Saturday 5 December 2020

In Other News

I'm conscious that I haven't posted here for a while - so I thought it might be useful to collate here stuff that I've written elsewhere:

Posted by at 5 comments:

Thursday 27 August 2020

Apples and Pears: GERS

The Scottish Government's economists yesterday published their latest Government Expenditure & Revenue Scotland (GERS) figures. I'll publish a more complete analysis on this blog soon, but the bottom line is they just confirm what we already know:

  • Mainly because of Scotland's spending per head being 12% higher than the UK average, Scotland has a far higher deficit/GDP than the UK as a whole
  • The scale of Scotland's notional GERS deficit (8.6% of GDP) is such that it would be unsustainable were Scotland to be independent or fiscally autonomous within the EU
  • The net effect of UK-wide pooling and sharing remains a fiscal transfer in Scotland's favour of £10.7bn a year or roughly £2,000 for every man, woman and child in Scotland

I wrote a brief summary of what this means for the Daily Record - it's the same old story.

But there is a piece of detail in the GERS report I want to draw attention to, because it illustrates the danger of the £2,000 per head number becoming a totemic figure in debates about Scottish separation. The table I'm referring to is on page 38 and details both Scotland and the UK's net contributions to the EU budget:

Let's get the Leave campaign's "£350m on the side of a bus" lie sorted first: you'll see the last row of the table show's the UK's net contribution to the EU was around £10bn pa, so in fact just under £200m per week. Of course the genius of the Leave campaign was to quote a false number so that we all kept talking about it - who honestly thinks the man in the street cares whether it's £200m or £350m? Either way its a big number and a big net cost. 

The true £10bn pa net cost to the UK is (coincidently) very similar to the net transfer that Scotland receives from the rest of the UK. Perhaps more relevantly, it's the equivalent of about £150 per head for every person in the UK.

Scotland's figure is a roughly £0.5bn pa net contribution to the EU every year, or about £100 per head (although without the UK abatement it would be nearly double that).

Here's the problem.  When people hear the "£2,000 per head fiscal transfer from rUK" number, common responses include "so what: leaving the EU is economically damaging and it didn't stop us" or "but the cost of leaving the EU is far greater". 

This is the danger when complex economic debates become reduced to a couple of headline-grabbing figures - people intuitively response by grabbing hold of the headline numbers (or arguments) they can remember ... and often end up making false "apples-for-pears" comparisons in the process. 

Let me explain.

Putting aside the EU exit charge, the annual impact of leaving the EU for the UK is a direct, day-one saving of c.£10bn pa or £150 per head. The comparable figure for Scotland leaving the UK is a direct day-one loss of  nearly £11bn pa or £2,000 per head.

So on a like-for-like "apples-for-apples" basis, the economic arguments are not even vaguely comparable. The UK leaving the EU prevents a £150/head transfer out from the UK, Scotland leaving the UK prevents a £2,000/head transfer in to Scotland.

The important point (both for Brexit and Scexit) is that this represents only the day-one fiscal tranfer impact before the impact of separation on our broader economic performance. It assumes nothing else changes - and the one thing that Scottish separatists and those of us who believe in UK-wide solidarity can agree on is that an awful lot would change (it's just the direction and scale of that change we disagree on).

The big headline "cost of Brexit" figures (e.g "£200 billion by the end of 2020") refer to this wider economic impact - normally an estimate of a cumulative GDP impact versus an alternative Remain scenario.

So what would the equivalent "cost of Scexit" figure be?

The first thing to note is the answer to that question is most definitely not the annual £10bn+, £2,000 per head figure that has become so totemic in this debate. If you've followed the logic up to here, you will realise that is a completely different additional cost that exists with Scexit, something which in Brexit terms was in fact a benefit.

Quantifying the long term economic cost of Scotland leaving the UK is of course not easy. Indeed Sottish separatists will argue that being freed from the contraints of Westminster will lead to a flourishing of the Scottish economy - but in doing so they echo the language of the Brexiteers and are falling into the same trap.

If we agree that Brexit will be a big net economic cost (I certainly do) then logically the equivalent economic cost for Scotland leaving the UK will be so much greater. 

The main driver of the Brexit downside is the risk of introducing trade friction with the EU. Scexit risks introducing trade friction between Scotland and rUK - and Scotland exports 3x more to rUK than we do to the EU (even after over 40 years of unfettered EU market access).

But Scexit introduces additional downsides: we share a currency, a welfare state and deeply integrated machinery of state within the UK. Leaving the EU will be a cake-walk in comparison - the economic cases are not even remotely comparable.

Posted by at 7 comments:

Saturday 18 July 2020

Fact Checking a Fact Check

The National today published a 1,000 article rather hilariously labelled as a "Fact Check" which amounted to little more than a personal attack against me. The entire piece is predicated on their view that issuing a clarification is "being forced to eat your words" - it's a sorry state of affairs when a blogger has more journalistic integrity than a publication claiming to be a national newspaper. Despite taking all those words merely to demonstrate their own failure to grasp the basic facts of the matter, they boldly conclude: "Chokkablog gets it spectacularly wrong".

