Why Not Scotland?

Despite the fact that recent opinion polls (eg. here and here) show that less than a third of Scots actually want it, Nicola Sturgeon has today announced that we are to be treated to a "pretendyref" on Scottish independence in October 2023. 

Given that nobody expects the UK Government to grant a Section 30 order, this will become a glorified opinion poll which pro-union voters will be inclined to boycott, rendering it unrepresentative and therefore entirely pointless.

But having set a date, presumably the SNP believe that they can now articulate a credible case that will win round those indy-curious voters who worry about the economic consequences of breaking up the UK. 

Which is curious, because just last week the Scottish Government published the first episode in their new and improved independence prospectus serialisation - and if this was intended to be a teaser for what is to come, it turned out to be a less than enticing flick of the Kimono. 

The Scottish Government's "scene-setter" paper compares the UK to a hand-picked selection of European comparator countries. Unfortunately it doesn't include any data for Scotland and skirts around the question of how different countries approach the trade-off between tax and spend.

This blog post's appendix walks through the journey from the bar charts presented by the Scottish Government to a more complete and informative presentation of comparative country data. But you don't need to travel that full journey to appreciate the view we reach at the destination: this simple chart compares the fiscal position of Scotland (in the UK) with all European OECD countries:

 

This clearly shows what the Scottish Government's paper failed to address: some combination of higher taxes and/or lower spending would be required for an independent Scotland to achieve fiscal sustainability (ie. to move up and/or to the left on the graph and get within the EU's 3% excessive deficit threshold).

In fact these international comparisons neatly illustrate that the UK's pooling and sharing of tax revenues allows Scotland (in the UK) to benefit from levels of government spending that would otherwise be unsustainable without significantly higher taxes in Scotland. 

Those who attempt to obfuscate this debate by questioning the validity of the data for Scotland are arguing with National Statistics published by the Scottish Government and don't deserve to be taken seriously. 

Those supporters of Scottish independence who do wish to be taken seriously need to explain how the revenues raised by the government of an independent Scotland could increase and/or how the cost of public services consumed could decrease relative to these "in the UK" figures. 

We can immediately see from this chart that tax revenues would need to increase and/or public spending decrease by c.6% of GDP just to get within the EU's 3% excessive deficit threshold and achieve the SNP's stated aim of being, in fiscal terms, "just like a normal independent country" (of whatever size).

All the countries on that chart have established currencies (or did so as pre-conditions of joining the EU and/or the Eurozone). An independent Scotland would no longer be in a formal Sterling currency union and we are told a new Scottish currency would be created as soon as practicable. That realistically means some combination of fiscal and/or current account surplus would be required.

Even if we just look at the countries the Scottish Government hand-picked as comparators, plenty of them run a fiscal surplus in normal times so, to coin a phrase, why not Scotland? 

To run a fiscal surplus would (on these pre-pandemic figures) require tax rises or costs savings of 9% of GDP. That is the equivalent of a 20% decrease in total government spending or a 24% increase in total government revenue.

To help those trying to make these numbers stack up, let's put 6 - 9% of GDP in the context of some existing Scottish revenue figures as % of GDP ...

• Income tax: 7.3%
• National Insurance: 6.4%
• VAT: 6.1%
• Onshore Corporation Tax: 1.7%
• Tobacco & Alcohol Duties: 1.3%

... or specific Scottish spending figures:

• Social Protection (inc Pensions): 13.5%
• Health: 7.7%
• Education and Training: 5.2%
• Public Sector Debt interest: 2.9%
• Defence: 1.9%

So the exam question for the SNP is a simple one: with reference to these current tax and spend figures, how would you achieve fiscal sustainability let alone the surplus position most of your chosen comparator countries achieve?

***

None of this is to deny the fact that historical actual figures can only represent Scotland as an integral part of the UK - the question is what would those reserved policy decisions and reserved spending allocations be replaced by?

The SNP's Sustainable Growth Commission suggested addressing the fiscal conundrum by simply reducing government spending as % of GDP (a policy more commonly referred to as "austerity") - but in doing so they failed to address any of the following rather important questions:

1. Many significant tax and spend decisions are currently considered to be best made on a UK-wide basis and are therefore reserved to Westminster; what different decisions might an independent Scotland make in areas such as income tax, VAT, corporation tax, social welfare spending etc. and what would the realistic net fiscal result be?
   
