The Great Escape

I'm just back from one of my regular business trips to China. These trips always provide a refreshing sense of perspective on the political and economic debates we have in the UK.

Based on my experiences on this trip I'm keen to write about democracy and state control of media.  I have a draft blog written about how even the structure of the Chinese language impacts the way we should think about our business and social interactions with Chinese business partners, colleagues and friends.

But these blog posts will have to wait, because today I feel compelled to focus on one topic: economic growth.

I return home to read of a predicted Scottish landslide for the SNP at next week's General election. If this happens (and it seems clear it will) this will be the greatest escape since ... well most of them didn't escape in The Great Escape but I'm too jet-lagged to think of an alternative analogy.  Let's just say it will be a great escape.

Since the referendum the publication of two sets of Scottish national accounts ("GERS") and the focus on the economic realities of Full Fiscal Autonomy (FFA) should really have nailed the SNP's economic nonsense once and for all.

I make no apologies for repeating this graph of the Scottish Government's own GERS data because it powerfully illustrates this point.

Without oil we consistently run a long-term onshore deficit gap to the rest of the UK of about £9bn. We are currently shielded from that by pooling and sharing with the rest of the UK - Scotland does not "suffer" this deficit gap currently.

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As an aside: some people react to this graph and say it's "just a snapshot". Below I have removed the most recent two years' data and highlighted the "snapshot" 5 years that were used for the Independence White paper. The Yes campaign used this period to justify their "we're independently fiscally as strong as rUK" rhetoric, long after more recent data became available.

Now *that's* what I would call taking a misleading snapshot.  To point out - as many of us did - that the figures actually showed how exposed Scotland's economy was to volatile oil income was dismissed as "talking Scotland down" or "suggesting oil is not an asset". Infuriating.

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So might oil come to our rescue?  This seems highly unlikely - not because the oil price will never recover but because their is an underlying decline in North Sea profitability due to rising extraction costs.  It's profit that get's taxed - so the North Sea tax yield has been deteriorating independently of the oil price decline.  Few people seem to understand this graph but I'll repeat it anyway - the black line shows the actual historic amount of North Sea tax generated for every $ of oil price.  The line declining shows the declining tax yield.  Contrast that with the red line showing the oil price and you should see my point.

It's quite possible therefore that North Sea oil revenues are in terminal decline. At the very least we are seeing a stark illustration of the fact that they cannot be relied upon as the basis for an independent Scottish economy. North Sea oil really does have to be considered as "just a bonus".

Faced with this harsh reality the SNP can no longer hope to deny the scale of the onshore deficit gap between us and the rest of the UK.

So back to this onshore (or "underlying") deficit gap. It's self evident that this gap is caused far more by higher spending on public services than by lower revenue generation.  Closing the gap by cutting public spending is the obvious easy fix (about 14% cuts across the board is all it would take) but hardly a vote winner so certainly not something the SNP would admit to contemplating. Raising tax rates wouldn't be a popular option either so the SNP are left grasping at the remaining straw left to them - they'll deliver "unprecedented" economic growth.

When asked quite how this will be delivered they reel off a series of tax cuts - cutting APD, reducing VAT on tourism and unspecified "targeted tax cuts to SME's".  In the short-term at least this would of course reduce the tax take and exacerbate the deficit problem but this is simply glossed over.  We're told we need to take a longer term view, look at the big picture, show some ambition and believe we'll grow our way out of this.

Let's put aside for a moment that there is little to suggest that the raft of tax cuts proposed would drive enough economic growth to offset their revenue reducing impact. Let's ignore the fact that if this strategy would work it would be as appropriate to the UK as a whole as it is to Scotland.  Let's run with the theory that the main Westminster parties are simply too stupid to realise that this political elixir is available to them.

Instead let's just ask three questions.

• How much economic growth would we need to close this deficit gap?
• How long would it take take to achieve that growth?
• What would we do in the meantime?
  

