Thursday, 31 May 2018

There Is No Growth Assumption

There appears to be be some confusion about the SNP's Sustainable Growth Commission recommendations when it comes to austerity. Let me attempt to quickly clear that up.

Nicola Sturgeon has taken to Twitter to make clear that the report "explicitly rejects austerity" and "recommends above inflation spending growth each year"

Unfortunately, Sturgeon goes on in that same thread to then assert that the report's "projections about deficit reduction [...] make no assumption about higher growth"

These two statements can't both be true - at least not without making some extremely contorted semantic distinctions between recommendations, projections and assumptions.

The following quotes are extracted directly from "Part B: The Framework & Strategy for the Sustainable Public Finances of an Independent Scotland"
"For the initial consolidation period, we recommend modest real terms increases in public sector expenditure" [B12.17]
"At Scotland's long-term trend GDP growth rate of 1.5% and inflation of 2%, this would mean that nominal increases in public spending of 2.5% would reduce the inherited deficit from 5.9% of GDP to less than 3% of GDP by year 9 (figure 12-2)." [B12.18]
"This rule would also have the same effect of reducing the deficit to less than 3% of GDP, at different levels of growth ..." [B12.20]

That section of the report is making assumptions about growth to be able to make a projection about deficit reduction that could be achieved while accepting the recommendation of modest real terms increases in public sector expenditure.

In fact for the deficit/GDP analysis shown here you don't need to make any inflation assumptions: as the sub-title of the graph shows, this illustration only needs to assume "Spending Change 1.0% less than Growth Rate". I've recreated the analysis (details here) to perhaps illustrate more clearly what it implies

Here's the problem: while all that's required to draw this graph is an assumption that spending growth will lag GDP growth by 1.0% (hence "would also have the same effect [..] at different levels of growth"), for that to translate into the recommended "modest real terms increases in public sector expenditure" we obviously have to assume real GDP growth of over 1.0%.

At the risk of labouring the point: to get the deficit down at this rate the report assumes that [Real Spend Growth] = [Real GDP Growth - 1.0%], a number that can only be positive if Real GDP Growth is more than 1.0%.

That's why in B12.18 the report assumes a real GDP growth rate of 1.5%, because spend growth at 1.0% less than that would still lead to "modest real terms" spending increase of 0.5% pa.

Let's compare and contrast these two statements
"During the transition period real increases in public spending should be limited to sufficiently less than GDP growth over the business cycle to reduce the deficit to below 3% within 5 to 10 years" [3.187]
"For the initial consolidation period, we recommend modest real terms increases in public sector expenditure" [B12.17]
The second statement above can only be consistent with the first statement if we assume real GDP Growth of c.1.5% pa or greater (as the report does for its illustration in Fig 12-2).

But, when I asked him for any comments on my previous blog on this topic (Growth Commission: Embracing Austerity), the report's Chairman Andrew Wilson was very clear:"There is no growth rate assumption"

Let's be clear: you can't say the report "recommends above inflation spending growth each year" (Sturgeon's words) or "recommend modest real terms increases in public sector expenditure" (the report's words) while also recommending "public spending growth  limited to significantly less than GDP growth [..] to reduce the deficit to below 3% within 5 to 10 years" (the report's words) without making a growth rate assumption - or at the very least, without making a minimum real growth rate assumption.

So I'm sorry, but to assert that "there is no growth assumption" at the same time as making claims that the report "rejects the austerity model" while recommending to "reduced the deficit to below 3% within 5 to 10 years" is, at best, carelessly inconsistent. At worst, it's a cynical attempt to mislead.


Let's finish by returning to the illustration the report uses to show how they assume we could get the deficit down to 3% of GDP within 10 years.

As discussed here, to create this illustration the report makes no assumptions about economic disruption caused by separation from the UK, makes heroically optimistic assumptions about cost savings we'd achieve to calculate our "legacy deficit" starting point and brushes over the practical challenges and implications of their sterlingisation recommendation - but let's park all of that and look only at what "Spending Change at 1.0% less than Growth Rate" would look like in the context of our actual historical spending levels and GDP growth rates.