   
2. In answering the above, what consideration has been given to the likelihood of capital and talent flight associated with higher tax-rates and currency uncertainty?
   
   
3. Some reserved UK spending is considered to be of equal value to all parts of the UK and so is allocated on a population basis. Compared to these allocated figures, what levels of expenditure would an independent Scotland commit to in areas such as defence and international development aid and what would it cost an independent Scotland to replicate and run what is currently the UK's shared machinery of state (e.g. HMRC, DWP, Home Office, Border Force, Treasury, etc.)
   
   
4. In answering the above, what consideration has been given to the defence spending requirements of NATO membership and the practical economies of scale when it comes to institution building (i.e. would stand-alone Scottish HMRC, DWP, Home Office, Border Force, Treasury etc. functions cost more or less than the 8.2% of the total UK cost of these institutions which is allocated to Scotland today?)
   
   
5. Scotland has 8.2% of the UK's population but 10.0% of the UK's civil service jobs are based in Scotland. Given that in reserved functions such as DWP, HMRC, MoD, DfID and OFGEM  (costs of which are allocated on a population share basis) significantly more than Scotland's population share of staff are located in Scotland, what assumption is made about the future of those jobs and any related fiscal multiplier effects?¹
   
   
6. There are other costs incurred in Scotland which are not charged to Scotland in these spending figures - for example 29% of Scottish Government ferries costs are allocated to the rest of the UK and nuclear decommissioning costs in Scotland are shared with the rest of the UK on a population share basis - what assumption is made about who bears those costs in the future? 
   
   
7. The Growth Commission and the Scottish Government both cite and therefore presumably accept analysis which suggests Brexit-related trade friction will harm UK GDP growth. Given that 60% of Scotland's exports go to the rest of the UK, what assumptions are being made about the impact on Scottish GDP of trade friction resulting from the creation of a Scotland/rUK border? 
   
   
8. Having answered all of the above, what is the realistic outlook for an independent Scotland's fiscal deficit over time - and with what implications for Scotland's cost of debt and ability to build currency reserves?

Where the Sustainable Growth Commission suggested reducing spending as a % of GDP, this latest Scottish Government paper hints at increasing taxes².  Whichever approach would be taken - and the scale of the challenge points towards both spending reductions and tax increases being required - it is hard to avoid the conclusion that the real-world implications for the people of Scotland would be eye-wateringly painful. 

The fiscal challenge an independent Scotland would face is the elephant in the room - if the SNP are serious about a referendum in 2023, they must address it.

***

NOTES

1. See Civil Service Statistics, all in the context of Scotland's 8.2% share of the UK population:

45,650 or 10.0% of the UK's 456,420 civil servants are based in Scotland, including in reserved functions:

• 8,260 DWP employees, 10.5% of the UK total
• 7,800 HMRC employees, 12.2% of the UK total
• 3,600 MoD employees, 9.7% of the UK total
• 950 DfID employees, 36.0% of the UK total
• 370 OFGEM employees, 37.8% of the UK total

    

2. See Independence in the modern world. Wealthier, happier, fairer: why not Scotland? Page 50:

"Why are most of the comparator countries able to sustain relatively high spending over the long-term? Evidence suggests that higher confidence in government is correlated with higher levels of willingness to comply with taxes [...] relatively high government revenues are not – as is often claimed – a barrier to growth and economic dynamism [...] “Far from impeding prosperity, it is high-growth countries that tend to have a larger share of tax revenues in GDP."

***

Appendix: The Journey

What the Scottish Government Paper Included 

The Scottish Government's paper included two mislabelled (the data is for 2019) bar charts of government spending and revenue as a % of GDP for the UK and their chosen comparator countries 

As highlighted in my previous blog, the data exists to be able to include Scotland (as part of the UK) as well. So I recreated the charts with Scotland (as part of the UK) added:

It's immediately obvious that Scotland (as part of the UK) benefits from higher spending than the UK average despite bearing basically the same tax burden. We can also observe that countries with similar or higher levels of spending than Scotland (as part of the UK) all have far higher revenue (aka taxes) - although that's quite hard to read across these charts.

