Tuesday, 30 December 2014

Business for Scotland and the SNP

"Business for Scotland is an independent and political party neutral business and economic policy think tank and network"
- Business for Scotland Website (30/12/2014)

This is a remarkable statement.  In August 2014 I wrote

  • Now obviously Business for Scotland is a non-political organisation - they make that very clear on their website. It's true that one of their founding Directors (Jim Mather) is the former SNP Minister for Enterprise, their CEO (Gordon MacIntyre-Kemp) is a failed SNP local council candidate and the First Minister is fond of using them for photo-opportunities and is attending their annual fund-raising dinner - but I don't think one can necessarily conclude from that that they're some sort of poorly disguised SNP campaigning vehicle designed to give the Independence case a veneer of business credibility.  I imagine Ivan McKee of Business for Scotland simply felt he should intervene out a sense of civic duty rather than because somebody suggested he should.

Throughout the campaign they tried to position themselves as politically neutral and many media outlets appeared to swallow that line.

Let's recap what we already knew about two of the founding directors
  • Gordon MacIntyre-Kemp (Chief Executive of Business for Scotland - one of two remaining Directors):  is a failed SNP councillor candidate
  • Jim Mather (founding director of Business for Scotland - no longer a Director): Former SNP Minister for Enterprise

Now here's a brief update on what I've since noticed about some of key individuals involved;
  • Michelle Thomson (Managing Director of Business for Scotland, the other remaining Director): now approved PPC for Westminster for SNP
  • Ivan McKee (erstwhile Director of Business for Scotland - he's not anymore, he should update his Twitter profile): now standing as Westminster candidate for SNP
  • Richard Arkless (member of Business for Scotland who spoke against me at the Business Insider Breakfast indyref debate): approved potential SNP parliamentary candidate
  • Sarah Jane Walls (Member of business for Scotland who appeared on TV during referendum): was operations manager for Yes Scotland and according to the Herald is an SNP member "who has set her sights on Westminster and is one of a number of candidates in the running to be the party nominee in Stirling" (with some laughable consequences)
Is it just me or is there a trend emerging here?  There may well be more, these are examples that have simply washed up in front of me.

Maybe they should update this statement on their website?


For those who argue they could be party aligned but retain business or economic "think thank" credibility;

Tuesday, 23 December 2014

Scottish Government Oil Revenue Forecasts

The 2 minute video here summarises the oil & gas forecasts as produced by the Scottish Government and places them in the context of OBR forecasts that existed over time.  For more descriptive detail see Oil & Gas: When Will We Ever Learn 

If you're on a desktop device you may prefer this version


Sunday, 21 December 2014

Oil & Gas: Will We Ever Learn?

That the current oil price crash exposes the weakness of the Yes camp’s economic case is undeniable, but those of us who argued against independence on the grounds of economic rationality would do well to avoid gloating. If we were currently experiencing a short-term price driven boom, the economically literate and rational among us would be arguing that we shouldn't make long-term judgments on the basis of short-term price fluctuations.

So instead of over-reacting to today's oil price, let's instead take this as an opportunity to reflect on how the economic case was presented by the Scottish Government and whether the electorate were suitably informed when votes were cast.

First of all it's worth noting that neither side of the Yes/No debate is celebrating the oil price decline. Even if we discount some of the more sensationalist headlines (North Sea Oil Industry Close to Collapse), measured voices such as Sir Ian Wood (North Sea Oil Collapse Fears 'Too Dramatic') and Oil & Gas UK (Oil & Gas UK have warned of up to 35,000) are warning of 18,000 - 37,000 job losses. Whilst the ever excellent David Smith argued in the Sunday Times (Relax: Lower Oil Prices Will Be Good For Growth) that the oil price slump may benefit the UK economy (because the UK is a net importer of Oil & Gas), nobody who cares for those employed in the industry will be celebrating the current market conditions.

Looking back to referendum debate I recall plenty of us complaining about the oil & gas forecasts in the White Paper (alongside many other complaints about the lack of a credible economic case) but hindsight can play tricks on us - so I have revisited the question using contemporaneous data sources.

The first and most obvious point worth making is that nobody predicted a price crash to today's levels. There are a lot of data points on the chart below but the overall message is simple - the price levels used in the White Paper (blue line) were at the high end of available forecasts at the time but no forecasts were as low as the prices we are now experiencing and expecting (the black line).