Well allow me to retort.

Context

I wrote some tweets and a blog complaining about Kate Forbes' attempts to seek grievance by suggesting that Rishi Sunak's "Plan for Jobs" £30bn pandemic support was worth only £21m to Scotland.

My main complaint was that she was mithering about funds the Scottish Government was receiving, cynically expecting independence supporters to read that as being all the support that Scotland was receiving. You might be thinking only a knuckle-dragging grievance-junky would make such a mistake. Ladies and gentlemen, I present to you the National's front page splash yesterday:


For the avoidance of any doubt: the claim that "Scotland only gets £21m from '£30bn'" is absolutely and unequivocally false. Rememember: this is the paper which is claiming to be publishing a "Fact Check" on this topic!

Here is what the IFS actually said: "Of course, Scotland as a nation will receive much more – UK-wide measures like the Job Retention Bonus, Kickstart Scheme and VAT cut could amount to around £1 billion of genuinely new money for Scottish businesses, jobseekers and consumers. And the Scottish Government itself will receive over £700 million as a result of other funding confirmed in the Summer Economic Update"

I also questioned the veracity of the £21m number itself, even as the figure the Scottish Government would get "of the £30bn". As is always the way with my blog, I laid out the audit-trail of information I was able to find, explained my reasoning and was clear about what I could and could not show.

I concluded: "To be clear: I don't know what the Barnett Consequentials are on the £30bn figure, but I do know the correct denominator for the calculation is certainly not £30bn* and I would be amazed if the correct numerator was as low as £21m"

* as that includes funds spent directly in Scotland, not via the Scottish Government

I was completely clear about the basis of my judgement and - as it happens - I was right.

Again looking at what the IFS actually said: "the Scottish Government will get far more than £21 million. Because stamp duty is devolved to Scotland it will get much more than that [..] Exactly how much is not yet clear [..] but initial estimates published by the OBR this week suggest it could amount to around £120 million spread over this year and next"

So why did I apologise?

I apologised because in my blog I referenced a statement made by the IFS as support for my conclusions and - emboldended by the IFS spokeperson being quoted as saying the £21m was "not true" - I said "far fewer people will take the time to understand the complicated truth than accept the simple lie".

When the IFS issued a subsequent statement (the one I quote above) highlighting that they had - like me - not realised how much of the £30bn was recycled money, I felt it would be wrong for me not to update my blog to reflect that. I also felt, in the light of the revised IFS statement, that I had been overly harsh in suggesting that Kate Forbes' claim was a "lie" and that I should apologise for that - so I did. I also pinned the Tweet making that apology to my Twitter profile, to ensure it was widely seen.

The National "Fact Check"

They offer their readers this "Doorstep answer": "Kevin Hague was forced to eat his words when the independent Institute for Fiscal Studies did the sums again and agreed with the Cabinet Secretary. Hague was forced to apologise."

I wasn't forced to do anything - who on earth do they think did this forcing? In fact what happened is that I had the integrity to ensure that my post was updated to reflect the IFS's own updated statement and I hope the good grace to recognise that I had been overly harsh in my original wording.

I'll skip the National's ad hominem attacks on me and the organisation I chair and try and focus on the odd moments where the National attempts to deal with what I actually wrote. They say: "he accepts at face value the Chancellor’s claim that the Plan for Jobs means £30bn of new money, though there are references in the initial Treasury paper to existing cash pledges being “brought forward”.

It is patently untrue that I accepted £30bn at face value as new money. They're claiming this is a "Fact Check" remember and my exact words were: "Now some of these are described as "accelerating investment" and some are "previously announced" - so it's possible that the Barnett Consequentials relating to them have already been included in previous figures announced". 

The National go on to say: "Suspiciously, despite endless laudatory quotes from Sunak’s Plan for Jobs .."

Far from being endless, there isn't a single "laudatory quote" in my blog (remember, they think this is a "Fact Check") - I merely detail what's in the Plan to explicitly separate out what would be UK-wide and so have no impact on the Scottish Government's budget.

They then rather neatly highlight my transparent honesty (don't forget they claim I'm doing this "suspiciously"): "... Hague actually avoids giving exact numbers for what he considers to be the correct Barnett consequentials. In fact, he admits: “I don’t know what the Barnett consequentials are on the £30bn figure”. How then can he criticise Kate Forbes?"

The problem here is that the author of the National's "Fact Check" clearly has no understanding of how an analytical audit trail works, or why admitting that you don't have the information to be able to calculate or recreate a specific figure is not "suspicious", it's transparent and honest. It is precisely because I am being very careful to avoid misleading readers of my blog that I feel I can criticise Kate Forbes.

