Saturday, 28 February 2015

Wings Over Scotland: An Apology

I feel bad.

I've upset the Reverend Stuart Campbell, custodian of the "Wings Over Scotland" website.

In August 2014 I attempted a knowing nod to his own shock-jock style in a blog post entitled "The Wee Blue Book of Lies".  In that post I tried to mirror his own irreverent approach whilst highlighting some material errors in his then recently published "Wee Blue Book". I understand now that the Reverend was so stung by my hurtful tone that he wasn't able to actually read the blog. My bad.

If you doubt that my gentle ribbing upset Stu so much that he was unable to read or respond to my blog, here's a selection of his Twitter responses











This is all very unfortunate.

His Wikipedia entry explains that his aim is to provide a "fair and honest perspective on Scottish politics".  By failing to be polite and respectful in my tone I prevented him from discovering that he was actually being unfair and dishonest in his Wee Blue Book.  I'm sure if he knew this he'd be deeply upset; I let him down.

So let me address Stuart directly

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Dear Mr Campbell (or Reverend if you prefer)

I'm sorry if my previous attempts to clarify your errors caused you offence.

Please allow me to clearly, politely and respectfully help you understand why - as a man of integrity and honesty - you will want to issue a public apology for a rather significant error in your Wee Blue Book.  There are others I could choose but let's look at this paragraph on page 13.


I choose this statement as it is central to your economic thesis and widely accepted as true by your followers and readers.

I want to focus on the words "on average Scotland sends £1,700 more per person to the UK in taxes".

The link you provide is to the Scottish Government White Paper which does cite £1,700 as the figure for 2011/12.  There are a number of issues here so let's take this very carefully.

  1. The figure quoted there is for 2011/12; it's not an average of any sort
  2. That figure came from GERS published in March 2012 (which was the latest available when the White paper was published)
  3. At the time you published the Wee Blue Book, updated GERS figures were available (and had been for about 5 months)
  4. When the 2012/13 GERS were published the Scottish Government restated the figures for 2011/12 to correct an error in the geographic allocation of oil revenue1 
To help you out here is a simple summary of the actual data that was available when you published the book (still the most recent GERS2  figures)


If you wanted to use the most recent figure (as you seemed to be trying to do in your original statement) you should really have said "In the most recent year for which data is available Scotland sent around £800 more per person to the UK in taxes".  I recognise that this is significantly less than the higher expenditure we receive; it's an unfortunate truth that doesn't really suit your central thesis.

So if you want to use an average figure to match the figure you (correctly) use when you say "UK spending is around £1,200 higher per person in Scotland than in the UK as a whole" you should really say "on average Scotland sends around £1,200 more per person to the UK in taxes".  The next sentence would I guess then read "We actually get back 100% of the extra money we send to London".

As a man who is keen to ensure that the Scottish people are well informed I think you will agree this is a materially different conclusion from the one you published. I take back my accusation that you knowingly lied - I am willing to accept it was probably just a mistake which I know you will want to correct.

You might also want to point out that in the most recent published figures we actually get back significantly more than we send to London (as we have in three of the four most recent years).  You could mention that this will undoubtedly be true in 2013-14 and 2014-15 as well - but it's perhaps unreasonable to ask you to stretch your honesty and integrity that far.

At the very least I am sure you will have the decency to update the electronic version of this document.  I imagine too you will also want to remove the words "Everything inside it is still true" from your fund-raising site (where you are selling hard copies of the book for £52 a shot).


Kind regards

Kevin

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For those who wonder why I still bother about this - this matters because this distortion of the facts was very widely circulated.

To quote directly his fund-raising site where he celebrates the success of the Wee Blue Book "At 72 pages it was twice as big as we originally planned, and we distributed around 300,000 print copies to every corner of Scotland - more than three times as many as the Scottish Government's White Paper - with another 800,000+ copies of the electronic version downloaded. In all we spent over £70,000 on it."

 At the time of writing he is even flogging tin-foil wrapped souvenir editions.

He actually says "Everything inside it is still true".

Oh dear.




If you think this is a one off and Stu is the only culprit - see my recent post > Simplify Exaggerate & Carry on Regardless
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 Footnotes

 1. The main source of revision for 2012-12 was the correction of North Sea Oil revenue allocation; you can see the full amendments as applied by the Scottish Government on page 86 of the 2012-13 GERS

2. In case there is any doubt about these figures here are the actual data tables from GERS



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Friday, 27 February 2015

Simplify, Exaggerate and Carry on Regardless

The editor of the Economist in the 1950's (Geoffrey Crowther) famously advised young journalists to "simplify, then exaggerate".   It appears politicians in general - and the SNP in particular - have embraced this principle and refined it by adding the coda "... and carry on regardless".

Readers of this blog will be familiar with the example of Alex Salmond's "We'd have been £8bn better off over the last 5 years" trope - repeated ad nauseam long after it had been shown to be complete nonsense.  If you missed it I cover the detail of that calumny here > Alex Salmond's Shameless £8bn Lie.

Another striking example is the SNP's resolute refusal to acknowledge the 2012-13 Government Expenditure & Revenue Scotland (GERS) numbers published in March 2014 (6 months before the Referendum). Those figures didn't fit their chosen narrative and their response was so brazen as to be almost admirable - they just kept quoting the old figures instead. In fact this "carry on regardless" approach served them so well that they still maintain it even now, 11 months after the "new" figures were published.

Allow me to illustrate:

Stewart Stevenson (@zsstevens) is a highly experienced1 SNP MSP who appears particularly wedded to this approach of carrying on regardless of the facts. Stewart has over 4,700 Twitter followers and to his credit he engages with those who disagree with him. Today - after getting awfully confused about the difference between taxation and expenditure - he Tweeted me with the following




Well now: that "per capita deficit lower than UK's" statement is demonstrably false. The table below summarises the only figures you need to know to follow this. They are direct from GERS (published in March 2014) and are completely uncontroversial; if you don't trust me see Footnote 2.



