Saturday 19 November 2016

Beyond GERS - Beyond Belief

This front-page splash and supporting article in the Nat Onal caused a great deal of excitement among dogmatic proponents of Scottish independence.

It's no surprise that the article itself was the usual garbled nonsense; the Nat Onal know their readers, so the report was spun as a GERS denier's wet dream
  • They describe it as "a new model aimed at replacing GERS figures" (it isn't, it's an attempt to predict Scotland's possible stand-alone finances, something GERS has never claimed to do)
  • They refer to "modest and conservative" calculations (which we'll see are anything but)
  • They offer this quote from Common Weal Director Robin McAlpine: "With this report we think we’ve reached deficit parity with the rest of the UK without cuts to anything other than defence." (which is - to be kind - a creative summary of the report's conclusions)
But those Nationalists who bother to read the report itself (published on the Common Weal website here) will - if they have any critical faculties intact - find themselves bitterly disappointed. I recommend anybody interested in the debate around Scottish Independence to read the report in full and - noting that it's written by an avowedly pro-independence author - ponder what it tells us.

So what does the report actually say?

Well let's start by applauding the author's intention. Some of us have spent the last few years patiently1 making the following point about GERS
"Nobody is arguing that an independent Scotland wouldn't want to and indeed have to do things differently - but GERS does show us the starting point, the run-rate, the pro-forma accounts on which an independence case needs to be built. Those who champion independence have to make a credible for case for how and why and by how much we'd change the GERS figures by being independent. Just saying "the GERS figures tell us nothing" simply doesn't wash - they tell us what happens if we were to keep taxing and spending at these levels (and why we can't)."  - Chokkablog August 20161
Regular readers of this blog will know that the GERS figures show Scotland received an effective c.£9bn fiscal transfer from the rest of the UK in 2015-16.

The Beyond GERS report validates this analysis by recognising that - just to get to "deficit parity" with the rest of the UK - we would need to find £9bn through some combination of savings to the costs and increases to the tax revenues shown in GERS. The author has - to his credit - accepted this challenge and had a go at addressing it.

As an side: we should also applaud how "Beyond GERS" handles tax revenues:
"the starting point is taken to be the latest figure of £53.748 billion extimated by GERS in 2015-16"
Hallelujah! No nonsense about missing VAT revenues or whisky duty, no confusion about export revenues, no erroneous suggestions that corporate head-office locations affect the figures or that HM Treasury is suppressing our tax figures by withholding data. Props are due to Fraser Whyte and Neil Lovatt for their consistent work rebutting these myths - maybe it does make a difference after all?

Business people are often faced with strategic decisions which are hard to robustly quantify. In those situations a useful approach is to work out "what would you need to believe would happen" for a decision to make sense. "Beyond GERS" offers us just such an analysis.

So - remembering that the Nat Onal calls these "modest and conservative" assumptions - here's what Beyond GERS suggests3 we would need to believe would happen for independence to make economic sense
  • We would save £1.7bn by walking away from 61% of our population share of the UK's debt
  • We would save £3.5bn by persuading the rest of the UK to pick up 38% of our pension bill
  • We could cut our defence spending by £1.0bn (as opposed to the £0.6bn saving assumed in the White Paper)
  • We could raise an additional £3.5bn of tax (equivalent to a 29% increase in our total income tax take)
  •  We could raise £0.7bn of revenue through "government re-organisation"
  • There would be no economic downside due to separation from our largest export market and the need to create our own currency

Anybody who reads that list and thinks "yeah, that seems like a reasonable set of assumptions", do please get in touch - I want to sell you things.

There are lots of issues with the detail of the report as it attempts to justify the above list. If it's not obvious to you why these assumption are at best heroically optimistic, most of the reasons are covered by Neil Lovat's excellent blog post here (which saves me a lot of time).

The base data he uses is all over the place. He uses a mix of 14/15 and 15/16 cost data which means he understates identifiable costs by £1.1bn and the accounting adjustment by £0.7bn - but this is more than balanced by the fact that (presumably because he's misunderstood the data) he's actually over-stated "other non-identifiable" and "overseas costs" by more than £2bn4.

** Addendum: I've taken the time to fully reconcile GERS, CRA and "Beyond GERS" here (it shows that the net effect is that "Beyond GERS" atually overstates Scotland's base costs by £1.3bn) **

But let's finish with the positive: I wouldn't go so far as to say the pace is glacial - it's maybe more akin to the speed of continental drift - but this paper does shows that the debate is gradually moving forward. The author has accepted the existence of the £9bn deficit gap and tried to make some assumptions to close it. In the process he has - perhaps unwittingly - provided a compelling illustration of the scale of the problem supporters of independence face.