The National continue: "Instead, Hague quotes an analysis written on the day of the Chancellor’s statement, by Peter Phillips of the independent Institute for Fiscal Studies (IFS). Here Philips rejects the Cabinet Secretary’s figure of £21m in Barnett consequentials as simply “not true”. Unfortunately for Hague, a week later Phillips completely reversed his judgement, explicitly exonerating Forbes."

It's not "instead" and it was an interview quote not an "an analyis", but yes I referenced an IFS quote in support of my conclusion - which is why when they issued a clarification I updated my blog.  It's also obvious to anybody who reads what the IFS actually wrote that, while mainly complaining about Sunak's misleading presentation of the figures, they were not "explicitly exonerating Forbes". They were recognising that the £21m was a valid number under a specific definition (Barnett Consequentials of newly announced spend) but also that it is not even all of the money the Scottish Government "get" as a result of newly announced spend ("Because stamp duty is devolved to Scotland it will get much more than that").

The National's Conclusion is actually - unintentionally I'm sure - rather flattering: "KEVIN Hague was quick to reword his original blog (yesterday). He also apologised for essentially calling her a liar. But in his reworked blog post, there remains the implication that Forbes was manufacturing grievance for political ends. Buried deep in the small print of the revised blog, Hague makes a grudging admission regarding his earlier erroneous criticisms of the Cabinet Secretary’s integrity: “... it’s only fair to highlight that her figure is more justifiable than my original wording implies.”

"Buried deep in the small print" amuses me, given there is no small print, it's the conclusion of the blog and I screen-capped, tweeted and pinned the apology - but whatever. Apart from that nonsense I'm pretty happy with the rest of their summary to be honest. Only a single-issue propaganda sheet with no journalisic integrity or interest in factual accuracy would see the act of clarifying and apologising as a bad thing - and my suggestion that she was manufacturing grievance for political ends is vindicated by the National's own headline on Friday, so I guess I should thank them for that!

Now, while it's always super fun to start the weekend defending yourself against a hit-piece in a national newspaper, I really do have better things to be doing with my time.
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Thursday 9 July 2020

Kate Forbes' Grievance, Dissected

At the time of writing, in the 24 hours since being posted this tweet from Scottish Finance Secretary Kate Forbes has received around 4 thousand retweets and likes Those are some big social media numbers for a bold claim - so let us dissect this grievance:

"Of the c.£30 billion announced by the Chancellor today to support the economy"

It's clear she's referring to this announcement by Chancellor Rishi Sunak and a quick browse finds us the (up to) £30bn

"the Scottish Government will receive..."

A cynic might see signs of sophistry here: by referring to what "the Scottish Government will receive" is she hoping casual readers will read that as being all the economic support Scotland will receive? Surely not.

On the off-chance that anybody might have fallen for this rather clumsy rhetorical sleight of hand: for those parts of the scheme that are UK or GB-wide, Scotland will receive money based directly on need (or take-up), it just won't come via the conduit of the Scottish Government.

So by limiting herself to funds "the Scottish Government will receive" she's able to ignore our needs-based share of the:
  • £9.4bn Job Retention Bonus
  • £2.1bn Kickstart Scheme 
  • £1.2bn of various support programmes for those seeking work
  • £1.2bn of decarbonisation initiatives
  • £0.5bn "Eat Out to Help Out" scheme
  • £0.3bn of UK-wide investment in "World Class Laboratories"
The above totals £14.7bn, of which Scotland will of course receive its fair share based on need and/or take-up. If we assume for illustrative purposes that equates to our 8.2% population share, that's £1,200m she's decided to disregard.

But the above are just the UK and GB-wide spending elements of the support package announced - the £30bn also includes £4.1bn of VAT reduction for hospitality, accomodation and attractions which Scotland will benefit from based on our share of consumption in those sectors (the Scottish tourism industry being of particular significance here). Again if we assume this translates into our 8.2% population share (my guess is it will be higher), that's another c.£330m of economic support she's disregarding.

But it doesn't stop there: the £30bn headline number also includes a £3.8bn cut to Stamp Duty Land Tax (SDLT) in England and NI. This is a tax fully devolved to Scotland (as LBTT) and there has been nothing - other than political will and/or courage - to prevent the Scottish government taking similar action. [I'll be honest: how - if at all - this cut would affect the Scottish Block Grant Adjustment is not something I've taken the time to get my head around].

**** Update 17/07/2020 ****
There will indeed be a Scottish budget increase as a direct result of this SDLT cut - according to the IFS, : "Exactly how much is not yet clear – it will depend on updated forecasts and ultimately outturns for stamp duty revenues in England and Northern Ireland. But initial estimates published by the OBR this week suggest it could amount to around £120 million spread over this year and next."

So if we add together the elements above, we have identified £22.6bn of the £30bn which is not relevant to the figure that the Scottish Government should receive.


