Growth Commission: A Simple Mistake

I'm indebted to Fraser Whyte who first spotted this rather significant error in the Growth Commission report and blogged about it here.

I trust Fraser - he's good - but what he identified was such a howler that I wanted to check and, having a bit more time, dig a layer deeper.  Fraser was right - if anything it's even worse than he thought.

So here we go, with references to the Growth Commission report indicated [thus]...

The largest claimed saving is for spending reductions compared to allocated UK government spending of 0.8% of GDP [B4.67]. The justification for this figure in the report is unclear and based on demonstrably flawed assumptions.

The report suggests [B4.57] a comprehensive 2 year review to analyse “where savings could be made where costs need not be replicated”.

The report then [B4.58] seems to declare the result of this proposed analysis by stating “This analysis shows an improvement in the public finances of around £1 billion [...] the equivalent of 0.8% of GDP”

An immediate concern here is that £1 billion is in fact 0.67% of 2016-17 onshore GDP¹, but the figure of 0.8% is the one the report goes on to use.

A bigger issue is the way in which the £1 billion figure is justified. It is explained [B4.58] as being made up of savings of £0.4bn and revenue benefits of £0.6bn.

The asserted potential saving of £0.4bn from costs “that will no longer be required” is supported by a few examples that total just £170m². Even the examples given are not well justified³ and include a sweeping “more than £100m for Whitehall running costs that will not need to be duplicated in Scotland”.

The revenue benefit of £0.6bn is explained as being associated with £2.4bn of “spending that is allocated to Scotland but takes place elsewhere”. Not only does this £2.4bn include costs that the report has just assumed will be saved (and so can’t be transferred), the assertion that all of this £2.4bn⁴ of spending currently allocated to Scotland takes place outside of Scotland is simply and very materially wrong.

To illustrate: the £2.4bn includes £484m [Table 4-2] of ‘Public & Common Services’ costs. In 2015-16 the equivalent figure was £467m, a figure we can break down in detail by using the GERS expenditure database.

This shows us that not only does this figure include all of the costs that the Growth Commission has explicitly assumed will be saved⁵, but that it includes spend which already takes place in Scotland.

The figure includes, for example, £234m⁶ of current expenditure on HM Revenue & Customs, this being Scotland’s 8.3% population share of the total UK figure⁷. In fact we know that 12% of HMRC headcount is currently based in Scotland⁸, so it is simply wrong to assume that Scotland would benefit from transferring this expenditure to Scotland.

In fact, in this specific example it seems likely that Scotland would see economic harm as a result of independence, as a greater share of HMRC employees are in Scotland than Scotland’s population share⁹.

This reveals another flaw in the analysis: not only are the Commission fundamentally wrong in assuming that no central spending allocated to Scotland takes place in Scotland, they don't consider the mirroring effect which is that there will be costs spent in Scotland that are currently allocated to the rest of the UK.  What the true net effect of this is would require deeper analysis - but we can be sure that the Growth Commission's analysis is simply and very significantly wrong.

So the assumed saving of 0.8% of GDP from spending reductions (compared to GERS allocated UK government spending) falls apart when tested and is clearly heavily overstated.

Two years they spent writing this report.

Two years.

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Notes:

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1. Using 2016-17 GERS figure of £150,025m for onshore GDP (£1bn is 0.63% of the £159,389m total GDP figure)

2. [B4.58] £50m associated with running costs of the House of Commons & House of Lords, £20m for the Scotland Office and “more than £100m for Whitehall Department running costs”

3. According to the 2015-16 GERS expenditure database, a total of just £36m is allocated for House of Commons and House of Lords; the Scotland Office figure is £23m

4. This figure appears to be made up of total allocated spending [Table 4-2] of £4.7bn less international affairs (£0.8), all economic affairs (£1.0bn), and we presume accounting adjustments and EU transactions (£0.5m)

5. House of Lords & House of Commons (£36m), Scotland Office (£23m) and various “Whitehall Costs” including Cabinet Office, DfID, HMRC, HMT etc.

6. This £234m is categorised as “non-identifiable expenditure” in the database, but this does not mean the expenditure takes place outside Scotland. We suspect this may have been the cause of the Commission’s misunderstanding

7. £2,838m, defined in the GERS expenditure database as: HMR041-S041A003-UK-TES_CUR-Non-ID-CG-SUB010100

8. Institute for Government, “Governing after the Referendum” - Figure 2, page 24

9. Of course to answer this question properly we’d need to know the share of spend, not just share of employment – but the point at issue here is that the Growth Commission’s assumptions are clearly and materially flawed.