As anybody who's been paying any attention knows, Scotland's deficit per capita (of course including our geographic share of oil revenue) was about £500 worse than the rest of the UK in the most recent year's stats.  In fact it's been worse in three of the last four years.  It's probably also worth mentioning that these figures are of course before the crash in oil price; as I've discussed here there is little doubt that our deficit per capita will have deteriorated even further versus the rest of the UK as a result. That's not an observation I take great pleasure in; it's an unfortunate truth.

Now you might think he's just made a simple mistake; he's a busy man, maybe he missed the fact that GERS figures were updated 11 months ago.  But then I recalled an exchange I'd had with him quite recently where I pointed him towards the up-to-date figures (this is part of a lengthy exchange in which you can see he was actively engaged and very specific about his definitions and source)




So we'd had this exchange; he'd assumed he could bluff his way through and was caught out; the actual data was clearly highlighted for him. And yet today he goes and repeats the same falsehood. It's almost as if he doesn't really care about the facts.

In fact a quick search reveals his consistent willingness to assert facts that are contrary to published data: these two tweets are from August 2014, 5 months after the GERS figures above were published. This was in the heat of the indyref battle when surely all politicians were closely attuned to the figures on our economy?  Do we seriously think he was misrepresenting this data by accident?




I particularly like his use of the phrase "even worst case"; to adopt that authoritative tone when you have such a loose grasp of the data demonstrates remarkable chutzpah - and not in a good way.

You might think he just has an unfortunate habit of making demonstrably false statements and failing to learn from his mistakes; but if that were the case how would he keep getting re-elected?

Of course the truth is more depressing and frankly more sinister than that.  These Tweets are symptomatic of a wider malaise. Mr Stevenson is just one of many politicians (and campaigners like the odious Wings Over Scotland) who have discovered the effectiveness of choosing a few simple lies and sticking with them regardless of the facts.  They've realised you don't have to be burdened by telling the truth; if you, your colleagues and your acolytes repeat a lie often enough it will penetrate the public consciousness, be simply accepted as a matter of fact.

Something needs to change.  If you're not angered and outraged by elected representatives behaving in this way then you should be.  If we've reached the stage where we just blithely shrug and accept that politicians are willing to lie when it suits their purposes then - well - then we get the politicians we deserve.


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ADDENDUM
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Incredibly when directed to this post the response from Mr Stevenson MSP was this

So in response to a post clearly highlighting and sourcing figures via GERS an SNP MSP cites the Wee Blue Book (as published by the notorious Cybernat Wings Over Scotland).  Of course the Wee Blue Book uses 2011-12 numbers despite the fact 2012-13 numbers were available 5 months before it was published (and as I show above the two preceding years also show us running a worse deficit).

It would be hard to imagine a more striking demonstration of precisely the behaviour I am highlighting in this post.

If anybody doubts that the Wee Blue Book is hopelessly inaccurate I suggest you read this: Wings Over Scotland: An Apology



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Footnotes

1. Stewart was elected to the Scottish Parliament in 2001.  Between 2007 and 2012 he held the post of Minister for Transport, Infrastructure & Climate Change and - according to Wikipedia - when he was elected as the SNP member for Banffshire and Buchan Coast in 2011 "His 16,812 votes represents the largest share of votes cast in a Scottish Parliament constituency with 67.24%"

2. I've covered the GERS stats (their definition, evolution and interpretation) in painful detail in this blog. If you have the stomach for it you can lose yourself in the numbers here > Scotland's Economy and here > Yes or No: Makes No Difference. Fortunately the figures you need to know to follow this story are very simple indeed and can be sourced from the GERS report here
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Wednesday, 25 February 2015

Yes or No: Makes no Difference

One of the unfortunate legacies of the Independence Referendum is that all subsequent attempts to constructively debate Scottish politics - and the economic choices we face - are rapidly hijacked by those who believe the only question that counts is: should we be independent: Yes or No?

That's unfortunate because one of the major positives of the Referendum should be that as well as being more politically engaged, many of us are also far more economically informed.

Why don't we capitalise on this improved understanding of our economic challenges and move the debate forward beyond simplistic Yes/No questions?

Why can't we make ourselves better voters by actually thinking about the difficult choices our elected representatives face without getting bogged down with worrying about whether they sit in Westminster or Holyrood?

Context

Hopefully we can frame the discussion with some uncontroversial statements that most rational observers agree with.

Firstly two observations that are as true for Scotland as they are for the whole UK
  • The level of deficit we currently run is unsustainable
  • There are social inequalities that need to be addressed

 Secondly some observations taken directly from GERS (detailed analysis here) about challenges Scotland would face if we were a fiscally autonomous region within the UK
  • Consistently higher levels of government expenditure in Scotland are offset by higher tax revenues only because of oil - at least from a deficit per capita  perspective we can't consider oil to be "only a bonus"
  • With oil revenues as they were in 2012-13, the deficit per capita was worse in Scotland than the the rest of the UK by £500/capita or about £2.7bn
  • The subsequently decline in oil prices means that by 2014-15 Scotland is likely to be facing a deficit gap to the rest of the UK of about £1,100/cap or nearer £6.0bn
  • It is quite possible that oil revenue will rebound
    • The worst case is that we are experiencing the beginning of a long-term decline in oil revenues 
    • The best case for Scotland is that we are currently just witnessing the impact oil price volatility has on our economy

Thirdly: there will be those who seize on any positive arguments made for the future of the Scottish economy with "well then we should have voted Yes" - so let's remind ourselves that as result of the No vote (whether you agree with it or not) there are additional questions which we don't need to concern ourselves with now
  • Currency
    • What currency would we have used and with what fiscal strings attached?  
    • Would we have needed our own currency and if so what would it have costed us to establish it?
       