"... only £21m - less than 0.1%"

Where does the £21m come from? The implication is that this is the Barnett consequentials on the £30bn announced, but that's a hard number to calculate (and as we've seen, £30bn is the wrong denominator to use).

We've already shown that £22.6bn of the package announced wouldn't be relevant for the purposes of calculating Barnett Consequentials anyway (because those are sums being spent UK or GB-wide and/or relate to tax cuts, not spending). 

But that still leaves us with c.£7bn of spending committed to England on which we might expect Barnett consequentials to flow to the Scottish Government.

That £7bn is made up of;
  • £2.0bn of Green Homes Grant (an English initiative)
  • £1.5bn of "accelerating investment" in England's NHS
  • £0.8bn of "accelerating investment" in England's Schools
  • £0.6bn of other "accelerating investment" in English infrastructure projects
  • £0.9bn of English home building / housing fund increase
  • £0.3bn of England-only job support
  • c.£1.0bn of implied other English infrastructure investment (mainly the Affordable Homes Programme)
Now some of these are described as "accelerating investment" and some are "previously announced" - so it's possible that the Barnett Consequentials relating to them have already been included in previous figures announced.

But Kate Forbes is talking about the amount that will flow to the Scottish Government "of the £30bn announced" and is using the £30bn as the denominator for her grievance-headline grabbing "less than 0.1%" claim - so it would simply be incorrect to exclude any of the Barnett Consequentials from the above in her calculation, whenever they may have been previously announced or discussed.

To be clear: I don't know what the Barnett Consequentials are on the £30bn figure, but I do know the correct denominator for the calculation is certainly not £30bn and I would be amazed if the correct numerator was as low as £21m (the Green Homes Scheme alone would surely generate £160m of Barnett Consequentials?)

In fact as I am writing this post I see "Leading economist: £21m claim by SNP finance chief not true" in which David Phillips of the IFS reaches the same conclusion.

**** Update 17/07/2020 ****
David Phillips has subsequently posted this "Up to £10 billion of the Chancellor's 'Plan for Jobs' will be funded by underspends on previously planned projects" making this very important correction:

"But the Scottish Government won’t, as I initially presumed, get extra funding as a result of the Green Homes Grant or the full £40 million it would if all of the money for traineeships and so on were new. Instead, apart from the stamp duty money, it will receive £21 million – the figure quoted by the Scottish Finance Minister – as a result of the combination of the ‘Plan for Jobs’ and the reductions in investment spending elsewhere that the Treasury is now expecting."

Revisiting my own text in the light of this, a couple of observations and corrections:

I said above "some of these are described as "accelerating investment" and some are "previously announced" - so it's possible that the Barnett Consequentials relating to them have already been included in previous figures announced" - Whilst I was right, there's no doubt that when writing I was assuming that some rather than effectively all of these figures had already been announced. So mea culpa, I fell into the same trap as the IFS

I did say "To be clear: I don't know what the Barnett Consequentials are on the £30bn figure" - and to be fair I still don't. All we know now is that the Barnett Consequentials on the proportion of the £7bn [i.e. that part of the £30bn that is not being spent UK or GB-wide] which is genuinely new money is £21m (and that there will be an additional c.£120m block grant adjustment over 2 years related to the SDLT cut).

I said above "I would be amazed if the correct numerator was as low as £21m ". Given at this stage we are past the "suggesting that what matters here is what the Scottish Government gets as opposed to what the people of Scotland get"point, we are now debating technicalities. So it's fair to point out that a/ "of the £30bn" the consequentials are indeed greater than £21m - when quoting the £21m we should be saying "of what's new in the £30bn" b/ the £21m excludes the block grant adjustment impact of the SDLT cut, worth c.£120m over 2 years

But I've thought about this and, given the incremental Barnett Consequentials from what was annouced are only £21m, I don't think it's unreasonable that Kate Forbes chose that as her headline "the Scot Gov gets" number. In an ideal world she should have said "the only new money the Scottish Government will receive is ..." and even then should have included c£120m for the likely SDLT block grant adjustment ... but it would be inconsistent of me to hold her to higher standards than HM Treasury, and it's their attempt to pass recycled money off as new that's caused the confusion and provided her with cover.

None of this changes the most important point here, the point Kate Forbes was hoping to distract from (again quoting the IFS):

Of course, Scotland as a nation will receive much more – UK-wide measures like the Job Retention Bonus, Kickstart Scheme and VAT cut could amount to around £1 billion of genuinely new money for Scottish businesses, jobseekers and consumers. And the Scottish Government itself will receive over £700 million as a result of other funding confirmed in the Summer Economic Update – mainly as a result of extra spending on public services in England such as the NHS.

There is no doubt in my mind that Forbe's tweet was intended to stoke grievance by implying that Scotland is only seeing 0.1% of the £30bn. That in itself is at best pretty disappointing, at worst downright outrageous.