The "how much" question is easy to answer - we'd need to grow our onshore tax revenues by 16% over and above  the rest of the UK to close the gap. The SNP say they would cut taxes to achieve this growth which means our tax take as a percentage of GDP would decline. This means of course that we would need to see even higher than 16% relative GDP growth.

OK so what about how long?  I decided to search  the Independence White Paper for any indication of the growth levels that the SNP were aspiring to back then. After much trawling (head-shaking and teeth-grinding) all I could find was this gem on page 108:

If Scotland moved from the rates of growth it has experienced in the past to instead match the levels of growth of small European countries, the benefits for people in Scotland in terms of prosperity and employment would be significant. As an illustration, had growth in Scotland matched these other independent nations between 1977 and 2007, GDP per head would now be 3.8 per cent higher

So the illustration they chose to demonstrate the sort of difference we could expect to see from independence was 3.8% higher GDP growth over a 30 year period.

At that rate of relative economic growth it would take us about 120 years to close the gap.

I think it's reasonable to conclude that the SNP's claims that growth alone will address the onshore deficit gap fails this "sanity check" rather spectacularly.

So as we come to the third question: what would we do in the meantime?  There are limits to how far we can go with debt - I think I might have once heard some Nationalists suggesting the amount of debt we have now is too much - so the answer is extremely simple.  We'd have to dramatically reduce public spending.

The SNP campaign to scrap Trident but not to dramatically reduce the defence budget, they talk of "unfair cost allocations" without actually pointing to any material examples - and in fact they talk of increasing public spending (alongside reducing business taxes).

The SNP position is transparently, demonstrably, economically nonsensical - and yet a large proportion of the Scottish electorate appear to accept it.

The SNP know what they are doing of course.  Tell big simple lies and keep repeating them, offer the people a bogey-man to blame, sell the hope and ignore the reality. It is cynical, calculated political deceit.

What makes it worse is that the people who will suffer most if the SNP succeed are those to whom their messages appeal most; the worst off in our society.

It appears the scale of the SNP's deception may only be realised by the Scottish people when it's too late to do anything about it.  Of course by then the SNP aim to have broken up the BBC and to have their own state-controlled media in place.  Having just emerged from a week behind the Great Firewall of China, I have some perspective on the potential for politicians to exert influence over the masses through media control - but that is a topic for another day.

Response to "Independence and the Economy - The Facts"

You have probably been directed to this post because you have watched a rather slick video from "Business for Scotland" rather hilariously titled "Independence and the Economy - The Facts".  I'd provide a link but they block even the most mildly critical comments so I'd rather not boost their traffic figures. All of the exhibits used are captured below.

For those who are unaware, I have discussed this (self)interest group at length here > Who are Business for Scotland - this video represents a new low in their attempts to mislead the public.

Let me take each of their exhibits in turn

Notice how only tax take is mentioned not public spend?  This is because public spending was of course also higher over that period - if they showed expenditure as well it would be more informative and show a far more balanced picture¹ (which is of course why they don't). This carefully selected 33 year time period includes the 80's when the main surge of Oil revenues was experienced.  The Union has been around for over 300 years; imagine what these figures might look like if we went back 60 years? (unfortunately we can't as such stats don't exist because reporting that splits Scotland from UK only starts at the point of "it's our oil").

This is true if you take a crude GDP/Capita measure.  There's a problem with this measure as has been widely commented (e.g. see this Guardian article): because so much of our GDP is owned by overseas firms (Oil & Gas, Whisky, Banking, etc.) the benefit doesn't fall to Scottish citizens.  Per the link above GNP (which factors in where the "production" is owned) is accepted by economists as a better measure. On a GNP/Capita basis (see the primary research)  iScot is behind the UK (probably - it's hard to work out).  The weakness of GDP/Capita as a measure is illustrated by the fact that Ireland ranks above Scotland on that basis (while suffering high unemployment, declining domestic demand, record business closures etc.) - hardly a "wealthy country" in any meaningful sense.

