Clowns Left, Jokers Right

Last week I published the following report.

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Read the Full Report Here

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The report was well received in the press and by informed commentators. It was quoted extensively in respected publications such as here in the FT:

"The best analysts of Scotland’s finances have been celebrating the day too [..] there is one from Kevin Hague, commissioned by the Scottish Conservative party (of which Mr Hague is definitely not a member). This is the longest and the most comprehensive of the lot."

If you haven't read it, please do (save the pdf, print it out, save as an ebook on your phone). It should serve as a valuable reference for anybody who cares about understanding the facts around Scotland's economic position within the UK.

Former SNP MSP candidate and current independent councillor David Berry blogged a response (Nae Twa Kitchens) in which he reluctantly conceded:

"to be fair, it is hard to poke holes in the extensive numbers he has gathered in this paper, based as they are on GERS and other government documents. He has set rigorous terms for any fiscal debate on Scottish independence [..] That Mr Hague’s numbers show we Scots are running a structural deficit worse than the UK’s is not some unionist plot to undermine the SNP. It is reality. And waving saltires at rallies will not make it go away."

Whilst he couldn't resist a few poorly aimed digs at me in his blog, I applaud David's willingness to address the reality head on.  Of course not everyone responded positively and so with a weary sigh I'm going to offer a brief response here.

I'll ignore the predictable and feeble ad hom attacks from the likes of Wings Over Scotland's Stuart Campbell. In fact I've taken to ignoring him altogether (you should too by the way - it's like taking off a pair of tight shoes, you'll wonder why you didn't do it sooner).

There were two responses in particular that were seized on by nationalists desperate to find an excuse to avoid facing the facts. On the left we have proud SNP member Alistair "wrote a Common Weal paper" Davidson and on the right we have those SNP cheerleaders Business for Scotland (who will need no introduction for regular readers of this blog).

The jokers on right's offering is too feeble to merit a response (check it out here if you don't believe me), but the clown to the left received the enthusuiastic support of Pat "always a yesser" Kane (National columnists and inhabitant of Thoughtland -  a land where apparently only one thought is allowed) who gleefully tweeted:

"One reason I know #Indy will happen is explosion of street-smart minds on our side. @moh_kohn dismantles @kevverage:"

I asked Pat if he'd read the report he thinks is being dismantled but he didn't reply. In fact - demonstrating a rather wonderful misunderstanding of how Twitter works - Pat tweeted that he's muted me because of some of the replies he received from some of the people who follow me. Hey ho.

Anyway, let's see how he thinks Alistair managed to "dismantle" my report. I strongly recommend you read Alistair's effort ("Trial at the Hague") for yourself.

He starts with a pseudo-intellectual ramble about the discipline of economics. He lists some economic schools of thought, just in case you doubt his ability to write down some names he's heard of.

He claims mine can't possibly be an objective report because economics is not an objective discipline. If only he'd managed to read the very first paragraph of my report where I explain very clearly: "These figures are used to explain Scotland’s past economic performance (as an integral part of the UK) so as to inform our understanding of the future choices a possible independent Scotland would face". I'm not attempting to propose an economic solution, this is not a prescriptive report, it's merely an analysis and presentation of the past data. That's why it can be objective; it's fact based.

He also dismisses the concept of an "understanding of practical economics", but we'll come back to that.

He then quotes me referring to the "net fiscal deficit" and in a flailing attempt to make a semantic point he asserts

The author is entirely using gross figures, rather than net.

No, I'm really not. I'm using the same terminology as GERS uses when it refers to the figure I quote as the "Net Fiscal Balance". These are not "gross figures" in any way shape or form. In case we still doubt that he hasn't a clue what he's talking about he elaborates:

This is akin to subtracting your mortgage from your net worth, but refusing to count the value of your house.

This is a quite staggeringly daft statement. Neither my report nor the GERS report are attempting to establish Scotland's "net worth", this isn't an asset valuation exercise. What this statement painfully exposes is the fact that Alistair in fact doesn't know the difference between a Cash-flow and a Balance Sheet. Understanding really basic concepts like this is the sort of thing I was referring to when I claimed an "understanding of practical economics", but I guess we already knew Alistair doesn't believe in such a thing.

He goes on:

£3bn was spent on capital investment, leaving a Current Budget Balance deficit of £11.9bn or 7.8% of GDP. Still a challenging figure, but the author’s misuse of the statistics undermines his entire analysis.

Aha! So he's talking about the difference between the Net Fiscal Balance and the Current Budget Balance (showing he doesn't actually understand the significance of the two figures in the process). Quite why my use of the Net Fiscal Balance figure, correctly naming it as such and using like-for-like definitions when looking at international comparisons is a "misuse of statistics" that "undermines (my) entire analysis" is not something Alistair explains. Maybe he thinks an independent Scotland wouldn't need to make capital investment? Does he offer other countries' Current Budget Balance figures for comparison? No, of course he doesn't.

He then looks at the EU stability and growth pact excessive deficit threshold of 3% and offers the following killer insight;

Many EU members breach the stability and growth pact.