  • Trade and employment
    • To what extent would our hugely important trading relationship with the rest of the UK have been damaged by independence and what would the implications for employment in Scotland have been?
    • Would our relationship with the EU have been jeopardised/weakened or actually saved/strengthened by independence?

Finally let me suggest we park to the side some of the other arguments which might distract us from positively looking at the challenges we face
  • The Oil Fund
    • If we're only interested in looking forwards, arguing what we should have done in the 1980's is pointless
    • We'd need to be running a surplus to contribute to an oil fund; so let's focus on working out how we might actually achieve a surplus (whether independently, with Full Fiscal Autonomy or as an integral part of the UK)
  • Competence
    • "Westminster has fucked it all up; surely we can do a better job ourselves" is - I hope we can agree - at best an incomplete thesis
    • Surely a more positive approach is to focus on what we think competent leaders could or should actually do and use that to inform who we vote for (and/or - if you insist - what level of devolution we might choose to fight for)

The Significance of Oil

 Whether your objective is to make a better economic case for independence (or maybe full fiscal autonomy) or simply to strengthen Scotland's contribution to the UK, our reliance on oil revenue has to be addressed.

It's obvious that we should maximise the value our economy generates from this natural resource so we need to strike a careful balance between the tax burden we place on North Sea operators and the relief we offer them when the global oil price slumps.  In this regard the UK and Scottish objectives are of course completely aligned - it should "simply" be about finding the right balance between taxing and supporting the industry.

It is equally obvious that the Scottish economy would be more robust if we were less reliant on this source of tax revenue.  For some this statement is considered heretical as if it in some way implies oil is not an asset; of course that's a nonsensical response to what is an economically rational observation. It would be naive in the extreme not to at least consider the possibility that the OBR oil revenue forecasts could be correct and may represent a long-term structural trend. The graph below shows actual figures in grey, 2012-13 (most recent GERS) in dark grey, OBR forecast in light grey and Scottish Government White Paper scenarios in red


In essence the challenge is simple: the only way we can reduce our reliance on oil is to generate more tax revenues from elsewhere or to spend less public money.  The alternative is to hope that oil "does it for us" which - to me at least - doesn't sound like a particularly robust economic strategy.


Revenue Side

Let me reintroduce my 2012-13 GERS revenue & cost flow chart (detailed workings here > Scotland's Economy); hopefully this can help us at least get our heads around the main dynamics we have to consider, the economic levers we have to play with.  Revenues generated in Scotland  are shown in Green, Scottish public expenditure made in red.




The net effect is that in 2012-13 we generated a £12.1bn deficit (i.e. £12.1bn more was spent* in Scotland than generated* in Scotland).  If you doubt this figure comes directly from Scottish Government GERS or if you have concerns about the nature of the GERS methodology I refer you to the footnotes at the bottom of this post.

* I'm aware that some of these costs and some of these taxes are allocated or estimated - we will come to that when we consider how they might be varied

We know things will have got >£3bn worse since these figures were produced due to the oil price crash - so in 2014-15 we are likely looking at a deficit of  >£15bn (or >£2,800 per capita).

In the spirit of this post I would argue that whether you believe we should be independent or not you should have a view as to how that deficit can be eliminated (or at least materially reduced).  Let's not distract ourselves at this stage with who holds the levers - let's think about what (from a Scottish perspective) we might want done with them.

So how can we raise more tax revenue or where should we reduce expenditure to find the £15bn pa. or so we need for Scotland (either independently or contributing as part of the UK) to be running a surplus (i.e. for us to be able to start reducing our debt burden)?  We need to grow the green bubbles and/or shrink the red ones - let's consider how.

The intention of the rest of this blog is to stimulate thought and debate, to share some thinking out loud; it is not intended to be in any way "the answer" but rather to help us understand the orders of magnitude we are dealing with here


Employment Tax Revenues

By far and away the biggest source of government revenues are employment taxes at £19.4bn: this in turn is obviously a function of how many people are employed, how much they are paid and the tax regime in place.

  • The electorate is highly attuned to tax rates: they affect us directly and we can easily work out whether a tax rate or threshold change would impact us personally.  Years of campaigning and polling have taught political parties to be wary of explicitly suggesting personal tax increases. It's worth noting the ICAS Report which observed that for Scotland "even if there are no behavioural changes [...] another 10% on the top rate of tax might raise maybe £240m". The implication is clear: to have a material impact on the deficit though income taxation requires addressing tax rates of those on middle incomes.  As a scaling factor here: if we all paid 5% more tax (and NI) this would generate about £1bn.
  • It's kind of obvious that reducing unemployment not only reduces the welfare burden on the state but also increases the tax revenues generated through employment taxes.  Without getting bogged down in definitions of employment and unemployment (e.g impacts of part-time work and those not actively seeking work) we can observe the headline unemployment rate in Scotland is 5.7% (very similar to rUK).  A halving of the unemployment rate would therefore add roughly 2.35% to the current employment rate of 73.2% = 2.35/73.2 = a 3.2% increase in working population.  If we take the highly (ludicrously?) optimistic assumption that these jobs would be at average wage levels this would increase employment tax generation by £0.6bn (3.2% of £19.4bn).  Of course this should remove some people from welfare which we need to consider when we look at the cost side of the equation.
  • If companies simply pay people more this of course directly generates more employment tax revenues (with a smaller negative off-set of corporation tax assuming all cost increase aren't passed on through price inflation).  These increases are of course at higher marginal tax rates. You can see why Osborne & Cameron are so keen to suggest companies give pay rises - from a government perspective it generates money for no political pain
  • Of course the National Minimum Wage is the only way the government can currently force companies to pay (some) people more.  In Scotland there are 100k people on the NMW (4.3% of the workforce) which allows us to work out a very simple scaling figure here: increasing the NMW from £6.50 to £7.00 for a full-time employee increases their annual income by about £1,000 and their employment tax contribution (tax at 20%,employees NI at 12%, employers NI at 13.8% = 45.8%) by  about £460.  So for these 100k people in Scotland this translates into only £46m (a 0.2% overall impact on employment tax revenues).  This is of course the minimum number of people who would be affected by an increase in the NMW as people just above the NMW are likely to swept up by any increase and there is the domino effect through businesses as other pay levels need to increase to maintain a sensible salary architecture.  That said I find it hard to imagine how even a 10% increase in the NMW could have a ripple effect of more than 1% on overall wages - so we can probably safely scale this as at best <£0.2bn impact on Scottish employment tax revenues.  This is a topic worthy of a blog post all on it's own (I'll get to it) because there are complex dynamics at play: e.g. reduction of welfare burden where households of those currently on minimum wage receive benefits; possible impacts on employment rates, pricing of goods, regional and global competitiveness etc.  If you're keen to know more now right now I suggest having a scan of the latest Report of the Low Wage Commission