The graph below shows two lines: actual real-terms Scottish Spending per GERS and what that figure would have been if from 1998/99 we'd applied the Growth Commission's Fig 12-2 assumption of  "Spend Growth 1.0% less than GDP Growth":

So there we have it. If applied in the recent past, the assumption the Growth Commission uses to illustrate how we could achieve their recommendation of getting from their "legacy deficit" to a deficit of under 3% of GDP within 10 years ... would have produced dramatically lower levels of public spending for Scotland than "Westminster austerity" has actually delivered.

That's unfair though - by rights we should apply the rule only when the deficit rose to the sorts of levels the Growth Commission is predicting we'd need to be dealing with. OK then

If applied historically, the Growth Commission's spending growth recommendation would have led to greater spending austerity than that we've experienced under the "Westminster austerity model" the Commission "explicitly rejects".

Of course if you assume higher GDP growth then that would change this picture - but as the Report's Chairman makes clear: "There is no growth rate assumption"

I'm indebted to @blairmcdougall for pointing out to me that the Scottish Fiscal Commission forecasts published today are for 0.9% pa long run GDP growth

On this basis, to achieve the deficit reduction at the pace the Growth Commission assumes in its illustration, we would have to be cutting real terms public spending by 0.1% pa (presumably by more than that on a per capita basis). Austerity for the long-run then.
** ENDS ** 

Wednesday, 30 May 2018

Growth Commission - Embracing Austerity

Recap on Growth Commission GDP/Capita Growth Rate Assumption

In previous blogs we've seen that the Growth Commission assumes an independent Scotland would achieve a GDP/Capita growth rate +0.7% pa greater than it would if remaining in the UK.

The justification for this figure is extremely tenuous, relying on including Hong Kong and Singapore in their comparison set despite explicitly rejecting those countries' low tax, high income-inequality economic models.

Remove Hong Kong and Singapore from the comparable countries' growth rate analysis and +0.7% becomes 0.26%. If this were the case, instead of the 25 years the Growth Commission assumes it would take to generate an additional £9bn pa of revenue, it would take 67 years. £9bn is of course less than the £10.3bn effective fiscal transfer Scotland received from the rest of the UK in 2016-17, something we would of course lose on day one of independence.

To test that assumption further: if we look back at the Independence White Paper, the equivalent figure used then was in fact only +0.12% pa - on that basis it would take over 140 years to achieve the aspired-for increase in GDP/capita.

Finally, if we look at the performance of the three countries the Growth Commission explicitly cites as being those they seek to "learn in particular from" (Denmark, Finland and New Zealand) then the superior growth rate (using the Growth Commission's chosen data source and time period) becomes an immaterial +0.06%.  It's a daft calculation of course, but on that basis it would take nearly 300 years to achieve the Growth Commission's target for superior GDP/Capita.

Implications for Austerity in an Independent Scotland.

The Growth Commission doesn't do us any favours when it comes to "showing their workings", but the projected deficit figures in section B are relatively easy to recreate because the analysis they use is not much more than "back of a fag packet" stuff anyway.

I've recreated all of the deficit/GDP figures used in the Growth Commission report (by going back to the source data and applying their stated assumptions) and - because I'm nice like that - I've put them in an easy to understand graphical format.

What we're looking at here is historic data per GERS, forecast to 2021/22 per IFS and then the Growth Commission's forecast to their Year 10 (per Figure 12-2).  The black line is revenue/GDP, red is spend/GDP and therefore the gap between the two lines is deficit/GDP.

The step-change between IFS and Growth Commission figures is a function of the Growth Commission factoring in some additional Brexit downside (per the Nov 2017 OBR report), removing the relatively small amount of Oil revenue that was in the IFS figures (£0.7bn) and then making the very optimistic assumption that Scotland would save c.£2.8bn1 compared to spending allocated in GERS.

This £2.8bn assumed saving is more than 4x the £0.6bn that was assumed in the (notoriously optimistic) Independence White Paper and relies on some heroic assumptions1 which we may come back to in another blog.

More importantly: no allowance at all is made for any "economic-shock" effects of Scotland separating from the UK. If the UK leaving the EU has negative economic consequences (as the Growth Commission assumes), it's frankly ridiculous for them to create financial projections that don't allow for any economic shock from Scotland leaving the UK (a market we trade 4x more with than we do with the EU).

Now look at what the graph shows: the closing of the deficit comes pretty much entirely from reducing spend/GDP.  Of course there's a numerator and a denominator effect here: the Growth Commission asserts that this can be achieved without real-terms spending cuts because GDP (the denominator) will be growing faster in real terms than spending (the numerator).

