The Emotional Case for Union: Articulating an Implicit Moral Contract

Whether you’re still mourning the result of the EU referendum or are one of those who sees Brexit as some brave new dawn (I know you’re out there), if you’d rather not see the break up of the UK then take a moment to consider this: Brexit is an illustration of the price we pay if we neglect to counter relentless grievance-mongering against a long-standing Union.

Alternatively, if you’re against Brexit but in favour of Scottish independence based on some emotional or “democratic deficit” based argument, I hope what follows may at least give you some pause for thought.

If however you’re in favour both of Brexit and Scotland leaving the UK ... well I’m afraid I can’t help you, best you stop reading now.

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It’s probably fair to suggest that what we saw with the EU referendum was the rational economic arguments against Brexit losing out to the emotional “taking back control” arguments in favour. Conversely, the Scottish Independence referendum was won by many voting No because their head was convinced by the economic arguments against, despite their heart being tempted by the emotional case for.

That’s partly because the economic arguments against Scottish Independence were an order of magnitude more compelling that those against Brexit: however bad you think Brexit is for the UK, exiting the UK would be so much worse for Scotland.

But what I want to focus on here is the nature of the emotional arguments in favour of Union, and the fact that far from being distinct or conflicting, the economic and emotional cases are inextricably intertwined. The economic case only exists because of the emotional case, it’s just that the emotional case is so deeply ingrained in most of us that we struggle to articulate it.

This debate matters and it matters now. If we wait until the imminent threat of another referendum before bothering to make the positive emotional case for the UK, we risk seeing Scotland’s relationship with the UK following the same path as the UK’s with the EU. Relationships suffer if emotions are neglected; a good marriage needs to be worked at.

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Let’s start by looking at the SNP’s core - and superficially compelling - emotional argument:

"The SNP believes that decisions about Scotland’s future – about our economy and society – are best taken by the people of Scotland: the more powers we have in Scotland the more we can achieve for the people who live here" - SNP 2015 Manifesto

In part this formulation simply relies on the reader’s sense of identity meaning that “we” and “Scotland” are emotionally synonymous. Of course those who are happy to think of “we” as the people of the UK can simply substitute “the UK” for “Scotland” in the phrase above and - if you’re so minded - this phrase then becomes an articulation of why we should leave the EU. There’s an obvious irony to the fact that the SNP’s core argument for independence is effectively the same as UKIP’s “take back control” argument for the Brexit the SNP so vehemently oppose.

But what of those who intuitively have a primarily Scottish sense of identity? For those people, the fundamental issue should be that the implied logical connection between the SNP’s statement and the conclusion that Scotland should be independent doesn’t actually exist; you can agree that “decisions about Scotland’s future should be taken by the people of Scotland” without concluding that Scotland should be an independent country.

Representative democracy allows us to decide how best to define which group of “us” should make what decisions. We decide that some issues make sense controlled at local council level, some by the constituent nations within the UK, some by the UK as a whole. Of course many also believe that some are better taken at an EU level or by the United Nations. So what some lazily term a “democratic deficit” others see as simply the result of deciding to participate in a democratic hierarchy that allows some decisions to be taken as part of a larger whole for a wider common good.

The biggest weakness in the SNP’s argument is of course the fact that the 2014 independence referendum took place and that the result was so clear. That vote wasn’t just about self-determination, it was self-determination. It was the purest possible demonstration of the people of Scotland making a decision about Scotland’s future – and we decided that our economy and society would be best served by remaining part of a wider democratic union. Just because the SNP don’t like that answer doesn’t make it not so.

The SNP would of course be quick to point out that no decision can be permanent and since the indyref there has been “material change” with the EU referendum vote threatening to see Scotland “dragged out of the EU against our will”.

Of course there have been other “material changes”, not least those to the economic case for independence. The oil revenue forecasts used by the SNP to underpin their fiscal projections are now known to have been recklessly optimistic and the SNP have accepted that they need a more credible answer to the currency question than simply saying “we’ll keep the pound” (but have yet to find one). The deafening silence from the “SNP Growth Commission” suggests they’re struggling to find a palatable strategy for maintaining an independent Scotland’s fiscal sustainability without slashing public services and while also finding the capacity to invest to grow the Scottish economy faster that the rest of the UK. They may be finding that it’s a lot easier to complain about how things are than it is to outline a credible alternative for how things should be.