So what do we conclude on Employment Taxes?   As context: over the last 5 years the nominal increase in Scottish employment tax revenues has been 4.6% - over that same period the Consumer Price Index increased by over 14%. I'd suggest that you'd have to be pretty optimistic about employment rates and wage inflation (even fuelled by a NMW increase) to generate more than £0.5bn of extra revenue (in real terms) before you have to simply start taxing middle earners more.  Of course economic growth (such that tax revenues increase faster than public spending) is the other way out of this trap - hold that thought.

 Consumption Tax Revenues: VAT & Duties

If you look at the size of the consumption taxes (VAT £9.3bn and Duties at £5.9bn) it's obvious why these are to "go to" place for politicians seeking a quick fix.  Assuming (simplistically of course) that consumption patterns wouldn't change a drop of VAT from 20% to 15% would lose us £2.3bn or of course an increase of the basic VAT rate to 25% would gain us £2.3bn. Of course as with any tax increase the fear is that it leads to a reduction in consumption and potentially slows or stalls economic growth.  You can't get something for nothing.  Similar arguments of course apply to duties with Fuel, Tobacco and Alcohol being the biggies.

Other Taxes

 If you look at the chart you can see that after Oil & Gas, Employment, VAT and Duties we're down into smaller numbers so it becomes even harder to have a material impact on the deficit by tweaking these.  Let's take them in turn

  • Business Taxes of £5.1bn are made up of corporation tax £2.9bn and Non-Domestic rates of £2.0bn.  It's worth noting that corporation tax is one of the most uncertain GERS figures because nobody knows how much profit companies would report in Scotland as opposed to rUK - in fact HMRC estimate this number as nearer £2.5bn in 12-13.  There has been much talk about tax avoidance (about which more below) but I haven't heard many arguing for a higher corporation tax burden.  It's worth highlighting that retained (post tax) corporation tax profits are what pay dividends; dividends (in the long run) drive share prices; dividends and share appreciation is how investors make returns; pension funds are the largest investors ... so controlling corporation tax is not just about incentivising business investment, employment and economic growth it's also about protecting the value of pensions.
  • Tax Avoidance is a hot topic right now but to scale the issue it's worth noting the Scottish Government Independence White Paper "targeted" a revenue gain of £250m through (unspecified) reductions in tax avoidance - so for the sake of this exercise let's give ourselves £0.2bn through reduced tax avoidance
  • Gross Operating Surplus (GOS) is largely the state owned Scottish Water
  • Council Tax of £2.0bn has of course been frozen in Scotland; a 10% increase would bring in £0.2bn
  • Wealth Taxes of £1.4bn are mainly taxes on interest & dividends (£0.6bn), the balance being capital gains, inheritance tax and other.  Clearly as interest rates increase and if corporate profits (hence dividend payments) grow we will see some up-tick in this figure but in terms of policy changes even (as an illustration) a doubling in inheritance tax take would only give you £0.2bn


Economic Growth

 So before factoring in real economic growth, on the revenue side (the green bubbles) you really struggle to anything close to £1bn of improvement without some fairly radical employment or consumption tax (e.g. VAT) increases

 Which is of course why economic growth is the key - so let's scale this.

Non-Oil revenues for Scotland were £47.5bn in 2012-13 so to close our £15bn (post oil crash) deficit we need 15/47.5 = 31% real revenue growth (that is growth in tax income above growth in public expenditure).

If we look at historic UK real annual GDP growth rates (using e.g World Bank data) we can see that the best average annual rate we've achieved over a 5 period in the last 20 years was 1.9% pa in the period 1990-1995.  14 years of that would get us there.

 This is of course why amid all the talk of austerity there is a clear understanding from all parties that economic growth is the golden key here - austerity that damages long-run growth is counter-productive .


 Cost Side

 Of course all of the above has looked only at the revenue side.  What choices do we face on the cost side (the red bubbles)?  Our total expenditure was £65.2bn in 2012-13 so to get our £15bn through cost-cutting we need to reduce all expenditure by 23%.  Tricky.

It's a big topic so forgive me if I skate through the main issues rather quickly;

 Defence

Scotland's defence "bill" in 2012-13 was £3.0bn.  The NATO member state target spend level on defence is 2% of GDP.  In Scotland's case in 2012-13 that would imply a spend of £2.9bn.

Some of the numbers that are loosely thrown around as savings from dumping Trident are extremely misleading (e.g. lifetime investment costs as opposed to Scotland's share of the annual cost).  There's an interesting debate to be had about spending on Trident or alternatives (as the Centre Forum cover here) - but people who think scrapping Trident is an economic fix are - assuming we are serious about remaining in NATO - wide of the mark.