The assumptions made are in fact extremely crude . They don't even refer to the +0.7% superior GDP/Cap growth rate analysis from earlier in the report, which makes me wonder if that analysis was added later as they scrambled to find some tabloid-friendly headline figures?

The Growth Commission's assumption is simply that real GDP growth will be 1.5% pa and real Public Spending growth just 0.5% pa. Of course this means the numerator (spend) is growing more slowly than the denominator (GDP) and so spend/GDP reduces, as we see on the graph.

This is really important: if GDP growth drops to 1.0% pa or less, the Growth Commission is implicitly assuming that spending would be cut in real terms (to maintain the rate of reduction in Spend/GDP they project). This is why so many commentators have referred to the Growth Commission "embracing austerity";
  • They assume we inherit another 5 years of austerity spending measures and yet don't seek to reverse those cuts on day one - implicitly accepting that today's cuts are necessary to get our economy on a path to being fiscally sustainable
  • They assume that we will continue to drive towards achieving a deficit of  under 3% of GDP through reducing spend/GDP, rather than by increasing the tax take (revenue/GDP)
  • A corollary of this is that they don't assume we can increase spend/GDP to grow the economy. This is a realistic assumption give their "sterlingisation" recommendation, but one that will cause a lot of head-scratching among SNP supporters who bought into their "anti-austerity" rhetoric

But the point here is not just about whether or not we will be able to achieve real spending increases while pursing the Growth Commission's economic model (i.e. whether or not we can achieve the GDP growth rates they assume). It's also about what their hoped for 0.5% pa real-terms spending increase would actually feel like for the people of Scotland.  To provide some context: over the 11 years between 1999/00 and 2010/11, average annual real spending growth in Scotland was 4.0% pa; in the 6 years of austerity between 2010/11 and 2016/17 average annual real spending growth has been 0.0%pa.  Basically, 0.5% really isn't very much at all.

It gets worse though, because the figures the Growth Commission projects are absolute GDP based3 not GDP/Capita. Given the recommended push for greater net inwards migration, the impact on a per person basis of this hoped for growth would be significantly diluted.

I'm really just playing with numbers here now, but 400,000 has been quoted as a net migration target: to achieve that over a decade would imply 0.7% annual population growth in Scotland, enough to turn a 0.5% real spending increase into a real decrease in spend per person.

However you cut it, even if we were to achieve the optimistic growth rates and spending cuts the Growth Commission assumes, their commitment to fiscal prudence means the people of Scotland wouldn't see the benefits in terms of meaningful public spending increases.

To illustrate the aggressive nature of the Growth Commission's Spend/GDP assumption, we can plot the graph above on an "onshore economy" basis only (to exclude N Sea oil volatility from the historical spend/GDP data)

The picture is pretty clear: the Growth Commission assumes that we'd be investing a lower proportion of our onshore GDP in public spending in 2030/31 than we were even in 1999/00 - in any practical sense of the word, this means continued austerity.

George Osborne would have been proud.



1. These are not clearly laid out, but the assumption is £0.7bn of effective debt interest saving, £0.7bn from defence,  and £1.4bn from allocated UK Government spending (Whitehall costs etc) - so a total saving of c.£2.8bn.  It's worth noting that the equiavlent number in the Independence White Paper was £0.6bn

2. Per GERS 2016-17 and applying the UK GDP deflator, see Chokkablogs passim

3. see page 96, B12.18

Monday, 28 May 2018

Growth Commission Claims

Having written a couple of work-in-progress blogs on this topic (here and here), I thought it might be helpful to summarise what we've been able to conclude so far about the claims made in the SNP's Growth Commission report.

To be absolutely clear: this is not a critique of the ideas in the report , it is solely a critique of the GDP/Capita and growth rate assumptions the report uses to make its economic case.

