Playing the Long Game

As an adult, do you honour the promises you made to yourself as a child? I do.

That's why you'll sometimes find me lingering a little longer than necessary at the confectionery fixture in a garage forecourt shop. The grown man able to buy any sweets he likes is pausing to allow his 12 year-old self to appreciate the moment. As I promised myself I would.

That's why - after I've climbed into my car and thrown another Curly Wurly onto the pile of uneaten confectionery on the passenger seat - you'll see me pause and smile. I'm allowing the 16 year-old me to appreciate the sense of freedom that comes with being able to drive. As I promised myself I would.

That's why one day I'll stop working for money and start writing for pleasure. The teenager who chose maths and sciences over English - who chose the pragmatic over the romantic, who chose business over pleasure - will finally find time to just sit and write. As I promised myself I would.

The past may be another country, but we shouldn't forget the promises we made when we lived there.

***

For me, keeping promises-to-self is an important part of "playing the long game". Apart from motivating and rewarding patience and tenacity, playing the long game forces you to think through the long-term consequences of your actions: don't make promises you can't keep, don't make assertions you can't support and don't pursue short-term objectives by offering long-term hostages to fortune.

Which brings us - of course - to the current political landscape in Scotland.

The SNP have famously been great players of the long game, eschewing short-term ambition and personal agendas (some might say principles) in favour of their one over-riding objective of independence for Scotland. But something changed during the referendum campaign when they thought they could see their end-goal in sight: they got summit fever. Like the climber pushing on to the peak despite bad weather closing-in, they dismissed any concerns about how they'd climb back down. The summit was all that mattered, the implications of possible failure were ignored. They stopped playing the long game.

Long after it became clear that the economic case in the White Paper was the stuff of fantasy they pressed on. They gambled the economic future of 5 million people on a set of flaky figures, they had no currency "Plan B", they defended their oil revenue forecasts when it was simply no longer credible to do so. Of course if they'd achieved a Yes vote none of that would have mattered because there'd be no turning back. Disgruntled voters may have come to realise that they'd been duped by a false prospectus, but they'd have no choice but to suck it up.

They didn't seem to care that, in the event of a No vote, they were leaving a hostage to fortune by hanging their case on £6.8 - 7.9bn of annual oil revenues. They may not have expected the out-turn to be as bad as the £0.1bn we're now seeing, but let's be clear: long before the referendum date they knew that £7.9bn pa. was the stuff of pipe-dreams. So in their summit fever they took the risk that they could be left exposed as reckless chancers, their economic credibility in ruins. The only thing that could spare them would be some big, bold, distraction, something to draw attention away from the unravelling of their White Paper forecasts - something like the fiscal framework negotiations.

Because of course the SNP weren't alone in falling prey to summit fever. With polls swinging dramatically towards Yes and the referendum date looming, the major Westminster parties panicked and cobbled together the now infamous Vow. Whether the Vow was necessary to secure a No vote we will never know, but what we can be certain of is that it was loosely defined and wide open to interpretation. As a result it has offered the SNP a life-line, the distraction they so desperately need.

Instead of digesting the scale of economic trauma we'd be facing if the SNP's false prospectus for independence had won the day, instead of focusing on the SNP's extremely patchy record in domestic office, voters are now distracted by a fresh head-to-head battle between Holyrood and Westminster. It's us versus them, it's Scotland versus the rest of the UK, it's the SNP fighting for Scotland's best interests. They're slap bang in the middle of their comfort zone.

Except that even here the expedient political rhetoric they adopted during the referendum is coming back to haunt the SNP, leaving them open to accusations of rank hypocrisy.

They find themselves tenaciously defending the dynamics of the Barnett formula, tacitly accepting that all of the objectively "fair" alternatives are not as beneficial to Scotland as the Barnett formula is in practice. The fact that they have to lean so heavily on an extremely broad interpretation of the "no detriment" clauses gives a lie to the notion that the existing settlement is somehow unfair to Scotland. Of course because they're currently negotiating in the best interests of Scotland (at least from a short-term economic perspective) it's hard to see this causing them too much harm. That said, assuming a deal is reached that preserves the economic insulation offered by Barnett, it'll be interesting to see how they square this particular circle when next trying to ramp up the grievance rhetoric.