Crazy Horses

Over the last few weeks the SNP's strategy for overcoming the awkward economic realities that stand between them and independence has become clear. It seems Sturgeon has decided to harness up the nationalist troika to three wildly incompatible horses.

On the right, former MSP turned corporate lobbyist Andrew "Acceptable Face of Capitalism" Wilson.

On the left, current Westminster MP George "Smash the System" Kerevan.

In the middle, a Pantomime Horse to amuse and distract the masses.

Each speaks to different constituencies

1. Andrew "Acceptable Face of Capitalism" Wilson

Andrew has been appointed Chair of the SNP's Growth Commission, tasked with creating a rational plan to "boost economic growth" and "consider the most appropriate monetary policy arrangements to underpin a policy for sustainable growth"

Given that the economic case presented for the 2014 independence referendum is now widely accepted as having been embarrassingly weak, you might think they'd use this opportunity to inject some fresh thinking, garner input from across the political spectrum and seek advice from a broad range of business voices. Then you'd look at the make-up of the commission and think again.

From the world of politics we have two former and five current SNP politicians alongside two leading lights from Yes Scotland¹. It's hardly surprising that a serious economic commission doesn't include anybody from the Scottish Socialist Party, but the Greens must surely be miffed that their "unconditional support" for independence hasn't been rewarded with at least a token seat at the table.

Add to that three academics - two of whom at least have nailed their colours pretty firmly to the SNP's mast² - and you start to get a sense that the Commission's thinking might be a little stale.

To be fair, they do also have two active Scottish businesswomen with real entrepreneurial credibility. They're pretty focused on the domestic Scottish scene and one of them was a proud champion of the discredited SNP front "Business for Scotland" (and holds some pretty "out there" views on hidden oil fields), but we'll let that pass³.

I confess I have some sympathy for Andrew. He is by all accounts a decent and intelligent chap, but his loyalty to the cause requires him to cook up a package of policies and then suggest they'll deliver unfeasibly high rates of growth.

The problem he faces is that one of the few certainties of independence is that Scotland would lose what is currently a £9bn annual fiscal transfer from the rest of the UK. To offset that transfer through growth alone requires Scottish GDP to grow by 17% more than the rest of the UK⁴. This isn't what would be required to eliminate the deficit, it's just what would be required to get us back to the level of deficit we currently share within the UK.

Coming up with a credible plan to deliver cumulative 17% superior economic growth in anything less than a few generations is some ask, particularly given we start from a position of slower growth⁵ and would need to overcome the negative impact of separation from our largest export customer (the rest of the UK). 

If all that wasn't hard enough, the Growth Commission is haunted by the ghost of SNP proclamations past. Their own independence White Paper proposed that a growth rate improvement of 0.12% a year would be a reasonable figure for the "bonus of being independent". It was a figure based on some pretty dodgy analysis, but the SNP liked it so much that they cited it five times in the White Paper⁶.

At plus 0.12% a year, it would take about 130 years to deliver the cumulative 17% superior growth required just to offset the existing fiscal transfer (through economic growth alone).

Andrew has his work cut out.

The Commission will surprise no-one by recommending some form of Sterling currency board and suggesting enormously optimistic growth assumptions based on a strategy of tax-cutting, investment incentives and financial services wooing. Reassuring messages will be whispered in the direction of big businesses and the wealthy - the Greens and Yes supporting enemies of neoliberalism will just close their ears.

2. George "Smash the System" Kerevan

You might ask why George (as a trained economist and member of the House of Commons Treasury Select Committee) isn't on the Growth Commission. The simple answer is that George is a bit too radical in his outlook to be allowed near the SNP's real plans, so he's kept on a loose rein and encouraged to make noises which appease the radical left and keep the anti-capitalists on side.

Regular readers of Chokkablog may recall that George is on record prior to his election as an MP as hoping to achieve the implosion of the UK economy: "after Home Rule, independence will follow as the UK economy implodes [..] I would relish the chance to take Scotland's fight to the enemy camp"

It appears that time at Westminster has done nothing to dampen George's revolutionary ardour. Let's look at some highlights of Citizen Kerevan's outpourings over the last few months:

• In July - he accepted the need for spending cuts under independence: "a separate Scottish currency pegged to sterling would necessitate fiscal consolidation to assuage the foreign exchange markets. It would certainly be doable, but would require independent Scotland to cut its budget coat to fit its fiscal means." - Cityam
• In August - he called for a revolution:"Popular, if often incoherent, opposition to this mad, mad system has suddenly boiled over into open revolt. Not enough revolt, in my opinion, but a line has been crossed. [..] The neoliberal order needed dismantling" - The National