The Nationalist’s biggest economic problem though is Brexit itself. Their previous assertion that Scotland’s trade with the rest of the UK would be unaffected by independence has gone from being at best dubious to now completely indefensible. If Brexit means the UK becomes subject to trade barriers with the EU, then a decision about Scottish independence becomes in part a decision about which trading block we favour: we would have to choose between the UK and the EU (or quite possibly risk ending up in neither). The fact that we export four times more to the rest of the UK than we do to the rest of the EU is now a pretty compelling economic argument against Scottish independence.

So the economic case remains the Nationalists Achilles’ heel, and they know it. In the press this week Ian Blackford MP (Leader of the SNP in the House of Commons) was quoted as saying that the SNP must convince Scots voters that their “economic future is better as an independent country”. Given they’ve demonstrably failed to do so to date, you’d think the SNP might at least consider the possibility that they’ll need to convince people that having a worse economic future is a price worth paying for independence

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But just as the Nationalists need to work on their economic case, so those of us who intuitively feel that the Union is “a good thing” need to find better ways to articulate and communicate our emotional case. One blog certainly won’t do it, but let me make a tentative start.

The people of the UK are bound together by much more than a common language and the economic self-interest of a shared currency and the UK-wide single market. We have a long history of common endeavour and a shared a sense of responsibility to look after all of those who live on these islands.

This results in what we might term an implicit moral contract that most of us accept without ever really considering it. This assumed contract means that wherever you live in the UK, whatever your background, class or economic circumstances, we will pool together to look after you.

There are standards of education you should receive, healthcare you should access, public services you should be able to rely on, a sense of security you should feel and a standard of living you should be able to maintain which should exist wherever you live within the UK. These things should not be based on the economic contribution you individually (or your region collectively) make. As a matter of principle we pool and share resources to ensure that basic standards are guaranteed - and over time raised - for all of “us” in the UK.

Needless to say, politicians will make their own cases for how best to fairly go about it and we can argue the merits of their different strategies all day long - but I’d hazard that few of them would disagree that their aim is to deliver against this contract, that it transcends party politics.

This moral contract lies at the heart of the emotional case for maintaining the Union and fairly obviously underpins the economic one. If you accept this implicit moral contract, questions like “why should we share our oil?” or “why should Scotland need fiscal transfers from the rest of the UK?” just seem daft: pooling and sharing happens because it’s the morally decent thing to do.

Similarly the flaw in the thinking which suggests “full fiscal autonomy” for any constituent part of the UK is some kind of ideal end-game becomes clear: if we economically ring-fence any geographic area of the UK we necessarily break this contract. Fiscal transfers are not a symptom of regional economic failings, they're the tangible result of a positive moral choice.

Referendums certainly (and general elections possibly) can offer us the chance to choose to narrow the definition of the “us” that this moral contract applies to.  Just as the EU referendum appears to have shown that many believe “we” shouldn’t include our EU neighbours, so it’s fair that Scottish Nationalists are free to argue that “we” shouldn’t include those with whom we share these islands.

Those committed to breaking up the UK will keep working towards it. Those of us who disagree with them, who believe that more unites than divides us on these islands, who believe that this implicit moral contract is something precious to be cherished - it's time we got to work too.

GERS 2014-15: Reasons to be Cheerful

Summary

The Government Expenditure & Revenue Scotland (GERS) figures for 2014-15 were published this morning¹. If you've followed Chokkablog then the figures will come as no surprise.

All figures quoted in this blog use the Scottish Government's preferred geographic share definition for allocating oil revenues (Scotland is shown keeping all of "our oil") and have been deflated (put in real £ 2014-15 terms) using the latest UK GDP deflator.

In summary:

• Scotland's total deficit was £14.9bn
• Scotland's deficit was 9.7% of GDP compared with the UK total deficit of 4.9% of GDP
• Scotland's deficit per capita was £2,800 compared with the UK total of £1,400

In simple terms: Scotland was running a deficit in 2014-15 that was twice as large as that we shared with the UK (whether you look at it on a per capita or % GDP basis).

On the basis that we take a population share of debt while we're in the UK, the difference between the amount of debt we accrued by being in the UK as opposed to being independent was £1,400 per capita (the difference between £2,800 and £1,400). Gross that up by our population of 5.3 million and the deficit gap versus the UK is £7.4bn.  For the avoidance of doubt: this is not our deficit, it is how much bigger our deficit would be if we were independent (than that we share by being within the United Kingdom).

