Saturday, 19 December 2015

Neuro-Linguistic Programming for the Masses

Having spent much of the last two years watching the highly impressive SNP spin-machine in action, it occurs to me that they are in fact expert practitioners of a kind of mass Neuro-Linguistic Programming (NLP).

For those unfamiliar with the concept of NLP1, our old friend Wikipedia explains that it's a system for exploiting the existence of "...a connection between the neurological processes ("neuro"), language ("linguistic") and behavioral patterns learned through experience ("programming") and that these can be changed to achieve specific goals ...".

A pragmatic exponent of some of NLP's more entertaining applications (and vocal critic of much of the exploitative psycho-quackery built around it)  is the charismatic brain-squeezer Derren Brown. He offers this rather simple explanation;
"by paying particular attention to the language we use, we can have a powerful effect on the unconscious neurological processes of the listener" - Tricks of the Mind, p176
Of course all political parties use carefully chosen language to try and programme the electorate to their way of thinking; we live in an age of endlessly repeated soundbites, of pithy phrases designed to penetrate the consciousness of the short attention-spanned. But what sets the SNP (the SNLP?) apart is the sheer audacity with which they're willing to relentlessly repeat not just partial truths but demonstrable falsehoods.

The mainstream media sometimes (although all too rarely) highlight the dissembling duplicity of the SNP's public pronouncements, but the SNP have immunised themselves against this by spending years patiently undermining all media sources except those they favour (which funnily enough tend to be the ones they have created or effectively control). It could be argued that the SNP's most impressive achievement has been to enable their supporters to give themselves permission to ignore all dissenting voices.

By their very nature, you'll be familiar with the sorts of phrases that I'm referring to.

Firstly there are those partial truths that focus on GDP or tax revenue but simply ignore spending (like judging the quality of a business on its revenues not its profits). These statements blithely ignore what it costs to run our country with the levels of public service we've become used to
These carefully chosen and endlessly repeated boasts were of course all dependent on oil revenues, so they're no longer valid. Take a meander through the remoter natwaters of social media though, and you'll see that plenty still believe and repeat these half-truths.

Secondly there are those statements that, by any reasonable analysis, are simply false. Here are just a few
I won't repeat the arguments here, but the wrongheadedness of each of these statements have been well covered in this blog.

Finally there's a category which is perhaps the most NLP-y of all: statements that can't be factually refuted and that imply (or explicitly claim) inevitability.

Perhaps the most notable example of this during the indyref was "Are you Yes yet? The clear implication being that you inevitably will be, it's simply a matter of time. To be fair this is simply an example of good campaign language. I offer no criticism in this instance, just polite applause.

But for me the most insidious example is "A Second Scottish Independence Referendum is Inevitable". This statement has the capacity to become a self-fulfilling prophesy if we allow it to become received wisdom.

As a rule, people don't vote to make themselves poorer. The last indyref took place in the context of a period where - if you ignored up-to-date data, shut one eye and blurred the other when looking at historical figures and were willing to believe hopelessly optimistic oil forecasts - you could just about persuade yourself independence wouldn't make us worse off. Those of us who looked closely quickly drew a different conclusion.

As as aside; I don't believe the fact that it would make us immediately worse of is in and of itself a reason not to vote Yes; but I do believe those campaigning for a Yes vote had a moral duty to be honest about the economic implications. This blog's existence is a direct result of the fact that they weren't, of my frustration with the transparent dishonesty of the Yes campaign's claims.

Now - following the collapse in oil revenues - it's clear Scotland would be £8bn2 a year worse off as an independent country if all else stayed the same (which of course wouldn't be the case3). The best spin-machine in the world couldn't hide that fact under the intense scrutiny another referendum campaign would bring. No amount of artificial grievance-mongering or empty "social justice" rhetoric would persuade us to vote to make every man, woman and child in Scotland immediately £1,500 a year worse off .

