FFA For Dummies Methodology

I'm delighted that more and more people who are avowedly committed to the Yes cause - who believe that Scotland should definitely be independent no matter what the economic implications - are starting to actually engage with what those economic implications might be.

As a result there have been two questions raised about the methodology I used in Full Fiscal Autonomy for Dummies (and more generally when comparing Scottish and rest of UK economic statistics). These are good questions, so I think its worth answering them.

1. The use of per capita comparisons instead of %age GDP comparisons

Quoting figures on a per capita basis (or as Alex Salmond used to delight in saying "for every man, woman and child in Scotland") is common practice  - people can relate to the idea of their own personal contribution, to their own pay-packet.

Oil tax revenues are notoriously volatile (that's kind of the point) and so Scotland's GDP is itself volatile.  If (for example) we look at a time-series of public expenditure as a %age of GDP it is harder to interpret than public spend per capita (e.g. has it gone down as a %age of GDP because it's gone down in total or because GDP has gone up?).

Similarly if we want to disaggregate the contribution of Oil & Gas Tax revenues from other (aka Onshore) Tax revenue, which GDP number do we use as the denominator? We could include Oil & Gas in the GDP in both cases or indeed if we could include it in one but not the other - either way it becomes harder to understand what is causing observed fluctuations.

Finally, the Scottish Government's preferred allocation methodology for nationally shared costs (debt interest, defence expenditure etc.) is on a per capita basis. When the indyref was in full flow there was broad agreement that (were it to happen) debt allocation would take place on a per capita basis. Given that (up until about now) Scottish GDP/Capita has been higher than the UK average for many years, it goes without saying that if you allocated these costs on a GDP share basis Scotland would appear worse off.

So, given my objective was to drill down and explain how the Scottish Economy differed from the rest of the UK, it made sense to use a per capita basis. That the resulting graph (see below) showed such a remarkably stable picture of onshore revenues difference and public expenditure difference per capita kind of proves my point: this is an enlightening way to look at the data.


2. The use of UK or "rest of UK" (rUK) for comparison

I do all of my analysis comparing Scotland to rUK (where rUK is the UK excluding Scotland). As with any good analysis there isn't a right and wrong answer here - it depends what you are using the figures for, how you interpret them.

The Nationalists delight in making the debate about us and them - although  "we contribute more than them" is heard rather more often "we get more spent on us" (and even the former won't be heard now oil has all but disappeared as a tax revenue generator). In that context it makes sense that "us" is Scotland and "them" is rUK, If the debate is about how much we pull our weight (the extent to which we give or receive more) within the UK then it makes sense to compare Scotland versus rUK.

If you're asking "what would the difference be for the Scottish population between Scotland standing alone and remaining fully pooled and shared within the UK" then it makes sense to compare Scotland with total UK (with us in it).

If we're looking at Full Fiscal Autonomy (as the blog post I'm referring to does) then we need to understand what it would take for Scotland not to be dilutive to the UK economy (for the rest of the UK not to be subsidising us indirectly through supporting the shared currency). In this case it's appropriate again to look at Scotland vs rUK.

It depends what you are using the analysis for.

One of the more bizarre suggestions is that I chose this methodology to make Scotland look worse - given that it makes Scotland look better in terms of relative tax contribution (and when we're a net contributor)  that accusation makes no sense at all.


Conclusion

I hope the merit of the Full Fiscal Autonomy for Dummies blog post is that by sticking to a single definition for comparison purposes (per capita and vs rUK) we can walk all the way through the figures understanding them in a way which is consistent with the language of the debate. It provides a clear and easy to follow explanation.

I stand by my position that for Full Fiscal Autonomy analysis it is correct to use Scotland vs rUK and that it is simpler to understand the figures and the debate in terms of per capita figures. I'm very clear about my definitions and the deficit gap I'm identifying is identified on a per capita basis.

I happen to agree that it's better to define the deficit gap on a %age GDP basis, but it's harder to create a consistent numerical narrative if you do the analysis in that way - for the reasons I explain above. What matters of course is what difference would it make?

This is why I'm so pleased that devoted Nationalists are engaging with this question.  If they would rather define the deficit gap on a %age GDP basis then they really should.  It would make a big difference if our GDP/capita was hugely different from the rest of the UK, but it's not. That's why some of the more wild-eyed cybernats have to use illustrations pretending we're like mexico versus the USA or that our population might be boosted by zombies who wouldn't impact our GDP or spending (yes, really).