Full sources and explanations are given at the foot of this post.

Of course there is a very efficient market in oil price futures so we can look back to the time of the White Paper publication and see if the price assumptions used were consistent with market expectation back then.  The chart below shows the expected market price for a barrel of oil in December 2017 based on the Futures Market Price over time.  The blue lines show the $113 assumption used in the White Paper and the White Paper publication date; it shows us that the price assumption used in the White Paper did indeed fairly reflect market expectations at that time.

Of course revenue is a function of both price and production volume, so let's look at revenue forecasts produced at the time of the referendum debate.

In the chart below, blue lines are Scottish Government Scenarios (as per the Oil & Gas Analytical Bulletins in March 2013 and May 2014)  red lines are OBR forecasts, the black line is the actual outcome.  The dotted lines represent forecasts as of 03/13 and the solid lines as of 05/14 (i.e. periods bridging the publication of the White Paper).  The two highlighted data points in 2016-17 are the two scenarios the Scottish Government chose for the economic forecast used in the White Paper.

You can see how these forecasts evolved over time here (> 2 min video blog)

It's a pretty graph, isn't it?  But let's consider what it is illustrating.
  • The dotted lines show how dramatically optimistic the Scottish Government scenarios were compared to the OBR at the time - they appear to have simply ignored the OBR forecasts (despite the fact that they have a consistent track record of being overly optimistic) and used a low case that was 60% higher than the OBR forecast
  • The solid lines show that when the OBR revised down their forecasts the Scottish Government simply assumed away the downward trend. In fact the Scottish Government introduced a 6th scenario, presumably so that the higher of the two figures used in the White Paper could still be justified
Now let us pause and reflect on this.  The White Paper was produced by the Scottish Government; this means civil servants should have ensured that it didn't become an SNP manifesto or a case weighted unrealistically in favour of independence. Similarly the Oil & Gas bulletins should surely be impartial assessments of the economic outlook we face? It's hard to look at the graph above and not conclude that the scenarios presented in May 2014 were manipulated to try and support the White Paper scenarios.

This civil service failing has been covered by others (notably John McTernan: White Paper Damns Civil Service) and extends well beyond the issue of North Sea tax revenue forecasts - but this graph alone is surely a compelling illustration of the need for an OBR equivalent independent fiscal watchdog in Scotland. Maybe we could call it the Scottish Office for Budget and Economic responsibility and task it with providing SOBER assessments to inform policy makers and votes?

It gets worse; even if we take the Oil & Gas scenarios as objective forecasts produced in good faith, how can the two scenarios chosen for the White Paper be justified? Any business person will tell you that scenarios should be used to provide an illustration of the range of likely outcomes, to stress test the plan and ensure that the a downside scenario can be weathered.

During the Independence referendum the Alex Salmond claimed "There can be little doubt that Scotland is moving into a second oil boom" and there were forecasters who shared at least some their optimism (e.g. the OECD The Price of Oil - Will it Start Rising Again?) so it is perhaps understandable that yes camp pushed for a bullish scenario in the White Paper.

But what about a conservative scenario?  If you produce six scenarios in the Bulletin you should surely include at least one that reflects a worse case than the OBR forecast?  Given the credibility of the OBR within the UK surely at the very least that forecast should be used as a base case?

In effect the Scottish Government White Paper presented two scenarios for North Sea tax receipts: "Optimistic" and "Hopelessly Optimistic".

Look again at the graph above.  The White Paper "low" scenario for 2016-17 is £3.9bn higher than the OBR forecast that existed 6 months before the referendum.  That's more than double, that's £734 per person or (to use the "over 5 years" methodology Alex Salmond used when propounding his Shameless £8bn Lie) that's £19.5bn over 5 years or £3,700 for every man woman and child in Scotland.

Remember: this is not hindsight. There were voices of reason at the time counselling that the Scottish Government’s forecasts were extremely optimistic (e.g. in the FT The Scottish Government is Misleading Scots about Oil) and the figures I'm using above are simply the OBR forecasts that were available at the time - the shortfall between the White Paper "low" scenario and current OBR forecast is even greater.