• In September - he denied the need for spending cuts, converting instead to the growth cause (while suggesting that the higher public spending we enjoy in Scotland is due to "incompetence of Westminster"): "Growth is the only sure route to closing any temporary budget deficit bequeathed to Scotland by the economic incompetence of Westminster." - The National
• In October - he abandoned the growth cause and shifted into full-on "smash the system" mode (volunteering the Scots to be used as lab-rats in the process)

“a new political economy using Scotland as a laboratory – an agenda that rejects not simply the neo-liberal variant of capitalism but the entire system itself. [..]  to embed a non-capitalist economic practice [..] Such an outcome will not be stable. There will be social friction and resistance from the prevailing capitalist order

The era of neoliberal tax cuts and low interest rates is over", corporation tax should not be used as “a crude bribe to secure inward investment” there should be greater taxes on wealth, despite “an inevitable response from the business class and rich that such a move will hurt ‘incentives’, discourage inward investment and ‘force’ high net wealth individuals to migrate”  

- the Herald Oct 2016

Of course anybody vaguely paying attention knows that in fact the SNP embrace capitalism and are fans of "neoliberal tax cuts". The only significant tax moves they've suggested recently have been to cut taxes (corporation tax, Air Passenger Duty, VAT on tourism, "use the tax system to improve incentives for investment" etc.)⁷ and they balked at the idea of raising the top rate of tax to 50p (as Scottish Labour and the LibDems proposed).

So why is George allowed to go so far off-script in a party famous for its message discipline? He's allowed to because he serves a valuable purpose pacifying "useful idiots" like those at Radical Independence and The Common Weal. The SNP would never translate Kerevan's anti-capitalist ramblings into policy - he's just making the right noises to keep the "radical left" on board.


3. The pantomime horse

So with two of their horses so obviously pulling in different directions, the SNP need something to divert the attention of the masses, to stop them asking if either actually makes a coherent and credible economic case.

No problem: the actors inside the costume may change, but the red-nosed, trouser-dropping, reality-denying antics of the SNP's pantomime horse is a real crowd-pleaser. Let's look at who has donned the paper-maché head⁹;

• Here's Finance Minister John Swinney MSP claiming (during the indyref) that the early years of independence would coincide with a "massive North Sea oil boom"
• Here's journalist Paul Kavanagh perpetuating the myth of missing whisky export duty (no such thing exists) and asserting that VAT is allocated in GERS based on corporate head-office (it isn't)
• Here's journalist Kevin McKenna getting just about everything possible wrong about the IFS's analysis of Scotland's economy (analysis since fully vindicated by actual figures)
• Here's Alex Salmond telling us that an independent Scotland would have been £8bn better off (where "better off" means £8bn further in debt)
• Here's tame academic Prof Dunleavy trying to justify a figure of £200m for the set-up costs of an independent Scotland (a figure nearer £2bn is now widely accepted as more realistic)
• Here's Joan McAlpine MSP telling readers of the Daily Record that Scotland misses out on whisky tax revenue (we don't, it's correctly fully allocated in GERS)
• Here's (deputy convenor of Holyrood's finance comittee) John Mason MSP admitting to not knowing the difference between debt and deficit
• Here's Stuart Hosie MSP (3 min 20 sec in) blatantly lying about oil revenue forecasts
• Here's the SNP's favourite economist Professor Hughes Hallet suggesting the GERS figures don't conform to international standards (because he doesn't understand that oil taxes are raised on N Sea profits, not revenues)
• Here's Angus MacNeil MP⁸ spreading obvious lies about what costs are attributed to Scotland in GERS (London infrastructure costs aren't)
• Here's Alex Salmond again, this time telling people we could save £30 - 35bn from UK costs attributed to Scotland in GERS (the real figure, using his own optimistic examples, is less than £0.5bn a year)

Isn't it just hilarious? Doesn't this pantomime horse galumphing around the stage make you forget about all the real economic arguments?

It's worth noting that these performances don't just the keep less-than-fully-intellectually-engaged Yes voters amused and well misinformed - they also ensure opponents spend their time and energy debunking myths instead of engaging in substantive and constructive debate; it takes a lot less time to make up nonsense than it does to robustly disprove it.



So there we have it. Three horse pulling in different directions. A smorgasbord of truths, half-truths and downright lies. A menu of clearly incompatible options to suit all political tastes. Whatever you need to hear to make you support independence, you'll be able to find somebody from the Yes camp saying it.

So far Sturgeon has done an impressive job of holding the reins of these three horses and providing at least the illusion of being in control - but is she really driving the carriage or simply hanging on for dear life?