Having said that it appears many NATO members spend nearer 1% of GDP (including Germany - see here) so I guess you could realistically argue for halving our defence expenditure and saving £1.5bn. That would clearly be a pretty controversial position to adopt - it's perhaps more realistic to note the Scottish Government Independence White Paper suggested a defence spend of £2.5bn or a £0.5bn saving


 Health

Let me declare an interest: the NHS saved my life when I had cancer and my wife works for the NHS. Perhaps its not surprising then that for me - as for so many - our health service is somewhat of a sacred cow when it comes to cost-cutting conversations.

Of course in Scotland we have free prescriptions for all and we are a relatively unhealthy lot (we generate £95 more tobacco and alcohol duty per capita than the rest of the UK) - this may in part explain why we spend £190/capita more on health than the rest of the UK.  If we closed that health spend gap with the rest of the UK it would save us 10% of our health budget or £1bn. Good luck to the political party who propose that.

 Welfare & Unemployment

 At £22.5bn this is clearly the dominant contributor to public spend.

From inspecting the UK accounts (p.71 here) more than half of this figure comes from old age (pensions) sickness & disability expenditure.  Unemployment benefits are only about 2.5% of this figure - the other main areas are housing, social services, benefits and income support

Unemployment is clearly a factor here but not the main driver. The chart below (from Prof Brian Ashcroft's Economy Watch) shows that unemployment rates are not high by historical standards and are falling (with Scotland very closely mirroring the UK as a whole).




The issue of in-work-poverty would appear to be a bigger concern - the Joseph Rowntree Foundation estimate that 21% of UK households live in poverty   There are clearly a significant number of people in low paid employment whose households are recipients of benefits. This is a huge and complex topic I won't attempt to cover here - but suffice to say the topic of National Minimum Wage must be one of the factors to consider in this debate.

 Others

 Frankly when you look at the other cost areas and you consider how we might find £bn's of cost savings it gets pretty tricky.  I'm running out of steam for now so I'll leave it for you to look at the remaining red bubbles and think about it!

So What?

I guess the overall conclusion once you've ploughed through all of this is not surprising - we can find maybe a billion or two by tweaking our tax and spend policies but the deficit will not be closed without either eye-wateringly severe austerity measures (hammering the masses with taxes and or slashing health & welfare expenditure) or a return to sustained long-term real economic growth.

But whilst it's easy to say austerity measures that threaten growth are to be avoided, I'd suggest it's equally important to observe that simply loosening our belts in the hope that economic growth will naturally follow is not a good enough strategy.

So what are the specific actions we can take to stimulate sustainable economic growth? Feels to me like a subject for a future blog post.


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Footnotes

For those who sometimes doubt the figures I use are the same as GERS

  • The data tables I uses are all downloaded from the Scottish Government GERS website here
  • The GERS methodology statement can be found here
  • The GER report itself is here
  • The table below shows the deficit of £12.1bn in 2013-14 that my figures reconcile back to


A common complaint raised when discussing GERS figure comes from those who followed some of the less reliable commentators during the referendum debate. These commentators sowed doubt and confusion by failing to understand how the GERS figures are compiled.  Take this statement from Wings Over Scotland (sourced here)
Or this from Business for Scotland (sourced here)




If they bothered to read the GERS Method Statement they would know that VAT and Duty are (correctly) estimated based on consumption and that corporation tax is estimated based on location of economic activity (not head office)





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Tuesday, 17 February 2015

Business for Scotland & Deutsche Bank Report

As one of Twitter's self-appointed guardians of good data, I occasionally have my attention drawn to articles that are being cited as proving some point or other to do with the on-going Scottish devolution debate.  The same culprits appear regularly and no one will be surprised to hear that "Business for Scotland" have been up to their old tricks again.

I've covered before how BfS are a thinly disguised SNP construct notably lacking in members who trade with the rest of the UK (our biggest trading partner).  If you doubt that, read "Business for Scotland: Who Are They?" and "Business for Scotland & the SNP".  Their economic analysis is notoriously ropey and I have taken them to task in various public forums so can attest that they tend to crumble very quickly when robustly challenged on their numbers.  Take for example "Response to Business & Economy: The Facts" or "The £8bn Lie" or (by a guest poster in my blog) "Bank Bail-out Myths".  I could quote more examples but suffice to say these guys have form.  

Their spinner in chief is Gordon MacIntyre-Kemp and on 14/02/2015 he was at it again with this pithily titled post: "Deutsche Bank the incomprehensible contradiction and the indefensible union".

The first hint that something might be awry is the fact that he doesn't link to the source document from which he skews his conclusions.  Is he afraid his readers might actually read the report themselves and make up their own minds or does he assume nobody who reads his postings would have the basic level of intellectual curiosity to want to read it? Either way here's the actual report which I urge you to read - it's accessibly written and takes a very rational and balanced approach > "Better off on their own?".

So let's look at Gordon's interpretation and check it against the source material.

Gordon says: "Scotland’s GDP per capita is 115% of the UK average says the report, once they had added in the oil revenues that Westminster governments like to exclude when talking Scotland’s economy down".  Is it possible Gordon didn't notice that the entire indyref debate was carried out using the figures with Scotland's geographic share of oil revenue allocated? 

True to form Gordon simply omits any mention of the cost side of our national accounts.  Maybe he didn't notice that the report also says: "All in all, it must be noted that in the area of public services Scotland reports substantially higher spending than the rest of the United Kingdom [...] total per capita spending in Scotland is also about 11% higher than at the national level. The relatively higher expenditures in Scotland are not a short-term phenomenon; the difference or gap of about 10% has existed since the 1980s at least". We all know this - but Gordon seems to think is he doesn't mention this inconvenient truth we might forget it.