Some of us argued against independence in part on the basis that an independent Scotland's economy would be over-exposed to this volatile commodity, we argued that the White Paper failed to make an economic case and that the economic risks were not being honestly presented to the Scottish voters. There were many other warnings being offered (e.g. around employment, currency, uncosted White Paper promises etc.) but the current oil price shock certainly provides a dramatic illustration of the point some of us were trying to make.

More thoughtful Yes voters might consider whether countering those rational observations made at the time with the simplistic, projected opinion that we were in some way suggesting Scotland was "too wee, too poor, too stupid" might not have been the most intelligent way to debate the issue. We weren't "talking Scotland down" or suggesting oil was somehow not an asset; we were simply trying to ensure that referendum votes were cast knowing the very real economic risks an independent Scotland would face.

Maybe next time (if there is a next time) we will succeed in having a more rational and informed debate, that those who counsel for rational economic assessments will not simply be shouted down and accused of negative campaigning.


Oil Price Chart Data Sources
The black line on the chart below shows the current market expectation based on the Brent Crude Futures market (Futures markets are of course not infallible, but they do provide a truly independent, market based 'Wisdom of the Crowd' forecast as of today).

Sunday, 7 December 2014

Alex Salmond's Shameless £8bn Lie

Alex Salmond has declared his intention to stand in the constituency of Gordon in Aberdeen for a Westminster seat at the 2015 General election. The voters of Gordon should be aware that our erstwhile First Minister is quite happy to lie to win votes.

If you think that's an extraordinary accusation, let's take a look at his assertion that Scotland would have been £8bn better off over the last 5 years if we had been independent.  He certainly repeated it often enough.

May 2013 on the Today Programme
  • "Alex Salmond was in ebullient form on the Today programme this morning, rattling off statistics showing that over the last five years, an independent Scotland would have been £8bn better off" - New Statesman
  • "Speaking on the Today Programme, Scotland’s First Minister Alex Salmond [...] Over the last five years, Scotland would have been £8bn better off if it had been independent, he claimed" - Local Government Chronicle

March 2014 during First Minister's questions
  • "12.08: "Over the past five years we would have been £8bn better off" if separate from the UK, Salmond says." - The Telegraph 
  • "Mr Salmond repeatedly drew attention to Scotland's relative strength over a five year or indeed 30 year period. Scotland, he said, could have been £8bn better off over five years if in sole charge of her resources." - BBC News 
August 2014 during the Live Leaders' Debate on STV
  • "Over the last five years we have £8bn more into the Treasury than we have had out of it, in relative terms. That is £1,500 a head for every man, woman and child in Scotland." - Evening Times & Belfast Telegraph 
August 2014 during the Live Leaders' Debate on BBC1
  • AD: "....for 22 out of the last 23 years Scotland has spent more than is got in"
    AS: "that's not true .. in the last 5 years relative to the United Kingdom Scotland was £8bn better off or would have been as an independent country, Alistair you know that because it's in the GERS figures" - Broadcast Footage
Of course where the First Minister leads, his loyal supporters follow; Business for Scotland worked it up into this slide for one of their risible You Tube videos

So this wasn't a one-off slip - the £8bn figure was drilled into the consciousness of a significant proportion of the electorate.  Those who believed it were gulled.

I highlighted these outrages against data at the time of course (The £8bn Misdirection and  £8.3bn Better Off?) but this blog can hardly challenge the SNP's PR machine (and - I have to say - the failure of either the Better Together campaign or the Main Stream Media to call him out on it).

Checking these figures is a very straight-forward exercise: the argument has nothing to do with changes to expenditure - it is simply about "more into the Treasury than we have had out of it, in relative terms -  we are talking about historical actual figures and we know there is no debate about how costs or revenues were allocated as GERS is the source cited (by both Salmond and Business for Scotland).

