An Open Letter to Nicola Sturgeon

Dear Nicola

First of all let me congratulate you on being returned as Scotland’s First Minister. Your party received a lower share of the combined vote than in 2011, you have fewer MSP’s and no longer command a majority - but nevertheless you can rightfully claim a strong mandate to implement your manifesto commitments.

So I’ve been checking the 36 “Next Steps” that were detailed in your manifesto, and see that independence is only mentioned in the very last one.

It would be nice to think that the other steps - things like investing in our NHS, improving our education system and creating a positive climate for business - are indeed more important for you right now than revisiting a debate you so recently lost. But if the headlines¹ you’ve been making since the election are anything to go by, the question of independence remains a little higher than number 36 on your actual to-do list.

I’m teasing of course. The SNP’s formal constitution makes clear² that independence is the first of only two objectives for the party (the second being the rather nebulous “furtherance of all Scottish interests”) - so of course independence is high on your list.

That 36th step in your manifesto talks of ”persuading a clear majority of people in Scotland that independence is the best future for our country".

Whether or not independence actually is the best future for our country is obviously not a question you’re willing to contemplate. You start with what for you is an unchallengeable conclusion and you work your way back from there.

This is hardly surprising. You joined the SNP when you were 16 and became their youngest ever parliamentary candidate as a 21 year-old. It’s probably fair to say you’ve dedicated your entire adult life to the party, that you’re wedded to the cause. In your position you have to show an unwavering belief that no matter the question, no matter the economic context or consequences, independence must be the answer. You clearly can’t ask whether separation from the rest of the UK actually is in our best interests - it’s an article of faith that it simply has to be.

So here’s what you need to understand to persuade people like me, people who don’t do blind faith.

You need to understand that we noticed your economic case relied on £6.8billion to £7.9billion of oil revenues every year³. We didn’t fall for “oil is just a bonus” because we saw that we’d need those revenues (and more) to continue enjoying the high levels of public spending we currently receive. We’ve noticed what’s actually happened to oil revenues, so know your suggested gamble wouldn’t have paid off. Those of us who’ve dug a little deeper also realise that the high extraction costs associated with our relatively mature oil reserves means that even a dramatic oil price recovery wouldn’t see North Sea tax revenues return to their historic highs³.

You need to understand that we know the UK currently transfers over £8bn a year to Scotland³. You know that too of course, because you worked hard to ensure that transfer remained in place when you negotiated the fiscal framework with Westminster. Some of us don’t see this transfer as anything to be embarrassed about either. We know that revenues generated from oil found in Scottish waters allows us to argue that (cumulatively) we’re net contributors to the UK since 1980³. You need to understand that people who don’t share your ideological position see receiving funds from the rest of the UK now as the sensible result of neighbourly pooling & sharing of our resources then.

You need to understand that we know why you’ve stopped talking about “full fiscal autonomy”. We know that if we were to pay for our public expenditure with the taxes we raise in Scotland we’d have to find annual savings (or tax rises) of £8billion – 10billion a year just to match the deficit levels of the rest of the UK³. We remember that your own notoriously optimistic White Paper identified just £0.6bn of net savings (primarily from defence cuts) and you will have noticed how unenthusiastically voters reacted to Labour and the Liberal Democrats proposing we pay just £0.5bn a year more in tax.

You need to understand that we’ve also worked out that to raise those taxes simply by growing Scotland’s onshore economy faster than the rest of the UK would, even optimistically, take generations to achieve. We’ve worked that out because we read your Independence White Paper and we did the maths³.

You need to understand that we’ve seen through the barrage of misinformation that’s been spread on social media. We know that England’s costs aren’t unfairly allocated to Scotland in the GERS figures that your government produces. We know that myths about missing whisky export duties or taxes allocated based on corporate head office location are simply nonsense.

So before you look for a fresh set of Nobel laureates to try and come up with a workable currency solution, you need to address this simple truth: many of us have considered the idea that independence might be best for Scotland and have rationally concluded that, whatever the weight of emotional argument on either side, the economic case is overwhelmingly against separation. To be fair I’m sure you understand this way of thinking as as you seem to have grasped it in the context of the EU debate.

Of course you might rightly argue that this is about more than simple economics - but in that case you should have the courage and integrity to be straight with people about the fact that we’d be paying the economic price for independence for many generations to come.

