Guest Blog: Neil Lovatt on N56

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Guest blog written by Neil Lovatt who can be found on Twitter @neiledwardlovatt

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N56 Analysis of Fiscal Autonomy: Spun for Social Media

Today we received two publications from the SNP leaning “think tank” N56, one on growth the other on Fiscal Autonomy. [KH: N56 was founded by Dan MacDonald, a board member of the pro-independence Yes Scotland organisation]

This post concerns itself with the second of these publications rather then the former. However I would say that growth strategy publication is a generic collection of good wishes such as investing in infrastructure where it has a positive value, encouraging exports and innovation as well as paying more in welfare. That’s what anyone in industry would call a “fairy dust solution” as it simply states policies that sound wonderful but actually have as much chance of failure as success.

However let me be clear: if there are obvious self funding policies that could be pursued that will help the UK or Scotland then I’m all for them, but who wouldn't be? Unfortunately the N56 growth report doesn't contain any such free and obvious policies.

But let’s turn to the Fiscal Autonomy paper.

Where’s Full?
The sharp eyed among you will have noticed that the title doesn't include the word “Full” - we might ask ourselves why. I suspect it’s because as the author worked their way through the proposal they realised that what they were proposing wasn't “Full”.  In fact it isn't “Autonomous” either as I’ll demonstrate. It appears that may have led to a rewriting of the title without editing the copy correctly. See here for instance:

Full Financial (not Fiscal) Responsibility is (or at least used to be) the Scottish Government’s position as set out here. The Scottish Government don’t like to be reminded of this as it was produced by them in 2011 when they had a very different view of the Scottish public finances.

However the N56 "Fiscal Autonomy" is not "full" - it differs from DevoMax or the Scottish Government’s proposals in two very important ways.

Firstly the report assumes that fiscal transfers (pooling and sharing) will continue under the arrangement.

This doesn't explicitly mean Barnett but it’s as close to a dog whistle as you are going to get. The idea that Scotland becomes fiscally independent from the UK but they receive fiscal transfers from the UK when it ends up below some needs based formula is de facto a continuation of our current pooling and sharing  arrangements with different accountancy treatment.

Also note the second paragraph about the principles to be agreed on how the proposal would work. This effectively says that the UK as a whole would need to agree on levels of spending, tax levels, benefits etc. In other words the Scottish Government would not be free to do whatever it wants, so neither “Full” nor “Autonomous” in any meaningful sense of either term.

This proposal is actually a good idea in my view, indeed I’ve been in favour of such an accountancy change whilst keeping something akin to Barnett as proposed by the Welsh Assembly (although that will still leave Scotland worse off than Barnett). However let’s be clear this is not Full Fiscal Autonomy or DevoMax - it’s Smith with the transparency of GERS put on a statutory basis.

Secondly, and quite outrageously, the N56 proposal flies in the face of the Scottish Government’s proposal for borrowing powers by arguing that borrowing should be granted to the Scottish Government but the UK should be the guarantor.

This proposal means that the Scottish Government would have the right to borrow at UK government interest rates despite having a higher credit risk (see Moodys analysis below) and have their borrowing guaranteed by the UK taxpayer.

You have to question what sane British Chancellor would accede to such a request. Allow the Scottish Government to borrow as it requires putting potential strain on the UK currency and UK interest rates on the understanding that the UK government would bail out the Scottish Government if they got into hot water?

That means that the Scottish Government will expect an explicit credit guarantee from the UK, effectively having its borrowing subsidised. Again that is neither “Full” or “Autonomous”.

If the Scottish Government wants borrowing powers it would need to either match the UK deficit (something that would cost us dearly as Kevin Hague demonstrates e.g here > The Great Escape) or it would have to borrow on the open market in its own name without a UK credit guarantee (as the Scottish Government proposed in the Full Financial Responsibility model). The consequences of this would be a sharp increase in Scottish borrowing costs as this would have to include servicing of its historic population share of UK debt at the higher Scottish interest rates.


The Debt Dodge
This brings me to probably the most intellectually insulting part of the N56 paper, on historic debt.

N56 shamelessly attempt to argue that Scotland should not take a population share of UK debt liabilities. This is based on a strange assumption that debt seems to start in 1980.