The SNP have been clear there won't be a second referendum unless they believe they can win it; they won't win it if a Yes vote would obviously make us all poorer. So what could change the fundamental economic situation, and are any of these things "inevitable"?
  1. Another windfall source of revenue could be found that generates £8bn+ a year in tax revenue and has the appearance of being sustainable. This could be oil & gas again (although the oil price simply returning to $100 won't be sufficient, as I explain here) or it could be we discover some other swiftly tax generating natural resource.
  2. Scotland's economy could miraculously boom such that our GDP (and therefore our tax revenue) growth outstrips that of the rest of the UK by 16% (the amount required to generate £8bn pa more income). The notoriously optimistic Independence White Paper itself argued that such levels of growth would take generations to deliver. There has been no credible case put forward for why further devolution (or indeed independence) should create superior growth for Scotland - the logic goes little further than "because Scottish people making decisions for Scotland"
  3. The drive for more powers for Scotland could lead to the Barnett formula being scrapped or drastically altered. The Barnett formula underpins the calculation of the block grant, the block grant provides us with funds for public spending that's currently £8bn pa. more than our proportionate share of (current) tax generation would allow. Take this away - stop us from benefiting from the "pooling and sharing" that protects our public spending - and we lose the single strongest argument against voting Yes: the £8bn a year Union dividend.
The third of these is of course made more likely by the SNP's persistent winding-up of the rest of the UK. If they persuade everybody that indyref II is inevitable it further helps their cause - why should the rest of the UK continue with pooling and sharing if it's inevitable that Scots will leave soon anyway?

So next time somebody tells you that a second independence referendum is inevitable, maybe ask them why - then judge for yourself if you think their opinion has been reached through reason or programming.


1. I'm using the term NLP as a convenient short-hand here, on the assumption that these basic principles are widely understood and easy to grasp. I think the wider NLP "industry" is well described by Derren Brown: "a huge industry of daft theories and hyperbole, evangelical mind-sets and endlessly self-perpetuating courses ..." - Tricks of the Mind p.177 

2. The £8bn is a conservative estimate and comes not just from my own analysis but also the highly respected independent think-tanks IFS and NIESR - I summarised these most recently here

3. Those things that "wouldn't stay the same" carry more downside risk in the short-term (issues around currency, trade, capital flight and transition costs) and the (highly debatable) upside benefits would take generations to materialise.

Friday, 18 December 2015

SRIT: A Blunt But Undeniably Progressive Tax

The SNP spin machine has been in full effect over the last few days. They need to be. How can they defend their decision not to use the Scottish Rate of Income Tax (SRIT) to protect us from the spending cuts imposed by Westminster's austerity policies?

The Spin is pretty simple: because the SRIT has to be applied to all tax bands equally (true) it would unfairly hit the poorest hardest (untrue).

Here's Swinney (our Finance Minister) to the Scottish Parliament
"By its nature, exercising that power would have a disproportionate effect on the amount of tax paid by the taxpayers on the lowest incomes."
... and being interviewed by the BBC
"It would have in fact been about double the effect on the taxable income of individuals at the lower income thresholds rather than people at higher income thresholds"
This is from the Scottish Parliament Information Committee (SPICe). Coming from the politically independent government body that is meant to inform MSP's I find this truly shocking - if you don't know why, read on

Here's SNP MSP Joan McAlpine on Twitter

I could find plenty of other examples but anybody with ears knows that variations on this theme are being hammered into the Scottish consciousness: the SNP aren't using SRIT powers because they would hurt the poorest most.

This (rather than governing) is what the SNP do best. It's a kind of mass Neural Linguistic Programming; they select a few simple statements and relentlessly repeat them until they are received as wisdom by their trusting supporters. All political parties do this to some degree of course, but the lack of scrutiny applied to the SNP and their sheer brass-neck sets them apart. The intelligentsia may expose their soundbites as being deeply misleading or (as in this case) simply wrong, but that doesn't matter. Their supporters are well trained to ignore dissenting voices.

We could assemble a greatest hits list: the ones that intentionally mislead by ignoring our higher public spending ("we generate higher GDP per capita", "we send more tax per head") or the ones that are - by any reasonable analysis - downright wrong ("oil is just a bonus", "we'd have been £8bn better off", "our oil forecasts were in line with the market at the time"). To the second list we can now add "using SRIT would hurt the poorest most"

So why is this assertion so misleading?

As I explained in my last blog (Swinney: Confused or Aiming to Confuse), the suggestion that a flat increase to all tax rates (which is all that SRIT currently allows) hurts the poorest most plays on a simple intuitive misperception: people think the poorest pay 20% tax and the richest 40%, so 1/20 is twice as bad as 1/40. Their are a couple of problems with this, the biggest being that we only pay tax above a threshold (the Personal Allowance) which means that a higher proportion of higher earners' income is taxed1.