This is the acid test of your faith: are you confident enough in your emotional case to be honest with us about the economic reality?

***

1. Recent Headlines

• Nicola Sturgeon: SNP leader rules out Holyrood coalition and vows to build independence case - IBT, 06/05/2016
• Scottish National Party leader Nicola Sturgeon says party will seek to 'persuade not divide' electorate on independence - Breaking news, 06/05/16
• Defiant Nicola Sturgeon; I’ll persuade not divide - Herald, 07/05/16
• Nicola Sturgeon vows to keep making the case for independence after failing to win an SNP majority - The National, 07/05/16
• Minority government will not be barrier to second independence referendum - The Press & Journal, 07/05/2016
• Nicola Sturgeon Confirms Intention to Relaunch SNP’s Independence Campaign - Herald, 08/05/16
• Sturgeon says summer independence Drive will go ahead - STV, 08/05/16
• Nicola Sturgeon Confirms Intention to Relaunch SNP’s Independence Campaign - Huffington Post, 08/05/16
• Nicola Sturgeon to launch new Scottish independence campaign - The Scotsman, 08/05/16

2. Extract from SNP constitution

The aims of the Party shall be:

(a) Independence for Scotland; that is the restoration of Scottish national sovereignty by restoration of full powers to the Scottish Parliament, so that its authority is limited only by the sovereign power of the Scottish People to bind it with a written constitution and by such agreements as it may freely enter into with other nations or states or international organisations for the purpose of furtheringinternational cooperation, world peace and the protection of the environment.

(b) the furtherance of all Scottish interests. 

I remain confused as to whether the personal statement from Nicola Sturgeon under the "constitution" link on the  SNP website has formally been adopted by the party as their new constitution. A very strange formal constitution and a very low-key change if it was

3. The Price of Independence 

It's Time For An Apology

During last week’s live TV leaders’ debate, Nicola Sturgeon had the opportunity to question Scottish Labour leader Kezia Dugdale.  This was a chance to highlight the defining policy differences between the SNP and Labour, to establish the terms of the election debate. The finest minds in the SNP will have agonised over how best to use this opportunity, the question will have been endlessly discussed and carefully rehearsed.

So what was the defining opening question? Our First Minister suggested that the Scottish Labour leader should “apologise” for “standing arm-in-arm with the Tories” during the independence referendum, that this somehow made Labour responsible for the Tories “cutting budgets, penalising the vulnerable”.¹  It’s hard to imagine a clearer illustration of the SNP’s single-issue focused, narrow-minded aversion to grown-up politics.

During the independence referendum, two political parties were willing to put generations of bitter rivalry to one side to campaign for something they both believed to be right. They agreed on an important issue, like grown-ups sometimes do. In the eyes of the SNP it appears this is something to be embarrassed about, something to apologise for. Apparently, if you agree with another party on anything that means you must agree with them on everything.  You’ll hear more sophisticated arguments in the school playground.

The suggestion that Labour are somehow responsible for Tory budget cuts as a result of campaigning together for a No vote is simply laughable. The fact that Labour (and the Liberal Democrats) agreed with the Tories on an issue as fundamental as Scotland remaining in the United Kingdom doesn’t make them responsible for the current Tory government, any more than the SNP standing for Westminster seats does. You don’t have to agree with Scottish Labour’s tax proposals to recognise that they offer a real alternative to Tory spending cuts.

The SNP themselves could choose to avoid “cutting budgets, penalising the vulnerable” through increasing the tax burden on those Scots who are in a position to afford it.  Scottish Labour, the Liberal Democrats and (to a more dramatic extent) the Greens all propose to do this, but the SNP don’t. The boldest proposal the SNP can muster is to not pass on a tax cut which would, for example, change the effective tax rate of somebody earning £100,000 a year by just 0.3%. This would translate into only £120m additional Scottish revenue next year, equivalent to less than 0.2% of total Scottish public spending.²

The party that offers to pass on the highest proportion of Tory spending cuts is the SNP, because they are the ones offering to do the least to prevent them through tax increases. On this basis the SNP are more responsible for penalising the vulnerable than any of the opposition parties.