1.  The £4,100 "independence boost for every Scot" claim used in headlines is nonsense
  • That's a GDP number - the related Government revenue number the report itself uses is c. £1,600 per person1
  • The justification for that number is "if we had the same GDP/Capita as the Netherlands". Hard to believe I know, but there is no more justification for the figure than that2
  • The Netherlands is not even among the countries the report name-checks when it says the report "learns in particular from Denmark, Finland and New Zealand"
  • That figure is anyway only enough to nearly off-set the loss of the fiscal transfer that currently results from pooling & sharing within the UK3 - something we would of course lose on day one of independence

2.  The report claims it would take 25 years to achieve this, based on a GDP/Capita growth rate 0.7% pa superior to that we'd achieve remaining in the UK . The analysis behind the 0.7% assumption is, to put it mildly, not robust
  • That figure is arrived at by comparing the long run GDP/capita performance of a list of countries including high growth countries Hong Kong and Singapore
  • The report explicitly rejects the low tax, high income-inequality models that HK and Singapore pursue - but if we remove them from the analysis the 0.7%4 figure immediately drops to 0.26%
  • This alone would change the 25 year time horizon (to achieve a figure we've already seen is based on a crudely simplistic comparison) to 67 years
  • If we look at the average growth rates of the three economies whose economic models the report actually suggests we most seek to emulate (Denmark, Finland and New Zealand) ... well in fact they don't show superior growth rates to the "large advanced economies" at all5
  • The entire economic case in the report is built on the foundation of this 0.7% figure - it is a figure that frankly isn't credible
  • At the very least the report should have shown a sensitivity analysis to highlight what would happen if that 0.7% turned out to be 0.26% - or indeed if it turned out to be the 0.12% figure the independence White Paper previously used. Of course we know the answer because it's a linear relationship; 25 years becomes 67 years becomes 146 years!

3.  The report does not present a case for independence because many (possibly most) of the recommendations in the report could be implemented using existing devolved powers or - in the case of immigration in particular - modified powers. 
  • The economic case presented is already (per the above) extremely optimistic 
  • Even then, we certainly can't attribute all of the benefits of the economic model suggested to independence because as the report itself concedes "many of our recommendations could be agreed and implemented [...]6 either with existing or enhanced policy responsibilities for Scotland's Parliament and Government"
  • But the problem around currency that the report seeks to address (with the much-maligned sterlingisation recommendation) is a problem that is only created by independence
  • The report implicitly recognises that creating a Scottish currency would require economic sacrifices that would be unpalatable to voters - but the sterlingisation model recommended implies a very compromised version of independence 
  • The report fails to quantify any of the Brexit-esque downside of independence - if separation from the EU single market damages us, separation from the UK single market would logically damage Scotland's economy far more
  • To take one high profile example: the report recommends that "the headline rate of corporation tax should not rise above the level prevailing in the rest of the UK" - so, unless we want Scotland to start competing as a low-tax regime, there isn't even an argument here for devolving corporation tax powers
So there we have it: the "the economic boost" headlines spun from the report are ridiculous, the report's assumptions on growth rates (and hence the 25 year timescale to achieve) are extremely optimistic and based on poor quality analysis ... and the report doesn't make a case for independence anyway.


1. £9bn pa is actually quoted in the report, which using today's population would be £1,665 per person - but in my attempts to replicate the figure it looks like the £9bn is a rounded-up number
2. I detail the full analysis here - basically the Netherlands is the median country you find if you rank their arbitrarily defined list of "small advanced economies" in order of GDP/Capita 
3. Based on the most recent figures, I've calculated this figure to be £10.3bn - details here
4. Actually 0.65% if we're being fussy - full analysis including effects of cohort selection blogged here (where I also recreate the analysis using the somewhat different cohort used in the independence White Paper)
5. Using the same data sources and same time periods for comparison as the Growth Commission, as detailed here - a point rather nicely illustrated here

6. From p.9 - The words I've taken out here are "in advance of independence", because those words are redundant unless you assume (as the report does) that independence must be the ultimate goal no matter what the economic case suggests

Saturday, 26 May 2018

SNP Growth Commission's GDP Growth Rate Claims

The SNP's long-awaited Sustainable Growth Commission Report is finally available.

I've already blogged on the pre-release headline spin about a "£4100 boost for every Scot" here, but now I have the full report to hand I can offer a more complete analysis.

The Growth Commission report can be looked at as doing three things;
  1. It sees what lessons can be learned from looking at their chosen benchmark of "small advance economies"
  2. It looks at the growth of those economies to scale the potential upside for an independent Scotland
  3. It details their preferred option for fixing the currency problem that would be created by Scotland leaving the UK
The first of these we'll come back to in future blogs, but suffice to say if you read pp 154 - 160 of the report there's an awful lot there that than can be done now, with the powers the Scottish Parliament already has.