But even if we grant her the semantic benefit of the doubt - if we assume she was expecting her followers to interpret this as an issue of control of spending rather than the absolute amount of support the Scottish economy is receiving - the figures she quotes make no sense. 

The Barnett Consequentials resulting from the figures annouced yesterday will clearly be greater than she claims*, and she divides this wrong figure by the wrong figure anyway to get to her 0.1% claim. This is the sort of behaviour that gives people like me headaches.

**** Update 17/07/2020 ****
* per the update above: the Barnett Consequential from that part which is new money of the figures annouced will not be greater than she claims. The italicised part above is important, but it's only fair to highlight that her figure is more justifiable than my original wording implies

It took Kate Forbes a couple of minutes to fire out that tweet, and it will have done its job for her amongst the SNP's grievance-hungry supporters. The moment I saw the tweet I, like so many others, knew instinctively it was nonsense. But it has taken me most of the day to robustly show why - and far fewer people will take the time to understand the complicated truth than accept the simple lie*. Such is the depressing reality of modern politics, I guess.

**** Update 17/07/2020 ****
* I still have issues with the tweet - the implication that £21m is all Scotland is getting, the fact she uses £30bn as the denominator ("of the £30bn") when most of the £30bn is UK-wide spend anyway and the fact that she ignore the block grant adjustment impact of the SDLT cut - but knowing what we now know about the way the treasury recycled already committed spending to make it look like new spending, I think I was wrong to label the tweet a "simple lie" and offer my apologies to Kate Forbes for doing so 

***

As an addendum: I see Andrew Wilson - Chair of the SNP's Sustainable Growth Commission (a commission on which Kate Forbes sat) - has offered his hot take:
Apparently in the world of the SNP fan-club, she is making a "self evidently truthful point" .. and to highlight the reality of the support the Scottish economy is receiving from the UK government is to somehow fail to "back devolution".

I despair.

***

For those who care about the workings, the below is the spreadsheet I used to turn the text in the "Plan for Jobs" report into something I could interpret


 












Posted by at 12 comments:

Wednesday 5 February 2020

Deficits, Deficit Gaps and Fiscal Transfers

To understand what is going on when we talk about implied fiscal transfers between different parts of the UK (as discussed here), it's perhaps easiest to think of what happens when we split the bill in a restaurant.

To know whether or not we benefit from splitting the bill, we only need to know two things:
  1. How much of the bill are we responsible for creating?
  2. How much of the bill do we actually have to pay?
If the first figure is greater than the second, we benefit from splitting the bill (we receive an implied transfer from the others we're splitting the bill with).

In the context of the debate around Scottish independence, the first of these questions is answered by the Scottish Government's own GERS report. This tells us, based on a series of explicit assumptions, how much of the UK's deficit (the bill) Scotland is responsbile for.

The second question is more contentious, as there are no "official figures" as to how responsibility for the national debt (the cumulation of annual deficits) is shared1  - so how much of the bill does Scotland have to pay?

Fortunately there is broad consensus around the view that the UK's debt should (or at the very least reasonably could) be shared on a population basis.
  1. The GERS figures include a population share of the interest charge generated by the UK's debt - given that debt is merely the accumulaton of the UK's deficits over time, that is effectively a population share of the UK's (cumulative) deficit
  2. The Independence White Paper in 2014 stated "Scotland and the rest of the UK will agree a share of the national debt. This could be by reference to the historical contribution made to the UK’s public finances by Scotland. An alternative approach would be to use our population share."
  3. The SNP's own Sustainable Growth Commission danced around this question, but eventually assumed a population share of UK debt interest within their proposed "solidarity payment"
So it's really pretty simple: the difference between the share of the UK's deficit Scotland is responsible for creating (see GERS) and the share of the UK's deficit Scotland pays for (assume population share) is the implied fiscal transfer.

As we'll come on to see, you can make different assumptions about the share of the UK's deficit Scotland will ultimately have to pay, and conclude a different figure for the implied fiscal transfer.

***

At the risk of labouring the restaurant analogy, let's run through an example with some illustrative figures to help us explain the differences between three terms that often get confused: the deficit, the deficit gap and the effective fiscal transfer:
  • Group A: 18 people go for a meal, the bill comes to £1,800 so they have spent £100/head
  • Group B: 2 different people go for a meal, their bill is £300 so they have spent £150/head
If Group A and Group B decide to get together and split the bill (to "pool & share the deficit"), what happens? The total bill would be £2,100 which split equally between 20 people would be £105/head. Here's a simple summary:


The spending gap between the groups is £50/head (Group B spent £50/head more than Group A), but the benefit of pooling and sharing - the effective transfer Group B receives - is £45/head2.

The total transfer from Group A to Group B is £45x2 = £90

Now let's replace the figures in our analogy with the fiscal reality (per GERS 2018-19) - the "bill" is the deficit, Group B is Scotland and Group A is the rest of the UK.