GERS numbers are really straight-forward but Twitter debates have taught me not take anything for granted when it comes to people understanding the figures so bear with me;
  • The GERS figures present "Scotland" and "UK" - the figures for UK of course include the figures for Scotland.  For those who care I repeat the analysis using rUK = [UK - Scotland] at the foot of this post; it doesn't make much difference.
  • We are using "Geographic Share of Oil Revenue" - this means the figures for Scotland include "our oil" using the Scottish Government's favoured geographic share definition. The figures for UK include Scotland and therefore of course include all Oil revenue. The repeated version of the analysis showing rUK figures is included at the foot of this post for those who want to see rUK without "Scotland's" oil revenue.  Again; it doesn't make much difference
  • Because the quotes I have cited cover a period during which new GERS figures were published (12/03/2014) I show the two different versions of "the last five years" that will have existed
The actual data set we need is very simple
  • We need two numbers for each year for each of Scotland and UK
    • What we pay "into the Treasury" = Tax receipts
    • What we have "had out of it" = Public Expenditure (Total Managed Expenditure)
  • The only other figure needed is population to allow us to define Per Capita figures (so we can compare numbers in relative terms) 
The other figures are simply a function of these data and are presented below in the simplest form I can manage whilst still providing audit trail clarity.

You won't see the £8bn figure in this table because that claim is transparent nonsense.  The observations we can fairly make are as follows;
  • Over the 5 years for which the data existed when Salmond made his assertions in May 2013 (and possibly for his March quote) the difference between Scotland's deficit and that of the UK was  an average of £112 per person per year or "in relative terms" £2.9bn over 5 years
  • Over the 5 years for which data existed when Salmond was making his assertions on the TV debates the the difference between Scotland's deficit and that of the UK was an average of £49 per person per year or "in relative terms" £1.2bn over 5 years
The figure was never £8bn.  In fact by the time he was speaking to his biggest audience during the TV debates the true number was £1.2bn or an average of £49 per person per year.  I think its fair to say that £49 per person is not a figure that has stuck in the minds of #the45.

I've highlighted the £1,515 as we often hear that Scotland contributes £1,500 more per person in tax than the rest of the UK.  If you attribute Scotland its geographic share of oil revenue that was true in 2011-12; the 2012-13 figure was £797 (which meant that the additional tax revenue generated generated fell well short of the additional public expenditure received, hence Scotland was running a higher deficit per capita than the rest of the UK in 2012-13).

The chart below shows these per capita deficit comparisons in graphical form (remember in all cases Scotland is given the benefit of its geographical share of Oil revenues).

Note the higher volatility of Scotland's deficit (because of the higher dependency on Oil revenues) and that in the most recent year Scotland ran a materially higher deficit per capita than the UK.  Of course with oil revenues plummeting we can expect that relative deficit to have deteriorated even further when we see the 2013-14 figures - but Scotland voted to remain in the UK so we are protected from the implications of that.

But I'm drifting away from the £8bn lie.  As a result of my blog post at the time (The £8bn Misdirection) and a live radio debate (John Beattie's Radio Scotland show) with a representative sent by BfS we know how the Yes campaign try to defend the £8.3bn figure. Read that blog post and the comments to-and-fro with Ivan McKee of BfS if you don't believe me but what follows is honestly how they get there (the radio debate also confirmed this but unfortunately is no longer on iplayer).

There are only two figures we can alter to make an hypothesised independent Scotland £8.3bn better off;

  • Tax Receipts: the GERS figures already give Scotland all of our attributable tax revenue including Oil revenues. Nobody suggest this number should change when explaining how we would have been £8bn better off
  • Public Expenditure: the argument that explains "£8bn better off" is based on having the same share of Expenditure as our share of tax receipts - that would mean spending £8.3bn more
So Alex Salmond's hypothesised independent Scotland would have been "£8.3bn better off" by spending £8.3bn more and running an even higher deficit.  As a direct implication, instead of being responsible for our population share of the debt we would responsible for our Tax receipt share (we are allocated our cost of the debt on a population share basis). 

Alex Salmond was saying that over the last 5 years an independent Scotland could have spent £8.3bn more, run an £8.3bn higher deficit than the GERS figures show and been responsible for an additional £8bn debt.  He either thinks that would have meant we'd have been £8.3bn better off or - as a qualified economist - he knows that's nonsense and he's willing to lie to win votes.  That should maybe give the voters of Gordon pause.


Below - for completeness - the longer form analysis comparing Scotland to rUK.  It makes very little difference.


Thursday, 4 December 2014

Smith Commission and Corporation Tax

I try to avoid writing these posts during working hours as I have a business to run; but this morning I was forwarded a link to this Scotland Tonight interview and it irritated me so much I have to get this out of my system.