In my last blog I explained (using rounded figures) how an additional 1% SRIT would mean - because the first £10k of income (the Personal Allowance) is not taxed - someone earning £20k would pay £100 more tax but someone on £40k would pay £300 more tax .

The wider point here is that this additional tax money raised could be used to alleviate the impacts of "Westminster's austerity policies". The additional money raised could be recycled into public spending in a way that defends our essential public services and protects the poorest in society. A simple person might think that the SNP - having campaigned as the "anti-austerity" party - would lose all credibility if they failed to take this opportunity to put their words into action.

But back to the narrow "proportionality" argument. I've had time to refine the analysis a little so that it includes employees' National Insurance Contributions. This means we can see the impact on take-home pay (which is surely the key measure here);

It's a detailed table but the key row is the one showing "impact on take-home pay" (the first column is for somebody working full time on the National Minimum wage).  Taking the first four columns, all figures are full annual impact:
  • Earning £14k: pay £34 more tax, a 0.3% reduction in take-home pay
  • Earning £20k: pay £94 more tax, a 0.6% reduction in take-home pay
  • Earning £40k: pay £294 more tax, a 1.0% reduction in take-home pay
  • Earning £60k: pay £494 more tax, a 1.2% reduction in take-home pay
It is undeniable that the poor are affected, but to suggest (as Swinney has) that SRIT would have a "disproportionate effect on the amount of tax paid by the taxpayers on the lowest income" or "double the effect on the taxable income of individuals at the lower income thresholds rather than people at higher income thresholds" is at best intentionally misleading and at worst (as I would argue) it is frankly wrong. The last row in the table above is how the SNP attempt to justify the statement: you be the judge.

Now regular readers of Chokkablog will know I do like a graph and this data screams out to be graphically presented. Just two graphs should do it.

To help us understand how effective tax rates vary by income level (factoring in the impact of the Personal Allowance) and how an additional 1% SRIT would impact that;

Note how the red line (the additional 1% SRIT line) diverges from the blue line (current tax policies) - the effect is magnified for higher earners.

As an aside: the first curved section of the line is of course tending towards 20% (the maximum tax you would pay if there were no higher bands). Similarly the second tends towards 40% (the proportion of income taxed at less than that rate declines as you head further right). The change in profile between £100k and £120k is simply because the personal allowance is phased out for higher rate tax payers over this range - effectively accelerating us towards the 40%. The final additional rate kicks in above £150k, sending us on a line which is asymptotic to 45%. If you earn £1m you pay 43.6% tax (somebody asked).

Finally, let's look at the measure that I would argue is the best single measure of the proportionate impact of SRIT: what impact a 1% increase has on the take home pay of people on different salary levels:

Now: you can argue that the incremental pound matters more to a lower earner and that existing SRIT powers don't allow us to avoid impacting all tax payers. They are valid points. But when Swinney brazenly asserts that using SRIT powers would "have a disproportionate effect on the amount of tax paid by the taxpayers on the lowest incomes" or would have "about double the effect on the taxable income of individuals at the lower income thresholds rather than people at higher income thresholds" he is engaging in a conscious deceit.

I'm not alone here (for example this We Need to Talk About Tax piece by Graeme Cowie covers similar ground), The good news for the SNP is of course that hardly anybody reads blogs like this - they won't be losing any sleep.

For what it's worth: here's my attempt at a shareable single graphic summary:

Or if we'd rather keep it in his "amount of tax paid" terms;

1. The other problem is that taking percentages of percentages is nearly always a misleading thing to do.  It's been (correctly) pointed out in the comments that "the percentage increase in tax bill" logic allows the statement to be justified - the lower income tax bills goes up by 5%, declining to 2.8% at £150k. This is true and I covered it in the previous blog - but as I highlight, the impact on take-home pay (or total effective tax rate) is greater the higher the income bands because a higher proportion of their income is taxed. I'm comfortable this is what matters, is the only reasonable way to interpret the figures

Thursday, 17 December 2015

Swinney: Confused or Aiming to Confuse?

Last night (16/12/2015) on the BBC's Scotland 2015 programme John Swinney was asked why he had chosen not to use the Scottish Rate of Income Tax (SRIT) to mitigate the pressure on public spending driven by Westminster's austerity policies.