1. Well, mostly
2. I really have been very consistent about this - the following from this year alone
"Nobody is arguing that things would remain the same. Those of us who argue for rational debate simply ask for those making the case for independence to actually explain coherently what the different "economic strategy" would actually be and provide a realistic assessment of how (and by how much) it would change the figures compared to those of Scotland being within the UK." - Chokkablog August 2016
"We should be very clear about what this analysis of historical fiscal data can and cannot tell us. The figures only tell us how an independent Scotland’s finances would have looked if we had already been independent but were still raising taxes and incurring public spending (including reserved expenditure) as we have been as an integral part of the UK. We are looking at what in financial accounting terms would be considered pro-forma accounts. The figures do not tell us what the future accounts of an independent Scotland would look like. They do however describe the starting point (the “run-rate”) from where we can start to consider the possible impact and fiscal implications of independence." - Chokkablog March 2016
"All I have been attempting to do is ensure we have clarity around our starting point. Were we to be independent or fiscally autonomous now, what would our pro-forma accounts look like? What is our economy's run-rate? This frames the debate, shows the size of the challenge. If we are all honest about this starting point then maybe we can have an interesting and constructive debate" - Chokkablog June 2016
"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." - Chokkablog February 2016

3.  The table below shows the audit-trail I've used to understand how the "Beyond GERS" middle case compares to actual GERS figures.

Beyond GERS uses PESA data whereas GERS traditionally uses CRA data - I don't claim to have reconciled them fully but merely observe the following;

  • The 2015-16 GERS figures were (for the first time) produced before the CRA data were published. These data now exist (as detailed in my last blog post here) so I have assumed identified expenditure in GERS = now available CRA data (in reality I expect GERS 2015-16 figures will be restated to reflect these actuals, so this is a source of likely reconciliation error)
  • At first look I don't understand why Beyond GERS has such a big figure for "other non-identifiable". This could possibly be due to PESA/CRA differences, but even netting the grey "opaque" figures off against each other I see £1.3bn of cost in Beyond GERS that I can't explain.
Frankly I don't think it's worth my time to go any further explaining and reconciling somebody else's figure

*** ADDENDUM ***

I couldn't let it lie - I hate being me.

So ... Beyond GERS uses 14/15 cost data from PESA (see page 158) and 15/16 revenue data from GERS - which is simply wrong. The 14/15 identifiable cost data in PESA he uses matches the 14/15 identifiable cost data in CRA (see page 15). The 15/16 cost data in CRA (which he should be using, although to be fair it's only just published) is £1.1bn higher (per my table above).

So he starts off £1.1bn low on costs.

He uses the GERS accounting adjustment for 15/16 and applies it to 14/15 cost data - again this is simply wrong. The accounting adjustment in 14/15 was £4.6bn versus the £3.9bn he uses.

So he's another £0.7bn low on costs there.

I think this is incompetence on the author's part (rather than an active attempt to deceive) because his £2.35bn on "other non-identifiable" looks awfully like a double-count to me (i.e. it's costs that are already attributed to Scotland in the CRA analysis). If not he's suggesting GERS is £2.2bn light on costs! So he seems to have double-counted £2.2bn of costs.

I've tried to be polite and constructive throughout this blog post - so let's just say the report's intentions may be admirable, the analysis less so



Anonymous said...

SNP could close and write off Prestwick which would be a "plus" rather than a "negative" to budget in future years

Drew said...

'We could cut our defence spending by £1.0bn (as opposed to the £0.6bn saving assumed in the White Paper)'

The Irish Government spend around 1 billion Euros annually on defence. Ireland was a non-combatant in World War II and was never threatened during the Cold War despite not being a member of NATO.

Where then is the justification for Scotland spending £3.5 billion annually on defence, as is currently apportioned by GERS?

Anonymous said...

"Where then is the justification for Scotland spending £3.5 billion annually on defence, as is currently apportioned by GERS?"

£3.5 billion?

According to GERS as produced by the snp government

Defence = £3.030 billion

Kevin Hague said...

Drew - as per other comment it's £3bn - but of course we could spend less on defence, I've never questioned that.

I merely observe that wasn't the prospectus offered before and that savings there as you suggest would not be close to sufficient to close the deficit gap.

Drew said...

I'm not saying spending less on defence would close the deficit gap entirely but clearly spending £1 billion as opposed to £3 billion would be a step in the right direction.

There are a whole range of actions required to get our spending back to sustainable levels but I was using defence as an example of where the UK Government spending in Scotland isn't as efficient as it should be.