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Notes

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1. Growth Commission Membership - SNP/Yes Scotland members

2 x Former SNP politicians

• Andrew Wilson (Chairman)
• Jim Mather

5 x Current SNP politicians

• Kate Forbes MSP
• Derek Mackay MSP
• Shirley-Anne Somerville MSP
• Roger Mullin MP
• Cllr. Marie Burns

2 x Former Yes Scotland activists

• Dan McDonald - Yes Scotland advisory board
• Mark Shaw - consultancy role with Yes Scotland

2. Growth Commission Membership - Academics

• Prof Andrew Hughes Hallet - known to readers of the FT (and this blog) as a man who doesn't understand how North Sea taxes work and a member of the SNP's old Fiscal Commission
• Prof Iain Docherty - a man quick to leap to George Kerevan's defence when he asserted that GERS understates Scottish tax revenues - although to be fair he backed down equally quickly > twitter exchange
• Prof Catherine Schenck -  seen here offering 7 minutes on "the concept that Scotland would ever have monetary independence is rather an illusion" without a single mention of the lender of last resort function or foreign exchange reserve requirements (issues explained by Prof McDonald here and here)

3. Growth Commission Membership - Businesswomen

• Marie Macklin CBE -  chairwoman of The Klin Group. A Scottish property investment business (founded by her father). Under her stewardship "The KLIN Group is emerging as an ambitious, entrepreneurial adviser, bringing ideas, imagination, knowledge and resources to help businesses and organisations to optimise their potential" - seems good to me.  What seems less good to me is what I learn from a quick scan of her twitter feed: she distrusts the CBI, is a proud member of the discredited SNP front "Business for Scotland" (and is a keen recruiter for them and thinks they are a reliable source of facts). She also thinks the bbc is biased and appears to think there are secret oil fields in the Clyde (also here) and that oil will last another 100 years (because Salmond said so). She also (perhaps unsurprisingly) seems to be a big fan of tax cuts.
• Petra Wetzel - an entrepreneurial businesswoman with a number of Scottish hospitality venues and an emerging beer brand > The Big Profile: Petra Wetzel, WEST

4.  Price of Independence

"£9bn pa represents 13% of total Scottish public spending and is greater than Scotland’s entire education & training budget; it’s 17% of total Scottish onshore revenue and 77% of the total amount Scotland raises in income tax [..] to close the deficit gap with the UK – to be in a situation where becoming independent wouldn’t make Scots immediately worse off – would require Scotland to out-grow the rest of the UK by 17%"

5. Scotland's GDP growth

6. The Scottish Government's own White Paper: Scotland's Future: Your Guide to an Independent Scotland had a go at scaling how much faster an independent Scotland might grow when no longer shackled to the UK. In fact they were so pleased with their analysis that they quoted it five times (pp 23, 43, 88, 375, 619). Here's the wording from page 23;

"Similar countries to Scotland have seen higher levels of economic growth over the past generation. That is because they have the bonus of being independent and are able to make the right choices for their nation and economy. If Scotland had matched the levels of growth of these other independent nations between 1977 and 2007, GDP per head in Scotland would now be 3.8 per cent higher"

I think we can safely assume that the countries and timescale used were selected to make the strongest possible case - after all, why stop at 2007 when more recent data was available? - and just in case you doubt if that is a cumulative 30 year figure, it's clarified on page 619:

"The average rate among small European countries was 2.61%, a gap of 0.12% each year. Over a 30 year period the compounded effect of this gap totals 3.8% of GDP"

7. SNP tax cutting proposals

"giving Scottish businesses a competitive edge by providing a clear timetable for reducing corporation tax by up to three percentage points; and improving international connectivity by cutting Air Passenger Duty by 50 per cent" - White Paper (p.6)

"One option for future governments to support manufacturing and boost innovation will be to use the tax system to improve incentives for investment, for example through more generous depreciation allowances for key growth sectors in Scotland." - White Paper (p.88)

"Tax based incentives that are aimed at encouraging investment in innovation activities can be applied to either expenditure (related to R&D) or income that results from investment in R&D. Following independence this Government will examine how best to develop and target such tax relief to encourage Scotland’s innovative industries" - White Paper (p.102)

 44 SNP MPs call on Treasury to reduce tourism VAT

8. Angus MacNeil MP retweeting a ludicrous meme (just one example of many)

9. This is an incomplete list of course - I've written entire blogs on the falsehoods perpetuated by the likes of Business for Scotland and Wings Over Scotland, the likes of Angus MacNeil and John Mason are serial offenders and there are many journalists I've not mentioned here who have shown themselves to be naively susceptible to an SNP press office briefing