If Scotland was able to run its own affairs - if we had control over the levers of growth - then we would grow our way out of the £8bn black-hole that we keep being told about. It might be true that Full Fiscal Autonomy now would be "tantamount to economic suicide" (SNP MP George Kerevan) - would be "a disaster" (SNP MP Tommy Sheppard) - but it's still a sensible medium term aim.
Saying we'd have an £8bn deficit as if that's something we'd have to get rid of overnight when all countries (including the UK) run deficits is simply scaremongering. Anyway these figures are all hugely uncertain and based on assumptions that the SNP don't necessarily agree with ... and who would argue that Scots wouldn't be better at running our own affairs than Westminster Tories?If I could be bothered I could find plenty of direct quotes (from the likes of Stewart Hosie and Pete Wishart) to back me up on this - but I think most will agree this fairly paraphrases the SNP line at the moment.
So let's unpick it.
"We would grow our way out of the £8bn black-hole if we had full powers"
Putting aside the obvious point that the SNP have yet to make any concrete policy proposals that would lead us to believe that they would somehow achieve this superior growth, let's just concentrate on the magnitude of the challenge.
The numbers are easy: Scotland generates £50bn of onshore tax revenue, so to increase that by £8bn means growing it by 16%. If we're to make this additional tax revenue through economic growth (as opposed to through increasing tax rates) then we'd need to grow GDP by 16%. [For those who care about such things, Scottish onshore tax generation consistently runs at about 37% of GDP].
It's important to understand that this growth needs to be growth relative to the rest of the UK because that £8bn figure is the deficit gap (on which more later). It's what we need to generate to be paying our way within the UK, for us to be making Full Fiscal Autonomy work. See my post Full Fiscal Autonomy for Dummies if you need convincing.
To get an indication of the scale of this challenge we need look no further than the Scottish Government's own White Paper: Scotland's Future: Your Guide to an Independent Scotland. As you might expect they had a go at scaling how much faster an independent Scotland might grow when no longer shackled to the UK. In fact they were so pleased with their analysis that they quoted it five times (pp 23, 43, 88, 375, 619). Here's the wording from page 23;
"Similar countries to Scotland have seen higher levels of economic growth over the past generation. That is because they have the bonus of being independent and are able to make the right choices for their nation and economy. If Scotland had matched the levels of growth of these other independent nations between 1977 and 2007, GDP per head in Scotland would now be 3.8 per cent higher"I think we can safely assume that the countries and timescale used were selected to make the strongest possible case - after all, why stop at 2007 when more recent data was available? - and just in case you doubt if that is a cumulative 30 year figure, it's clarified on page 619:
"The average rate among small European countries was 2.61%, a gap of 0.12% each year. Over a 30 year period the compounded effect of this gap totals 3.8% of GDP"So the Scottish Government's own attempt at scaling the economic growth benefits that "the bonus of being independent" might bring was 3.8% over 30 years. We're looking for 16.0% to grow our way out of the deficit gap. As one of my erstwhile American colleagues used to say: you do the math.
Frankly I could stop here. The assumptions required for the SNP's "levers of growth" argument to work are exposed as ludicrous by their own analysis. But I'll carry on because this SNP Hydra has many heads ...
"The IFS say we'd have an £8bn deficit"
The £8bn (or £7.6bn) is consistently referred to by the SNP as the IFS forecast of Scotland's deficit. This is simply untrue.
I've blogged about this before and this simple table summarises the key figures
Scotland's deficit in 2013-14 per Scottish Government's own GERS analysis is £12.4bn and is forecast by the IFS to be £14.2bn in 2015-16. This is the net result of (largely know) oil revenue declines offsetting expected deficit reductions (as a result of UK-wide policies).
It shouldn't be beyond the wit of any half-decent politician to understand and remember these figures. If they're going to engage in this debate they really should know what Scotland's deficit is. If they're going to write a press release about it surely it would unforgivable to get this basic fact wrong?
Well here's the SNP's official press release (posted on Thursday 11/06 at 07:44) which includes these words:
"The IFS figures they cite suggest that Scotland would have a deficit of £7.6 billion in 2015-16. But over the five years to 2013-14, the UK’s cumulative deficit has been worth over £600 billion."I (and many others I'm sure) jumped on this howler within minutes - the BBC picked up on it and contacted the SNP for a statement (see at 22:30 in this broadcast of BBC R4's More or Less) and yet still (13:50 on Saturday as I'm writing) the Press Release sits there uncorrected.
There are only two possible explanations for the SNP and their spokespeople making and repeating this error: either they don’t even know what our deficit is or they know full well but think they can get away with simply lying about it. I don’t know if they’re insulting our intelligence and actively trying to deceive the electorate or they’re just spectacularly incompetent. These are the people negotiating Scotland's economic future - god help us.