And I can't see the logic in you denouncing most of what was in the White paper as being not true, but then taking it as gospel truth that the Scottish Government could only save £0.6 billion on defence.

Kevin Hague said...

Drew - you're having an argument about a point I'm not making

As this blog shows, what the report from Common Weal shows is you'd have to do *all* of these things just to be back where we started - the only one of their proposals that we could definitely do is cut defence spending, I agree that's an option. Merely pointing out that's not an option that was presented before doesn't mean I'm taking the white paper as gospel.

In essence you're picking a fight about £0.4bn (the difference between White Paper and Common Weal defence saving assumption) - I'm not taking part in that fight, I'm happy to accept it as feasible (albeit maybe not desirable to voters/defence sector employees).

Now how about the other £8.6bn?

Drew said...

I'm not picking a fight about anything. I just think some of your logic is inconsistent.

I don't see how you can take the £0.6 saving at face value if all the other figures in the white paper are open to question.

But we can't cut defence spending because we don't control it. Thankfully the UK Government is making a start by closing 8 out of the 22 bases here.

In terms of the other £8.6 billion, as the setting of the Scottish budget and reserved spending is currently fixed by the UK Government and unless we get power devolved to set our own budget and spending limit, we can't make cuts to expenditure.

So the only logical way we can reduce our deficit is to use the powers we get over income tax, ADP, Aggregates level, land & buildings tax and landfill tax.

I would estimate to using the powers we will shortly get, we need to raise income tax by about 16p in the pound to raise £8 billion.

If our politicians want to try and sell that to the public, the very best of luck to them!

Peter said...

Very good, and tackled with saintly patience and forbearance to boot.

The core section to a carefully-reading layman such as myself (its clarity assisted further by format & layout!) is the series of bullet points.

And then the equally cogent conclusion.

At "pro-forma" and especially "run-rate", I slipped momentarily into a cricket image, which was a wee bit distracting. ...

For that OTHER central issue - the relentless attempts by a number of repeat offenders (with by now fairly obvious motives) to demolish the whole edifice of economic analysis as a legitimate basis for modellings of impact & outcome, giving due respect to relevant variables and reasonable margins: one way I'd put it is that the only plotting such people appear to permit and have any understanding of is ... conspiracy.

Rejecting all bases of realistic planning and any concept of probability, they appear to value obscurity, superstition and blind faith in an inspirational political pea-souper.

PS: I'd tidy up small typos like McAlpine's name (courtesy stuff!) and "as an aside". but easy and probably pedantic for me to say!

Excellent post, as was Neil's stylistically very different contribution with tallying conclusions.

Kevin Hague said...


The article is about a report suggesting what we could do if independent - I don't know why you're cluttering the comments with complaints about what we can't do now to explain why you can't find the extra £8.6bn you'd need to make your independence case deficit break-even

Drew said...

Apologies Kevin if I've not made myself clear.

The report authors highlighted defence spending as an area where an independent Scotland could make potential savings, further to those suggested in the White paper.

You highlighted this and reading through your sarcasm you seemed to suggest this wasn't a reasonable suggestion.

My point is that I agree with the report authors on reducing defence spending, however I believe we could cut defence even further than £0.6 billion, even further than £1 billion. We should cut it by £2 billion, down from £3 billion to £1 billion.

The UK Government has already committed to nearly 20% reduction in the defence estate in Scotland by 2030 which I think is a sensible approach and long over due. But I think they need to go much further.

I'm not arguing in favour of independence however, I'm arguing for a much more sensible approach to Scotland's spending within the UK which I believe to be too high.

To be clear though, criticism of the UK doesn't automatically mean someone is pro-independence.

Kevin Hague said...

Fair enough Drew - I don't for one minute dispute that we could spend far less on defence - whether that would be wise or popular is another question for another day

Drew said...

I wouldn't leave it to another day too far in the future. In a few years time when Brexit becomes a harsh economic reality, I think the idea Scotland will continue to be allowed preferential treatment with higher public spending will be open to a fairly rigorous challenge. We need to have our house in order when that day comes sooner than later.

Anonymous said...

There's one aspect of "defence" that's often overlooked in the independence debate,
and that's the income that high end defence R&D and product design brings into

Leonardo ('used to be Ferranti') in Edinburgh employs ~1200 well paid people and
exports £Hundreds of Millions of radar and other defence related products
worldwide. Someone said they were/are Scotland's top 5 exporters.
Much of this work, especially American related ITAR jobs depend on being in the UK.
Independence would see all this move south of the border.
Raytheon and Thales are in a similar position.

So some might be saved in defence spending, but probably more would be lost in
exports and well paid salaries.