To be fair the biggest single recommendation is probably the one about attracting more inwards migration to Scotland, which would require further powers to be devolved to the Scottish Government.  I predict a long discussion to come about the desirability and practicality of that and, for what it's worth, I personally remain open-minded and look forward to that debate.

In this blog I want to focus on the second of the above, namely how they've scaled the economic upside and whether that analysis is robust.

I should be clear that by critiquing the analysis I'm not critiquing the specific growth recommendations. I'm focusing here only on understanding how they've arrived at the "purely illustrative" figures they've used to scale the potential and to ask how reliable those figures are.

So let's start with the figure that has been (mis)used in headlines, the £4,100 per head number that I discussed in my last blog. Having chosen an arbitrary set of 12 countries (we'll come back to that) the report states clearly;
"If Scotland were to be added to the list of 12 benchmark small advanced economies, it would be 12th out of 13 in terms of GDP per capita. The median of this group is 14% higher than Scotland, a gap of $5,500 (£4,100)"
I've recreated the analysis - it doesn't take long, the source data for the benchmark countries can be found and downloaded here and for Scotland the data can be found in the latest GERS report here). There's nothing like recreating a piece of analysis to expose how simplistic it is.

Apologies if this seems condescending, but for those who don't know: the term "median" simply means the middle one in a set of values arranged in order of size. So in this case we simply arrange the 13 countries (the 12 benchmark countries + Scotland) in order of GDP/Capita and find which one lies in the middle. That country turns out to be the Netherlands. The report does show this, but in such a way that  a casual reader might think it's more significant than just saying "let's assume we were the same as the Netherlands":

I know, right? The headline figure from this 354 page report is based on nothing more sophisticated than saying "if we had the same GDP/Capita as the Netherlands we'd have £4,100 more GDP per capita."

To illustrate how flaky this figure is: they could have decided not to include New Zealand and Belgium in this list (it is after all an entirely arbitrary selection) and the median country would become Sweden - if our GDP per Capita matched Sweden's we'd have 25% higher GDP or £7,250 per person. Yay!

I'm sorry, but using this type of "analysis" to scale the GDP per Capita potential of an independent Scotland is pseudo-scientification of the worst kind.

It's not even as if the Netherlands is the economic model the Growth Commission recommends we seek to emulate:
"We recommend a 'Next Generation Economic Model for Scotland', designed to achieve cross-partisan support, which learns in particular from Denmark, Finland and New Zealand" [2.21, p.9]
So why scale the potential by comparing our GDP/capita with the Netherlands? Because if you compare our GDP/capita to the [mean] average of the three countries mentioned above, it would suggest an increase of only 7%, half the amount used to get to the £4,100 GDP per capita figure (used in the headlines.

To be clear: that would translate into an aspiration to achieve additional tax revenues of c.£4.5bn pa, less than half the amount we would lose from the Barnett Formula driven fiscal transfer on day one!

In fact, as the chart above clearly shows, New Zealand's GDP/Capita is lower than Scotland's - which kind of highlights the ridiculousness of this particular "if we were the same as them" analysis. It seems clear to me that this "GDP/capita gap" nonsense was retro-fitted to this report to force out a palatable and tabloid-friendly headline.


So what about the analysis that's used to justify the conclusion that, if we can learn from this cohort of countries, we can expect to achieve GDP growth that would be 0.7% superior to that of the rest of the UK?

Note that this assumption is absolutely critical when it comes to determining the timescales involved - the time it would take us to claw back what we know we'd lose from UK-wide pooling and sharing on day one (the net fiscal transfer of around £10bn pa that comes to Scotland as a result of the Barnett Formula).

The good news is that we can find the IMF data used to reach these conclusions here (you can thank me later).

Let's talk first about the 12 countries that have been selected as the list of "benchmark small advanced economies". There doesn't appear to have been an objective criteria applied to arrive at this list, and the extent of its subjectivity is perhaps best illustrated by looking at the list of "small countries used for comparison" when similar analysis was published in the Independence White Paper (page 620) back in 2013..

The Scottish Government analysis in 2013 concluded that the superior GDP per Capita growth rate enjoyed by those countries that had "the bonus of being independent" was just 0.12% greater than Scotland's onshore economic growth over a 30 year period. That's quite a way short of the 0.7% we're now expected to believe we should expect, is it not?

So what's changed?