So Scotland's GERS deficit is £12.6bn, the deficit gap is £11.6bn and the effective fiscal transfer to Scotland is £10.7bn. 

A huge amount of confusion is caused by people failing to understand the conceptual the differences between these figures - if you've followed what's going on up to here, give yourself a pat on the back.

***
So armed with this understanding, let's take a look at the most common mistake made when people debate the "£10bn fiscal transfer". To illustrate, let me use the following screen-capture which (incredibly) is taken from Stuart Campbell's own "Wings Over Scotland" blog:


 If you've been following this blog post so far, you will realise who the twit is in the exchange above (hint: it's not Paul). To walk through this carefully, per the figures above:
  • Scotland's deficit is £12.6bn
  • We assume Scotland bears a population share of the UK's deficit - so in this year Scotland takes on an additional "loan" of just £1.9bn
  • The difference of £10.7bn is the effective fiscal transfer Scotland receives - it's the amount over and above the "loan" Scotland takes on
Fun Fact: this means that those who argue Scotland should assume less than our population share of the UK's debt are - whether they realise it or not - arguing that the effective fiscal transfer in Scotland's favour is in fact larger than £10.7bn.

***

A common reaction to these figures is "how can Scotland's 8% of the UK population possibly be responsible for a third of the UK's deficit - that seems unbelievable". This is what is technically known as an "argument from incredulity" and is perhaps best summarised by this quote from Professor Richard Murphy:
"I have been continually bemused by the fact that GERS says that Scotland runs a deficit so  much larger in proportionate terms than that for the UK as a whole."
Here our restaurant bill analogy falls short, because what we're dealing with when we're sharing the deficit is not how much we've spent but the net effect of how much revenue we've generated less the amount we've spent. I've explained the dynamics involved here in this brief video (with apologies for my exasperated tone and the figures being a year out-of-date)




Another way to help understand this point is to look at fiscal transfers across the UK (including the English regions) as this blog has recently done here. There is nothing surprising or hard to fathom going on here - it's just simple fiscal arithemetic.


As I've pointed out before: it's not hard to imagine a situation where Scotland runs a small deficit while the the UK overall is in fiscal balance - in that scenario Scotland would be responsible for an infinite (or more accurately: a "divide by zero error") share of the UK's deficit. It's just maths.

***

When we use the GERS figures to scale the effective fiscal transfer, we have to recognise that these are only pro-forma figures, they represent what Scotland's stand-alone defict would be if we kept generating revenues and incurring spending as shown in GERS.

In case it's not already dead, let me flog the restaurant analogy one more time: "if we weren't sharing the bill, maybe we wouldn't have tipped the waiter 15% and perhaps we wouldn't have ordered the bottled water for the table."

This is a fair point. Even before we consider the likely economic shock impacts on revenue or spending that separation from the UK would cause (see Brexit), the scale of deficit that the GERS figures reveal means that current levels of spending would be unsustainable for a newly independent Scotland, particularly if trying to launch a new currency.

It's true that some of that spending in GERS is costs allocated from the rest of the UK on a simple population basis (defence, debt interest and international aid being the vast majority of these), so any case for independence needs to start by working out what an independent Scotland would replace these costs with. For reference: relative to that £10.7bn fiscal transfer, the notoriously optimistic White Paper on independence assumed a net saving of £0.6bn.

What typically happens at this point is that some of the more blindly-committed supporters of independence start suggesting that the GERS figures are all made up anyway as part of some vast conspiracy by which Westminster has managed to get the Scottish Government's own economists to pull the wool over the eyes of the SNP (and their Sustainable Growth Commission, their Fiscal Commission Working Group, the IFS, Fraser of Allandar, NIESR, UK Statistics Authority, etc. etc.).

This is of course a ridiculous position to adopt (which, to be fair, is why only those flakier members of the independence movement attempt to adopt it). Alex Salmond was certainly very clear about what the GERS figures told us when he thought he could spin them in his favour:



Salmond is the man who once proudly boasted of his ability to put “a gloss on statistics or any economic figure” to build a political case, and he certainly did his best to do that with the 2010-11 GERS figures. He made the highly dubious claim that they showed an independent Scotland could have been spending £2.7bn more and therefore should have been running an even higher deficit than that shown in GERS!




Still: desite the fact that he used a different method for "splitting the bill" (based on a GDP share not a population share), he was recognising the principle of the fiscal transfer3.

Unfortunately for independence supporters, taking the logic Salmond applied to the 2011-12 figures and applying them to the 2018-19 figures produces a massive fiscal transfer now in Scotland's favour - so by his own logic, an independent Scotland should now be spending £10bn less4.

At this point, most of those arguing for independence ignore how wedded they used to be to the figures and return to straight-froward "GERS denial" - fortunately this blog has already comprehensively dealt with those denials here > GERS Deniers.