Of course the SNP didn't want us to be here, they campaigned for a Yes vote. The latest Government Expenditure and Revenue Scotland (GERS) figures show that, had we voted Yes, Scotland would have started negotiating its independent life based on figures showing a deficit of £14.9 billion or 9.7% of GDP. That’s a bigger deficit than any EU country and twice as large as that we currently share within the UK. It’s now clear that the inevitable result of a Yes vote would have been far more severe cuts than those we're currently experiencing.³

In this context it’s worth reminding ourselves what the Independence White Paper (“Scotland’s Future: Your Guide to an Independent Scotland”) had to say on the matter: “On independence in 2016, Scotland’s estimated financial position will continue to be healthier than the UK as a whole. We will set out on a firm financial footing”.⁴

This statement has been shown to be flat wrong. Those who suggested at the time that this was an unjustifiable assertion were accused of “talking Scotland down”. Now it seems they’re expected to apologise for campaigning to avoid the economic trauma a Yes vote would have caused.

If we’re asking people to apologise for anything about the Independence Referendum, let's look at the oil revenue forecasts that were used to back up false assertions like the one above.

It's a matter of public record that the White Paper used two scenarios for oil revenues that were £2.5 billion and £4.0 billion a year higher than the Office for Budget Responsibility (OBR) were forecasting at that time. This isn’t hindsight, this is comparing forecasts that existed when the White Paper was being written.⁵ The SNP attempt to bluster over this by talking about oil price forecasts rather than oil tax revenue forecasts, but these are very different things⁶.

Given that the OBR have maintained a track-record of always being optimistic on oil revenue forecasts, the Scottish Government presented scenarios which at the time could have been fairly labelled “very optimistic” and “hopelessly optimistic”.

Which brings us back to the question of apologies and who should be apologising for what?

Those who campaigned for a Yes vote based on a set of hopelessly optimistic financial projections were responsible for placing the vulnerable at risk. Those who are too timid to make meaningful use of our tax powers are responsible for passing on Tory spending cuts.

Rather than demanding apologies, maybe it's time our First Minister considered offering a few.

****

This article appeared in the Daily Record on April 7, 2016

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Footnotes

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1. STV Leader's Debate ("Scotland Debates"), 29/03/2016 from 50:30
Sturgeon:

“Kezia, the last time you did a TV debate in this room was in the referendum. On that occasion you were in a [spits] team [/spits] with Ruth Davidson helping to ensure that Scotland was stuck with a Tory government we didn’t vote for. Now that you know what the Tories are doing to Scotland, cutting budgets, penalising the vulnerable, do you understand why people across Scotland are so angry with Labour? Do you regret your alliance with the Tories and will you take the opportunity tonight to apologise for it?”

Dugdale: [starts to respond]

Sturgeon [interrupting]:

“Do you regret standing arm-in-arm with the Tories?”

2.  BBC News Report on SNP Tax plans, 29/03/2016
In 2017-18 the SNP propose to increase the 40% tax threshold to £43,387 instead of £45,000 as will happen in the rest of the UK. This means for anybody earning over £45,000, £1,613 of their income will be taxed at 40% instead of 20% if we simply followed the UK's policy. This translates into £323 pa. of saving not passed on.


3. The Price of Independence, 24/03/2016

4. White Paper  page 4.

5. Oil Revenue Forecasts

• The OBR March 2013 report (p.110) showed total UK oil and gas revenue forecast for 2016-17 of £4.8bn
• Scotland doesn't get 100% of that figure - over the last decade Scotland's geographic share has ranged from 80% - 90% so Scottish revenue forecast for 2016-17 would be £3.8bn to £4.3bn
• The White Paper was published in November 2013 and the only oil revenue forecasts included were for the year 2016-17 (p.75)
• £6.8n was the low scenario: that's 57% to 77%, £2.5bn to £3.0bn higher than the OBR. This is the low scenario and it's more than £2.5bn higher than the OBR (than the OBR who had a track record of only ever being optimistic)
• £7.9bn was the high scenario: that's 83% to 105%, £3.6bn to £4.0bn higher than the OBR
• So the White Paper only included scenarios that were 50% to 100% (£2.5 to £4.0bn) higher than the OBR were forecasting at the time

6. Oil Revenue vs Oil Price
Oil tax revenues are generated by a tax levied on production profit. Production profit is driven partly by the dollar oil price but also by the sterling dollar exchange rate, actual extraction costs and total production volumes.  It’s possible to make identical assumptions about the oil price but reach dramatically different conclusions as to the amount of tax revenue that would result. The Scottish Government may have used similar price forecasts to the OBR but, given they produced vastly larger revenue forecasts, they must have been far more optimistic about exchange rates, extraction costs and/or production volumes.