Firstly the set of countries used for comparison is different - out go Iceland, Luxembourg and Portugal and in come Hong Kong, Singapore and Switzerland along with Belgium and the Netherlands.  The addition of Hong Kong and Singapore is particularly noteworthy as they significantly raise the average growth rate for this cohort but they are - as the report concedes - countries with appalling levels of income inequality.

It's hard not to conclude that those countries were included to boost the average growth figures of the comparison countries - they certainly aren't countries with socio-economic values consistent with those voiced by the Growth Commission.

The other significant change is that the White Paper looked at onshore economic performance only, whereas the Growth Commission is looking at overall economic performance including Oil & Gas. I can't be bothered to work out how that affects this analysis to be honest, but mention it in case others have the necessary enthusiasm to recreate the analysis separating onshore from off-shore performance.

So can we recreate the 0.7% figure?

The report is surprisingly opaque when it comes to precisely how this number is arrived at (emphasis mine):
"Figure 2-2 shows there has been a a distinctive edge of around 0.7% of GDP growth in small advanced economies over the last 25 years compared to their larger counterparts"

If the number 0.7% jumps out of figure 2-2 for you, you're better at visually interpreting data than I am. I include figure 2-3 above because I presume this shows us (on the right hand side) the countries included in their "large advanced economies" list.

We should now be able to recreate the 0.7% figure and see how sensitive it is to which countries are included or excluded. Notice that the graphs above cover different time periods: 1990 - 2016 (referred to as "the last 25 years") and 2000 - 2016 for the bar charts.

To check that I've understood the methodology, I've recreated chart 2-2 using the IMF data :

Looks spot on to me apart from a superior average growth shown for the SAEs on my graph in 2015. I can't see any problems with the data which I downloaded only today - I suspect the graph in the report was produced over a year ago and the data has subsequently been updated by IMF (but that's just a guess).

So lets see if we can recreate the 0.7%;
  • If I use the 27 year period as as used on figure 2-2 and compare these two cohorts (using most recent available IMF data) I get a figure of 0.59%
  • If I take the last 25 years as quoted in the text (assuming that's 1992 - 2016) I get a figure of 0.65%
  • If I take the last 17 years (as used for the bar charts) I also get a figure of  0.65%
So, at a pinch, we can see how the 0.7% is arrived at.

Sticking with the 25 year time period, let's play with the cohort mix to get back to the cohort used in the White Paper and see how the growth gap changes;
  • As used by Growth Commission: 0.65%
  • Remove Hong Kong and Singapore: 0.26%*
  • .. then add back Portugal: 0.15%
  • .. then remove NL, CH, BE & NZ, add back L & IS: 0.45%

* [Update 28/05/18] in the detail of the report, Hong Kong and Singapore are pretty much only mentioned in the context of concluding that they are low tax, high income-inequality societies that we don't seek to emulate - which makes it quite bizarre to include them in the cohort for calculating the growth rates we might expect to achieve by pursuing the model the report actually recommends

If we change to the last 17 years (as per the bar chart) instead of last 25;
  • Using cohorts as used by Growth Commission: 0.65%
  • Remove Hong King & Singapore: 0.22%
  • Using White paper cohort for SAEs: 0.35%

How about if we look at the performance just of the three countries the report tells us we see to "learn in particular from": Denmark, Finland & New Zealand? Taking the simple average for these three countries we see;
  • Over the last 25 years the annual growth gap to the 'large advanced economies' was just 0.06% [just 0.09% to the UK]
  • Over the last 17 years these three economies on average actually under-performed the larger countries by -0.02% [during this period the UK was the same as the average for the 'large advanced economies']

Digest this.

The report scales the GDP per capita growth gap by assuming we match the GDP/capita of the Netherlands and scales the rate of growth we might achieve by comparing us to a cohort that includes the high growth, high inequality countries of Hong Kong and Singapore.

But the report actually recommends we seek to mainly emulate Denmark, Finland and New Zealand, countries whose growth rates are not materially different from those of the 'large advanced economies' (or indeed the UK itself).

The Growth Commission's "small advanced economy" cohort is arbitrarily chosen and clearly designed to maximise the "growth gap" claim. Does anybody really think Scotland wants to be socio-economically similar to Singapore or Hong Kong? Just removing those two countries from the cohort reduced the "GDP growth gap" from 0.65% to 0.25%.