Gordon says: "The report also says the risks of going it alone have decreased for smaller countries, as Eurozone membership has helped to “reduce some of the fundamental disadvantages that would otherwise be faced by countries such as Luxembourg, Malta, Cyprus and the Baltic states".  Do you notice how Scotland isn't one of the examples cited - do you think the fact that we aren't in the Eurozone may be a factor here?  Maybe Gordon has forgotten that participation in the Eurozone was explicitly ruled out by the Yes campaign during the referendum - I recall the carefully reasoned position adopted was "It's our pound and we're keeping it". 

The Report also says: "a seceding region would probably have to officially apply for EU membership".  Maybe Gordon missed that bit, he doesn't mention it.

Gordon Says: "This would mean that according to Deutsche Bank, in five months when Scotland’s largest natural economic asset halved in price, our economy went from being completely unable to afford independence to being one of the regions in Europe that can make an economic case for independence."  I've re-read this a couple of times and I have no idea what the "this" is that Gordon is referring to  - but either way it's clear he's suggesting that Deutsche Bank are now saying Scotland can make an economic case for Independence.  Guess what?  No they're not.

The Report actually says: "From a fiscal standpoint Scotland's public finances thus depend heavily on oil and gas production. Proponents of independence should keep that in mind, particularly in light of the recent drop of the oil price. In fiscal 2012/13 the offshore receipts – unlike in most of the preceding years – were unable to plug the gap between expenditures and revenues excluding offshore".

So the report actually highlights that volatile oil & gas revenues (the ones that according to Gordon and his cronies are simply "a bonus") are essential to plugging the fiscal gap - but they weren't sufficient to plug the gap in 12-13.  And - as the report specifically mentions - that's before the recent drop in oil price (we know that since fiscal 12-13 and current fiscal 14 -15 Scotland will have lost a further £3bn+ of North Sea tax revenues). 

Far from arguing that Scotland can make an economic case for independence the Report actually concludes: "Objectively speaking, there are not many channels via which independence can actually generate financial advantages. One of the few, and perhaps the most obvious, is the disappearance of financial transfers to other parts of the country. Thus, only in a prosperous region (relative to the rest of the country) is it possible to maintain the fiction that going it alone would be the better option. In other words: one has to be able to afford it"

What Gordon is hoping the reader won't notice is that the Scotland is not an example where we are burdened by financial transfers to other parts of the country.  A cursory glance at GERS would tell you that.  The report itself highlights that in 2012-13 the oil revenues were not enough to "plug the gap" and that those revenues have declined dramatically since then.

In addition to this headline conclusion the report also reiterates other issues which were raised during the indyref but Gordon appears to continue to hope to simply ignore:
  • On debt and borrowing the Report states: "Scotland would also have to shoulder a share of national debt. [...] this would result in substantial fiscal burdens" and "If Scotland had attained independence [...]  it would have to pay a premium on British bonds"
  • On trade links the Report states: "The rest of Spain is by far the largest trading partner for the Basque Country and Catalonia; the same applies to the United Kingdom in the case of Scotland [...] national borders often continue to play a significant role [...] it seems exceedingly unlikely that the intensive trade relations would survive a (possibly discordant) separation without sustaining any damage whatsoever [...] borders (whether political, linguistic, cultural …) still play  an important part in a united Europe"
  • On the general economic cases for independence the Report states:  "While there are few reasons, from an objective point of view, why Scotland or Catalonia should gain a substantial degree of prosperity via independence, nationalist parties cite this very issue as being one of the most important arguments.  Secession from an existing state structure harbours huge economic risks, though.

I think it's fair to say Deutsche Bank are not as convinced of the economic case for independence as Gordon suggests.  Not content with asserting that Deutsche bank are now saying Scotland can make an economic case for independence (when they have said nothing of the kind) Gordon concludes his post with this jarring non-sequitur: "However, the Scottish people have had their eyes opened, Westminster started to lose interest in the people of Scotland on the 19th of September and as a result the people of Scotland have lost faith in Westminster economics, big business and the mainstream media, and with Labour seemly locked in a Scottish death spiral, who can credibly defend the indefensible union when we ask the question again?"

Contrast this with the section of the Deutsche bank report that addresses the Scottish situation specifically - with reference to the post referendum changes the Report concludes: "If the additionally planned changes are adopted, the concessions made to Scotland should – at least from a financial perspective – actually suffice to address key demands being made by independence advocates."

So the Report actually says
  • Independence appears only to make economic sense if as a result you avoid large financial transfers to other parts of the country - and notes that's not the case with Scotland
  • The specific powers recommended by the Smith Commission should be sufficient to meet the demands of the independence brigade
Now why couldn't Gordon just say that?

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Wednesday, 11 February 2015

Scotland's Economy

The SNP appear hell bent on pushing for Full Fiscal Autonomy (FFA) for Scotland and with possible Westminster coalition deals to be done this may be closer to reality than many think.

So here's a quick summary of the realities of Scotland's finances as presented in the Government Expenditure & Revenue Scotland (GERS) figures.  These figures are produced by the Scottish Government and I show the numbers here assuming we Scots get to keep "our" oil & gas revenue.

I'm not trying to make any political point and will try to avoid revisiting old independence referendum arguments.  My intention is merely to inform the debate, help the intellectually curious consider the implications of Full Fiscal Autonomy and - perhaps more constructively - help us all think about how our national economy works and what choices our elected representatives face.


Public Sector Revenue

 All the figures here are most recent (2012-13) GERS figures quoted on a per cap (i.e. per person) basis.  I often see Scottish figures compared to UK (including Scotland) which can lead to confusion - so the comparisons I use here are between the Scottish figures and the "Rest of the UK" (rUK) where rUK = UK - Scotland (which I think is less confusing).

So let's look at where public sector revenue is generated in Scotland


Revenues from employment taxes (i.e. income tax and National Insurance contributions) are  -£335/cap or 8% lower in Scotland.  Given unemployment rates are almost identical, this simply reflects Scotland's lower average salary levels.