Improving the Data presentation

The difference between a country's government revenue and government expenditure is of course its fiscal balance. So why not present the data on a single chart in a such a way as to show that relationship, use circle-sizes to indicate relative population sizes and indicate where the EU's Excessive Deficit Threshold sits?

Taking a wider view

Having pulled together the data in this format we can also add Greece, Portugal, Slovakia and the Czech Republic (the European small advanced economies the report chose to exclude) ...

... and there's no reason not to include the other European countries as well to give us a more complete picture and, while we're here, go back to 2017 and show how the picture has evolved up to and including the first pandemic-affected year of 2020.

This wider view merely reinforces the observation that Scotland (in the UK) is an outlier: it consistently benefits from higher spend as % of GDP than any other country with similarly low levels of revenue as % of GDP.

There is also no obvious correlation between country size and fiscal strategy - all European countries are fiscally prudent during normal times and larger countries are equally capable of pursuing higher tax / higher spend fiscal models.

The data used for international comparison comes from ther OECD; the UK and Scotland data is taken from GERS (the UK data in GERS reports to a slightly different year-end, but very closely matches that shown by the OECD)

**** ENDS ****

We Need to Talk About Scotland

The Scottish Government has just published (under the headline "First Paper in new independence prospectus") the remarkably verbosely titled "Building a New Scotland - Independence in the Modern World. Wealthier, Happier, Fairer: Why Not Scotland?".  

We've been here before of course, but such is the real-life Groundhog Day of Scottish Politics under an SNP government:

"This guide to an independent Scotland will be the most comprehensive and detailed blueprint of its kind ever published [...] it is a landmark document which sets out the economic, social and democratic case for independence." - Nicola Sturgeon, 11/2013

“Two years on from the historic vote of 2014, the fundamental case for Scotland’s independence remains as it was." - Nicola Sturgeon, 11/2016

"The publication of the Sustainable Growth Commission’s report is an opportunity to begin a fresh debate in Scotland [...] this report sets out how much more could be achieved with independence" - Nicola Sturgeon, 05/2018

 "It is time for Scotland to become independent' - Nicola Sturgeon, 04/2019 

"Today, we publish the first in a series of papers [...] that will make afresh the case for Scotland becoming an independent country." - Nicola Sturgeon, 06/2022 

Still, Scottish Government resources have been diverted away from the tedious day-to-day business of running the country to write these papers and our First Minister has taken time out from her busy schedule of talking about independence to hold a press conference to announce that "it is time to talk about independence", so we ought to look at what they have to say.

I have read through the report in detail and tweeted about it extensively. Going through it line-by-line would be too tedious even for Chokkablog, so what follows is my attempt to summarise the main take-aways.

1. There is no data in the report relating to Scotland 

There are 22 figures, 11 charts, 6 boxes and 1 table in the report and not a single one of them includes any data relating to Scotland¹. This is an extraordinary state of affairs: a report written by the Scottish Government which we are told is "designed to contribute to a full, frank and constructive debate on Scotland's future" fails to include any data about Scotland.

The introduction offers a frankly feeble attempt to justify this approach (at least in relation to fiscal data) by blithely asserting that the fiscal position of Scotland within the United Kingdom "tells us nothing about how Scotland would perform as an independent country and is, in any case, an argument for change, not against it."

I'm genuinely shocked that the civil servants involved could have allowed such a statement to be included. 

To suggest that data about the scale of our existing tax base (the tax paying workers, consumers, households and businesses in Scotland today) and the cost of delivering the public services Scots currently receive (pensions, social welfare, healthcare, education, transport etc.) tells us nothing about how our economy would perform after independence is frankly insulting to the reader's intelligence. 

That statement doesn't only ask the reader to ignore the economic reality of Scotland today, it also makes the nakedly political assertion that any data that does exist is "an argument for change, not against it". Unfortunately this is typical of the paper's use of lazy rhetorical assertion rather than robust analysis and sound reason - we can do better.

To illustrate why writing a report on Scotland's future without reference to data about Scotland is less than helpful, let's look as two related charts as they appear in the paper:

Let's put aside for now the question of how this sample was chosen and how meaningless it is to include Ireland on an unadjusted GDP basis (which the paper itself footnotes on page 9, before then proceeding to present charts like this²) and find out what happens if we include the data for Scotland.