It features our old friend Gordon McIntyre Kemp, Chief Executive of Business for Scotland.  I will resist an ad hominem attack and I've said my piece about Business for Scotland and their Smith Commission Submission so let me focus instead here on the specific question being debated, that of income tax devolution.

To be absolutely clear: I'm a businessman who would benefit from lower corporation tax in Scotland but I think it's a bad idea for two reasons
  • Using differential corporation tax rates to shift business activity around the country is value destructive to the UK as a whole - it simply reduces the UK's overall corporation tax take and hands money back to profitable businesses instead of targeting the less well-off in society

  • Worse than that: it creates incentives for creative accounting within businesses to ensure profits are reported in low tax areas of the UK without necessarily needing to change any real economic activity.  Just look at the tax avoidance strategies of Google, Amazon, Starbucks etc. - if they'll do that across international tax borders we can safely assume they would apply similar accounting strategies within the UK

I could take apart McIntyre-Kemp's arguments one-by-one but frankly what's the point?  We know he leads an organisation who's very raison-d'etre is to campaign for independence and more powers for Scotland. That's fair enough; he and his members are entitled to think that way.  Unfortunately for them they are not in tune with the democratic will of the Scottish People.  

The Vow itself states:  "We agree that the UK exists to ensure opportunity and security for all by sharing our resources equitably across all four nations to secure the defence, prosperity and welfare of every citizen".  McIntyre-Kemp and his members would I'm sure accept they don't share that view
  • His focus and that of Business for Scotland is not "sharing resources equitably" but rather on Scotland getting its hands on as much resource as possible

  • Their concern is not "defence, prosperity and welfare of every citizen" - they would be compelled to append the words "of Scotland" to that sentence
But even given that context some of McIntyre-Kemp's arguments are a little strange

  • He points to discussions around possible devolution of corporation tax to Northern Ireland and suggests the "bit of water" which separates us doesn't make a difference.  Mr McIntyre-Kemp clearly isn't involved in the physical movement of goods if he really thinks that.

  • He complains about not being able to control VAT on tourism activities - surely if its a good idea for Scotland it's a good idea for the UK?  Of course arguing to reduce taxes you don't control is easy when you don't have to live with the consequences of reduced tax revenue that might result.  The Nationalists do that a lot.

  • He complains about not having control of NI whilst we're being offered full control of income tax. Let's be absolutely clear on this one: the proposed new powers allow the Scottish Government to redistribute wealth through income tax policy changes - nobody seriously argues that not having control of NI is a hindrance to that

  • He moans about not having power over oil & gas taxation.  You might have noticed that Nationalists have been a little quiet about that one so it's surprising to hear this on his list. The block grant would be reduced on day 1 by the amount of oil & gas revenues transferred and it would be damaging to Scotland's economy if those revenues continue to decline.  I guess Mr McIntyre-Kemp lacks the economic pragmatism of some of his Nationalist bed-fellows.

McIntyre-Kemp suggest we need to "get serious about the powers that are needed". Maybe he and his memers should "get serious" about deciding what they will do with those we'll be getting.  
  • Full control of income tax: so we can redistribute wealth, we can reduce or increase the total income tax burden.  So what are their proposals?

  • New powers to make discretionary payments in any area of welfare: so we can use money raised through income taxation or saved in areas of devolved cost to help those less well off in our society.  So what are their proposals?

Instead of using his valuable airtime to make a positive case for how these new powers could be used he - with wearying predictability and embarrassing inaccuracy  -  resorts to asserting that these powers do not represent "substantially more devolution ... unless they meant substantially less" and complains "we've been promised more powers but we're not getting them".  He even argues the powers mean "effectively we can't have a labour government".

The SNP, Business for Scotland and Mr McIntyre-Kemp have become so used to complaining about what we don't have that they appear incapable of changing tack. We are getting substantial new powers; we will face tough tax and spend decisions. Making constructive recommendations around what we'll do with these powers is a lot harder than simply complaining and blaming others for all of our woes.

I look forward to seeing how the Nationalist organisations propose embracing and using these new powers - they are substantial enough to expose expose their "all things to all men" promises and to require them to stop ducking economic reality.

No wonder they're not happy.