These figures relate to April 2014 - March 2015 and include £1.8bn of oil revenue for Scotland - this means the onshore deficit gap (i.e. how much worse off we'd be if we didn't have any oil revenues) was £9.2bn.

Given that this year (15-16) oil revenues are predicted to be only c.£0.1bn we will (all else being equal) be looking at a deficit gap of c.£9bn.

It is now clear that, far from scaremongering, those of us who a year ago warned of an £8bn - £9bn annual deficit gap if we voted Yes were pretty much on the money. To put this in referendum propaganda terms: a vote for Yes was a vote to make us immediately £1,400 a year worse off for every man, woman and child in Scotland.

Of course as an independent country we would face a series of new challenges and opportunities that may make that situation better or worse. What's clear - now undeniable - is that the starting point (based on taxes we're used to paying and public spending we're used to receiving) would be £1,400 per person per year worse off than we are by remaining in the UK. That's £2,800 per tax payer.

To understand whether this would really matter - would we need to take drastic action or simply choose to fund this higher deficit with yet more debt? - we need to look at these deficit numbers in context.

Scotland's Deficit in Context

These 2014-15 figures would be the actual numbers we'd be using to negotiate any currency solution and the terms of (indeed the very existence of) our EU membership. One of the less intelligent comments thrown out during debates about the GERS figures and what they tell us about Scotland's deficit is the statement that "every country runs a deficit" as if the scale of the deficit is irrelevant.

Let's look first at the evolution of this deficit over time. The lower line is our onshore deficit (i.e. excluding any oil & gas income) and the upper line is our deficit including oil & gas.

This highlights a very important dynamic: although our overall deficit is worsening, our onshore (underlying) deficit position has been improving  since 2009. As oil declines the lines clearly converge.

Now let's put that in context with the total UK (the red lines)

We can see clearly that oil & gas has a relatively small impact on the UK's total deficit to GDP and that Scotland's onshore deficit (excluding oil & gas) is consistently worse than the UK's (for reasons readers of this blog will understand well, primarily higher expenditure per capita).

The improving trend in onshore (underlying) deficit to GDP tracks the improvement in the UK as a whole. Given the common fiscal approach this is unsurprising. Clearly we don't know what would happen under alternative economic plans, but the current path being pursued by the UK is undeniably leading to a reduction in the scale of the onshore deficit for both the UK and Scotland.

We'll explore the reason why Scotland's onshore deficit is so much worse than the UK's later in this blog, but first let's look at the scale of the deficits we're looking at in an EU context.

It's a bit of an over-kill graph but the following maps each EU country² against the figures for the UK and Scotland both with and without oil

It's a lot to take in but actually the overall picture is pretty clear;

• With oil, Scotland's deficit/GDP tracked the UK's pretty closely until 2011 ... but the subsequent decline in oil revenues predictably caused Scotland's deficit to worsen despite the UK's improving trend
• The "oil is just a bonus" argument is and always has been nonsense. Without oil the scale of Scotland's deficit would have been consistently the worst in Europe over this period ("beaten" only briefly by Ireland in peak financial crisis and Slovenia last year)
• On the most recent year's data, Scotland would have the worst deficit in the EU even with oil

Remember: not only would we be having to work out how to fund this excessive deficit, we'd be taking these figures to the negotiating table to try and renegotiate our EU membership if we'd voted Yes.

The rather gloriously named "corrective arm" of the EU Stability and Growth Pact "ensures that Member States adopt appropriate policy responses to correct excessive deficits by implementing the Excessive Deficit Procedure (EDP)" and defines an excessive deficit as 3% of GDP.

Let's just look at the most recent year's data from the graph above to put that in context

Let there be no doubt: if Scotland had voted Yes and we were facing independence, seeking a currency solution, incurring the costs of separation and negotiating EU membership ... we would be forced to take drastic fiscal steps to reduce this deficit. We would inevitably face tax rises and/or far deeper public spending cuts than we're currently experiencing.

As it is - as secured by the fiscal framework agreement - Scotland benefits from a fiscal transfer from the rest of the UK. On the generally accepted assumption that we incur only our population share of the UK's debt this means we are benefiting by about £8bn a year currently as a result of voting No. This is how pooling and sharing works - its the quid pro quo for the massive contribution Scotland made to the UK during the oil boom of the 1980's.


