Saturday 6 February 2016

What's £8bn Between Friends?

£8bn - Eight billion pounds - £8,000,000,000

It's meaningless isn't it? Just a big scary number that's bandied about among other big scary numbers. Except this particular big scary number (allowing for a bit of rounding here and there) is central to the ongoing Scottish constitutional debate.

Let's start with some historical actual figures. This blog has shown that - using the Scottish Government's own GERS figures and applying a range of possible methodologies - the onshore deficit gap between Scotland and the UK has historically consistently been between £8bn and £9bn.

It's worth being clear about what this number means: it's a measure (pro-rata on either population or GDP) showing how much worse Scotland's deficit would have been than that we share with the rest of the UK if we hadn't had North Sea oil.

This onshore deficit gap matters because it is revealed - it becomes real - as oil revenues decline. This is not to say that were Scotland to be independent this gap would remain; it might narrow, it might widen. It merely gives us an idea of the run-rate relative disadvantage we would be starting with if we sacrificed the benefits of UK-wide pooling and sharing (assuming the days of significant oil revenues are indeed behind us). If you like, it's the head-start we'd be giving to the rest of the UK.

For the avoidance of doubt: this is not Scotland's deficit without oil & gas; it is how much worse than our shared UK deficit Scotland's deficit would be without oil and gas.

So GERS figures show we've historically run an onshore deficit gap versus the UK of over £8bn pa.

When the IFS analysed the projected fiscal gap between Scotland and the UK they concluded that there would be a gap of £7.6bn in 2015-16. At that time they were assuming £0.6bn of oil revenue, so without oil revenue that shows an onshore deficit gap of £8.2bn.

So the IFS projected our onshore deficit gap versus the UK for 2015-16 would remain around £8bn pa.

The NIESR recently analysed the difference between the Scottish and UK economies using the generational accounting method (which among other factors models the net fiscal implications of different population age profiles over time). The NIESR used the latest OBR assumptions for oil & gas revenues, which in this context are effectively zero (£0.1 - 0.3bn pa. in coming years). Their conclusion was that in the long-term a fiscal gap exists of £9.5bn to £10.7bn pa.

So the NIESR highlighted structural reasons why the deficit gap between Scotland and the UK would widen over time to well over £8bn pa.

The Barnett Formula is the mechanism that currently allows Scotland to benefit from higher public spending per capita than the UK as a whole. It involves notoriously complex calculations and is increasingly complicated by increased devolution of revenue raising powers ... but if we want a simple indication of "what's Barnett worth to Scotland" we need only look at how much greater public public spending per capita Scotland receives than the rest of the UK. In the most recent available GERS figures Scotland received 11.6% higher expenditure per capita than the rest of the UK (table 5.7); in cash terms that works out at £7.7bn.

So the Barnett formula currently benefits Scotland to the tune of about £8bn pa.

The fact that this £8bn figure keeps recurring is not coincidental. The Barnett formula predates the 80's oil boom which is why it protects our public spending when oil revenues decline. It's worth c.£8bn to us because it fills the onshore deficit gap; that onshore deficit gap is largely caused by the higher spending that Barnett enables.

So hopefully it's becoming clear that this £8bn figure is central to the debate around independence (or indeed Full Fiscal Autonomy). Again: it's not how big our deficit would be; it's how much bigger our deficit would be (than the one we currently share with the rest of the UK) if oil revenues go and if we lose the Barnett formula delivered benefits of UK-wide pooling & sharing.

But of course it's only how much worse off we'd be if all else remained the same - if all else remained the same, what would be the point of independence?

I don't want to retread the well-worn path of why independence might in fact make things relatively worse (minor issues like what currency we'd use and within what fiscal constraints, business and capital flight etc.) or why some of the claims for why things might get better are - how can I put this? - somewhat less than logically compelling.

Instead let's simply look at the White Paper: "Scotland's Future: your guide to an independent Scotland" and consider how that dealt with the £8bn problem.

This 649 page document found room for just the one page of financial projections: an estimate of Scotland's financial position in 2016/17 "under current constitutional arrangements" (page 75). The figures used were basically a merging of GERS figures and OBR projections with a few choice adjustments.

Imagine putting this page together and having to defend these numbers. You want to be able to say "oil is just a bonus" but without admitting that without oil you've got an £8bn gap to fill.

