Wednesday, 21 December 2016

Impact of UK Austerity on Scotland's 2017-18 Budget

When Finance Secretary Derek Mackay announced his party’s Budget last week, he came under pressure for many reasons, not least because buried in the detail was the fact that the SNP are imposing a £327m cut in central Government support to local government services1.

Mr Mackay defended his budget by saying "Let me be clear, I will not pass the costs of UK austerity on to the household budgets of the lowest-income taxpayers"2 and in the budget document itself stated “The UK Government’s approach to public spending is having a significant detrimental effect in Scotland”3.

The problem here is that - as so often with the SNP - the rhetoric is plainly at odds with the facts. I’ve taken the time to study the actual figures in some detail, and it’s clear that attempting to blame UK Government austerity for cuts in Scotland’s 2017-18 budget is nothing short of blatant deception.

All you need to understand to realise that Mr Mackay is trying to pull the wool over our eyes is this simple graph showing the Total Scottish Budget in real (inflation adjusted) terms over the last 10 years. [Note y-axis does not start at zero]


I expect a lot of people in Scotland will find this graph hard to believe. After all, we hear so much from the SNP about Tory austerity that few would expect the real-terms trend in Scotland’s budget to be upwards over the last four years – but that is the reality. In fact, if you look carefully at the graph, you’ll see that Scotland’s Budget is now (just) higher in real terms than it was in 2009-10 before austerity cuts started to bite.

How come this plain reality isn’t common knowledge? Well the simple fact is that the SNP have gone out of their way to hide this information. If you take the time to look up last week’s budget report, you’ll find the summary tables they include show data for 2010-11 but then just miss out the four intervening years to 2014-155. That’s the first step they take to disguise the reality of the rising budget trend.

The second step they take is to bury this Total Budget information deep in an Appendix on page 169 of the report. They use the up-front summary tables to instead focus on a few sub-totals that exclude things like Annually Managed Expenditure (AME) which, for example, pays for NHS and teachers’ pensions4.

In some highlighted figures they even exclude Capital Borrowing4. This is a devolved power that enables Scotland to spend more by taking on further debt in addition to that we share with the rest of the UK. It’s a critical and growing source of funding for Scotland and it’s hugely misleading to focus on figures that omit it.

The third step they take is to distract from the budget year that’s actually being announced by providing a pretty meaningless longer term forecast. The longer term forecast they made last year has already been shown to be far too pessimistic6. To illustrate how flaky their latest forecast is, despite the clear commitment from the SNP to deliver a 50 per cent reduction in the “overall tax burden of APD” (Air Passenger Duty), their forecast makes no allowance for this £171m headline revenue loss4.


As an aside, it’s also the case that by the end of their forecast period the Scottish Government will control roughly half of the revenue raising powers involved. So when they forecast a real terms decline in “Fiscal DEL” (a subset of the total budget that excludes among other things, AME and capital borrowing), the Scottish Government appears to be forecasting that their own economic strategy will fail.


So by missing out intervening years, focusing on a measure which excludes very significant sources of revenue and stretching to an unrealistically pessimistic forecast year, the SNP are able to engineer a figure which appears to suggest “Westminster austerity” is causing the budget to decline. In fact, as the graph clearly shows, the opposite is true.

The reality of our fiscal framework agreement with the rest of the UK is such that the SNP is lucky enough to preside over a spending budget that’s rising in real terms.

The fact that the SNP are cutting Central Government funding to local government is their choice, not something that’s forced upon them - just as the fact that the SNP don’t use their income tax and benefits top-up powers to reduce tax for low-earners, redistribute wealth and address inequality is their choice.

Next time you hear UK austerity being blamed for specific Scottish budget cuts, remember this simple fact: over the four years from 2013-14 to 2017-18, the Total Scottish Budget has been increased in real terms by £1.9bn or 5.4% . 

It really is long past time the SNP stopped blaming Westminster for their own failings.



******

Notes
1. Table 9.02: Local Government and Central Government Grants to Local Authorities

3. page 2 of Budget Report
4. I provide a full audit-trailed explanation of the various figures on an historical like-for-like basis here: this table shows the sources I needed to access to create it (it was hard work)

5. See Tables 1.01 and 1.02 pages 3 and 4

6. See Spinning the Scottish Budget: Part II



Tuesday, 20 December 2016

Spinning the Scottish Budget: Part III

- Seriously Kev, you're still banging on about this?

- Yes, yes I am.