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.

Barnett Fair?

During a brief appearance on BBC's Scotland 2016 last night I was asked about Nicola Sturgeon's letter to David Cameron (full version below) in which she highlighted the importance of the interpretation of the Smith Commission's "no detriment" clause in relation to the ongoing Fiscal Framework negotiations.

I had about a minute to try and cover this rather complex subject and - if I'm honest - I think I made a pretty decent fist of it. Judge for yourself: the relevant part starts at 25:30

With the benefit of the breathing space that this blog allows, forgive me while I let my belt out a notch and try to present a slightly more complete answer.

The key question here is: how do we interpret the Smith Commission's "no detriment" clause?

Even if you don't read the Smith Commission Report in full, I strongly recommend you read paragraph 95 from which I extract the following snippets (bold highlighting is mine);

95 (3): No detriment as the result of the decision to devolve further power; the Scottish and UK Governments' budgets should be no larger or smaller simply as a result of the initial transfer of tax and/or spending powers, before considering how these are used.

[...]

95 (4): No detriment as a result of UK Government or Scottish Government policy decisions post-devolution

(a) Where either the UK or the Scottish Governments makes policy decisions that affect the tax or expenditure of the other [...]

(b) Changes to taxes in the rest of the UK, for which responsibility in Scotland has been devolved. should only affect public spending in the rest of the UK. Changes to devolved taxes in Scotland should only affect public spending in Scotland. 

So there are in fact two "no detriment" clauses in Smith.

95(3) is very straightforward. If control over a tax that currently generates £1bn of revenue is transferred (and therefore Scotland gets to keep that revenue directly) then the block grant is reduced by £1bn at the same time; there is no detriment on the initial transfer¹.

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It's worth noting that if this "no detriment" principle was followed to allow all tax raising powers to be transferred to Scotland then there would still be a rump of block grant left at the end of about £8bn (because the "no detriment" approach protects the value of Barnett under current tax raising circumstances²). Readers of Chokkablog will be very familiar with this figure; if you're not please read "What's £8bn Between Friends"

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95(4) is conceptually simple but could be hugely complicated in practice.

First of all let's clear up a surprisingly widely held misconception: this does not mean that the block grant would get reduced if Scotland raised more taxes by using one of its powers (increasing income tax for example). This point should be self-evident (there would be no incentive to use powers to raise more taxes if any increase was offset by a block-grant reduction) but Lord Smith himself felt the need to offer the following clarification in the House of Lords in November 2015;

We arrived at a principle whereby, when taxes are raised, the money is kept and is available ...³

The tricky point this clause is trying to to address is the knock-on effect of changing a tax in one country on tax or spend in another. Here are just three illustrative examples (there are many more);

• If different healthcare charges were introduced in one country but not another, that could trigger health tourism, placing an increased cost burden on the "cheaper" country


• If Air Passenger Duty is reduced in Scotland that could cause loss of air traffic to (say) Newcastle Airport thereby reducing the UK's APD take


• If one country created a low income tax regime it could cause high earners to relocate to the other, thereby reducing the tax take in the country they leave

Clearly isolating and robustly quantifying effects like this will be extremely difficult if not impossible. The presence of these types of effects (whether intended or unintended consequences of Scotland using its devolved powers) is one of the main reasons why some of us counselled against the rush to devolve more powers. I covered many of these arguments while the Smith Commission was deliberating in 2014 and - having argued against devolving income, corporation and capital gains taxes or the minimum wage - I concluded

"... whilst "more powers" is a superficially attractive concept, the devil as always is in the detail.  "More powers" could - if not carefully calibrated - lead to the dismantling of the very benefits of Union that the Scottish people voted so overwhelmingly in favour of retaining."

But we are where we are. The Smith Commission agreement has to be honoured and the issues above should be resolvable by pragmatic political negotiation. As we'll come on to see; it's not as if the existing Barnett arrangement is flawless⁴.