Understanding the Deficit Gap between Scotland and the rest of the UK

Anybody who has read FFA for Dummies will hopefully understand the following graph. Unlike the analysis above which compares Scotland on a % GDP basis with the UK as a whole, this analysis compares us on a per capita basis with the rest of the UK (i.e. the UK without Scotland). As explained in FFA for Dummies: Methodology this approach gives similar answers (particulalry now GDP/Capita is so similar between Scotland and the UK) but has the advantage of putting the numbers in a form people can relate to.

There are three lines:

• The green line shows how much less per capita we raise in taxes in Scotland than the rest of the UK (about £300)
• The black line shows how much more tax we raise per capita when you include oil revenues (in the most recent year this means our total tax generation is in fact at parity with the rest of the UK)
• The red line shows how much more per capita public expenditure we enjoy in Scotland than the rest of the UK (about £1,500)

The figures are almost identical to those we started this blog with: with the most recent year's data now available we see £7.6bn of the £9.2bn onshore deficit gap that exists between Scotland and the rest of the UK revealed by falling oil revenues.

This deficit gap is clearly mainly due the higher spend per capita in Scotland than the rest of the UK. As this blog has covered before (see FFA for Dummies) this is in large part due to Scotland's lower population density, remote communities and unique demographic challenges. None of these would miraculously go away if we were independent.

We really should be thankful we voted No.

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Experience tells me it's a good idea to include the following summary table here:

Notes:
1. 
As is the way with these things prior years' data have been restated. It's worth noting that there's a material change to TME in 2013-14 leading to a £1bn increase in the reported deficit for Scotland. The UK reported deficit increases by only £3.6bn so this implies an increase in the reported deficit gap between Scotland and the UK which is reflected in this blog. See GERS Appendix B for more detail.

2.
The EU works to calendar years, so our 2014-15 data is mapped here against 2014 EU AMECO data (which is generally the most recent actual year available as of today's date). The definition used for deficit by the EU is:

Excessive Deficit Procedure (EDP) Government surplus / deficit (net lending/borrowing under EDP
= net lending (+)/ net borrowing (-) of 'general government' (as defined in ESA 2010)
= National accounts (ESA 2010) net lending (+)/ net borrowing (-)
= total revenue less total expenditure

This maps closely with GERS/HMRC defined deficit but there are some technical as well as timing differences. I do not claim to have understood all the technical differences but the following graph comparing UK fiscal year data (from GERS) with EU AMECO data shows they match reasonably well

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Who's Really Against Austerity?

It's increasingly clear that the key to political popularity these days is to tell anybody who'll listen that you're "anti-austerity" and that your opponents are "pro-austerity". It's quite simple really: we're being subjected to unnecessary hardship because [insert nemesis] is ideologically committed to austerity and causing unnecessary economic pain. The names of Paul Krugman and Joseph Stiglitz are normally mentioned; cue rapturous applause and soaring poll ratings.

Now the two Nobel Laureats cited above are undoubtedly hugely influential economic thinkers and staggeringly smart men - but I would suggest they are only peerless in their field when it comes to self-promotion. You don't need to believe you're smarter than them to observe that it's easy to build a popular following by telling people that they needn't be enduring the austerity being foisted on them by nasty politicians. That those nasty politicians have to prioritise actually running national economies ahead of selling popular books on economics and building their media profiles is by the by.

I'm not saying that Krugman and Stiglitz are wrong - I'm simply suggesting that they could well be wrong, that having a Nobel Prize does not confer infallibility.

If we were able to sit and discuss the question of austerity with either of these two eminent men, I'd like to think that they'd make nuanced arguments. Maybe they'd suggest that austerity isn't really a binary choice - it's not something that you either do or don't do - but that's its all about timing and degree. Maybe they'd sheepishly explain that part of their role is to gain headlines, fill column inches, boost their universities' profiles - to be box office.  Maybe we'd discover some of their more simplistic (some say strident, some say patronising) pronouncements are simply a result of them playing to the gallery;

"I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world – the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere" - Paul Krugman

"Austerity has failed. But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working!" - Joseph Stiglitz

When it comes to the public debate they are in the enviable position of arguing against strategies currently being pursued - it's pretty easy for them to simply assert that whatever the current outcomes, it would have all been so much better if only more politicians had listened to them.

Unfortunately for Krugman he squandered some of this advantage by making doom-laden forecasts of continued economic decline and spiraling unemployment. As many commentators have pointed out, events have proved him wrong: "Paul Krugman is wrong about the UK and borrowing" (Andrew Lilico), "Where Krugman Goes Wrong About Expansionary Austerity" (Tim Worstall), "Paul Krugman has got it wrong on austerity" (Jeffrey Sach).