You see I've invested quite a lot of effort into understanding what’s actually been going on with our Scottish Budget, and in the process it's become clear to me that the Scottish Government have gone out of their way to obscure the reality. So I think it's worth me going out of my way to make that reality clear.


To save me repeating myself: all growth percentages quoted here are real (i.e. inflation adjusted1) and all values are quoted in real 2016-17 terms.


Let’s get one possible source of confusion out of the way first: we’re going to focus here on the devolved Scottish Budget, not Total Managed Expenditure (TME) that’s shown in the Government Expenditure & Revenue Scotland (GERS) Report.

GERS TME is considered to be controversial by some because it includes per-capita allocations of defence, debt interest and foreign affairs as well as allocated costs for other reserved matters like the state pension. The following graph puts the Total Scottish Budget (blue line) in context against the GERS TME spend (black line);


I confess this is not the most exciting graph you'll ever see, but I think it's important to be clear how different the Budget (for which we now know both this year and next) is from the total GERS attributed spend on Scotland (for which we only know up to last year actual)

That black TME line is basically flat. From its peak in 2010-11 its down by 2.3% but since 2008-09 it's grown by 2.3% and last year it grew by 0.6%. But this includes stuff like debt interest and allocated defence costs and other things the Scottish Government doesn't control, so we need to focus instead on the blue Total Scottish Budget line - this is what the budget exercise is all about.

Let's zoom in by changing the y-axis scale (note it now doesn't start at zero) and adding some of the other spending definitions we'll need to understand to follow the various claims being made.




I'm astounded by how hard it has been to pull this together. I'd normally footnote this sort of thing, but to give an idea of the work I've had to do to get comparable cash figures, here's a table showing where I had to go to get like-for-like nominal (cash terms) numbers just for the most recent five years (no highlight means figures were explicit but not shown, yellow is unexplained differences2 and other background colours signify I had to source from different budget reports);


It's almost as if somebody didn't want anybody to be able to follow what's been going on since 2013-14. Anyway, all I had to do then was source the HM Treaury GDP deflator which the Scottish Government uses1 and convert the figures into comparable real terms values.



So let's now look at each of the lines on that graph.



Total Budget - the blue line
The Total Budget was cut over the three years from 2010-11 to 2013-14, but has grown since. That’s right: Scotland’s Total Budget has grown over the last 3 years and is in fact planned to grow by a further 1.1% in the coming year.

Between 2013-14 and 2017-18 the budget will have grown by 5.4% (remember: all these figures are real, inflation adjusted). For context, that's a £1.9bn increase in Scotland's spending budget over a period when North Sea oil revenues  have declined by £4.0bn.

The Total Budget for 2017-18 is in fact slightly higher than its previous peak in 2009-10 – so we’re back to pre-austerity spending levels.

You won’t find this mentioned anywhere by the SNP and you’d have to have made it to Appendix G table 4 on page 169 of the 2017-18 budget report before you'd see this data (which you'd have to adjust for inflation, as I have done).

Total Departmental Expenditure Limits (DEL) - the red line
Total DEL differs from the Total Budget because it doesn’t include Annually Managed Expenditure (AME). You’d need to make it to page 165 of the 2017-18 budget report to find just two years worth of AME data where you'd discover that for example in in 2016-17 it was £6.7bn,. The Glossary explains that AME is;
"spending that does not fall within Departmental Expenditure Limits (DEL). AME is generally less predictable than expenditure in DEL and is not subject to multi-year limits. It is set each year and contains those elements of expenditure that are not readily predictable. For example, NHS and Teachers’ pensions count as AME"
Now here I confess the limits of my tenacity and stamina were reached. Each year's budget only include two years of AME data and the information for DEL in these budgets only goes back as far as 2010-11. So I merely observe that (by implication) AME has grown faster than DEL over the graph period (i.e. the blue and red lines diverge slightly)

If you think only DEL matters and we should ignore AME, good luck explaining your logic to a Scottish teacher or a nurse whose pension is paid by it.

But even if we do look just at DEL, it’s still grown by 3.1% since 2014-15.

Discretionary Spending Limit - the grey then gold line
I've called this "Discretionary Spending Limit" as it's the last total in table 1.02 which has this title -  but that row is rather cumbersomely named "SG Adjusted Spending Limits" in the table itself.

To get from DEL to this “Discretionary Spending Limit” we need to subtract both “non-cash DEL” and “financial transactions”. Stick with me, we’re nearly there.

