Full Fiscal Autonomy in 700 Words

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

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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.

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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).

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For a more complete explanations see;

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