Fair enough. There's nothing wrong with lauded experts' forecasts occasionally being seen to be wrong (unless you're one of those who believe Nobel Prize winning economists are somehow meant to be infallible).

How does Krugman explain why economies pursuing the austerity he dismisses have been recovering? Take this example where he states that after imposing "harsh austerity" in 2010:

"... Prime Minister David Cameron’s government backed off, putting plans for further austerity on hold (but without admitting that it was doing any such thing)" - Krugman

Krugman is so passionately wedded to "austerity bad" (in a way that doesn't allow for any nuance around nature or degree of austerity being pursued) that the only way he can explain how unemployment has continued to fall and modest economic growth has been delivered is to suggest that we've not really been experiencing austerity after all. We went from "harsh austerity" (we'll come on to look at whether that was actually true) to no austerity at all. Who knew?

Of course the reality that Krugman himself is tacitly admitting to here is that austerity isn't as black-and-white a choice as his headline assertions would have us believe.

One of the problems is that it's not always clear what we mean when we talk about austerity. This isn't "just semantics" - it's important that we agree what a word means before we decide if we're for or against it.  Let's take two definitions of "austerity";

• "In economics, austerity is a set of policies with the aim of reducing government budget deficits. Austerity policies may include spending cuts, tax increases, or a mixture of both."
  - Wikipedia
• "A lower standard of living associated with the curtailment of government spending" - Chambers Dictionary: 

Of course the first of these defines austerity policies, the second describes the hardship that is one of the potential outcomes of some austerity policies. This semantic confusion is easily exploited in the world of sound-bite politics. It's as if we used the same word for surgery and pain: we're probably all against pain (other than the occasional masochist among us) but I'd suggest fewer of us are against surgery.

So let's agree that by "anti-austerity" we mean being against directly addressing the deficit through spending reductions and/or increases in taxation rates (the alternative being to increase expenditure and/or lower taxation rates in the hope that resultant economic growth will lead to higher tax revenues sufficient to cause indirect deficit reduction ... or I suppose if you're really blasé there's an option not to worry about deficit reduction at all).

If you accept this definition and think about it for even just a nano-second, it's clear that statements like "Anyone who understands macroeconomics knows that austerity is microeconomic theory that can't work" are nonsensical. The corollary of that argument would be that no spending level can be too high, no taxation level can ever be too low - that no matter what the deficit level you should never reduce spending levels or raise tax rates (because that would be the very definition of austerity and that "can't work").

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As an aside; the quote above comes from a Twitter exchange with Richard Murphy of Tax Research UK. He often makes very useful contributions to taxation debates in particular - but in this instance he actually asserted that austerity was "deliberate sabotage of UK economy". He appears to be currently acting as Jeremy Corbyn's economic advisor. Quite incredible.

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To be clear: I'm not championing "austerity" here, I'm merely suggesting that we have to look at the nature, scale and pace of austerity measures being introduced before we can form a view as to whether they are appropriate or not. I'm also not arguing that the way the austerity we have experienced in the UK has been delivered is "right" - I happen to believe that too much attention has been paid to reducing spend and not enough to raising taxes (as we'll come on to see), and that the spread of pain has fallen far too heavily on the poorest in society. This graph (created by the ever excellent IFS) illustrates the second of these points clearly - the people being squeezed down on are not the middle, they're the poor.

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Twitter exchanges have taught me that people struggle to read this graph  so I'll walk through it (assuming you've at least read the title). 

• From left to right we see the poorest in society across to the richest, broken into deciles (groups of 10%) - so the poorest 10% in our society are the left-most column, the richest 10% the right-most of the continuous sequence. The final column on its own on the right is the overall average.
• The coloured bar elements sum to show the annual cash impact (the white line) of the tax and benefit reforms on individuals in each of these groups - so the poorest 10% loose £800, the next poorest 10% lose £1,300 ... whereas the richest 10% only lose £200 and the second-richest 10% actually gain nearly £200
• The blue line shows the same thing but as a percent of net income (i.e. what proportion of "take-home" money is lost) using the right-hand scale  - so the poorest 10% and next poorest 10% are about 7% worse off ... whereas the richest 10% are only 1% worse off and the second richest 10% are actually slightly better off.