Revenues from consumption & transaction taxes (i.e. VAT and duties) are
+£36/cap or 1% higher in Scotland
  • VAT revenues/cap are almost identical
  • Stamp duties (i.e. property transaction taxes) are -£59/cap  or 40% lower in Scotland 
  • Alcohol (+£28/cap, +18%) and Tobacco (+£67/cap, +47%) duties alone raise +£95/cap more in Scotland
Revenues from non-North Sea business taxes (corporation tax, business rates and other levies but excluding employer NIC's, VAT, fuel duty etc. already included above) are only -£13/cap or 1% lower in Scotland.

Council Tax revenues are -£38/cap or 9% lower in Scotland (where we have of course had a council tax freeze).

Revenues from other wealth taxes (Capital Gains, Interest and Dividends) are only -£11/cap or 4% lower in Scotland.

Profits generated by publicly owned assets appear in National accounts as Gross Operating Surplus (G.O.S.).  Mainly because Scottish Water remains in public ownership, G.O.S is +£194 or 47% higher in Scotland.
The sum  of all the above largely explains why (before North Sea revenues are considered) Scotland raised -£163/cap or 2% less revenue than rUK in 2012-13.  

Attribution of North Sea Revenues is clearly a controversial topic, but assuming we allocate the North Sea revenues to Scotland on a geographic share basis (as the Scottish Government prefers) in 2012-13 Scotland generates an additional
+£1.032/cap more than rUK.

The net effect is that Scotland can be shown to have generated +£869/cap or 10% more revenue than rUK in 2012-13

The relative significance of North Sea revenue to Scotland's finances is clear.  In 2012-13 these revenues represented 10.5% of Scotland's Public Sector Revenue (1.1% of the UK's).  In 2008-09 North Sea revenue was 20.9% of Scotland's Public Sector Revenue (2.4% of the UK's).

To put this 2012-13 figure into context let's look at North Sea Revenues over time. The figures below are total North Sea revenues (of which Scotland's geographic share ranges from 95% to 84% over the last 4 years). The dark grey bar is 2012-13;  2013-14 is now known (although full GERS accounts are yet to be published) and the OBR forecast for 2014-15 can be expected to be pretty accurate given we are now in Feb 2015.  The dark red bar is the - ahem - "low" scenario used in the Independence White Paper (the lighter red the "high" scenario).


In absolute terms Scotland's North Sea revenues in 2012-13 were £5.6bn (£1.3bn below the White Paper figures) and we now know that by 2014-15 they will be around £2.4bn (£4.7bn below the White Paper low scenario).

We therefore already know that on oil & gas alone Scotland will be about £3.2bn worse off in 2014-15 than we were in 2012-13 (that's about £600/cap).

It's worth noting that of course some level of oil recovery is possible - but there are complicating factors that rarely seem to be considered

  • 86% of the 2012-13 North Sea revenues came from corporation tax - that is taxation on profit. A halving of the oil price is likely to lead to far more than a halving of profits available to be taxed.  This is what I mean when I say there is a non-linear relationship between the oil prices and North Sea tax revenues
  • There is (sensible) talk of reducing the taxation burden on North Sea companies in response to the oil price slump.  This may help save jobs - but again the North Sea tax revenue generated per barrel will of course be lower. 

Of course with the figure above this still means we'll be generating more public sector revenue per capita than the rest of the UK to the tune of about £250/cap in 2014-15.

I guess that's what the SNP mean when they refer to oil & gas as merely a bonus.  As long as we don't spend considerably more than the rest of the UK we shouldn't be any worse off as a fiscally autonomous country - so let's look at the spending side of the equation.

 Public Sector Expenditure

 Using the same methodology as for Revenue;



Expenditure on Welfare and Unemployment benefits are +£296/cap or 8% higher in Scotland than rUK.  Given unemployment rates are almost identical this is presumably largely a function of greater levels of in-work-poverty in Scotland.  This topic (in particular with respect to the National Minimum Wage level) is one I hope to return to.

Health expenditure is +£190/cap or 10% higher in Scotland than rUK.  I haven't investigated this further but factors here will include the fact that the Scottish NHS is fully devolved, free prescriptions are given and (I think) the Scots are simply on average less healthy than those in rUK.  The significantly higher alcohol and tobacco consumption implied by the duty figures above must be a factor here.

Education spend is +£75/cap or 5% higher - presumably largely due to the abolition of tuition fees in Scotland.  Wiser heads than mind are grappling with the question of whether or not the Scottish education system is delivering a better education to all as a result of this.

Transport spend is +£240/cap or 85% higher as a result of lower population density and remote Scottish communities.  This factor is rarely acknowledged when people complain about high profile transportation infrastructure investments in the rest of the UK.

Public Order & Safety (i.e. Police) spending is -£19/cap or 4% lower in Scotland than rUK.

Other areas which can be broadly defined as "social expenditure" are all materially higher than rUK.  Across Public & Common Services, Environment Protection, Housing & Community Amenities and Recreation, Culture and Religion Scotland spends +£396  or 57% more than rUK.  I must confess this figure intrigues me.

Expenditure on Enterprise and Economic Development is +£125/cap  or nearly three times that in rUK.  Agriculture, Forestry and Fisheries expenditure is +97/cap or more than double that of rUK.

International Services and Defence are allocated on a per capita basis already (and Full Fiscal Autonomy is normal interpreted as everything except foreign relations and defence - so the GERS figure are consistent with that principle).

It is worth noting that Public Sector Debt Interest is already allocated on a per capita basis in the GERS figures.  This is consistent with Scotland having a per capita responsibility for the UK debt (which was widely accepted as the fair basis for allocation during Independence discussions).  This should be remembered when the likes of Ms Sturgeon make wild statements about Scotland "putting in more than we get back" from the the UK.  This statement is normally justified with dodgy comparisons of percent of tax raised with percent of spending received.  The main flaw in this logic is that if you gave Scotland the same share of UK expenditure as it's share of UK revenue, Scotland would be responsible for its revenue share (not population share) of debt.  It's also worth noting that even on this flawed basis of comparison, in fact in 2012-13 Scotland was responsible for 9.16% of revenue raised and received 9.29% of expenditure.