As GERS data goes back to this date it provides an interesting starting point. It also coincides with the North Sea oil boom when for a relatively brief but important period Scotland contributed substantially more to the UK Exchequer than it received in spending. Again this has been comprehensively discussed by Kevin eg here > Explaining the £7.6bn FFA Black-hole

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KH: note that this graph uses 12-13 data instead of more current 13-14 data ... and of course this is a misleading way to present the data.  To illustrate: if we are responsible for 10% of tax revenue and 10% of spending we are responsible for 10% of the deficit ... but we are 8.3% of the population so our deficit per capita is higher.  This is why I favour per capita analysis (consistent with the default assumption of Scotland assuming per capita share of debt). See for example Full Fiscal Autonomy for Dummies]

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But let’s accept the "the world started in 1980" claim for the purposes of this argument. The authors then attempt to propose that had Scotland held on to their surplus from the 1980s it would not have any debt. However I’ve calculated the effect of reinvesting the GERS surplus at 4% (a Business for Scotland assumption) to project the size of an oil fund. This shows that the effect of higher public spending in Scotland negate any effect of a "start the clock in 1980" surplus.

But let’s deal with the start in 1980 debt dodge. You have to ask the question why start there? Why not 15 years ago for example where GERS shows that on a per head basis Scotland has only had three years where it had a lower deficit or better surplus than the UK.

My own view is that you should start in 1888.

That was the year that the Goschen formula started, which was the forerunner to Barnett. It guaranteed a level of public spending for Scotland which turned out to be far greater than its population share. Something that the the Taxpayers Alliance have been at pains to point out.

Of course whilst we know that Scottish spending was higher than the UK on a population basis (and rightly so due to our relatively sparse population which makes providing services more expensive) we don't have equivalent data on income. However it is reasonable to assume that the Scottish contribution to taxation would be broadly in line with its population share largely because that’s what the GERS data shows if you exclude oil. [KH: if we're being fussy I'd note that in fact the figure is consistently about 6% lower over the last 15 years]

On that basis from 1888 up to the advent of North Sea oil Scotland contributed a population share on taxation but received a higher than population share of public spending. It therefore received a subsidy from the UK, again which was reasonable due to the wider dispersal of the Scottish population.

On this basis a population share of the current debt is an entirely realistic arrangement and if offered on independence or real Full Fiscal Autonomy Scotland should grab it with both hands.


Not so hidden Spending
N56 then follow the debt doge with another social media dog whistle: apparently the UK is actually hiding spending and GERS does not accurately reflect the position Scotland under Full Fiscal Autonomy or independence.

Again let’s start with the bleeding obvious: GERS is produced by the Scottish Government. To argue that GERS is disguising the real position of the Scottish public finances would be to imply that the Scottish Government are involved in a conspiracy against themselves!

Taking the actual N56 claims:

The first implication is that Scotland “only” receives £40.8bn in public spending and not the £66.4bn as allocated by GERS. Social media is full of graphics showing this without the remaining paragraphs and it’s quite clear that N56 has written this to allow this to be pulled out of context.

Unfortunately what follows is rather important! The other £25bn is almost entirely made up of £22.3bn welfare (which I expect no one is proposing that the Scottish Government cuts) and £3bn debt servicing (which I’ve argued is entirely reasonable).

This then leaves the hidden spending as little more than a rounding error - and yet N56 seem to imply that there are elements of saving which could be made here on culture (BBC?) and the old chestnut of public administration.

Given the numbers no consultant worth their salt would put this section into a serious report. I can only conclude that it has deliberately been designed to be taken out of context and plastered all over social media.

Spun for social media
That leads to my rather depressing conclusion about this report. It potentially contained some interesting ideas such as the kernel of a new approach to devolution where Scotland accounts for all of its taxation, and annual flows of transfers between Scotland and the UK are openly recognised within a new needs based formula.

However the authors have clearly sought to produce a report for quick headlines and social media. The attacks on the IFS are there to provide comfort to anyone who is unsettled by the conclusions of their analysis on DevoMax. However the N56 criticism does stand up under any reasonable analysis.

The debt dodge is designed to try to underline a myth put out by the SNP that Scotland doesn't need to take on a population share of debt - it does.

Finally the entire paper is designed to be digitally waved about by anyone posting "Full Fiscal Autonomy can work for Scotland".

Unfortunately the proposals outlined are neither “Full” or “Autonomous” - they are a continuation of the best parts of the UK. In other words the dirty little secret behind this report is another pro-SNP organisation has quietly concluded that DevoMax or independence is not something that Scotland should contemplate. I wonder how many SNP supporters will tweet or post that?

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Guest blog written by Neil Lovatt who can be found on Twitter @neiledwardlovatt

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