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It strikes me the only way we can move away from the simplistic binary rhetoric of pro- and anti- austerity is to look at some actual data - what levels of austerity are we in the UK experiencing and how do these compare with other economic areas? If we're "anti-austerity" what precisely is it that we're against?

I've downloaded info from the Eurostat Annual Macro-economic Database (May 2015) and stuck to this single source (trusting that the EU's economists are better at compiling cross-country comparable economic data than this weary blogger). The data series they provide includes forecasts for 2015 and 2016 - for some reason they don't provide data prior to 2006 for "Euro area" or Greece. So be it.

The analytical approach I've chosen is to take 2006 as a base year for indexing purposes  (i.e. the year before the current economic crisis kicked-off) and to look 10 years either-side so we can see the net effect of the financial crisis and austerity measures in context. It's an approach that has its pros and cons (choosing an arbitrary starting year is always slightly dodgy) but it gets us going, allows us to at least start asking some sensible questions.  If you think of understanding the figures as peeling the onion, what follows is just the removal of the crusty brown outer layer.

Starting with government expenditure (excluding debt interest) in real terms and comparing the UK with the US and the Euro Area;

The surge in spending through 2007 - 2012 is due in part to government interventions to support the banks¹ (the UK intervened earlier than the Euro Area) ... so presumably part of the subsequent apparent decrease would be due to these interventions not being repeated. The key here is that I think it's reasonable to compare our 100 index point of 2006 (before any interventions) to 2014 (after the main interventions) to get a sense of the underlying real terms increase in spending over that period. On that basis we can see that government spending in the UK and Euro Area is actually about 10% higher than pre-crisis levels and the US is on track to be 20% higher. 

Now let's add to this graph some selected Euro Area countries to provide a little wider context - the scale of the financial intervention in Ireland of course stands out;

It's interesting to note that the only countries spending below pre-crisis levels are (of course) Greece and (just) Italy. The trend in UK spending is towards the bottom end of the range of other countries but is very similar (post 2006) to Germany and the Euro Area countries. Prior to 2006 it's clear the the UK's rate of government spending was increasing at a markedly faster rate than all but Ireland; France and in particular Germany have seen far smoother (but on average lower) spending growth over the period. The forecasts (when Eurostat published these figures in March) are for The UK to be the only country other than Greece to be reducing real spend.

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As an aside: in the context of the Scottish FFA debate I've highlighted before that if you were to close the £8bn deficit gap through spending cuts that would require a 12% reduction in government spending. That would drop us somewhere between Italy and Greece on this graph - proof that it could be done I guess.

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To what extent are these absolute expenditure trends supported by GDP growth? To understand this (and get a sense of the different government spending models) we can look at spending as percent of GDP;

It's no surprise that the US has a lower government spending model and it's clear their forecast spending increase is GDP growth driven (spend/GDP is actually slightly declining). The UK's model is to to spend slightly less of GDP than the Euro Area average - and the current trend is to further widen that gap.

Adding other countries for a wider perspective, France's higher spend model stands out.

So we've seen the spend side of austerity - now let's look at the taxation side. We're going to look here at the Tax Burden as percentage of GDP² so we can see the extent to which tax has been used as austerity measure (again indexed to 2006);

It's striking that (relative to the starting point of 2006), the UK has been been reducing the tax burden overall whereas the Euro Area and the US have been increasing it. Oil revenue declines will be a contributing factor here but certainly doesn't explain this size of shift³; clearly something else is going on. Depending on your perspective you might see this as justified if it drives superior growth in the UK, or you might feel that increasing the overall tax burden is (potentially) a good way to make sure those with broader shoulders can take their share of the pain of austerity (and free economic capacity for spending driven growth).

Adding other countries to the graph simply reinforces this observation - the UK's is the only line heading downwards in recent years, the only country reducing our tax burden;

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Here's a good point to pause and consider Krugman's comment about the "harsh austerity" implemented in the UK in 2010.

I'd suggest you would measure "harshness" by either the steepness of either the increase in tax burden/GDP or the decrease in real expenditure - or possibly by the overall change in these measure from 2006 (pre-crisis) to now. On that basis I reckon Greece, Ireland and Spain have experienced far harsher cost side austerity than us and we've largely avoided tax side austerity (unlike Greece, Italy, France and - to a minor degree - Germany).

Some of the poorest people in the UK have experienced austerity of course (per the earlier IFS "squeezed Poor" analysis) - but at a macro level it's hard to argue that the UK as a whole has experienced "harsh" austerity.