If a 0.25% growth gap is a more realistic long term aspiration - and remember the independence White Paper used 0.12% and the three countries the Growth Commission most seeking to emulate achieve at best 0.06% - then instead of having to wait 25 years to deliver the additional GDP per capita the Growth Commission aspires to it would take nearer 70 years. As the analysis above I hope makes clear, that's still being extremely optimistic based on the empirical comparable data.

None of this is to suggest that there aren't good ideas in the Growth Commission worthy of serious consideration - but let's not kid ourselves: the numbers used to scale the upside and indicate how long it might take to get there are backed up by very superficial analysis and have been manipulated to show the most positive case possible.

Thursday, 24 May 2018

Sustainable Growth Commission: Jam Tomorrow, Gruel Today

I'm writing this before the Sustainable Growth Commission is published and on the basis only of the press releases that have foreshadowed its publication tomorrow. I'd have waited to comment but I was asked onto STV's Scotland Tonight show last night to discuss it (see link below) so had to form a view based on the pre-release hype.

** Update: I now have the report in my hands and - frankly - the analysis below turned out to be pretty much spot on - I'll highlight new info thus **

Let's focus on the headline claim, as seized upon by "The National";

Now. We don't need to read the full report to be able to show that this claim - not the report itself, I'm referring specifically to the way this figure has been spun here - is laughably, transparently and desperately ridiculous. Let me explain why.

The press release talks about "driving GDP per head" towards the levels of a carefully selected group of 12 "best performing small advanced economies".

The release goes on to state "the analysis has shown that small economies* have performed better than larger ones consistently by around 0.7 percentage points per year in economic growth rate, over the last 25 years on average"

* of course this should say "this cherry-picked basket of small economies over this arbitrarily selected time period". In fact, in the Independence White Paper in 2014 they cherry-picked a different basket for the same type of analysis (although over a 30 year period) and concluded that the superior growth these economies achieved "because they have the bonus of being independent" was 0.12 percentage points per year. You can see my analysis of that claim at the time here - but we clearly now live in even more optimistic times so I'll run with the new 0.7 percentage point figure.

Now let's do some simple maths.

The first point to make is that the money government raises in taxes is not the same as GDP, so to get the GDP claim into a figure we can compare with figures we're used to discussing in this debate (to put it on an equal footing with GERS terms like deficit, deficit gap vs rUK, fiscal transfer, education spending etc) we have to make an assumption about the tax yield on GDP. Last year that figure for Scotland (per GERS) was 37% and on average over the last 10 years that figure has been 36%.

Seems reasonable to take 37% of the GDP claim to turn it into a Government Revenue figure - so 37% of £4,100 = £1,517 per head.

Multiply that by our population of 5.4 million and you get a headline figure of £8.2bn.

** update: the report [3.32] says £9bn in tax revenues - close enough **

But of course it will take a while before (aspired for) growth would deliver that figure - the questions is how long and what happens in the interim?

Here we can turn back to the 0.7 percentage points per year superior growth and do another simple calculation.

Scotland's tax take in 2016-17 (per GERS) was £57,952 million, so to increase that by an additional £8.2bn we'd need to grow it by an additional 14.1%. If you simply cumulate 0.7% a year growth it would take 19 years to achieve that figure.

But hold on a minute. I very much doubt that the Growth Commission will claim that their recommended strategies would deliver that superior growth overnight - it would take time to get to that 0.7% superior growth figure (if it is indeed achievable). Indeed the report's author Andrew Wilson is quoted as saying "to secure an improvement in our performance will take purposeful strategic effort for over a generation". I think in this context we can safely assume we're referring to real generations, not SNP "once in a generation opportunity" referendum generations.

** update: the report [3.39] says 25 years to close the gap - close enough **

There's more - the press release is clear that they "identify ways in which Scotland can match the success of other small countries using powers available now and with independence". So we know that not all of that aspirational 0.7% superior growth can be attributed to independence.

So pause. The headline "independence boost" figure isn't £4,100 (because an as yet unquantified portion of it can be delivered using powers available now), that figure is actually nearer £1,500 in Government Revenue terms anyway ... and it would take well over 20 years to be reached because growth doesn't change overnight.

** update: the report actually says £1,700 (but heavily rounded claim) over 25 years - close enough **

I'm afraid there's yet more - sorry. So far we've only talked about the uncertain aspirational upside (because to be fair that is what that the commission was tasked with identifying) - what about the balancing negative impact of separation from the UK?