BfS have been throwing this £8.3bn figure around for a while now. They claim GERS as the source but the number doesn't appear anywhere in GERS.  They provide no further justification and have ignored several requests to explain it. Given the BfS track-record it's hard to take this number seriously. Update: since writing this post BfS have been shamed into explaining this number - and it's palpable nonsense.  Their "argument" is that we should have incurred a further £8.3bn of debt and that would have made us "better off". This is like saying I would have been better off if I'd been allowed to run up a bigger credit card debt. Full explanation here > £8.3bn Better Off? 

Can you spot the "per term" small print?  So presumably this means £875m pa.  There is no back-up for this figure of course and the White Paper doesn't help.  The IFS concluded: "The White Paper outlined specific tax raising measures and spending cuts that would together save just under £500 million a year. On top of this there is an aspiration to raise a further £235 million through, as yet unspecified, measures to remove exemptions and reduce tax avoidance".  So £875m is a stretch.  For context: Nuclear is 5% of the UK defence budget and supports thousands of jobs in Scotland; scrap it and we'll be "anti-nuclear" so it's hard to see how we'll gain membership of Nato ("anti" is not the same as "non"). The House of Lords costs Scotland about £9m p.a. so is irrelevant in these figures. Every manifesto claims it will "reduce waste"; let's see how much waste Holyrood generates.  And what about the spending side of the equation?  The IFS go on to say "The spending increases and tax cuts described in the White Paper are more numerous and more costly – around £1.2 billion a year in the short term and potentially considerably more in the longer term if full aspirations for childcare and state pensions are met". So the IFS estimate that an independent Scotland would in fact be £500m to 700m worse off. This would at least help explain why John Swinney recently had to admit that in the first 3 years of independence an iScotland would actually be increasing borrowing by billions (£2.4bn in 2018-19 alone).

Developing renewable energy capacity requires massive investment; this currently comes from rUK subsidies.  If Scotland becomes independent the rUK would look to invest in their own renewable capacity (eg. offshore wind-farms) rather than those of a foreign country.  In addition the rUK would look to source cheaper renewable energy from eg. Iceland or Norway which offer a cheaper option than subsidising Scottish renewables (and the inter-connect capacity is coming on-stream to enable this). It's a downside of independence, a downside of breaking the single UK energy market.

Looks like they were running out of ideas by this stage.  This exhibit says *if* we increase exports by 50% then we'd create jobs. Hold the front page! What will drive this theoretical growth in exports is a mystery: the White Paper mentions that we will have a "a streamlined system of overseas representation focused on Scottish citizens and priority business sectors".  That means we will only partially replace the existing international diplomatic and trade network infrastructure. *If* indeed.

Cutting Air Passenger Duty? Hardly the most "green" policy I've heard of.  Lower VAT on tourism? That's a new one (not aware of it being Scot Gov policy) - wonder how that will fit with EU membership conditions around VAT harmonisation?

Well there are a lot of small independent nations and plenty of them are struggling too so not really sure what the point of this exhibit is.  And where's Ireland? It has an even better GDP/Capita than Scotland so following the logic of these exhibits it's "wealthier" ... there again we can't really say it's thriving can we?  And are we really comparing the Scottish Economy to that of Switzerland?

This entire video insults the intelligence of the viewer.

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1. This is the net fiscal balance over that period sourced from the Fiscal Commission Working Group; as you can see there was a burst of net contribution from Scotland to the rUK in the 80's (we were in a Union, we shared our Oil & Gas windfall as we should have done) but since then in fact we have effectively "kept our oil" in terms of higher expenditure. Let me restate that: for the last 25 years Scotland have effectively "kept our oil" despite being in a Union with rUK.

Look at our GDP/Capita; Look at Ireland

This post is a distraction from the main argument but I have felt compelled to write it in response to some of the more ill-informed Twitterati...

I don't have the time or energy to go off on a massive side-bar analysis of UK versus Ireland and the impact of the financial collapse, bailout and austerity measures on the people of Ireland.