If they want to talk about the "independence difference" rather than the "FFA Challenge" (although I still don't think many of them have understood this subtlety) then they should do the analysis versus UK instead or versus rUK.

I keep challenging them to do this with the real numbers (as opposed to some they've made up)

1. Recreate the graphs below using %GDP and vs UK
2. Tell us what the resultant onshore deficit gap is on that basis

I've shown the second graph on a %age GDP basis in my blog - see if you think it makes a difference to the narrative

I can guarantee you they've done this and discovered that

• It's hard to get a clear picture on the first graph because of denominator volatility (so in trying to draw that graph they'll understand why I chose the definitions I did)
• The resultant onshore deficit gap is a figure they can't (yet) bring themselves to say in public (I'm keen they work this number out for themselves - but they could just look at the IFS analysis and adjust out the oil)

As with my previous blog: I applaud their engagement with the analysis. It's a good thing.

** Addendum **

I have given up waiting for those who challenge the methodology I used to re-run the analysis on a %age GDP and vs Total UK basis so I've done it and decided to post it here. This way people can see why they're so reluctant to do it.

Remember we're looking at the Onshore deficit gap (i.e. the difference between Scottish and UK economies if there was no oil tax revenue) so that we can see what the underlying gap is. This gap has in the past sometimes been filled to over-flowing with oil, but given how bleak the oil outlook is now it would likely need to be filled with tax rises or spending reductions (or - for as long as it would be sustainable - greater borrowing).  The view as to how necessary it would be to close this gap varies depending on your perspective: if we were Fully Fiscally Autonomous the rest of the UK would require us to close the gap to avoid the rest of the UK subsidising us by supporting our shared currency (see Eurozone).  If we were independent we might choose to simply run a higher deficit and build up yet more debt - but by any measure if we don't close the gap we'd be worse off.

So let's plot the deficit gap over time using the two alternative methods. For the per cap / rUK method this is effectively a plot of the gap between the red and green lines in the graph above.

As I've argued throughout - the methodological difference is very small. Hardly surprising given our onshore GDP/Capita is so similar and we represent under 10% of the UK.

For the record, the 15 year average onshore deficit gap in real terms is:

• Per cap / rUK Basis (Chokkablog Full Fiscal Autonomy For Dummies Method): £9.1bn
• % GDP / UK method (arguably better for Independence option analysis): £8.6bn

As you can see the lines actually converge in more recent years: the last 5 year averages are £9.0bn and £8.8bn respectively.  I think we can safely say that the Onshore deficit gap is stable at around £8.5 - 9.0bn (I've consistently argued for +/- £0.5bn on these figures anyway).

Let me repeat here for the avoidance of doubt: were we to be independent or fiscally autonomous we would not expect this gap to remain the same.  The gap is a function of being in the UK, sharing a tax system (and currency), generating slightly less onshore tax and having a lot more spent on public services (as UK Pooling & Sharing allows).

What this analysis shows us is: to not be worse off than we are now (at least from a net fiscal balance perspective) we'd need to find £8.5 - 9bn from some combination of N Sea revenues, higher tax rates, higher economic growth and/or public spending cuts.

This analysis is simply a guide to scale, it gives us a clear indication of the size of the challenge we'd face, it tells us broadly what we'd need to believe for separation or Fiscal Autonomy to make economic sense.

To help put this £8.5 - 9bn in perspective:

• The last time oil was at $99/bbl (in 2014) we generated only £2.6bn of tax revenues - and tax rates and N Sea profitability have declined since then.
• The total defence budget allocated to Scotland in the most recent figures was £3.0bn
• Our total  education and training spend in the most recent figures was £7.6bn

I understand why committed separatists would rather talk about theoretical examples involving Snow White and Zombies (yes really) or why they'd rather play with numbers for Mexico and the USA (don't ask me). But the harsh truth is these number represent the best understanding we have of our economic situation and they expose very clearly what many of us were saying all along: oil was never a bonus, it was the bedrock of the economic case for Independence.  Without that oil, there is no economic case for independence.

For absolute Completeness Here's the Fully Audit-Trailed Data Set for vs UK Figures