Even the most fervently optimistic nationalist must accept that UK-wide pooling and sharing via the Barnett Formula will cease on independence. On the most recent available figures that means the loss of £10.3bn a year in effective net fiscal transfer overnight - we won't have to wait "over a generation" for that impact.

Of course there will be other changes some of which may be reductions to spending as attributed to Scotland in GERS (defence/Trident, House of Lords, etc.).  The notoriously optimistic 2014 White Paper put that figure at a £0.5bn pa saving, so even if we double that (in the spirit of this new-found enthusiasm for using numbers that are even more optimistic than the 2014 White Paper) we're still certain to be losing over £9bn of Government Revenue on day one of independence.

So the portion of that £8bn from growth attributable to independence (as opposed to using additional powers) - which will realistically take more than 20 years to achieve  - will necessarily be less than the at least £9bn we'd lose on day one.

** update: the report appears not to deliver when it comes to identifying the split between "doable with current powers" and "actually requires independence" - but it does say [2.19] "many of our recommendations could be agreed and implemented in advance of independence either with existing or enhanced policy responsibilities for Scotland's Parliament and Government" **

It gets worse, because we haven't even started to talk about the "Brexit-esque" impacts of leaving the UK single market. Scotland trades 4x more with rUK than we do with the EU - if one accepts that economic disruption is inevitable for the UK leaving the EU, it logically follows that greater economic disruption would result from Scotland leaving the UK.

This is an essential point - the loss of Barnett and the inevitable disruption to our economy that separation from the UK would cause would dramatically reduce our financial capacity to invest to grow our economy. It would reduce our capacity to invest in public services like education (probably the single most important way to grow our economy in the medium to long term).

** update: I've yet to read the full report - but so far I'm afraid the above point appears to have been glossed over; I will return to update the following section if required when I've finished reading it all **

We're nearly done I promise ... but we've got this far without even mentioning currency. Building and defending a currency costs lots of money and requires (to coin a phrase used in the Growth Commission press release) "disciplined public finances". While we weather the loss of Barnett and the disruption of separation, "disciplined public finances" would mean getting our deficit down to sustainable levels. For the generations who would be trapped while waiting for this aspired-for growth to deliver, that can mean only one thing: severe austerity through public spending cuts way beyond anything Scotland has seen in recent years. Just to offset that £10bn loss in effective net fiscal transfer from rUK would require total public spending to be reduced by over 14.5%*

*and some of that total is debt interest, so the reduction in public services expenditure would need to be greater - but let's not open the "what debt would we inherit" can-of-worms here


Let me be clear that the preceding is not a critique of the Growth Commission report (how could it be, I haven't seen it yet) but an interpretation of the headline's offered in the press release. If I discover that any of my interpretations above are wrong when I finally get my hands on the full report, I shall of course return to this blog post and amend/correct as necessary.

I'm pretty confident in my conclusion though: I think The Growth Commission will  have delivered a report which - when the contents are fully digested - will show that a vote for separation from the UK would be a vote for generations of economic hardship in Scotland in return for an extremely uncertain hope of a brighter economic future for generations to come. My suspicion is that the report's authors grappled with this harsh reality and wanted to focus a significant part of the report on how our existing powers could be used to make our lives better within the UK - quite possibly it is arguments over that which have delayed the report's publication for over a year.

I've avoided talking about the currency question in detail in this blog because the press release tells us very little - but I'll leave the final word on this to Gordon McIntyre-Kemp of Business for Scotland. In our live discussion on STV last night I asked him what his organisation thought it would cost to achieve his preferred currency solution and what he thought of Professor Ronald MacDonald's figure* of £300bn ... see his answer here

* to be fair Prof MacDonald actually suggested a range of £30 - £300bn, which is the very least I'd have offered as a riposte if I'd been in GMK's position


I have now analysed the expected GDP/Capita growth rate claims in detail, replicating the Growth Commission's analysis - the detail is here - in summary:

The report scales the GDP per capita growth gap by assuming we match the GDP/capita of the Netherlands and scales the rate of growth we might achieve by comparing us to a cohort that includes the high growth, high inequality countries of Hong Kong and Singapore.

But the report actually recommends we seek to mainly emulate Denmark, Finland and New Zealand, countries whose growth rates are not materially different from those of the 'large advanced economies' (or indeed the UK itself).