If you watch from 13 minutes in, you'll see he's pressed as to why he didn't increase the SRIT by even just 1p in the pound. The following is a verbatim transcript:
"Well what that would have done would've put a disproportionate impact, and had a disproportionate impact on the incomes of people in low income households. It would have in fact been about double the effect on the taxable income of individuals at the lower income thresholds rather than people at higher income thresholds and I don't judge that to be the right way to deploy any tax raising changes"
Similar statements are now being parroted around social media. By seeding this misunderstanding Swinney shows that he either doesn't understand the effect of Personal Allowances on effective tax rates or that he is consciously trying to deceive the Scottish electorate.

Let me explain.

If all income was subject to tax then the statement above would make sense. If for example low earners paid 20% on all income and higher earners 40% then adding a flat 1% additional tax to both would indeed be "disproportionate". The lower earners' tax burden would rise by 1/20 = 5.0% whereas higher earners would rise by 1/40 = 2.5%.  I think this is how most people intuitively think about tax; it's an intuitive misconception that Swinney either shares or wishes to exploit.

Maybe Swinney is unaware of this thing called the Personal Allowance, the threshold above which tax has to be paid?

To illustrate with realistic (but rounded) numbers: say the Personal Allowance (PA) is £10k and we look at a low earner on £20k and a higher earner on £40k.  The 1% additional tax is only paid on income above the Personal Allowance, so

  • The lower earner pays the additional 1% on £10k (£20k income minus £10k PA) so has an additional tax bill of £100
  • The higher earner pays the additional 1% on £30k (£40k of income minus £10k PA) so has an additional tax bill of £300
So the lower earner is seeing a further £100/£20k = 0.5% of their total income being lost but the higher earner sees a further £300/£40k = 0.75% of theirs.

The simplest explanations is this: The Personal Allowance means that the higher an individual's earnings, the larger the proportion of their income that is subject to the additional 1%.

I've used round numbers here to try and make the illustration clear, but they're pretty close to the actual figures. For those who like to see the actual numbers (and a graph) I include them at the end of this post.

But this is about more than arguing over how to interpret percentages. These additional taxes would be directly available to the Scottish Government to alleviate spending cuts, to protect the public services on which the most needy in society depend.

Let's take our worked example further: what does the Scottish Government do with the extra £400 they've raised from our two tax payers? Even if they couldn't find a way of spending it to disproportionately help the lower earner (as they surely could), both the earners in our scenario could benefit from £200 of additional public spending (their "population share" of the additional £400 raised).

The net effect would therefore be that our lower earner would be £100 better off (because they pay £100 more tax but they benefit from £200 more public spending). This would have been achieved by our higher earner making a net contribution of £100 more (paying £300 more in tax but only receiving back £200 by way of public spending).

Of course there are non-earners who could benefit from those additional taxes, which would be even more redistributive than the example above.

SRIT may be a blunt instrument, but it undeniably has the potential to redistribute wealth from the richer to the poorer.

So now let's return to Swinney's statement:
"It would have in fact been about double the effect on the taxable income of individuals at the lower income thresholds rather than people at higher income thresholds"
It appears to me that this statement is demonstrably untrue. If I'm right then Swinney is either an incompetent Finance Minister or a liar.

***** Clarification / Correction *****
When I first published this post I offered that if anybody could demonstrate that I'm wrong - that his statement could be justified with reference to robust factual analysis - then I would of course post an appropriate correction and apology here. So here we go ...

It appears Swinney's figure comes from taking the %age increase in the %age effective tax rate (which is a bizarre way to interpret "proportionate impact" as the explanation above I hope proves - taking percentages of percentages nearly always leads to confusion).

In our worked example (see table below) the effective tax rates are 9% and 15% respectively. If we take the increase in effective rate and divide it by the effective rate, our £20k and £40k earners both see a 5% increase (the numbers are rounded in the table;  0.47/9.40 and 0.74/0.147 respectively). At £60k the increase by this measure becomes 3.69% (0.82/22.34), at the higher threshold (£150k) the figure becomes 2.8%. So 5.0/2.8 = "proportionately 1.8 times more" i.e. double in Mr Swinney's rhetoric (I'm not quibbling abut 1.8 vs 2.0).

If you've understood the worked example above, I hope you'll agree using this figure to argue that lower earners are disproportionately impacted is disingenuous at best.

