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).



Tommy Aikenhead said...

Kevin.....I hope you bought Mr McIntyre-Kemp dinner and maybe one of those single roses before you did that......if not, I sincerely hope you at least gave him a lingering cuddle?

Dougie said...

Thanks for this. I'm open to any and all facts at the moment as I fear the debate is about to get a little more interesting.

Ian Clark said...

Clear and decisive comments, I wish SNP supporters would read the article and start thinking instead of keeping their blinkers on.

Don Briggs said...

'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.'

Wasn't Scotland's deficit £15 billion a few years ago? (prompting the £15 billion black hole headlines)

While I appreciate most of the credit due for this deficit reduction must go to the UK Government if true, surely a 30% deficit reduction in a matter of years gives some grounds for optimism Scotland can indeed erradicate our overspending and therefore reliance on London almost entirely?

For the record I am neutral on the question of independence.

Anonymous said...

Your usual pish then Kev, do tell tho, what are your actual qualifications in economics ?

£300 Billion for a currency, Norway and Denmark hold reserves of round £42 Bill !

Anonymous said...

"Scotland's tax take in 2016-17 (per GERS) was £57,952 million"

There is a difference between 'tax take' and 'revenues'

Even the snp government refer to the figures in GERS as revenues.

Anonymous said...

I'm assuming that at most one of those 12 smaller countries in the comparison group has an NHS style health system, that all of them have a position in the Nanny State index way below Scotland, that all of them would apply tolls on bridges ( and congestion in many cases ), with the exception of Norway they would have lower subsidies to owners of qualifying farm land, and are far more likely to be free market economies with more liberal planning systems and which would exploit the income available from technologies like fracking.

To get the growth, and the higher quality of life, you actually have to follow the growth friendly policies, which I'm not sure the SNP would be willing to do. Still, comparing yourself is a good start, it's just a shame they've compared themselves to the results, not the policies.

Scott said...

i might be reading this wrong but your calculations appear to use 0.7% growth taking over 19yrs to generate extra 8.2bn instead of the 0.7% superior growth. EU growth is forecast at 2.4%, which itself would generate over 8.2bn extra in 5 years?

QoL said...

Don't forget my own prognostications from a year+ ago!

I'd guess there will be alot of rather irrelevant storyboarding about government powers and Scotland's strengths and so on..

Anonymous said...

Is the fiscal transfer gifted to Scotland from WM or is it a loan taken out on Scotland's behalf that must be repaid?

Will g said...

In regards to the introduction and implementation of a new currency what would speculators "do with it" in your opinion?

Ferdinand said...

I would say in a jaundiced way: it is the Indy, and maths is irrelevant.

Ferdinand said...

Sod if. For Indy read National :-). Their designs are clearly too similar.


Kevin Hague said...

the figure i’m referring to is the effective net fiscal transfer from rUK - the amount our deficit exceeds our per capita share of the UK’s

Kevin Hague said...

fine - revenues - amounts to the same thing

Kevin Hague said...

but the issue is the *gap* vs rUK - my calculation is correct and as we can now see consistent with the Growth Commission’s own analysis and interpretation

Anonymous said...

Scotland's finally in the money

Section 3.126

"The UK’s debt will therefore remain the responsibility of the UK Government after Scotland becomes independent.

By definition, an independent Scotland will start with zero debt."

What's not to like?

rUK doesn't send £14bn to Scotland
Scotland sends £15bn to rUK

Scratches head!

Alastair McIntyre said...

I noted some swinging comments in the pro independence National newspaper on this report. I also note almost complete silence in comments sections of other newspapers by the pro independence folk.

I suspect this report it the end of the SNP in power.

Chris Sheridan said...

Which one of those countries do you think we'd be, because their currencies operate very differently from each other, and how would Scotland emulate your preferred option?