But the latest point of disagreement in the fiscal framework negotiations is the one where the SNP really have been hoist by their own petard. The point of contention is the assumed one-off costs of establishing the systems to administer Scottish taxes (and the ongoing costs of running them). This matters because the UK Government is committed to paying a share of these costs, so it's important to Scots that they're not underestimated.

In Nicola Sturgeon's latest letter to David Cameron she has stated that, just for the limited welfare powers currently being transferred, the set up costs would be "between £400m-£660m". The obvious problem here is that during the independence referendum the SNP argued that the entire administrative infrastructure for an independent Scotland could be set-up for just £250m. This glaring discrepancy has not been lost on those negotiating on behalf of the Treasury - you don't have to be great exponents of the long game to remember fractious arguments that took place less than two years ago.

It's worth recapping quite how aggressively the SNP fought their corner over this £250m figure at the time. The approach they took was one which was well tried and tested during the referendum. First they found a tame expert willing to sacrifice their credibility for a political cause. As this blog highlighted at the time (Dunleavy and the Costs of Independence), some quite remarkable logical contortions were performed by said expert to deliver what was a frankly meaningless £200m headline figure. Then Salmond went into full Mr Bombastic mode, waving this number as if it was indisputable proof that the Treasury (who had suggested a figure of  up to £2.7bn) were up to no good. He demanded an investigation - of course he did - into the Treasury's "grossly misleading claim" and pronounced that it was "now very difficult for people in Scotland to trust any information on the independence referendum issued by the UK Government."

Without gaining anything like the headline coverage that Salmond's faux outrage did, further work by Oxford Economics suggested the figure was in fact likely to be £1.5 - £2.0bn and even drew an admission from the tame academic Prof Dunleavy that the figure could be up to £1.5bn. The Centre for Economics and Business Research (CEBR) subsequently suggested a figure of "nearly £2.5bn".

It's hard to believe that anybody would have been put off the idea of independence by the thought of a couple of billion of set-up costs, but the SNP apparently couldn't resist picking a fight with the UK Government over this and had no qualms pushing the patently ludicrous figure of £250m. I guess it's in their nature.

Salmond's bombast succeeded in winning the battle of the headlines at the time, but maybe if they'd kept their eye on the long game they'd have realised that playing silly-buggers with important numbers like this could one day come back to bite them.

It normally does.

Dunleavy and the Costs of Independence

If you only look at an arbitrarily defined sub-set of the costs involved in setting up an independent Scotland you can produce a figure of £200m to save the First Minister's blushes ... but no matter how hard you try you can't disguise the fact that the true cost will be significantly more than £1bn.

Before getting lost in the detail of this post let me make a "meta" point: if independence is a good idea for Scotland the question of whether it "costs" £200m or £2.7bn is largely irrelevant; the benefits should dwarf any set-up costs.

But ...

So much nonsense has been spoken about the "set-up costs" of an independent Scotland the subject deserves attention because it tells us something about the role of experts and media spin in this debate.

At its simplest the narrative can be summarised as;

• 26/05/2014: HM Treasury Press Release
• "The Institute for Government (IfG) and the London School of Economics (LSE) have published independent analysis which puts the average cost of setting up a new policy department at £15 million. Applying this to the 180 departments the Scottish government states it would need could see Scottish taxpayers fork out £2.7bn"

• 29/05/2014: Salmond backs economist's £250m start-up price tag for independence
• "The First Minister backed estimates by London School of Economics expert Patrick Dunleavy, who has put the cost at between £150million and £300million"
• 22/06/2014: Transitioning to a new Scottish State by Prof Patrick Dunleavy (hereafter "The Report")
• "An independent Scotland would face immediate set-up costs of up to £200 million in creating new administrative structures that duplicate UK institutions"
• 24/06/2014: First Minister Alex Salmond (in one of his more self-righteous outbursts - and that's saying something) stated in a letter to David Cameron published in the Daily Record: 
• "Professor Dunleavy’s report this weekend has vindicated the Scottish Government’s position and demolished that of the UK Government."

So its pretty clear right?  Anybody reading the Scottish press - certainly anybody skimming the headlines - would come away thinking this is the story: Scottish Government vindicated, UK Government position demolished.