But there is another far larger stumbling block to negotiation which has been raised by the SNP. In Nicola Sturgeon's letter to David Cameron (see page 2 below) she states;

"we are not about to accept risks [...] about which Smith made no recommendation"

So she explicitly accepts the points she's about to raise are not covered by Smith's recommendations before going on to say;

"The UK government's proposals for adjusting the block grant would require Scotland to grow receipts from devolved taxes more rapidly than the corresponding receipts in the rest of the UK simply to ensure its budget is not reduced. This does not meet the Smith Commission's no detriment principles.

We'll come back to this, but we've see what the Smith Commission explicitly covered in their "no detriment" principles and - particularly given she has already accepted that Smith "made no recommendation" about this area - the last sentence here is an unfounded assertion. She goes on to elaborate by saying;

In addition* we could not accept the risk that Scottish funding might be reduced below what it would have been under current funding arrangements simply as a result of differential population growth [...] We could not accept that relative demographic trends within the UK [...] should lead to a reduction in the Scottish budget

* I don't think this is actually "in addition", I think she's explaining why the highlighted problem arises

So what's going on here, why would "relative demographic trends" lead to a reduction in the Scottish budget and is it reasonable to "not accept" exposure to this effect?

To understand this we need to understand both the intended and the actual consequences of the Barnett Formula. Bear with me, this isn't as bad as you might be expecting - let's take it in steps and illustrate by example

• Scotland famously gets more spend per capita than the rest of the UK as a result of the Barnett Formula


• The intention of the Barnett Formula was to close that gap over time (what is sometimes referred to as the "Barnett squeeze") by allocating any growth in spend equally per capita between the two countries


• This works if both country's populations grow at similar rates. If you think about it, if all new Barnett money is allocated on a per capita basis then an increasingly large share of Barnett money becomes shared this way. The overall Barnett sum would trend towards being split equally on a per capita basis (the "unfairly" split base becomes less and less significant over time)


• But - and it's a big but that was not foreseen by Barnett - this doesn't necessarily work if Scotland's population grows more slowly than the rest of the UK. This is easily illustrated by example;
• Say Scotland's population is static but the rest of the UK's grows by 10%
• If the rest of the UK maintain spend per capita then their total spend rises by 10%
• Barnett means Scotland gets our population share of that 10% rise so our spend rises ...
• ... which means Scotland's per capita spend must rise (spend has gone up, population hasn't) even though the UK's hasn't. Good old Barnett.

This really matters. Scotland's population growth lags the rest of the UK; at the moment the way Barnett is structured means we actually benefit as a result. The effect is of course symmetrical - for the same reason we currently aren't suffering the same level of per capita spend spend reduction as the rest of the UK

So the problem for Sturgeon - the problem for Scotland - is that by devolving powers we inevitably shift some money away from being indexed to UK spend and towards being directly dependent on our (population's) actual tax revenue generation. Because our population growth is slower that means we lose out compared to the alternative of not devolving the powers and maintaining Barnett.

It seems to me that it was never the intention of the Smith Commission to have "no detriment" applying to "compared to the alternative of not devolving the powers", but by trying to retain this rather perverse Barnett effect that is what the SNP are arguing for.

There are three lines in Smith that seem relevant here

95 (1): ... the block grant from the UK government to Scotland will continue to be determined by the Barnett Formula

95 (3) (c): The future growth in the addition to the block grant should be indexed appropriately

95 (6): ...the arrangements should [...] be seen as fair, transparent & effective

Well that's not a massive help really is it? As the IFS have pointed out

"it is impossible to design a block grant adjustment system that satisfies the spirit of the ‘no detriment from the decision to devolve’ principle at the same time as fully achieving the ‘taxpayer fairness’ principle: at least while the Barnett Formula remains in place." 

For what it's worth I think the IFS reach this "impossible" conclusion because they are applying a broader interpretation of "no detriment" than that  intended by Smith. It seems clear to me that the specific demographic trend benefits of the Barnett Formula can only be retained in proportion to the block grant. A proportion of the currently "locked in" benefit of Barnett must surely be sacrificed in return for transferring funds out of the block grant when devolving control/retention of more taxes.

So what?

The problem here is that the Barnett Formula is - under current demographic trends - objectively unfair to the rest of the UK. It's therefore impossible to find a fair solution that both gives Scotland the upside of replacing Barnett money with direct control/retention of more of our own taxes whilst at the same time keeping the protection from demographic trends that Barnett affords us. The fiscal framework negotiation are simply highlighting the inherent unfairness in the way an unchanged Barnett would work in Scotland's favour if no further powers were devolved.