There's a good reason why the SNP don't point to Ireland (or Iceland) anymore as their exemplars of what an Independent Scotland could look like. Most people get that it has been pretty nasty, so it's a pretty niche argument I'm responding to here.

More generally I think those who quote GDP/Capita figures in an effort to make some vaguely undefined point about how Independence would "make us richer" are wide of the mark for many reasons. I'm not going to start explaining (and to be fair in many case understanding) the myriad of different measures that you would need to look at to make a balanced assessment of "in which country, over what period of time, who is 'better off'?"   Well not in this post anyway;  IMHO it is a distraction from the actual question that matters: "what will change for Scotland if we separate from the UK?"  [See my posts linked on the right for more focused analysis on that - far more relevant -  topic]

I'm sure someone with more time than me could find some better data and more rounded perspectives; I'm not going to expend more energy on this question so let me just throw this out there

1. For those who believe GDP/capita is the "best" measure
I'm not arguing that GNP is the best measure ... but it's arguably a better measure of how the nationals of a country are faring.  Ireland ranks behind the UK on this measure but I don't draw any conclusions from that; it simply illustrates that it is easy to find measures with rankings to support different cases if that is the game you choose to play (I don't).

Source: Diffen

Update 1: since I originally posted this following article was published in the Guardian which elaborates on this very topic:  New Doubt Cast Over Alex Salmond's Claims of Scottish Wealth 

Update 2: since I originally posted this I stumbled across the Tim Harford article below;

Update 3: this analysis by economists John McLaren & Jo Armstrong reinforces the GDP/GNP point with actual figures for Scotland > Scottish Independence: 'Richest Country' Claims Disputed


2.  For those who say "whats wrong with just comparing GDP/Capita"
Extracted from The Impact of Anti-crisis measures and the social and employment situation: Ireland

• "GNP is a better guide to per capita income but even it barely rose and has fallen, by 15.3 % from peak. A far better way of evaluating real economic welfare is to examine domestic demand [...] it fell by a massive 24.9 % in four years. Other indicators of falling demand include falling retail sales, falling tax revenue (when rate increases are excluded), falling employment (down by 306,000), falling employment participation (down from 64 to 60 %), rising emigration, rising long-term unemployment (now 56.3%), rising under-employment (currently 25 %), rising business closures (up 20 % last year), and falling confidence, as orders fall per the purchasing managers' index. The economic collapse is the main cause for this fall in domestic demand, followed by the failure of the private banks" Dr. Peter Rigney, Feb 2012

3. If you want to look at some broader factors the OECD Better Life Index is pretty interesting

Examples from the Better Life Index:

• "Money": 
• In Ireland the average household net-adjusted disposable income per capita is $23,721 vs. $25,828 in the UK
• "Employment": 
• 59% of people aged 15 to 64 in Ireland have a paid job compared to 71% in the UK
• 62% of men are in paid work compared to 76% in the UK
• 55% of women are in paid work compared to 66% in the UK

I've chosen those two areas to illustrate my point, not to draw conclusions. My point is precisely that it is lazy and weak-willed to leap to snap conclusions from a handful of simplistic measures; I'm sorry, but it's just more complicated than that. 

4. For those who may not have noticed what has happened in Ireland since 2007

• " in November 2010 the government had to seek a €67.5 billion "bailout" from the EU, other European countries (via the European Financial Stability Facility fund and bilateral loans) and the IMF as part of an €85 billion 'programme'. The Irish State assigned €17.5 billion to this 'bailout' an amount that was equal to the Total Discretionary Portfolio of the National Pensions Reserve Fund."Wikipedia (I know... I don't have time to go a level deeper for primary sources)

5.  For those (like the risible "@bizforscotland") who fire out Tweets like this (as if its making some kind of point);

If you look at the actual original Forbes table "best countries for business" it clearly explains that it's  "based on country’s major stock index returns for 12 months through November 20 [2013]".  Do I really need to spell this one out?  The Irish stock market has still lost about 50% of its value since 2008 even following the growth in 2013; hardly a great case for mimicking that particular Celtic Tiger is it?