The best you can cobble together through assumptions about "savings or increases in revenues" is £0.6bn a year (p.78). To get to this figure you've played your defence and security spending joker (the Trident card), you've had to accept that GERS figures already exclude expenditure that the Scottish Government judges we don't get any benefit from (Olympics, Crossrail, London Sewers etc.) and you've made some heroically optimistic assumptions about the costs that will be required to replace the administrative functions currently shared with the rest of the UK. And yet you've hardly dented the £8bn.

So you're back looking at oil. You've largely relied on the OBR for forecast figures (see White Paper notes 42 and 43) but they're forecasting only around £3bn for offshore receipts. So what do you do? You ignore the OBR oil forecasts and bung in assumptions for offshore revenue that range from £6.8bn to £7.9bn pa.

So the White Paper solved the £8bn problem by assuming oil revenues of up to c.£8bn.

Who'd have thunk it?

Anybody who doubts that the "oil is just a bonus" claims were rhetorical nonsense need look no further than the White Paper itself: if oil was just a bonus, why did the economic case for independence rely on it?

Of course some will argue that the existence of the £8bn onshore gap is somehow proof of the fact the the UK is failing Scotland. This overlooks the blindingly obvious fact that this gap is a result of higher public spending in Scotland far more than it is lower onshore tax generation (a topic covered in depth in the blog post FFA for Dummies).

So this £8bn figure really matters - and with the OBR now expecting oil revenues to be around £0.1bn - £0.3bn pa. it's a number that isn't going away anytime soon.

So £8bn isn't just another number being thrown around in the debate; it is in fact the crucial number in the debate. So it's worth getting our heads around what £8bn actually means;

  • We have a population of 5.3 million: so £8bn is £1,500 every year for every man, woman & child in Scotland

  • There are 2.7 million Scottish tax payers: so £8bn is £3,000 every year for every tax payer in Scotland

  • Scottish Tax Payers pay £11bn income tax on £68.7bn of income: so to raise £8bn through income tax alone would require an additional 11.6% on everybody's income tax rates (or for those who prefer to present it this way: a 73% increase in our total national income tax bill).

  • Our onshore GDP in 2013-14 was £135bn (£153bn including oil): so if we wanted to just carry that £8bn as higher deficit this alone would account for an additional deficit of 5.9% of GDP (that's in addition to any underlying deficit we would have by tracking the rest of the UK). To put that figure in context, the EU stability and growth pact sets a total deficit target of less than 3% of GDP.

Given the attacks of the vapors suffered by SNP MSPS's at Labour's suggestion that we might offset "Tory cuts" by raising a mere £0.5bn through income tax, you have to wonder how on earth they would have coped with the prospect of plugging the £8bn fiscal gap a Yes vote vote would have left us facing.

Fortunately we voted No and can reasonably argue that £8bn pa. isn't that much between friends ... when our friends are 10 times our size and we shared "our" oil revenues with them in the boom years. But if we continue to indulge in the politics of unjustified grievance, we might end up losing our friends and finding out the hard way quite how big a deal £8bn is.


Unknown said...

Am starting to wonder whether it is time to move on from this argument to other things. I mean this with the greatest respect for what you have achieved and the work you have put in. The fact is that the argument has been won. There are only a few people who would still argue that we would have been better off financially with independence given the collapse in oil and the unfolding figures - in fact even the figures without the oil collapse. You might come across them on social media and through trolling, but that is not representative of the general population.

Of those who still make the argument, the stupid we can forgive - they just can’t do the figures. There are the cynical, and I’d count Swinney, Hosie and others at the top of the SNP hierarchy in that bracket. They know the figures, but choose to lie and avoid the “hypothetical problem" of the issue, even though they argues for it so recently. Then you are left with those who choose to avoid the issue, it being in their grasp but too uncomfortable to face head on. This is fairly hard to contemplate for those of us who think these things important, but truth be told, no amount of blog posting is going to affect them. They will just keep turning away. They will ignore facts and figures to concentrate on “freedom”, with no need to be responsible in terms of the effect of their dreams. Like a child of ’68 carrying a little red book, the horrific reality of what they support will never trouble them.