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To complete the picture it makes sense to look at the tax burden as a percentage of GDP. As you would expect this is broadly the same profile as the spend/GDP graphs: the US economy is a low tax / low spend model; the Euro Area is (on average) a higher tax / higher spend model than the UK

You know the drill by now - we'll add other countries and you can pick your favourite;

So now we've got an actual data driven view of the alternative tax/spend and austerity models being pursued, let's see what macro outcomes are being delivered. We'll start with real GDP (again indexed to 2006);

The Euro Area has had it's double dip recession and is limping back towards growth; the UK is back to reasonable levels of growth; the US has been growing steadily now for 5 years. If what we've been experiencing is austerity, by this measure at least it's working. Of course we will never know what might have happened had we just kept spending ...

Let's add the other countries for the wider context;

It's clear that in terms of real GDP growth only the US and Germany (of our selected subset of countries) have done better than the UK since 2006 ... and if you look carefully you'll see that we've grown faster than all of these comparators except the US since 1996*. The scale of Greece, Italy and Spain's woes is clear, as is the extent to which they drag down the Euro Area.

*Addendum: looking again I see Ireland has actually grown significantly faster over the long period

Finally let's look at Deficit/GDP. This is simply an arithmetic function of all the figures we've just covered plus non tax-burden government revenues less debt interest^4,5 (I'm too tired to graph these but trust me it all adds up - I'm careful like that);

On this important measure (below the line means the absolute debt is increasing), the UK and the US started from worse positions in 2006 and fell deeper than the Euro Area - but in all cases the deficit to GDP ratio is improving and (recognising the last two years are forecasts) the UK appears to be reducing its deficit at an accelerating rate. On this measure we are close to getting back to where we were before the crisis - although of course our debt burden now is much greater and the UK's deficit rate is still materially worse than that of the Euro Area.

One last time; let's crowd the graph up;

We weren't in a great place in 2006. The combination of cost-side austerity and GDP growth is slowly coming to our rescue but on latest actual numbers we still have a deficit of concerning magnitude (for reference the EU's "excessive deficit" threshold is 3%). It's possible that reducing the tax burden is at least in part the driver of higher GDP growth - but it's yet to be shown whether that will truly deliver in terms of deficit reduction.

Focusing on the UK: it seems to me there's room to be a bit more aggressive on overall taxation levels and certainly opportunities to spread some of the pain away from the poorest in society; in return it looks like we could let our belt out a notch on expenditure to drive economic growth through investment.  Of course that - at its simplest - was the Labour Party's economic strategy going in to the last General Election.

Funnily enough it's also pretty much what the SNP's published economic strategy was too. Analysis by the IFS showed they basically matched Labour's more relaxed spending plans ...

... but (despite their cries of "social justice") were less willing to use tax increases as an economic lever.

Of course the SNP's rhetoric was that they were the only anti-austerity party⁶.  The IFS showed - and anybody paying attention already knew - the easy sound-bites were not supported by published policies.  So next time somebody tells you they're against austerity, maybe ask them what they actually mean by that.

It strikes me that being against austerity is like being against surgery: it's unpleasant, you only do it if you have to and there are a wide range of different procedures to choose from.  Not all cuts are the same.

*******************

Footnotes

1. As explained at least in part by Eurostat (Impact of support for financial institutions on government deficitsImpact of support for financial institutions on government deficits) bank capital injections were largely treated as "deficit increasing capital transfers (government expenditure)" and had a big impact on Euro Area Expenditure in 2010 and 2012 - these were calculated to increase Euro Area deficit by about 0.5% of GDP in each of those years and given spend/GDP is <50%, the direct  impact of the bailouts would only be about 2 index points on the Euro Area spending line. The impact in Ireland was much larger (20% of GDP in 2010) and was significant in Greece and Spain in (3 - 4%of GDP 2012).

2. This this makes up about 90% of the total government revenue for the UK and Euro Area, about 83% in the US.

3. Oil revenues went from 2.3% of UK revenue in 08-09 to 0.8% in 13-14 (per HMRC/GERS) so that would only explain roughly 1.5 points of index movement

4. It breaks down like this:

  -  Revenue/GDP  = (Tax burden/GDP + other revenues/GDP*) 

  -  Spend/GDP = (Spend.GDP + interest/GDP**)

  -  Deficit/GDP = Revenue/GDP - Spend/GDP

* In the UK these are fairly consistently about 4% or GDP, in the US 6-7% -- I've not dug into detail but I presume they include Gross Operating Surplus of state owned assets and proceeds from asset sales

** In the UK this was 2.0% of GDP in 2006, 2.7% in 2014

5. An annoying definitional idiosyncracy: Public deficit/surplus is defined in the Maastricht Treaty as general government net borrowing/lending according to the European System of Accounts (ESA95) - to all intents and purposes this means that we can treat "net borrowing/lending" as the same thing as "deficit". I've checked and the figures do indeed reconcile closely with the figures you'll find elsewhere n this blog using UK Government and GERS figures.