Ah but wait: what about "this is just a snapshot"?

OK, well we can do this analysis over time and plot the size of the deficit gap5 for the last 21 years:


You can see why Alex Salmond was so excited about the 2008/09 to 2010/11 figures6.

The reason for the dramatic reversal and growth in that gap will be familiar to regular readers of Chokkablog - they are most easily summarised by this graph:


  • The gap closed when North Sea revenues boomed, but has grown massively as North Sea revenues have plummeted
  • Scotland has not only continued to spend more per head than the rest of the UK, that spending gap itself has actually grown (thanks to the Barnett Formula and low levels of absolute spending growth7) 
  • Scotland's onshore revenue performance has declined relative to rUK8
For completeness, we can plot the onshore deficit gap over time (i.e. to see what happens if we strip out North Sea revenue effects from these figures):



Without oil revenues, there would never have been a prime facie economic case for Scottish independence - and the vagaries of the Barnett Formula (plus perhaps the impact of the SNP's tax rises) have led to the scale of the fiscal transfer that Scotland benefits from within the UK actually increasing in recent years.

/Ends/


Notes



1. This very carefully worded FoI response is sometimes in debates around the fiscal transfer:
"Official figures for any fiscal transfer are not available.
The reason this information is not available is that such a figure requires a number of assumptions to be made. For example, as the UK as a whole spends more than is raised in revenue, an assumption would need to be made about which parts of the UK borrowing is undertaken for, or which types of public spending are financed by borrowing as opposed to taxation. This information is not available as, for example, some taxes are ringfenced to fund particular services; for example, some national insurance contributions are ring-fenced to fund the NHS. As such, any figure for a fiscal transfer from the rest of the UK to Scotland would rely on a number of assumptions."
this is entirely consistent with what this blog (and others) have always said - to calculate the implied fiscal transfer, we have to make some assumptions. In fact, argue we can calculate and implied fiscal transfer by only making one assumption: that the burden of the UK's deficit (and associated debt) is borne on a population share basis

2. People used to dealing with numbers will have spotted that the transfer = [(1-population share) x the gap] - something easily proved if you care for such things


This matters only insofar as we need to understand that, in the case of Scotland in the UK, the fiscal transfer is 92% of the deficit gap
3. The IFS implicitly use that same assumption when referring to the fiscal tranfer here
The most recent figures (2016–17) imply a budget deficit for Scotland of 8.3% of GDP. Managing this is the UK Government’s responsibility as it is part of the UK’s deficit, which was 2.3% of UK-wide GDP in the same year. Therefore there was a fiscal transfer from the rest of the UK to Scotland of about 6% of Scotland’s GDP (equivalent to around £1,750 per person in Scotland).
Because GDP/Capita is now about the same for Scotland and rUK, allocating the deficit on a per capita basis or per GDP basis makes no material difference - but I would still argue that per capta is the right way to do the analysis as long as GERS uses per capita allocations for all shared UK-wide costs
4. To be completely accurate: if we used his GDP share rather than population share method then the figure would be £9.8bn (rather than the £10.7bn we get using population share) - but the broader point stands

5. Remember: the implied fiscal transfer = [(1-population share) x the gap] = 92% of this figure

6. These are the latest available restated historical figures - when first released the figures showed a significantly more favourable position for Scotland, but later revisions lowered Scotland's apparent fiscal advantage vs rUK - covered in some here: The SNP: Living in the Past

7. A dynamic most easily understood if you imagine a scenario where UK spend (and therefore Scotland's spend) doesn't change, but Scotland's population grows more slowly than rUK's - under that scenario it is inevitable that the gap between Scotland's spend/head and rUK's must increase

8. Due to some combination of historically over-estimating the number of top-rate tax payers in Scotland and/or the increase in the Scotttish Rate of Income Tax causing some of those tax payers to redomicile
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Sunday 2 February 2020

Pooling and Sharing: The English Regions

In a few weeks time I'll be chairing a conference in Newcastle - These Islands: Our Past, Present & Future

The conference will feature an impressive array of speakers and panelists including: Douglas Alexander, Philippe Auclair, Gordon Brown, Andy Burnham, Frances Coppola, Sir John Curtice, Simon Evans, Sophia Gaston, Ayesha Hazarika, Gerry Hassan, Fiona Hill, Henry Hill, Colin Kidd, Carwyn Jones, David Lidington, Ian Murray, Baronesss Quin, Mark Reckless, Willie Rennie, Lord Salisbury and many, many more. If you're interested in coming along, you can find more details and ticket booking information here > eventbrite page.

Needless to say: just as Bob Geldof wasn't going to go to all the trouble of organising Live Aid and not get on stage to perform with the Boomtown Rats, so I will not be passing up the opportunity to put some graphs in front of this captive audience1 .