So when you add all of that up we actually spend +£1,382/cap or 13% more than rUK.  Of course this higher spend more than offsets the higher Revenue we generate due to North Sea Oil such that the Scottish deficit is +£512/cap worse than rUK in 2012-13.  In absolute terms that means we need to find about £2.7bn simply to be no worse off than the rest of the UK.

The higher Scottish spend/cap figure has been remarkably consistent over the last five years (ranging between £1,225 and £1,438).

Now may be a good time to remind ourselves that in 2014-15 we are likely to have a Revenue advantage over rUK of only maybe £250/cap - so we can expect to see a deficit difference to rUK of nearly +£1,100/cap. 

 Let's pause and think about that for a moment.  If we tax and spend as we do today the accounts for a fully fiscally autonomous Scotland are likely to show that - for every man, woman and child in Scotland - we would be £1,100 a year worse off than if we continue to pool our lot with the UK.

Something would have to be done.  Tax take would need to go up or public expenditure would need to be reduced.  These are the economic realities from which we can't hide.  Of course economic growth would help but it's hard to imagine how or why a fiscally independent Scotland would miraculously create growth (or how long it would take before it materially affected the deficit).  We already spend a relatively high amount on Enterprise and Economic Development as well as Agriculture, Forestry and Fisheries - and it's worth remembering that EU rules constrain the level of government support that can be given to industry.

Now whether or not Scotland is fully fiscally autonomous (or indeed independent) the economic challenges we face are clear (and largely shared with rUK).  To put absolute numbers against this - the GERS deficit for Scotland in 2012-13 was £12.1bn and the Oil & Gas revenues in 2014-15 are likely to be another £3.2bn lower giving us roughly a £15.3bn deficit problem to address.

The graphic below (a work in progress) attempts to put the sources of revenue (in Green) and areas of Expenditure (in Red) is some kind of relative context.  All you have to do (given we know the oil & gas number is now much lower)  is work out how you might find £15.3bn through higher taxes or lower expenditure to eliminate the deficit.

If that defeats you - on the basis that we appear set on devolving away Barnett benefits and driving to full fiscal autonomy - try and find £6.0bn or so to make us at least no worse off than being within the UK.

Please drop me a line when you've worked it out.





 Addendum

Here is how the absolute Scottish figures have shifted over the last five years, which may be helpful in considering what it takes to move these numbers by £6.4bn (to be no worse off than the UK is now) or £15bn+ to eliminate our likely deficit right now.

Taking sources of funding first:


If you follow the chart up from the bottom you can see;

  • Frozen Council tax
  • (Surprisingly?) Stable Business Taxes - although it's worth noting the GERS figure is a guess as no-one how business would report profits and hence pay taxes between Scotland and rUK. (HMRC estimate this figure would be almost £1bn lower)
  • Duties fairly stable - creeping up slightly
  • "Wealth taxes and other" have declined since 2008-09 due to reduced Capital Gains Tax and lower dividend & interest taxes (presumably because of lower dividend & interest payments)
  • Employment (Income Tax and NI) is of course the biggest contributor and has increased by nearly £1bn over this period
  • VAT has grown by nearly £2bn due to the VAT rate increase to 20% in 2011
  • Gross Operating Surplus (GOS) is mainly Scottish Water profits - reasonably stable
  • Oil & Gas is of course the volatile element
  • The balance of funding required not met by theses taxes raised is of course deficit - the required increase in debt each year
Looking now at where that money is spent:



Again if you follow the chart up from the bottom you can see;

  • The biggest chunk of spend is Social Protection (welfare and unemployment) and this has increased by £4bn over the period
  • Other Social (Housing & community amenities, public & common services, recreation, culture & religion, environment protection) is reasonably stable
  • Health spend has increased by £1bn
  • Education, Transportation and Public Order & Safety (Police) expenditures are fairly flat
  • It is worth noting at this point we are already roughly spending about what we generate in public sector revenue (the black line)
  • Other Commercial (Enterprise & Economic Development, Agriculture, Forestry & Fisheries, Science, Tech & Employment Policies) have declined a little
  • The unhelpfully titled (in GERS) Accounting Adjustment is (I think) mainly cash versus reported cost accounting differences (e.g. when capex exceeds depreciation).  GERS is a little opaque on this - comments welcome
  • All we have to do now is pay our share of Defence (fairly stable) and Debt Interest (which of course grows with debt and varies with interest rates)
Take time to ponder these numbers - its what our politicians are (or should be) doing ...

Addendum II

The initial response to this post on social media was interesting with some suggesting this data presentation was some sort of "spin" applied by me to the numbers or me in some way applying my "model".  In fact all I have done is summarise the data all of which (with the exception of oil forecasts) are taken directly from the Scottish Government's own GERS data tables available here

There are also a surprising number of commentators who appear to get very confused about percentages and some - I'm looking at you "Wings over Scotland" - who don't seem to realise that we ran a large deficit in 2012-13 and that it was worse than the rest of the UK on any measure ... and that this was true before  we factor in the known £3bn+ subsequent loss of North Sea oil revenues.

Others have highlighted how these figures compare to OECD international comparisons - I think this is because those figures are current account balances (i.e. before capital investment or consumption).

To save time in debates and on Twitter I have created the following table which I believe comprehensively summarises all of the different deficit figures over the last five years for Scotland, UK (and by implication) "rest of UK".


Finally - as I have aggregated GERS categories into my own sub-totals to make it easier to digest - here are the tables mapping most detailed GERS figures onto my categories;




Done.



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