6. "48 Hours To End Austerity: SNP MPs will vote for an end to austerity and against Labour or Tory cuts"

Guest Blog: Bank Bailout Myths

Would you be surprised to hear that the biggest bank bailout of a British bank was Barclays and not RBS? Or that the USA contributed more to the bailouts of British banks than the UK? Finally did you know that banks are not bailed by the country in which they are headquartered?

Given all the newspapers, books and numerous investigations into the financial crisis have come to an opposite conclusion it was very surprising to read these points in “Scotland: Destroying Darling’s Bank Bail-out Myth” by Gordon MacIntyre-Kemp in the Huffington Post.

Before diving into the details it is worth just taking a moment to understand how banks were supported during the crisis. A big part of banking is about changing liquid assets (say a deposit in a bank account which can be withdrawn at any time) into an illiquid asset (say a 20 year mortgage where the bank cannot get the money back earlier).

Banks very rarely have an exactly balancing number of deposits and loans so they borrow and lend to each other on the markets. During the financial crisis these markets froze completely and had to be replaced by the central banks under schemes called Liquidity Support.

The US Federal Reserve’s rules for Liquidity Support loans were they had to be paid back within 90 days and banks had to pay a good rate of interest. The banks also had to supply security in case they were unable to repay. As a result the Fed made $14bn of profit from these loans, which went to US taxpayers [Financial Times, 31 August 2009].

Unfortunately some banks had made bad lending decisions or suffered actually losses. They did not have a liquidity problem, they had a solvency problem. These banks needed to receive bailouts, which have generally not been repaid. Rather than making profits for the taxpayers the bailouts have saddled us with huge national debts.

So in summary: Liquidity Support was profitable and safe to taxpayers; bailouts were risky and generally loss making.

The key claim in the article comes from this graphic (source given as Business for Scotland):

Bail Out at Barclays – an English-registered bank
US Federal Reserve:   £552.32bn
Qatari Government:   £6bn
UK Government:   £0

It is not at all clear what this table is showing. If it is about bailouts then it would be correct to show the UK Government at zero but then the US Federal Reserve should also be zero. If it is about Liquidity Support then the UK Government number should not be zero as Barclay’s participated in a £200bn Bank of England liquidity operation.

The author is trying to present the US Federal Reserve’s profitable short term loan to Barclay’s as a bailout and also conveniently avoids disclosing the reason for it. Barclay’s had just spent £1.75bn buying a chunk of the US bank Lehman Brothers and the Fed was keen to support the rescue.

Barclay’s had in fact wanted to buy all of Lehman Brothers but Alistair Darling blocked the deal on the grounds of risk to the UK [Darling ‘blocked’ Lehman takeover, Financial Times, 30 January 2010].

To present a UK partial rescue of a US bank as the reverse is really quite astonishing.

Another surprising table from the article is this:

UK government and US Fed Contributions to British bank Bail out packages
UK:   £124bn
USA:   £640bn
The source is given as “Business for Scotland”.

The only mention of £124bn I can find is in the National Audit Offices Update on the support schemes 15 December 2010 which stated that the amount of cash borrowed by the government to support the banks had declined from £955bn to £124bn on that date.

As already discussed the US Federal Reserve did not spend a cent on British bank bailouts. A more accurate table would be UK £955bn and USA £nil.

The irony is that the fund flows were actually in the opposite direction to the claim in the article. The UK’s largest bank bailout was RBS, which was triggered by losses on US subprime mortgages and the ABN Amro acquisition. The real flow of funds was from the UK out to the USA to repay these mortgage losses. Subsequently, huge losses emerged from property loans in the Republic of Ireland that once again landed with the UK taxpayer.

It really is a shame that the author’s central proposition is untrue. If banks really were bailed out based on where their operations are then the UK tax payer would have been landed with a much smaller bill.

Guest Author: Andrew Veitch