---

An aside on the data audit trail: following the link to the source data shows us that these charts are mislabelled - the data being shown is for 2019 not "2020 or latest available". This makes sense as 2020 was of course a pandemic year (e.g. the UK's general government spending figure was over 51% of GDP in 2020) so we need to go back to 2019 to get sensible 'in normal times" data. One hopes this sloppy labelling of the charts is not indicative of the general attention to detail being paid by the report's authors

---

Having established which year the data actually refers to, we can recreate these charts and add Scotland (as part of the UK) to them³

The title of this Scottish Government paper asks "Why Not Scotland"? When it comes to the data being shown in the charts, we find ourselves asking the same question.

Had Scotland been included in these exhibits it would have been obvious that it enjoys far higher levels of public spending than the UK overall but bears basically the same tax burden.

This will not be a surprise to regular readers of Chokkablog. What we are seeing here is simply an illustration of the fact that Scotland gets a higher share of spending than its share of revenue generated. To couch this in terms nationalists like to use: Scotland gets back more than it sends to Westminster. 

To put it another way: all of the comparator countries with similar or higher levels of public spending are only able to sustain that by having far higher government revenue (ie taxes) than Scotland pays within the United Kingdom. Scotland is able to sustain this level of public spending because of UK-wide pooling and sharing. This chart shows a material tangible advantage to Scotland of remaining part of the UK.

This brings us to another frustration with this Scottish Government paper: why do they do such a bad job of presenting information?  Having two charts with the countries in a different order makes it hard to see what's going on and we can't easily see the deficit levels implied (i.e the difference between Revenue and Spending figures).

We could add another chart to show the difference between Government Revenue and Government Spending so that we can see the scale of each country's Surplus/(Deficit) ...

... but why use three different bar charts to show this data when we can use one, far more informative chart?

Using the same data I've produced the chart below while sitting on a train - it's really not that hard:

All I've done is plotted the data as an x-y scatter, taken Ireland off (for the reasons explained in note 2) and added the context of the EU's Excessive Deficit Crieria. Now we can really see what's going on:

• Higher tax is obviously correlated with higher spend
• The comparator countries (and the UK) were all above the EU's excessive deficit threshold in 2019
• Scotland is an obvious outlier: it enjoys mid-table levels of public spending despite being a relatively low tax economy - this is a tangible benefit Scotland sees from UK-wide pooling and sharing of taxes

Remember: without including any fiscal data for Scotland, this Scottish Government paper asked us to take on trust the assertion that the fiscal data is "in any case, an argument for change, not against it".

Moving beyond ideologically motivated assertion and looking at the actual data - which one might have hoped the authors of this report would have done - it becomes clear that the fiscal data can be used to make a compelling, economically rational argument for Scotland remaining in the UK.

2. There is a clear indication that the SNP is now looking to make the economic case for independence based on moving Scotland to being a high tax country

In the context of the charts above, the paper asks:

"Why are most of the comparator countries able to sustain relatively high spending over the long-term?"

The first thing to point out is that we have now seen what the paper chose not to show - that Scotland already enjoys "relatively high spending" (and it has done over the long-term). That's a pretty big point for the paper to omit.

The improved presentation of the data above also makes the answer to this question blindingly obvious: by having relatively high taxes.

This is all just a very roundabout way of saying that deficits matter. The data provided (once we've put it into a more helpful format) just shows that the comparator countries are all fiscally prudent. In normal times they only allow spending to exceed revenue within the constraints of the EU's 3% Excessive Deficit threshold.

So if an independent Scotland is to sustain current levels of public spending (let alone increase public spending as many independence supporters seem to believe would happen) then tax revenues would need to dramatically increase.

The answer given by the Paper hints towards realising this, albeit indirectly:

"Evidence suggests that higher confidence in government is correlated with higher levels of willingness to comply with taxes ..."

The paper goes on to reference an Economic Observatory article in support of higher tax economies:

"Far from impeding prosperity, it is high-growth countries that tend to have a larger share of tax revenues in [sic] GDP"

The SNP's own Sustainable Growth Commission previously recommended controlling the deficit through austerity (i.e. by cutting public spending as a share of GDP.) This latest paper strongly hints towards an independent Scotland increasing tax revenues as a share of GDP.