We're holding the conference in Newcastle to highlight the importance of the English regions in any debate about the future of the UK. To this end I've been doing fresh analysis on the fiscal economics of the English regions and - because I won't have time to present detailed analysis at the conference - I though I'd quickly blog about it here.

Chokkablog regulars will be familiar with the concept of the implied fiscal transfer, but to recap: if a devolved nation runs a deficit per head (aka "per capita deficit") higher than the UK average, then that nation is benefitting from an implied fiscal transfer from the rest of the UK2.

The same principle can be applied to the English regions. Fortunately the data now exists to allow us to calculate and understand these regional fiscal transfers just as the (notorious?) Government Expenditure and Revenue Scotland (aka GERS) figures do for Scotland3.

The source data is Country and Region Public Sector Finances analysis as produced by the ONS4. All the figures we use here are those that allocate a "geographical share" of oil & gas revenues (i.e. Scotland gets to keep the oil & gas revenues generated by oil in Scottish waters).

The only other thing we have to remember before diving into this analysis is that the per capita deficit difference to the UK average is made up of two distinct parts: the per capita revenue difference and the per capita spending difference. The former reflects the economic performance of the region in terms of tax revenue generation, the latter reflects the cost of delivering public services to that region5.

So let's look first at per capita revenue generation differences by region:

Remember that what we're seeing here is how well these regions generate tax revenue versus the UK average. There has been a lot of talk in recent weeks of "levelling up" - that's basically about getting these bars to shrink back towards zero, so the size of the red bars is a decent guide to which areas are in greatest need of "levelling up".

It should come as no surprise that London and the South East are the areas which "out-perform" and - unless you've been deceived by the SNP's grievance rehetoric - it should also be no surprise to see Scotland (like the East of England) performing as per the UK average and significantly out-performing Wales, Northern Ireland and all other English regions.

So what's Scotland's problem?

Well let's look at per capita spending per region4:

Here's where we see the areas that enjoy (or require) higher spending per capita: Northern Ireland and Scotland most significantly, with London, Wales and the North East as the other "relatively high spend" areas. The extent to which this is based on greater need (e.g. to deliver equivalent services in areas of lower population density and/or with remote/island communities and/or to reflecting higher social costs driven by demographic factors and/or due to areas of endemic poverty) or greater investment (for better services than the UK average or to stimulate economic development) is the subject of some debate.

If we combine the per capita revenue difference with the per capita spending difference, we get to the per capita fiscal balance difference (and hence the implied fiscal transfer):

It's quite a striking picture isn't it? The Devolved Administrations in Wales and Northern Ireland receive far greater per capita fiscal transfers than Scotland, as does the North East.  London, the South East and the East of England are responsible for generating fiscal transfers that go to the rest of the UK.

It's perhaps helpful to summarise all of this data on one exhibit:

What this shows us is the extent to which the fiscal transfer to Scotland (caused by the much debated higher notional Scottish deficit) is a function of higher spending, not lower revenue generation (i.e. not "weaker economic performance"). This contrasts dramatically with Wales the Midlands and the North of England, where relatively poor fiscal performance is explained by weaker revenue generation (i.e. "weaker economic performance") far more than by any spending differences.

It's clear that any debate about the future of the UK has to grapple with these two related questons
  • How are resources most fairly and efficiently distributed between and administered in the devolved nations and English regions?
  • What practical steps can be taken to "level up" economic performance across the UK?
***

For those who like to see the figures behind the pictures:


For those who wonder about regional difference within Scotland, I offer the following GDP/capita chart - suffice to say we could expect there to be similar fiscal transfers happening within Scotland, and the variance of economic performance within Scotland appears not dissimilar to the variance across the UK (or indeed in continental Europe):





Notes

1. Yes, I'm aware how ridiculous it is to imply that this conference is some sort of constitutional Live Aid

2. We share the burden of the UK's deficit UK-wide - both in these analyses (i.e. the cost of the total UK debt is allocated to the regions and devolved administrations on a per capita basis) and as widely assumed and accepted in the case of inherited liabilities (i.e. were Scotland to separate from the UK, it would inherit a population share of he UK's debt, as accepted by the Independence White Paper and the SNP's more recent Sustainable Growth Commission)

3. This figures differ from GERS, but not materially so at the deficit per head level - comparing 2018-19 ONS and GERS, it looks like there is a different approach to what is taken as revenue vs what is netted off against cost (but I'm guessing here) - all that really matters is that the figures used for the exhibits on this blog post are all compiled on a comparable basis
  • Spend/head: ONS = £14.5k; GERS = £13.9k
  • Revenue/head: ONS = £12.0k; GERS = £11.5k
  • Deficit per head: ONS = £2.5k; GERS = £2.6k
4. It is worth noting that these are not qualified as National Statistics, but rather Experimental Statistics

5. It's worth noting that those costs which are shared on a population basis (mainly debt interest, defence and international aid) have no impact on this analysis - there is by definition zero difference between per capita costs allocated on a per capita basis!
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