I'm happy to apologise for suggesting Swinney might have been lying. I maintain however that he either doesn't really understand what the figures mean or he is trying to confuse people

**** Clarification Ends *****

The Smith Commission powers being delivered through the Scotland Act 2015 will give the Scottish Government the ability to flex all income tax thresholds and rates. Let's hope that by the time those powers are delivered our SNP overlords have managed to understand how taxes work and/or start being honest about the choices they are making.

Is that too much to ask?

The following graph shows the effect of the personal allowance (note the personal allowance gets phased out between £100k and £121k) and changing tax rates at different thresholds. Note how the red line (adding 1% to SRIT) subtly diverges from the blue line - this is the graphical representation of the dynamics this blog describes.

I'm indebted to Andy Wightman for pointing out the existence of this incredibly misleading graphic (which simply ignores the Personal Allowances diluting impact for lower rate tax payers). I'm genuinely shocked to find it comes from this Scottish Parliament Information Centre (SPICe) briefing paper. Holyrood: we have a problem.

Tuesday, 15 December 2015

Why Our Kids Should Hate Us: Debt and Taxes

With a title as enticing as "The sustainability of Scottish public finances: a Generational Accounting approach" you could be forgiven for not having read the latest paper to emerge from the National Institute of Economic and Social Research (NIESR).

It's a rather dry academic text which necessarily spends a lot of time defining the analytical approach taken and assumptions used. The findings of course have to have caveats applied, but there are two unsurprising (and helpfully quantified) headline conclusions

1. "The current path for the [UK] public finances is unsustainable"
  • By not paying enough tax (and/or by spending too much on public services) we are passing on an unfair financial burden to future generations
  • To address this now through tax increases (such that future generations would face the same fiscal burden as ours) would require an increase of between 3 and 10% to our total tax burden1.

2. "from a purely fiscal point of view, Scotland is better off without 'full fiscal autonomy'"
  • If the SNP achieve their stated aim of Full Fiscal Autonomy (FFA) for Scotland, we would be materially worse off. This is of course before allowing for the positive (or negative) impact of the different economic policies that FFA would enable Scotland to pursue. 
  • To address the additional burden that Scotland would face under FFA (over and above that which we face already as part of the UK) would require a further increase of between 19% and 21% to our total tax burden (all other things being equal)

What's quite helpful about this analysis is you don't need to fully accept the first conclusion (or indeed the underlying premise) to be able to appreciate the second. By comparing their baseline projections for the UK and an FFA Scotland, the relatively greater scale of Scotland's economic challenge is revealed.

So on the specific question of "what price FFA?", the NIESR's view can now be added to the list of voices saying "over £8bn pa"2
  • In FFA for Dummies and FFA for Dummies: Methodology we saw that the 15 year average onshore (e.g. excluding North Sea revenues) deficit gap  between Scotland and the UK has consistently been in the range of £8bn to £9bn a year. Given the OBR are forecasting only £0.1 - 0.2bn pa of oil revenue, this "without oil" analysis is increasingly apposite. Let's take the £8bn (low end of the range) and state that figure in the same terms as above: we would require a 16% increase in our total tax burden to close that gap.
  • In March 2015 the IFS forecast a 2015-16 deficit gap of £7.6bn. The OBR oil revenue forecast they were using at the time was for £0.6bn - so simply adjusting for the latest OBR forecast of £0.1bn gives us a restated IFS deficit gap of £8.1bn. So again: we would require a 16% increase in our total tax burden to close that gap.
  • As we've already said, the NIESR analysis of FFA suggests we would require a 19% to 21% increase in our total tax burden to close the gap. In 2013 cash terms that's £9.5 to £10.7bn pa.

The reason why the NIESR FFA gap is wider is conceptually quite straight forward. Their analysis includes the same starting deficit difference (Scotland's deficit is higher than the UK's) and uses the same OBR assumptions for future oil revenues, but in addition they factor in the net fiscal implications of Scotland's different population age profile over time. At its simplest: Scots are on average older3 and receive higher age-adjusted per capita spending on education and pensions while generating a lower level of per capita income tax revenue.

So common sense observations of historical trends and realistic assumptions about future oil revenue showed that FFA would (all other things being equal) require a 16% increase in Scotland's overall tax burden1. The NIESR have simply shown that if you add in Scotland's particular demographic challenges the scale of the fiscal gap will become even greater, equating to a c.20% increase in Scotland's overall tax burden.