This is not the place to re-run arguments about the GERS deficit - but some of us have been saying for a long time that, were Scotland to become independent, a combination of tax rises and public spending cuts would be an inevitable consequence.

Although this paper doesn't address the issue head-on, buried within it is a tacit admission that only by generating higher taxes could Scotland sustain the higher spending we already receive as part of the UK.

How effective tax rate increases would be is a debate for another day. But if a lower tax regime is just across the mainland border and another even lower tax regime exists in neighbouring Ireland, it's not hard to see what would happen to the tax base in an independent Scotland if corporations and high-earners were squeezed with higher taxes.

We wait with interest to see if future papers in this series address the fiscal deficit question using actual numbers for Scotland's economy and with realistic estimates for the scale of tax rises and spending cuts that an independent Scotland would have to bear to achieve a sustainable fiscal position.

  

3. The Scottish Government's responsibilities are ignored

There are plenty of other charts and exhibits where we might have expected the Scottish Government to provide at least some contextual data to show how Scotland performs after 15 years under SNP control. I'm doing this in my spare time, so I'm not going to attempt to address them all.

But given the devolved Economic Development, Income Tax and Benefit Top-up powers the SNP have, it seems extraordinary that no attention is given to what has been (or could be) achieved by the Scottish Government to support business investment or to address issues like poverty, income inequality and social mobility. 

Take this extract from Scotland's National Strategy for Economic Transformation which is quoted in the paper:

“Despite our wealth, too many households continue to live in poverty as a result of structural inequalities. Healthy life expectancy is too low in the most deprived areas of our country. Tackling the underlying causes of inequality in our society and providing economic opportunity is vital in order to improve life chances. Scotland’s productivity lags behind that of many other advanced economies and whilst we continue to innovate too few of our ideas are turned into businesses and too few of our new businesses are scaling up successfully"

The paper expects the reader to accept as read that this sorry state of affairs exists simply because Scotland is not independent. Yet we've seen - by looking at data the paper itself didn't see fit to include - that levels of Scottish public spending are higher than Scotland's tax base could sustain without the benefit of pooling and sharing taxes across the UK. 

Combine that economic reality with the devolved powers at the Scottish Government's disposal and an alternative hypothesis is surely worth exploring: maybe the party that has been in power in Scotland for the last 15 years should take some responsibility for these outcomes instead of writing papers like this that seek to pin all the blame on being "not independent".

It seems this paper has been written as an exercise in talking down the UK whilst absolving the SNP Scottish Government of any responsibility.

 

4. The report assumes independence must be the answer; it doesn't provide a meaningful argument for why it must be the answer

We've seen above how the fiscal data for Scotland provides one of the most powerful arguments against independence, yet the paper has simply ignored it. This is symptomatic of a wider problem with the paper, illustrated by the following extract:

What do these other countries have that Scotland does not? They have significantly more economic policy autonomy and a much greater ability to tailor policies to their own specific circumstances. The evidence points to independence broadening the policy options available to address areas of relative under-performance and to make the most of Scotland’s potential. 

The first logical flaw here is that this paper doesn't compare Scotland with these countries - it compares them to the UK which obviously already has "policy autonomy".

But a more fundamental flaw is that there are obviously lots of possible answers to the question "What do these countries have that Scotland does not?". Each country has its own unique combination of history, trading relationships, natural resources, established industries, centres of excellence, skills, climate, geographic proximity to other markets, language, population density, political stability, cultural work-ethic and much more.

One could just as easily answer that question by saying those countries are not governed by a political party focused on fostering grievance and division, that they don't have a government that devotes energy to writing papers like this one.

If the logical flaw here isn't obvious, this exercise is no more meaningful than plotting the FIFA rankings for small countries who outperform Scotland and asserting that therefore the "evidence points to" their better footballing performance being because they are independent.

These are complex multi-variant questions, but a nationalist hammer will always see the nail of separatism.

5. Brexit Bad, Scexit Good?

The paper keeps reiterating that barriers to trade caused by Brexit will be economically damaging:

"Brexit [...] has set the UK on an economic path that imposes higher barriers to trade with Europe, and is likely to lead to slower growth .. " 

"the particularly damaging form of Brexit chosen by the UK Government has increased barriers both to freedom of movement and to trade with Europe"

"Brexit will almost certainly exacerbate at least some of the UK’s longstanding structural problems by, for example, further reducing the scope for productivity growth by establishing barriers to trade."