In fact - despite the SNP's continued bleating about "Mainstream Media Bias" - the way this story has been reported is a triumph of SNP spin.  They've won the battle of the headlines; they don't need to worry about the few thousand people who will actually bother to understand the numbers and inform themselves ... ah well: at least if you make it to the end of this post you'll be one of the informed few.

So what does Dunleavy actually say?

He's clearly extremely (and to some extent justifiably) irritated that Treasury took his department's name in vain when publishing their £2.7bn estimate.  It's worth noting (as I pointed out at the time > Lies, Damn Lies and Cost Estimates) that the Treasury's estimates may have been disappointingly crude but at least they made no attempt to present the numbers as anything more than scoping figures. Other than two specific cost estimates ("a new benefit system could cost £400m alone, and setting up a new tax system could be as much as £562m") they merely stated that costs if you assume 180 departments at £15m per department "could be up to" £2.7bn. They also provided a percentage of GDP scoping of £1.5bn

What's clear from the tone adopted in Dunleavy's report is that he has dropped any pretence at objectivity. Contrast his assertion that the UK Treasury "demanded that Alex Salmond produce cost data for things that could only have numbers attached to them by someone with the prophetic powers of the Delphi oracle" and that they briefed "spectacularly wrong information" with his somewhat more emollient attitude towards the SNP's behaviour "It is possible the £600m number [leaked estimate of annual cost of running the Scottish tax systems] in the Swinney memo is itself just a mistake". It's clear to any objective reader of the report that the Prof has chosen his side.

Having chosen his side the Prof is faced with a challenge: how to retain his credibility at the same time as producing a number that will save the First Minister's blushes?  He gives the game away pretty early in the report, on Page 5 in fact:

• "what we try to do here instead is to show what definite costs will be incurred in the short term - these are genuine "set-up" costs"

Do you see what he did there?  Just the "definite costs ... in the short term" followed by the blithe assertion that "these are genuine set-up costs".  Let's think about what the Prof is saying here.

• Only definite costs: anything uncertain is simply excluded.  I don't think you need to have "the prophetic powers of the Delphi oracle" to make reasonable assumptions around costs that are not definite; but this appears beyond Professor Dunleavy.  To be fair, he's Professor of Political Science and Public Policy Chair; he's not an economist.
    
• Only short term costs: the Report states elsewhere that "the transition will take more than seven years" ... but by restricting himself to "short term costs" he only includes costs he assumes will be incurred in 2016.  To say that the costs incurred after 2016 (to complete the creation of dedicated Scottish government infrastructure and systems) are in some way not "set-up costs" is frankly ridiculous.

He goes further in his desperation to create a small headline number; he creates categories of costs which in his arbitrary definition are distinct from set-up costs: "Transition Costs", "Investment Costs" and "Disentangling Costs". I mean this is hardly subtle. Let's be clear: there is no accounting definition of "set-up costs"; Prof Dunleavy has chosen to define these in a way that allows him to achieve the lowest possible headline number 

So let's go though each of these costs and see what the Prof concludes;

1. Set-up Costs: "they cover just the legal costs of setting up a department, agency or public body, and any additional accomodation/IT costs plus hiring in staff not needed before" -- mainly defence, foreign affairs, tax and benefits.  In the range of £150m to £200m
2. Disentangling costs: "governments on both sides of the border will need to de-merge data ... and perhaps change some back-office operational processes".  No estimate given
3. Transition Costs:  "when Scotland negotiates or contracts with rUK to keep doing part of processes.... only the extra cost of the contract negotiations and monitoring are new burdens borne by Scottish tax payers". No estimate given
4. Investment costs: "to be borne by Scotland in order for its policy makers to gain full control over the tax, benefits and defence areas, running all the back-office systems in a self-sufficient way".  In his executive summary he states these IT costs would "certainly cost several hundred million pounds" and that Treasury estimates of £962m (for welfare and tax systems alone) "do not seem implausible" but is keen to point out they are "not based on any careful analysis".