One of the benefits of Kezia’s tax policy is that it focuses on the marginal, and allows us to examine what powers we want to take up and this we don’t. The battle for future government in Scotland has to be fought at the margin, where powers can be exercised. Do we want to cut services or raise taxes to pay for them? How could we grow the economy to generate more revenues for services? Scotland now has around 70% of the population supporting centre or centre right politicians, yet the media and comments keep pretending we are some put upon supporters of socialism at the mercy of a right wing English agenda. We need to look at what the Scottish people are really saying with their votes, and work from there. Only then can we examine the Nationalist option with a clear eye.

Anonymous said...


Another great Blog. It's so important to keep challenging the SNP on their lack of financial understanding (to put it charitably) - Thank you.

Niall is right to say that labour tax hikes are stimulating a right and proper debate that will also expose some more of the many inconsistencies in the SNP.

David From Scotland

Richard A said...

Good that you continue to highlight the challenge we face.

It would be interesting to see in due course a dispassionate analysis of the growth factors being used in the negotiation of the Scotland Bill. My Swinney appears to be remarkably downbeat about his ability to deliver growth in Scotland and now is pointing to lack of control over immigration as a reason even though there are millions of EU citizens who can come and work in Scotland if they believe it is an attractive country to be in.

David GREEN said...

I don't get this. Swinney is haggling over a loss from the Fiscal Framework that might amount to £3.5 billion over ten years, whereas his preferred solution, and that of Sturgeon et al., is to commit to a policy (FFA/independence) that would lose the same amount in 5 months, and then continue to haemorrhage at the same rate for years without obvious relief! How on earth is this Stronger for Scotland?

Sheumais said...

Niall Murray, I'd include Swinney amongst the stupid. What should be hanging Salmond out to dry is his past as an Oil Economist, though perhaps it wasn't just his preference for the skulduggery of politics that brought that career to an end.

I appreciate you might feel this drum has been banged a little often, I suspect this blog is only read by a select few, those who perhaps already sympathise with its position and those who are directed to it to attack the author. With the SNP filling the void left by the imploded Labour party, it is important to keep banging this drum ahead of the Scottish election and the EU referendum, until its logic finally does overwhelm even the diehard Nats.

This blog reveals the utter nonsense of the SNP's fiscal posturing and the dishonesty of its opposition to "Tory austerity", with the final nail in the coffin being the realisation independence is incompatible with EU membership and Jim Sillars is taking care of that. Even if tax was only raised by £4 billion and expenditure reduced to make up the difference, tumbleweed would be the most active presence in an SNP economic forum in an "independent" Scotland, accompanied by sobbing.

I can't recall where I read it, but an article exposed the likely ineffectiveness of taxing the better-off more, noting combining all those who earn sufficient to pay more than the basic rate already pay substantially more than 50% of Income Tax revenue in Scotland. That, I would suggest, already surpasses fair.

The drum needs continual banging, at least until May.

Paul Robson said...

@niallMurray . You'd think so. It takes a special type of self delusion to ignore Kevin and others pointing out the £8bn shortfall. Yet all I hear is a fantasy about independence not being oil based, it's a bonus.

Daly many of you countrymen are still buying the fantasy.

So Kev should keep going. If he doesn't, the loons will use his sile.nce to claim they are right, ignoring countless posts like this by Kev and others.

People who get their first nformation from W*nks over Scotland cannot think logically by definition , if you have any brain you just laugh at it. Unfortunately many do view it as a balanced source of facts.

Probably they will only change their mind by actually getting the SNP utopia. I don't care about svotnats , tHey deserve it, but it's unfair on intelligent nscots

Anonymous said...

@sheumais, I seem to remember reading the same, but can't remember where either. This SG paper does give some useful background data .

On the continuing need for Kevin to keep up the good work, the SNP and their "case" for independence have gained a great deal of traction simply by repeating feel-good nationalist soundbites over and over again until they are regarded by many people as a self-evident truth. This sort of deeply embedded propaganda is hard to shift in any manner, but certainly not by ceasing to point out its underlying fallacies. Meanwhile the SNP's Constitution - or what passes for one - continues to state that independence is the best future for Scotland, without a shred of evidence to demonstrate its viability, only that the case has to be better made and more people convinced. I suggest that the need for someone like Kevin to point out that the emperor STILL has no clothes is much stronger today than it was even when oil was at $113. Rocoham

Anonymous said...

Another good essay, Kevin. I disagree with Niall Murray above. The argument for Scottish Independence was always selfish and is increasingly threadbare. A time will come soon when that the shortcomings are self-evident, but that is not quite yet. That we are so close owes a lot to your efforts. Please keep up the good work.