To compare this (wrong) annual figure with the cumulative 5 year UK figure really is so obviously ridiculous that I'll treat it as an aside.
For fun let's work out the scale of this misrepresentation of data
- Using the £7.6bn increase instead of the £14.2bn total is a 1.9-fold misrepresentation
- Comparing a single year with a five year total figure is obviously a 5-fold misrepresentation
- Comparing an absolute number spread across the whole of the UK with an absolute number shared across just 8.3% of the UK’s population is a 12-fold misrepresentation
- Comparing UK figures from the past (when the deficit was worse) with a Scottish figure for the future (when the onshore deficit is forecast to decrease) is – as it happens - a 1.6-fold misrepresentation
Of course the right comparison to make is that Scotland's deficit is forecast to be 8.6% of GDP compared to 4.0% for the UK: so more than twice as bad.
"Suggesting we'd have to get rid of the deficit overnight when all countries (including the UK) run deficits is simply scaremongering"
Under FFA we would still be sharing a currency and a national debt with the rest of the UK, so to be be paying our way we would simply need to be (over a sensible period of time) running a deficit at a similar rate to the rest of the UK. That's what the £8bn defines - the amount we'd need to find from more taxes or less spending to be holding our own within the UK. If you like: it's the amount we'd need to find to get back to the position we're in now by pooling and sharing within the UK.
Nobody's saying that under FFA Scotland would have to eliminate its deficit.
As for "all countries run a deficit" - no they don't. To put it simply: those running deficits borrow their money from those running surpluses.
As for "we'd have a deficit but so do lots of European countries" - it's rather silly to talk about having a deficit as if it's a binary thing (you either have one or you don't). Clearly the scale of the deficit matters, so let's put that forecast deficit of 8.6% in context.
The graph below shows European Commission data on net lending / (borrowing) by country as a percentage of GDP in 2015;
Stop drooling over Norway; it's unseemly.
I confess I'm not sure how Norway's sovereign wealth fund plays in these figures (although it's clear in 2014 Norway was running a considerable surplus) - but for other countries this is basically the same as surplus/(deficit).
Let's repeat the graph without Norway (just so it's easier to read) and add a line at -3% (which the European Commission's Stability & Growth Pact defines as the threshold for "excessive" deficits).
I don't think anybody can seriously argue that Scotland running a deficit of 8.6% of GDP would be "just like other European countries running deficits". Our deficit would be considerably worse than any other European country, worse than Croatia, Serbia and Montenegro.
This would need to be addressed and it could only be addressed by yet more borrowing (if Scotland's borrowing capacity would allow it), higher taxes or lower spending. To imagine how this would be playing out had we voted Yes and been renegotiating our position within the EU - while grappling with currency issues, transition costs and business flight - is quite terrifying.
"These figures are all hugely uncertain"
Actually they're not really. All the IFS assumptions do is extend the consistent long-term relative onshore tax and spend generation levels and factor in the known impact of oil revenue declines.
Of course these figures don't reflect what actions a Scottish Government would take if given FFA. That's precisely the point: maintaining the tax and spend status quo would be unsustainable under FFA. What we need to hear is how the SNP propose to close this gap. These analyses present the problem with FFA and - given they're the ones asking for it - it's right that the SNP should be asked to explain what their solution would be.
I think we've shown that just saying "we'll grow the economy" is not a good enough answer - so it becomes a question of which taxes will go up and which costs will be cut? The SNP are very reluctant to answer this question.
"It's based on assumptions that the SNP don't necessarily agree with"
As we've seen the assumptions are hardly controversial and it is - as ever - really just all about oil. The latest OBR Fiscal Sustainability Report is very thorough on the topic. We can argue about future oil prices but two points are undeniable;
- The profitability of North Sea production is in long term decline due to rising costs, not just falling oil prices.
- The decline of North Sea production is not a surprise - it's been forecast for years, the only question has ever been one of timing
"Who would argue that Scots wouldn't be better at running our own affairs than Westminster Tories?"
This is always the payoff. When all else fails (and it does) accuse those who argue against FFA of talking down Scotland, of suggesting Scot's aren't capable.
It's true that the SNP seem hell-bent on demonstrating that they don't understand Scotland's economy, but let's not make the mistake of conflating the SNP's leaders with the Scots people.
The question is not one of competence or who happens to be in power in Westminster right now. It's about understanding and valuing the benefits of UK wide pooling and sharing. FFA means sacrificing that and for some of us that seems like a wildly reckless and self-destructive act.