So he simply fails to provide any estimates at all for two of his categories of costs and offers no more than "several hundred million pounds" and a begrudging acceptance that £900m is not implausible for some specific IT investment costs.  It's worth mentioning here that ICAS in Scotland's Tax Future observed  "In New Zealand, for example, changes to the tax system which are less complex than those for an independent Scotland are costing around £750m. The cost for an independent Scotland could be significantly greater".  A leaked memo from Swinney (the one that Dunleavy is embarrassingly keen to dismiss as "just a mistake") stated that tax system costs would be "expected to lie in the region of £575 to £625m"

The Professors complex semantic gymnastics cause him some problems here. He states IT investments costs are "not just 'set-up costs'". Not just - so he tacitly accepts that even by his own arbitrary definition at least some of these costs are set-up costs.  He bends over backwards to try and justify keeping these IT numbers out of any headline figures: "these are investments"; "could well be cheaper and far more flexible to operate"; "systems might well be smaller, more flexible and more modern than those in the UK".  Well I would have thought that by definition they'd be more modern ... and yes they might be, they could well be better; but that doesn't mean the entire IT "investment" can be dismissed. If there is a Yes vote there will be hundreds of £ millions spent on IT development that otherwise would not be spent. Nobody is arguing that rUK would spend less - this is simply added "system" cost however you choose to allocated it. 

And there's more

• There are other costs that appear completely excluded by Dunleavy's analysis because they are not "immediate" (and so don't fit his arbitrary "set-up costs" definition) and don't fit any of his other cost category definitions either.  For example 
• He states "a full embassy network covering about 50 countries would come later" and so presumably are simply not included in these cost estimates at all
• Under the "Investment" heading he states "as the Scottish Defence Force builds up, they too can take over their own command and control, procurement and other complex back-office functions". He offers no cost estimates for this saying only "the UK Treasury has not given any specific numbers for defence" -- apparently the Prof will not make estimates in this area unless the Treasury have. I mean; we know he doesn't possess the prophetic powers of the Delphi oracle but you think he'd offer some estimate. 
• 43 existing UK government bodies have been completely excluded as "clearly or probably not needed".  He doesn't share which government bodies these are (let alone which are "probably" as opposed to "clearly" not needed). Which is a shame

In fact he doesn't share any of his workings to get to the £150 - 200m headline figure. This seems a rather surprising omission from someone who is so quick to criticise the UK Treasury's lack of "careful analysis". I guess we take his word for it.

Instead of sharing his workings, he instead chooses to dedicate much of the report to the topic of policy cost savings and defence spending; a subject that is so clearly "off-brief" it betrays his desperation to find ways to justify ignoring whole categories of costs to help the headline cause. Why not look at the other side of the equation: factor in increased costs of debt due to currency separation? Possible costs of lost EU rebates? Economic cost of employment loss due to firms relocating employment South of the border to avoid export and/or to mitigate future currency risk? The selectivity of Prof Dunleavy's vision is telling.

So what does his report actually tell us?

If you only look at an arbitrarily defined sub-set of the costs involved in setting up an independent Scotland you can produce a figure of £200m to save the First Minister's blushes ... but no matter how hard you try you can't disguise the fact that the true cost will be significantly more than £1bn and in fact look to be closer to the Treasury estimates than Alex Salmond's.

Addendum
I see that today (26/06/2014) an Oxford Economics Professor (Ian McLean) has come out to say "closer to £2bn than £1bn" and in response Prof Dunleavy now says "up to £1.5bn".  Those £200m headlines seem like a distant memory; let's hope the "Main Stream Media" is paying attention to these developments.

Our First Minister's statement that Prof Dunleavy "has vindicated the Scottish Government’s position and demolished that of the UK Government" is now shown to be nothing more the dissembling bluster many of us knew it to be.  We know he's very keen on demanding apologies;  I wonder if he'll apologise for knowingly misleading the Scottish people over the true costs of Independence?

Addendum II
Today (31/08/2014) the Sunday Times published findings from a Centre for Economics and Business Research (CEBR) study - commissioned by The Sunday Times - which concludes "The set up costs for an independent Scotland would run to nearly £2.5bn while taxpayers could face paying out a further £2bn on new currency arrangements" and points out the £2.5bn figure is "ten times greater than SNP leader Alex Salmond has previously suggested"