Saturday, 25 April 2015

Full Fiscal Autonomy in 700 Words

This piece originally appeared in the Daily Record on 25/04/2015

When the SNP campaigned for Independence they convinced many voters that a Yes vote would make us better off. Those voters should now be asking themselves why the SNP is backing away from the idea of Full Fiscal Autonomy (FFA) anytime soon.

Full Fiscal Autonomy is a very simple concept. It means Scotland keeping everything we raise from taxes and using that money to pay for our own public spending.  We’d need to pay the UK government for some shared costs (like defence and foreign affairs) but effectively it means we’d get to run our own economy, to stand on our own feet.

In fact FFA would give us many of the claimed benefits of independence without some of the big risks like currency.  We would keep our oil revenues and choose what taxes to raise and how to spend our money.

Under FFA we would still be sharing a currency and a national debt with the rest of the UK, so to be paying our way we would simply need to be running a deficit at a similar rate.

The Scottish Government's own figures (GERS) tell us where we would start from.  These are not Westminster's numbers; the Scottish Government's Chief Statistician takes responsibility for them.

The GERS figures simply show us how much we spend and how much we raise through taxes. The difference between the two is our deficit. By comparing to the rest of the UK on a per person basis we can see our relative deficit rate – how much better or worse off our stand-alone finances are than those we share as an integral part of the UK.

First let’s look at what we spend. Over the last 15 years (adjusted for inflation) we spent on average over £1,400 more per person than the rest of the UK.  This is largely due to the fact that our population density is 20% of the UK’s so it’s more expensive to provide the same level of public services in areas such as education, health, and transport. This higher spend is very consistent and is the equivalent of £7.8bn per year.

Next let’s look at the taxes we raise before oil is included. Again there is a remarkably consistent trend. We generate similar but slightly less tax per person than the UK average. Over the last 15 years (adjusted for inflation) the average difference is £250 per person or £1.3bn per year

During the referendum we were told by the SNP that oil revenues were just a bonus.  Yet before we take into account oil revenues, these figures show Scotland has consistently run a £9.1bn per year higher deficit than the rest of the UK for the last 15 years.

Some people react to this by suggesting it shows that Westminster is somehow letting Scotland down. But our economy does pretty well at generating revenue. It seems harsh to blame Westminster because they allowing us to spend more.

So does keeping “our oil” overcome this deficit gap? It has done in only three of the last 15 years, the most recent of which was 2011-12 (the base year used for the Independence White Paper).  Since then oil revenues have plummeted and as they decline we are seeing more and more of the underlying £9.1bn deficit gap exposed. This is what is often referred to as the “black-hole” in the SNP’s plans.

But we’ve just looked at the past, what of the future?

Oil is extremely unlikely to come to our rescue.  Tax revenues are generated by oil industry profits and the North Sea oil industry’s profitability has been in long term decline. The oil price crash just makes it worse.

Some pin their hopes on Scotland achieving unheard of economic growth. This is of course what any country’s government wants. Achieving it is another matter and the SNP haven’t suggested any radical policies that might actually make it happen.

So the most likely solution would be to pile on additional austerity measures (on top of those the rest of the UK choose) and/or to take on even more debt.

No wonder the SNP aren’t that keen on FFA anymore.  They might even be secretly relieved we didn’t vote Yes.

For those who are visually minded the following graph represents the data described above.

The solid red line is actual higher Scottish public spending per capita; the solid blue line is Scotland's lower onshore tax revenues per capita; the solid black line is Scotland’s actual higher tax generation per capita when “our” oil is included.  

The gap between the blue and black lines is oil & gas tax revenues.  The gap between the red and black lines is Scotland’s higher deficit (when black below red) or lower deficit (when black above red).

For a more complete explanations see;

> Full Fiscal Autonomy for Dummies
> Oil Price & Scottish Tax Generation


Anonymous said...

Hello Kevin
Firstly, thank you for all of your blogs about the economy. For a non-economist that are logical and easy to follow.
I would be really grateful if you could briefly describe the meanings of terms such as "export tax", " excise relief" etc. I have friends who are telling me that Scotland 'loses' much of its revenue at the moment due to these monies not being accounted for in figures such as the GERS figures and therefore that, in the case of FFA or independence Scotland's revenue would actually be a lot higher than the GERS figures would suggest. Is this correct?
I have looked online to try and find an explanation but have had no luck.
Thanks in advance.

Kevin Hague said...

In this "GERS misses chunks of revenue" nonsense - how stupid do they think the Scottish government are to have failed to take this into account?

Of course they haven't missed anything in the numbers they used to write the White Paper for heaven's sake!

There is no such thing as alcohol export duty - duty & vat are consumption taxes so calculated based on spend in country. Anybody who has read GERS methodology knows this - it's misinformation wilfully spread to try an hide from the fact the reality is unhelpful to those who argued for independence on a false prospectus
Read footnote 2 here and see link in text near where that footnote is referenced

David GREEN said...

An excellent précis of your previous blog. The more one looks at Scotland's balance of income over expenditure, the more it is clear that, for practical purposes, the Barnett formula compensates for Scotland's geography. This geography is not going to change any time soon. Ergo, Scotland could do with extra cash from the more centralised rUK, more-or-less in perpetuity. The seductive prospect was undoubtedly that a resource grab for oil would offset the geographical problem. If the oil revenues largely disappear, Scotland is heading for relative poverty and the best prospects for most young Scots will be the road to England and Europe. If the Scots really want to see how an open economy of their size would operate, they need only look at New Zealand. New Zealand, with 4 million, has to operate a ruthlessly efficient set of state services, because it does not enjoy economies of scale or sharing. It has independently to provide for its armed services, a reserve bank, border control, etc. Those familiar with New Zealand will tell you that even the Centre-Left is way to the right of where the Centre-Right was 40 years ago. And despite Centre-Left governments of some durability (think Helen Clark), all governments have been punctilious in preserving some sort of working relationship with the US and Australia. Although New Zealand has its own currency, it has to pay considerable attention to Australia, which is not even half the size of rUK relative to Scotland. New Zealand is, of course, a sovereign country, and punches above its weight. However, it is fully aware that sovereignty produces only limited independence. Like an independent Scotland, it has a large area for its population, and knows all about the tyranny of distance. The SNP's so-called economic levers have all been tried by New Zealand, without any evidence that they enable New Zealand to leap-frog its rivals. Moreover, its universities, which are solid, could not possibly hope to aspire to the international position of Scotland's major universities without greatly increased levels of investment that New Zealand could not afford. The conclusion? Sadly, an independent Scotland will show signs of decline from day one. The Quebec effect will kick in and many of the brightest will simply get out. The quality of services will decline progressively, and the universities will show a very sharp decline. Sad, and completely unnecessary.

Terry Summers said...

Maybe an intrepid political interviewer needs to raise the subject with Ms Sturgeon and get her to make a definitive statement supporting the Scottish Government's GERS figures as an accurate statement of the position of the Scottish economy.

Terry Summers said...

Stuart Hosie's pitch for Deputy Leader of the SNP proves Ms Sturgeon 'doth protest too much', it is all about Indy

Terry Summers said...

I came across this link whilst reading comment on an article in the Scotsman. It is a wee gemm of information.

bucksboy said...

Good article, thank-you.