If only I'd shown all EU countries' deficits on a comparable basis, both now and over the last 13 years, so that people could see that very point graphically illustrated. Oh, hold on, I did (maybe this is where he saw it?)

I notice that Alistair doesn't take the EU to task for their "misuse of statistics" by judging countries on their Net Fiscal Balance rather than their Current Budget Balance. He should maybe have a word with them?

Actually maybe he will, because he then gets into full Dave Spart mode about the EU:

The pact was designed according to the same neo­classical economic theories that created the banking crisis and have plunged Eurozone economies into a lost decade of low growth.

Maybe his argument is that rather than having to work within the EU's rules, were Scotland to be an independent country we could negotiate our EU terms by explaining how they're all wrong? He carries on:

This 'objective' report has also taken the Better Together argument about EU membership as read.

Actually no it hasn't. I was very careful to refer simply to Scotland's requirement to "negotiate EU membership". If he's seriously suggesting that Scotland wouldn't need to negotiate with the EU following a vote for independence ... well frankly I despair. Mind you, given his little rant above maybe he doesn't want us to be in the EU anyway? It's quite hard to tell what he thinks to be honest.

He goes on:

This section rests on negotiations going entirely against Scotland. The author imagines Scotland being forced to close its notional deficit faster than any other nation outside the Eurozone has had to, while taking a full population share of UK debt, and no or limited assets.

No it doesn't. I make no assertion about assets, he's just made that up. I make no judgement about the outcome of negotiations (which for example could well include the EU simply refusing Scotland re-entry until it had sorted out both it's own currency and its deficit). In fact let me just repeat precisely what I did say: "it is inconceivable that an independent Scotland would be able to negotiate EU membership (or indeed a workable currency solution) without having a clear and credible plan in place to dramatically reduce the scale of its deficit.".  I stand by that.

He has a quick ramble about how we could "pivot" and simply "launch our own currency". So that's alright then. No mention of the financial challenges that would create, not a whisper about foreign exchange reserves or cost of debt ... but we'll let that pass because what follows is priceless:

To 'prove' how poor Scotland is, the author has taken the 'objective' decision to exclude a major Scottish industry. I am tempted to write a similar report that excludes volatile banking and financial services from the UK's public finances.

If he managed to read my report he'd realise that actually all I've done is isolate the impact of North Sea revenues for what, surely, even to Alistair are bloody obvious reasons. As for the banking and financial services analogy: really? If somebody claims that industry is "just a bonus", if we discover we have finite and maturing reserves of "financial services assets", if "banking and financial services" becomes a globally traded commodity and the price collapses ... well then maybe he should do that analysis. But that would require him actually doing some analysis with real numbers, so we can be pretty confident he won't.

He then implies the current oil revenue slump is just a blip (repeating the standard "it's just about the oil price" line that I carefully debunk in my report) and rambles on aimlessly for a bit - look, I have guests, it's Easter Sunday, I refuse to waste too much time on this.

Then he moves on to the part of the report where I highlight that Scotland has in fact been a significant net contributor to the UK since 1980, so the support we receive now is simply "pooling & sharing" in action. His response to this is quite remarkable:

Fiscal transfers to Scotland show that Scotland is a basket­case; fiscal transfers from Scotland are good pooling and sharing.

I mean seriously? I explicitly point out that fiscal transfers from the UK are "good" pooling and sharing and he accuses me of saying they show Scotland is a "basketcase" (his word, I say nothing of the sort anywhere in the report).

It gets worse.

In my report I clearly reference the five separate pages in the White Paper which offer the illustration that countries with the "bonus of being independent" experienced superior GDP growth of (cumulatively) 3.8% over a 30 year time period. Having already established (on the same page) that the gap to the UK is equivalent to 17% of total revenues, I make the simple observation that, at that rate, it would take over 90 years to close the gap to the UK (in case there's any confusion I explicitly note that I'm assuming revenue/GDP remains stable so as to isolate the effect of GDP growth on the revenue gap). If you calculate the cumulative percentage you'll see that at a rate of 3.8% every 30 years, after 120 years you'd still only have achieved 16% cumulative superior growth. So in fact I was being extremely conservative. Let's see what Alistair thought:

No citation is given for this 90 years figure. Nor does the author seem to understand economics. Arguments that bonuses from independence or the union could be found in the government accounts were always facile.

So he hasn't read the footnotes (57, 58) and/or he can't do simple maths and/or follow the most simple train of logic. He then starts thrashing around, dismisses the White Paper ("we expect such arguments from politicians") and makes the palpably ludicrous statement that seeking evidence of economic impact in government accounts is "facile".

Enough.

Alistair's document isn't evidence of an "explosion of street-smarts", its a damp-squib. It isn't a "dismantling" of my report, it's a cringe-inducingly confident display of Alistair's own ignorance.

That SNP cheer-leaders seize on Alistair's effort as something to celebrate merely exposes the intellectual vacuum that now lies at the heart of the Nationalist movement.