Wednesday, 25 June 2014

Dunleavy and the Costs of Independence

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

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

But ...

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

At its simplest the narrative can be summarised as;
  • 26/05/2014: HM Treasury Press Release
    • "The Institute for Government (IfG) and the London School of Economics (LSE) have published independent analysis which puts the average cost of setting up a new policy department at £15 million. Applying this to the 180 departments the Scottish government states it would need could see Scottish taxpayers fork out £2.7bn"
  • 29/05/2014: Salmond backs economist's £250m start-up price tag for independence
    • "The First Minister backed estimates by London School of Economics expert Patrick Dunleavy, who has put the cost at between £150million and £300million"
  • 22/06/2014: Transitioning to a new Scottish State by Prof Patrick Dunleavy (hereafter "The Report")
    • "An independent Scotland would face immediate set-up costs of up to £200 million in creating new administrative structures that duplicate UK institutions"
  • 24/06/2014: First Minister Alex Salmond (in one of his more self-righteous outbursts - and that's saying something) stated in a letter to David Cameron published in the Daily Record
    • "Professor Dunleavy’s report this weekend has vindicated the Scottish Government’s position and demolished that of the UK Government."
So its pretty clear right?  Anybody reading the Scottish press - certainly anybody skimming the headlines - would come away thinking this is the story: Scottish Government vindicated, UK Government position demolished.

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

So what does Dunleavy actually say?

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

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

Having chosen his side the Prof is faced with a challenge: how to retain his credibility at the same time as producing a number that will save the First Minister's blushes?  He gives the game away pretty early in the report, on Page 5 in fact:
  • "what we try to do here instead is to show what definite costs will be incurred in the short term - these are genuine "set-up" costs"
Do you see what he did there?  Just the "definite costs ... in the short term" followed by the blithe assertion that "these are genuine set-up costs".  Let's think about what the Prof is saying here.
  • Only definite costs: anything uncertain is simply excluded.  I don't think you need to have "the prophetic powers of the Delphi oracle" to make reasonable assumptions around costs that are not definite; but this appears beyond Professor Dunleavy.  To be fair, he's Professor of Political Science and Public Policy Chair; he's not an economist.
  • Only short term costs: the Report states elsewhere that "the transition will take more than seven years" ... but by restricting himself to "short term costs" he only includes costs he assumes will be incurred in 2016.  To say that the costs incurred after 2016 (to complete the creation of dedicated Scottish government infrastructure and systems) are in some way not "set-up costs" is frankly ridiculous.

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

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

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

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

And there's more

  • There are other costs that appear completely excluded by Dunleavy's analysis because they are not "immediate" (and so don't fit his arbitrary "set-up costs" definition) and don't fit any of his other cost category definitions either.  For example 
    • He states "a full embassy network covering about 50 countries would come later" and so presumably are simply not included in these cost estimates at all
    • Under the "Investment" heading he states "as the Scottish Defence Force builds up, they too can take over their own command and control, procurement and other complex back-office functions". He offers no cost estimates for this saying only "the UK Treasury has not given any specific numbers for defence" -- apparently the Prof will not make estimates in this area unless the Treasury have. I mean; we know he doesn't possess the prophetic powers of the Delphi oracle but you think he'd offer some estimate. 
  • 43 existing UK government bodies have been completely excluded as "clearly or probably not needed".  He doesn't share which government bodies these are (let alone which are "probably" as opposed to "clearly" not needed). Which is a shame
In fact he doesn't share any of his workings to get to the £150 - 200m headline figure. This seems a rather surprising omission from someone who is so quick to criticise the UK Treasury's lack of "careful analysis". I guess we take his word for it.

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

So what does his report actually tell us?

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

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

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

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


Anonymous said...

Excellent piece of analysis, sir.


JohnWest said...

To be honest, I don't think Dunleavy was ever actually trying to say the entire cost full stop would be £200 million. He was writing it as a response to the undoubtedly flawed way the Treasury had used his previous research. What he's said quite clearly today is that it would be somewhere between £600 million and £1.5 billion.

The £200 million figure was latched on to in the media (and the usual outlets - Wings Over Scotland etc.) without any context given on what it actually means. Nobody is really arguing for that figure except the SNP and Yes campaigners - Dunleavy certainly isn't arguing for it and he's the original source.

Anonymous said...

All of these numbers are easily covered by Scotland NOT having to fork out £4b for it's "share" of HS2. The £200m number was always an immediate number with longer-term costs being greater than this. Somewhere in amongst the semantics that both sides use is a truer number but like most of these projections, you can't know for sure until it's done and dusted.

Anonymous said...

"Scotland's 4 billion share of HS2"??? How much has the UK taxpayer paid towards the Edinburgh tram system, The new forth road bridge, The Scottish parliament building and the hundreds of wind farms?