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.


Sam Duncan said...

“Does anybody really think Scotland can or wants to be socio-economically similar to Singapore or Hong Kong?”

Well, exactly. Unlike you and, I accept, most “No” voters, if I thought for a moment that such an outcome was on the cards I'd consider changing my opinion about seperatism. I don't mean that it alone would change my mind, however it would make me think a bit. But it simply isn't.

Indeed, given the motivation behind most “Yes” votes, it would be far more likely to end up less like those economies than it is now.

“[T]he numbers used to scale the upside and indicate how long it might take to get there are not backed up by robust analysis and have been manipulated to show the most positive case possible.”

To nobody's surprise at all.

Anonymous said...

This blog is to separatists what sunlight is to vampires.

Anonymous said...

Forgive me but I have absolutely no interest in reading another 300+ pages of an Indy bid, but from what i've heard about it i fear that the SNP are going for "hard hitting honesty" at a superficial level so they can redelve into the world of fantasy beyond that with a veneer of respectability.

They like to push this idea that small economies are inherently better than large ones. First of all, yes small countries are likely to appear at the top of lists, because small countries that have strategic or natural advantages won't dilute their GDP with less advantageous areas. For example Norway's oil wealth or countries within the "Blue Banana" ( - aren't going to have their GDP diluted by sharing their resources or natural advantages with poorer regions. But there are plenty of small economies in Europe that are not so rich: Greece, Portugal, Bulgaria, Slovakia, Bosnia.

Now there is one area where small countries might have an inherent advantage over large ones, and that is that they can operate a very business friendly environment (usually involves very low taxes) and milk the richest/workers companies out of neighboring countries. That is what you see happening with a lot of countries on the list: Singapore, Hong Kong, Ireland. But all over the world it occurs, particularly in the Caribbean.

And that is fine as a economic model and i'm personally in favour of economic liberalization, but it's not what the SNP preach is it? The SNP would be having a seizure if the UK proposed being more like Singapore, Hong Kong, Ireland or New Zealand. Ironically there is a town in Hong Kong called Aberdeen that has a nearby Shanty Town! Don't believe me, see for yourself:,114.1378277,3a,60y,359.79h,89.72t/data=!3m6!1e1!3m4!1s_Xc0p9ZKYbnPFZXSe8lSKg!2e0!7i13312!8i6656

So unless Scotland is going to become an ultra-Thatcherite economy, simply being a small country isn't going to make it inherently richer and catch up with some other smaller economies. It's just going to be a small poorer country.

I also object to the idea that we just need a more liberal immigration policy to attact all the immigrants Scotland needs to fill in the gaps. I don't believe Scotland is especially more welcoming to mass immigration than the rest of the UK, so that could bring its own objecttions, likewise the most prominent source of immigration (English people) might feel spurned and put off if Scotland left the UK. Finally, Scotland already has an incredibly loose immigration policy as a member of the EU. People want to migrate to rich countries, that's why they aren't migrating en masse to Greece, likewise, they aren't going to migrate en masse to Scotland if it's going through years of crippling austerity and budget balancing.

It seems to me that the SNP have chosen 2 things that they can't do by being part of the UK: Scotland can't be a small economy, and it can't have a looser immigration policy. And they've worked backward from these 2 things, waved their magic pixie wand, and tried to put together a spurious argument as to why Independnce will eventually be good economically.

Realistically though, it's going to require years of austerity and public spending cuts, busienss friendly tax rates and labour laws and mass immigration just for Scotland to stand still. Why not just stay part of the UK and be a centre-left country that is so popular?

Lindsay M said...

Thank you for this excellent analysis,Kevin. As usual, it's well researched and explained.

Andrew Carey said...

There are plenty of US States with similar sizes to Scotland that did not get a look in here. I can guess why, but can't be sure. The US operates a much more devolved system than the UK, ( minimum wage setting, VAT or the sales tax which is the nearest equivalent, drug laws, property taxes etc are all devolved afaik ), and every single US State is richer than the UK ( on GDP/head by PPP ).
So why did the Growth Commission make comparisons to similar sized independent countries, but not to similar sized regions with high levels of devolution?

Don Briggs said...

Why I find some of these blogs interesting casual reading, I fear the author and the respondents are at risk of wasting their time spending hours and days on this topic.

I'm 99% sure any future UK Government isn't going to offer the Scottish Parliament the temporary powers to hold a 2nd referendum in most of our life times and possibly even our children's lifetimes.

There's nothing in it politically for them to gain and everything to lose.

1) Losing the 1st referendum was supposed to kill off the SNP. Paradoxically they gained members/MPs. Losing a 2nd referendum would almost certainly finish the job but it is still a gamble they don't need to make, as the public at large are mostly bored or apathetic of the independence debate and the SNP in office.
2) Brexit will take a decade or so at least to resolve fully from.
3) Coulport took 5 years to build from scratch and 13 years to redevelop from Polaris to Trident. The risk of starting over elsewhere in the UK would be a infrastrure project on a size, scale and cost bigger than the channel tunnel and Crossrail, not to mention a logistical and political headache.

So relax, enjoy the summer and get out into the garden or park while you still can! Or take up golf, it's great.