More broadly, these negotiations highlight the fact that with devolved power comes devolved responsibility. Part of that devolved responsibility means being more directly affected by Scotland's particular demographic challenges.

I fear that in their summit-fever rush for more powers the SNP made the mistake of believing their own grievance-rousing rhetoric about how badly the Union treats Scotland. The next few days of negotiation are critical: we're about to find out how high a price we're going to pay for the SNP's intemperate haste to seize more powers and weaken the bonds of Union.

*****

Full Letter from Nicola Sturgeon to David Cameron (With thanks to Glenn Campbell's Twitter feed)

1. There is a minor point of uncertainty here between what any given tax did raise in the prior year and will raise in the year it's tranferred (before it's potentially changed) - but that is a relatively trivial point of negotiation

2. This would be in addition to our per capita share of debt, so is not the same as saying we would have an £8bn deficit; we would effectively be able to run a deficict £8bn larger than our per capita share of the UK's

3. As is often the way in live debate he completed the sentence with a form of words that can be somewhat confusing: " ...and, when taxes are reduced, the money comes off the block grant".  The only interpretation of this that makes sense to me is that by "comes off the block grant" he means you'd just have to use the block grant as it exists (take the money off it) rather than that the block grant would be reduced (which would clearly be ridiculous)

4. As the IFS have pointed out, in addition to the relative population growth effect discussed here there issues around the treatment of business rates as well

Mind the Gap

Yesterday I appeared on John Beattie's Radio Scotland show to help "fact check" a couple of the statements made by Nicola Sturgeon during her interview with Andrew Marr (I wrote about it shortly after it was broadcast on Sunday: Marr Fails to Grill Sturgeon.).

The other person on the line from the studio in Bath was Stuart Campbell, custodian of Wings Over Scotland and a crowd-funded SNP apologist. If you're just interested in the facts you can skip the next section.

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I recognise the term "crowd-funded SNP apologist" may seem rather dismissive. I use it only because during the broadcast Stuart referred to me as "some dog food salesman". It was a predictable attempt by him to deflect from the point being discussed by getting a rise out of me and I wasn't going to waste valuable airtime by biting.

In his rapid-rebuttal blog post immediately after the interview he refers to me as "an amateur blogger with a keen interest in Pedigree Chum".  Quite why the fact that I'm an "amateur" blogger (translation: runs real businesses and does this in their spare time) is considered relevant I don't know. He's a "professional blogger" which presumably means he'll have the time to be far more informed and better researched than I am ...

Oh and the business of mine he's referring to? It doesn't sell Pedigree Chum - but then Stuart never has been overly bothered about factual accuracy

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You can listen to the part of the broadcast I participated in here. It was an interesting debate (do listen if you have time, the segment was about 15 minutes long).

The conclusion on question one was pretty unequivocal. The statement made by Sturgeon that we were testing was:

the projections the Scottish Government made were in-line with [chuckle] all [/chuckle] external projections for prices and for revenues …

This statement was shown to be false.

Stuart from Bath asserted that the statement was in fact true because the price assumptions used were in line with (among others) the OBR. Unfortunately - despite being a "professional" blogger invited on to comment on this specific question - Stuart appeared not to know what the revenue forecasts he was defending actually were.

I observed that at the time of writing the White Paper the £7.9bn oil revenue assumption the Scottish Government used for 2016-17 was £5bn higher than the £2.9bn the OBR were forecasting at the time. I suggested that it was therefore clearly incorrect to suggest that the SG forecast was in-line with all external projections for prices and revenues.

[I also pointed out that they weren't even in line with the OBR on price  - at the time of the white paper the OBR were forecasting $97 versus the SG's $113 - but that was beside the central point.]

I showed that the fact that the forecasts were not in-line with others' was clear at the time of the referendum by quoting the IFS May 2014 statement on "Oil: The Continuing Source of Disagreement"

The main point of disagreement is the different forecasts for revenues from North Sea oil and gas used. Our figures and the Treasury’s figures are based on the Office for Budget Responsibility’s projections. The Scottish Government report instead uses their own – higher – forecasts for North Sea revenues.

Stuart countered with some predictable ad hom against me and accused me of "obsessing with the OBR's projections" as opposed to "everyone else". Unfortunately he wasn't able to cite a single alternative oil revenue forecast made by anyone else to back up his assertion. At the time of writing he has still not (either on twitter or his blog) been able to cite a single alternative forecast that would back up the statement.

