic disruption that separating from the UK would cause - leaving the UK single market, leaving the Sterling currency union, losing the fiscal transfer from rUK - is arguably a very optimistic assumption). More importantly: as we see in the two attempts to justify these assertions, at no point do the SNP present a case that suggests they'd have changed historical rates of GDP growth.

7. Source GERS (the same base data the Growth Commission used) for 2018-19

8. The sound-bites offered by the SNP tend to refer to the "Scottish Budget" - of course the Growth Commission's recommendations relate to Scotland's total expenditure ("Total Managed Expenditure" in GERS terminology) which includes rather important costs that are outside Scotland's Budget, not least Social Welfare costs including pensions. It's impossible to read across from the Growth Commission's spending restraint recommendation to specifically what that would mean for only those costs in the Scottish Budget, as the GC make no specific recommendations about Social Welfare spending (for example).

9. I considered sharing a screen cap of the DM but that feels like crossing a line - but if any journalists or fact-checkers want to see confirmation of this I would happily provide

10. This is in itself a hugely optimistic assumption based on some highly questionable analysis - but I don't want to get bogged down in those arguments which were covered in These Islands Growth Commission Response: A Reality Check. Similarly the target of a deficit of 3% of GDP within a decade is insufficiently aggressive on the Growth Commission's own terms, as covered in the These Islands Growth Commission Response: Aiming Too Low, but I'm trying to avoid this blog re-running too much ground that's already been covered

11. There is a wrinkle in their model which (see B12.19) in that they assume "savings of 0.3% GDP associated with investment in best-in-class institutions realised over a three year period from year 5" - that basically makes it easier for them to get to the 3% figure in 10 years. Bar that wrinkle and the impact of assumed debt interest on new debt, the model is incredibly simple: revenue grows with GDP, Spending grows more slowly (by the "spending lag") and hence the deficit must come down.

12. As we'll come on to see, the definition of "10 years ago" will become important. Here I have used 2007/08 as the starting position: this is the year the SNP came to power and - given these initial assertions were being made in May 2018 so we'd just completed year 2017/18 - that seems like 10 years ago to me. The second definitional issue we have is "onshore deficit" at that time (the onshore deficit is the figure the Growth Commission consistently use) - per most recent GERS (so dealing with any historical restatements) the 2007/08 onshore deficit was £12,774m. If we divide that by onshore GDP of £120,929m we get a figure of 10.6%; if we divide it by total GDP of £145,372 we get a figure of 8.8%. To err on the side of caution, I have taken the lower figure.

13. The previous conclusion we drew when modelling this was that a lag of 1.5% would be required - the analytical challenge relates to what one assumes in terms debt costs for the counter-factual historical case. The higher figure comes from simply taking the forward model (as per our recreated Growth Commission model), changing the "legacy deficit" assumption to be as per the historical deficit and then working out what the lag would need to be to get to the deficit to 3% after 10 years - that gives the higher end of the range (basically because we're having to service more incremental debt in the future model because we're no longer sharing our deficit with the rest of the UK)

14. This gets a little tricky as at the time Kate Forbes and Sturgeon first made their assertions, the latest GERS figures available were for 2016-17; since then 2017-18 and 2018-19 figures have been published and of course these will include historical restatements / corrections. Taking the most recent 2018-19 version of the figures, over either of the 10 year periods from 06/07 to 16/17 or 07/08 to 17/18 gives the same answer of 1.0% annual GDP growth [the 10 years to 18/19 would now give us a 1.2% average]

15. Again using the latest (2018-19) GERS report: the onshore deficit in 2010-11 was £19,607, onshore GDP was £124,611m and total GDP was £147,983 - again I'm erring on the side of generosity by using total GDP as my onshore deficit denominator