It's important to highlight that none of these analyses factor in the possible impact of FFA on Scotland's relative performance versus the UK, the extent to which FFA may allow us to close the fiscal gap through superior economic growth. Of course it's quite possible that FFA could be damaging to Scotland's economic performance, but even if you believe FFA is some sort of magic wand that would deliver extraordinarily superior economic growth, these analyses show quite how extraordinarily superior that economic growth would need to be. 

The SNP's own White Paper showed that cumlative 3.8% superior growth over 30 years was an empirically observed "bonus of being independent" - at that rate it would take over 100 years to close the fiscal gap identified by all these analyses.

The alternative to more debt and/or more taxes is of course to reduce public expenditure. Here's where the absolute figures matter: we're now looking for £8 - 10bn a year of savings versus those costs allocated to us in the Scottish Government's own GERS figures. Without getting distracted here with the usual arguments (Trident, House of Lords, HS2, etc.), suffice to say that nobody has come close to suggesting savings that would add up to anything like £8bn a year; the notoriously optimistic White Paper itself suggested only £0.6bn of net savings.

You'll still come across deficit-gap deniers on social media of course - but the reality is that there is now an overwhelming consensus that Full Fiscal Autonomy would be economically ruinous for Scotland. In the words of SNP MP George Kerevan
For Scotland to accept fiscal autonomy without inbuilt UK-wide fiscal balancing would be tantamount to economic suicide.
Well quite.

If Scotland becomes fully fiscally autonomous future generations will have two things to thank us for: more debt and higher taxes.


But let's look back at the first of these conclusions: from a UK perspective, to what extent are we failing future generations by not paying enough tax (or spending too much) today?

The first issue to consider is demographics: the ageing population. In our lifetimes we pay taxes to and receive expenditure from the State. At either end of our lives (when we're in education and in retirement) we are typically net beneficiaries and in the middle of our lives we are (hopefully) net contributors.

The longer we spend in our dotage the longer we spend being net beneficiaries (through pensions and healthcare). This is of course why retirement ages are being increased - to make us net tax revenue generative for longer and to have a commensurately shorter period during which we will be a burden on the state. Needless to say, being a burden on the state really means being a burden on the next generation.

This is where the Generational Accounting (GA) approach comes in. It aims to address the question of generational equity: what is the tax burden that we should incur now to avoid future generations having to incur an even greater tax burden?

Based on the above dynamic you would think perhaps that the very act of running a deficit would create generational imbalance - by living longer we're going to be a more expensive generation to support in our dotage than the last one was, so why don't we need to be saving for that now?

The answer of course is the countervailing influences of population growth, real productivity growth and other costs which may not grow as quickly (the benefits of national scale) . So let's get into some of the assumptions the NIESR have used.
  • They assume 1.5% real productivity growth in perpetuity (which, as Prince would point out, is a mighty long time) and a 3.0% real government discount rate (which makes future costs smaller in net present value terms)
  • They use ONS population projections (which must include highly uncertain net migration assumptions)
  • They assume that unallocated expenditure (UE4) either remains static in real terms or (even under the worst case scenario) only grows in line with population.
To these arguably optimistic assumptions we have to add one important caveat about the GA approach: it explicitly assumes that all debt must be paid back (or to be more precise: as time tends to infinity debt must tend to zero). This feels pessimistic to me in that it implicitly assumes there isn't such a thing as a sustainable level of national debt.

Feel free to grapple with the equations in the paper yourselves. I don't claim to have fully understood the analysis and may well have missed something.  If  I've understood the dynamics of the equations properly then the starting deficit and debt positions are in fact the dominant variables5 (at least when it comes to defining the FFA gap).

But maybe we don't need to get buried too far into the detail. It seems intuitively obvious that if we don't do something about the scale of the UK's debt (by addressing the deficit) then future generations will be repaying our debt and shouldering some of the tax burden that we should surely be facing now.

The NIESR analysis certainly seems to suggest our approach to fiscal policy is akin to our approach to climate change: we are in danger of leaving a generational legacy to be ashamed of.

When our kids get round to working this out - when they realise we bequeathed them the certainty of more debt and higher taxes - they'll have every right to ask us: what the hell were we thinking?

1. Note on use of "increase in total tax burden"

For simplicity the NIESR state all of their findings in terms of tax as a percentage of GDP. To make the figures easier to relate to, I state them as an increase in total tax burden. To illustrate: the current UK tax burden is 36% of GDP, so a required increase of 3.6% of GDP would be a 10% increase in total tax burden.