I happen to agree with that conclusion, but given the Scottish Government's argument for independence is predicated on re-joining the EU, the logical inconsistency here is obvious.

After decades of unfettered access to both the EU and the UK single markets, Scotland still exports more than three times as much to the rest of the UK than it does to the EU. If an independent Scotland were to join the EU, those barriers to trade would shift from affecting the 19% of Scotland's exports that go to the EU and instead impact the 60% of exports that go to the rest of the UK.

The evidence of economic damage being caused by EU/UK trade friction is an argument against independence, not for it.

6. I could go on ...

This blog post is already too long, so let me just make a last few random observations:

Statistical Gerrymandering: as with the SNP's previous Sustainable Growth Commission report, the countries chosen as comparator countries are pre-selected based on being "better performing" on the measures chosen. Portugal and Greece are absent, as are the Czech and Slovak Republics. Compared to the SNP's Growth Commission report, Iceland has been added but Hong Kong, Singapore and New Zealand have been excluded.  This "pick and mix" approach to choosing comparator countries may be reasonable when looking to learn lessons from "successful" models, but it means general conclusions about the performance of small countries can't be drawn. This approach also suggests that nothing can be learned from those countries which have been excluded from the comparator set - if they share some of the characteristics of the "successful" countries, can we really conclude that those characteristics are determinants of "success"?

Data conspicuous by its absence: there is nothing in the Paper about educational achievement or health outcomes (or indeed drug deaths). Why would the report exclude comparison of performance in areas of devolved competence?. 

Currency is not discussed: suffice to say none of the comparator countries studied are using the currency of another country (so obviously none of the EU members among the comparator countries are using the currency of a non-EU member). There will no doubt be a paper to come on currency - it will make for fascinating reading. 

Covid is referred to in the paper as a source of economic damage and disruption - but at no point is the UK's role in sourcing vaccines or providing financial support (eg. through the furlough scheme) mentioned. No consideration is given to the wider question of how an independent Scotland could handle another economic shock of that kind while simultaneously addressing its fiscal challenges, establishing its own currency and central bank, dealing with capital and talent flight, building the required machinery of state to function as an independent nation, etc.

The instability caused by the war in Ukraine is referred to only in the passing. The value of combined UK defence and security apparatus is not mentioned, NATO is not referred to at all and no consideration is given to the geopolitcal implications of breaking up and potentially destabilising one of NATO's three nuclear weapons states.

Nation Building: it is hard not to raise a quizzical eyebrow when the Scottish National Investment Bank (SNIB) is cited as an example of "institutional infrastructure that an independent country would need".  For the avoidance of doubt, it is a development finance company, not a banking institution. 

***

So there we have it. The first paper in a series intended to form "a new independence prospectus" focuses on comparative data but ignores data for Scotland, presupposes independence must be the answer and then - using logic that even a child could see is flawed - tries to suggest that independence is a logical conclusion. It doesn't bode well for what is to follow, but we await the next papers with bated breath.

Notes

1. For the pedants out there: one of the boxes lists reserved powers - but I don't think that really counts 

2. Footnote 2 on page 9 ...

which links to this: "The unsuitability of GDP as a measure of both the size of the Irish economy and its rate of growth has been well documented for over 20 years. The problems with using GDP in an Irish context were brought into sharp focus in 2016, when CSO National Accounts data recorded an increase in GDP for 2015 of just under 26 per cent, a year in which employment grew by 3.4 per cent. Since 2015, there is evidence of a widening gap between measured GDP, in the official National Accounts published by the CSO, and what could be considered as underlying domestic economic activity – i.e. economic activity conducted in Ireland that affects the employment and incomes of Irish residents. In 2021, GDP is likely to overstate the underlying rate of growth in the Irish economy by around threefold

3. These figures come from the Scottish Government's own National Statistics Publication: Government Expenditure and Revenue Scotland 2020-21. This includes data for 2019-20 which closely matches the UK data shown on these exhibits. [I've left Ireland on there to confirm that the data is consistently sourced.]