I've checked the SNP's website - they're famed for the speed of their rebuttals but I see nothing there to support the FM's assertion.

I've gone back to read the Scottish Government's Oil & Gas Bulletin from March 2013 which includes the £7.9bn figure for 2016-17. The only other revenue forecast they refer to is the OBR (in the 5 page document the OBR is mentioned 10 times).

We've established that the £7.9bn forecast was not in-line with the OBR and that the OBR (who are relied on by HMRC and the IFS among others) is a very significant "external forecaster".

So the statement about being in-line with all external forecasters when related to revenue forecasts in the White Paper is demonstrably false.

What interests me now is: were they actually in-line with any credible external forecasters when it came to forecasting North Sea Oil revenue generation in 2016-17? I'm sure they'll be able to dig out some from somewhere, but the fact that they haven't been able to yet speaks volumes.

For completeness: the second point under debate was something I agreed was - as narrowly stated - true because it was a truism. Sturgeon said.

Well, I've said our growth in onshore revenues over the next few years is projected to [chuckle] significantly [/chuckle] outstrip the decline in offshore revenues ...

As I pointed out - if you're flexible enough in your interpretation of a "few years" to include 8-10 years - then of course underlying GDP growth will eventually replace lost oil revenues. The point I attempted to make was that if you have to use all of the GDP growth over the next 8-10 years merely to plug the gap left by oil you can't use that GDP growth to invest in public spending. A corollary of this is that the fiscal gap that exists between us an the rest of the UK - widely referred to as the "black hole" - wouldn't be closed because of course the UK's GDP is also growing.

Stuart suggests that because I accepted Sturgeon's statement was a truism this somehow represented (I'm directly quoting his subsequent blog post here)

"categorical agreement from the Yes and No sides alike that actually the falling oil price makes an independent Scotland MORE economically viable, not less"

I mean this is really desperate stuff.

He justifies this because he quoted an unrelated BBC report (which I've now found here) which did indeed say:

The Scottish economy will continue to pick up pace, despite the lower oil price having an adverse impact on the oil and gas industry.

The Fraser of Allander Institute's regular forecast shows the boost to oil users in Scotland outweighs the harm to North Sea producers

It turns out that report was dated March 2015 (so nearly a year out of date) and also stated

The University of Strathclyde institute's report's conclusions run counter to the view of the Bank of England governor, Mark Carney.

He said he expected the UK economy to be helped by lower oil prices, while the Scottish economy would not be

So I've had a quick check to see what the Fraser of Allander Institute are actually saying now (rather than nearly a year ago). I confess I've only skim-read their latest Economic Commentary but I can't find anything in there that backs the assertion Stuart makes. Here are some highlights that caught my eye;

For 2016, we have also revised down our forecast to 2.2% from 2.3% in June, in recognition that the slow down in the rate of recovery will continue into 2016 as exporting continues to be difficult due to the high pound sterling and because of the lingering effects on Scottish onshore activity of the low price of oil.
[..]
As noted below, the effect of the slowdown in the oil & gas industry due to the low price of oil is also affecting the service sector in Scotland much more than the UK, for obvious reasons. And that is one contributory factor to Scotland’s weaker service sector performance recorded here
[..]
In Scotland, weakness in the service sector has been affected by the onshore implications of the fall in the price of oil hitting business services in particular as well as mining and quarrying.
[..]
The Survey also reveals the impact that the low global market price for Brent crude oil is continuing to have on the Scottish economy, with the performance of oil and gas service businesses dampening results in the Financial and Business Services sector.
[..]
Domestic demand in Scotland and the UK continues to be boosted by low inflation, helped by the fall in the price of oil and some other commodity prices, with the fall in the oil price being key, further boosted by the low price of imports due to the strength of sterling

So whilst there's recognition that there is a positive demand boosting aspect to the fall in oil price, I see nothing there to suggest that it makes "an independent Scotland more economically viable".

The rather obvious point here is that from the low point of now (with oil revenue this year estimated to be only £0.1bn) the economy boosting effects of lower oil price may be net positive - but relative to the indyref case that was presented (assuming £7.9bn annual oil revenue) it's frankly preposterous to argue that the chronic decline in the North Sea oil industry makes "an independent Scotland more viable"