It's perhaps worth noting that if we were to translate these figures into "take-home pay impact" (i.e. if the increase tax revenue was to be achieved through income tax and NI alone) we would need to multiply the figure by 2.4 (NI and Income tax makes up 42% of total UK tax revenue; 1/0.42 = 2.38). So an increase in the total tax burden of 10% would mean a 24% increase in the Income tax and NI burden if that were to be achieved solely through payroll taxes.

Of course the alternative to increasing taxes would be to reduce public expenditure; so you can take as read the words "and/or an equivalent reduction in public spending" every time a required tax increase is mentioned. Of course public spending is higher than tax revenue (hence the deficit) so the percentage reduction in public spending required will be slightly lower than the percentage increase in tax. To illustrate: Scotland's 2013-14 deficit of 8.1% of GDP is as a result of spending being 23% higher than revenue, so e.g. a 16% increase in tax is equivalent to a 16/1.23 = 13% decrease in spending.

2. Note on NIESR analysis of devolution impact

The NIESR also has a go at calculating the Generational Accounts for Scotland under the devolution settlement currently being negotiated. Given there's conceptually no need for Scotland on its own to achieve intertemporal and intergenerational balance under a devolved arrangement (even if we accept the principle that the UK should) and the inevitable uncertainty around the nature of the future block grant, I'm leaving this analysis to one side.

I confess to some confusion as to the presentation of the Devolved scenario figures on page 23 where the paper states;
"One interesting result is that if we add the size of the required tax increase in the UK and the devolved Scotland scenario together, then the resulting tax increase would be about 1 to 2 percentage points of GDP lower (depending on the assumption about the unallocated public expenditures) than in the case of a “fiscally independent” Scotland."
This seems to imply that the Devolved scenario is additive to the UK baseline scenario and not a standalone scenario

3. Note on Scotland's different age profile

Scots are on average older despite dying younger. The obvious implication is that (differences in birth rates aside) proportionately more young people emigrate and/or less young people immigrate to Scotland. This is one of the reasons why Scotland needs economically productive migrants even more than the UK as a whole.

4. Unallocated Expenditure

Government costs that "cannot reasonably be allocated to individuals" such as defence or environmental protection

5. Notes on Generational Accounting Methodolgy

The explicit assumption is that all debt is repaid by future generations (or at least that debt tends towards zero as time tends towards infinity). There is presumably an argument to be made for a sustainable level of debt which would lower the implied tax burden increase required.

There is an assumed real rate of productivity growth of 1.5% compared to a real government discount rate of 3.0%. I think this means that if there were no age profile changes then the discounted contribution of future generations would inevitably be lower than today's.

The observation (page 15) that the tax increase required for intergenerational balance is lower than that required for intertemporal balance suggests that the above difference in real productivity growth and real discount factors is more important than the increased burden created by changing age profile. I think.

The assumption around net government purchases which are not allocated to individuals (UE) is critical. These costs are discounted at 3.0% but assumed to remain either static (in real terms) or to grow only in line with population. I *think* this explains why the highest baseline tax increase required (3.7%) is lower than than the current deficit (5.6%). Basically this is suggesting we don't need to eliminate the deficit today to meet our future financial requirements (even given the unfavourable demographic trends) because the UE burden will relatively decline as long as real productivity growth is achieved

Wednesday, 2 December 2015

Joan McAlpine in the Daily Record

I wrote an intemperate rant on Facebook today as I didn't have the the time to write a blog post in my normal (I hope) more reasoned style. I've now taken the time to tidy it up and add in the data graphs that illustrate my points.

I had my attention drawn to this piece by SNP MP Joan McAlpine in today's Daily Record

She says politicians are mocking Scotland over the fall in oil prices. Mocking the SNP is not mocking Scotland; it's mocking the SNP. The SNP deserve mockery for basing the economic case for an independent Scotland on oil revenues of £6.8 - 7.9bn a year (when in fact we're now looking at £0.1 - 0.2bn a year).

She suggests Scots deserve an apology. We do - an apology from the SNP for trying to win a Yes vote on the basis of a demonstrably false prospectus.

She says Kez Dugdale appears to blame the SNP for the falling oil price. Kez was actually blaming the SNP for trying to win a Yes vote by making demonstrably (at the time) unrealistic oil revenue projections.

She asserts Scotland will - over a decade - have "lost" £3.9bn under the Tories as we take our share of austerity cuts. The alternative would be of course for us to increase our share of the debt by £3.9bn (at least in the short term - we can debate the pros and cons of Tory austerity another day). The difference between the White Paper "low case" oil forecast and current OBR forecasts over the next decade is c. £67bn (that's right - I haven't missed a decimal point there) - an issue which is literally an order of magnitude bigger than "Tory austerity".

She asks why Labour don't have more to say about that "vindictive attack on our people" - whilst spending the majority of her article attacking Scottish Labour. Joan being Joan we can infer that by "our people" she means Scots - neglecting the fact that we are simply taking our share of the UK's pain. Scots are not suffering more than the rest of the UK, so there's nothing "vindictive" about it. Of course because of Barnett, because of "pooling and sharing", we are suffering far less than we would if her party had fooled us into voting Yes.

She says the "unionist parties" claim the oil slump makes independence impossible. Nobody claims it makes independence economically impossible, merely that the (now undoubted) economic hardship it would cause makes it politically extremely unlikely.

She says "wealth per head in Scotland would be similar to the UK without including oil" and the Yes campaign "always said oil was just a bonus". We surely all see through this by now? By "wealth" she means GDP, from whence our taxes generate revenue. But she ignores the spend per head that (per the Scottish Government's own GERS figures) show us consistently c.£1,700 per head worse off than the rest of the UK without oil. That grosses up to £9bn a year.

We are used to high levels of public spending in Scotland that we simply couldn't sustain were we independent without booming oil revenues. If Joan thinks austerity cuts of £0.4bn pa are unbearable, how on earth would she describe the £9.0bn pa of cuts (or increased taxes) that an independent (or FFA) Scotland would need without oil? Oil is no more a bonus than being able to fund Scotland's entire education and training budget (£7.6bn) is a bonus.

She misquotes Standard & Poors (because she doesn't understand credit ratings) and quotes a credit report made before the oil slump. In fact Standard and Poor's said: "In brief, we would expect Scotland to benefit from all the attributes of an investment-grade sovereign credit [rating]". That means BBB- or higher. There are 8 grades between BBB- and the UK's AAA.

She makes the observation that nobody predicted this level of oil price slump (which is true; not even Standard & Poors did) but ignores the fact that the White Paper low oil revenue forecast was £2 - 5bn higher than the OBR forecasts that existed at that time. That's the Office for Budget Responsibility, the people the UK government rely on - the clue is in the name.
[Here she's simply parroting the line esrtwhile SNP spin-doctor Kevin Pringle was using at the weekend in the Sunday Times - something I covered in detail here]

She asserts the oil price will rise again, ignoring the fact that it's North Sea profit that generates tax revenues ... and that profitability (due to rising extraction costs as fields mature) is in long term structural decline. The last time oil was at $100/bbl was in 2014 and we generated just £2.6bn in oil revenue. The White Paper "low" scenario was for £6.8bn (implicitly in perpetuity) and tax rates have been reduced since then (in an attempt to protect oil industry jobs). Implying the economic case for indy will be repaired by an oil price rise is simply nonsense - even before you factor in the volatility risk.

She rants about the fact there wasn't an oil fund built. This is a point that is as true for the UK as it is for Scotland; it has absolutely nothing to do with the future, with the choices we (whether as the UK or as Scotland) now face. Needless to say if we (the UK) had created an oil fund then we (the UK, including Scotland) would have had to pay higher taxes or enjoyed lower spending to fund it. We were at the party, we drank our fair share.

She talks of a "massive transfer of wealth" from Scotland to the UK. The Scottish Government's own figures show that this is nonsense. We were a massive contributor in the 1980's, on average we've been a large beneficiary since and certainly right now - to adopt Joan's language - there's a "massive transfer of wealth" taking place from the rest of the UK to Scotland. That's how pooling & sharing works.

She asserts (ridiculously) that the UK "would have gone bust" without oil. That statement doesn't even merit a rebuttal.

Finally she suggests an apology is called for. She's right: the SNP and the wider Yes campaign should be apologising for presenting a hopelessly optimistic economic case in their attempt to win a Yes vote. If they'd succeeded the Scottish people would be facing a level of economic hardship that would make current austerity measures seem trivial.

I would also suggest that Joan should apologise for writing this nasty, vindictive, grievance mongering article in a national paper.