"Non-cash DEL” is basically depreciation, a figure that needs to be accounted for but is a “given” as far as planning the budget is concerned. It is (annoying inconsistently) described in the Budget Glossary as "Ringfenced Resource DEL (non-cash)":
"depreciation or impairment costs associated with the ownership of assets. HM Treasury rules mean that this element of the overall DEL budget cannot be used to fund pay or procurement costs and as such this budget does not represent spending power for the Scottish Government."
I'm not sure if that second sentence makes grammatical let alone logical sense - depreciation costs aren't cash, so it's hardly because of "HM Treasury Rules" that they can't be used to "fund pay or procurement costs" (answers on a postcard).

I'm tired and confess I’ve not really got my head around “financial transactions”. It seems clear to me that this is real money, albeit effectively in the form of borrowing for restricted use. The definition offered is
"Financial Transactions are allocated by HM Treasury to the Scottish Government and can only be used for the provision of loans or equity investment beyond the public sector. Financial Transactions facilities have to be repaid to HMT in future years."
We'll talk more about borrowing in a moment - but just because it's borrowing doesn't mean it doesn't count when it comes to money available to spend in the Scottish budget.

So we're now looking at a sub-set of the Total Budget that excludes loads of highly relevant figures - and this is basically flat over the last five years (actually +0.2%).

"Fiscal Revenue + Capital DEL" - the grey line
Prior to 2015-16 this was the same as the Discretionary Spending Limit, but as it doesn’t include Scotland’s devolved capital borrowing it's a pretty meaningless figure from 2015-16 onward.

I can't emphasise this point enough - to consider our spending capacity without considering the money we can borrow directly (as opposed to Westminster borrowing it on our behalf) is simply ridiculous.

The 2016-17 budget presented this figure as an emboldened total called "SG Spending Limits" and showed its growth relative to 2010-11 (when of course there was no devolved capital borrowing power). This is repeated in the 2017-18 budget when it is shown again as an emboldened total with growth figures in the "Discretionary Spending Limits" Table, just named "Total":
This is hugely misleading, it's a ridiculous figure to draw people's attention to. At least in this year (unlike last year) an "SG Adjusted Spending Limit" total is included below which at least does include Capital Borrowing but - as you will now understand - still excludes a lot of spending that is essential to the Scottish budget.


. ****
As explained in my previous blog the forecasts beyond the budget year in question are frankly a distraction and of marginal value at best.

So there you have it. Faced with a budget that's rising in real-terms and is now back to it's pre-austerity peak level, the SNP managed to come up with this summary:
"The UK Government’s approach to public spending is having a significant detrimental effect in Scotland. Between 2010-11 and 2019-20, the Scottish Government’s Fiscal Departmental Expenditure Limit (DEL) from HM Treasury will fall by over nine per cent in real terms – the equivalent of over £2.8 billion"
So that's taking a figure from the peak forward to a pretty meaningless forecast and - outrageously - that 9.2% means they're using the "Fiscal Revenue and Capital DEL" (aka Fiscal DEL) that excludes the impact of Capital Borrowing.

I'm sorry - that's just wrong.


*****

Notes
1. Using the HM Treasury GDP deflator as referenced by the 2017-18 Budget
2. The figures in this table show that (sourced from within the same budget report) the Total Budget does not equal DEL + AME  as we would expect.  But then taking the 2017-18 budget as an example, the Total DEL figures on page 168 do not tie to the figures in the up-front summary either (a £217m difference for 2016-17 year) so frankly I start to give up.

Sunday, 18 December 2016

Spinning the Scottish Budget: Part II

Yesterday I rushed out a blog looking at the figures that were (and just as importantly were not) shown in the Scottish budget (> Spinning the Scottish Budget).  I've had some time now to dig a little deeper and if anything the spin is worse than I initially thought.

Let's be very clear: the budget is for 2017-18 so that is the year that matters, the year for which decisions are being made.

So let's look at the figures shown for real year-on-year growth in "Fiscal DEL" (aka Discretionary Spending Limits) for each of the last four draft budgets;


Not showing the real year-on-year growth for 2017-18 in the 2017-18 budget is a glaring omission is it not? The data to calculate the figure is of course there, it's just disguised in cumulative percentages and absolute totals. So let's fill in the gap (and while we're at it we'll show what the actual prior-year real terms year-on-year growth figures turned out to be):


So the first observation we can make (as per my last blog) is that Fiscal DEL is budgeted to increase by 0.7% in real terms for 2017-18.  If you've been listening to the SNP's rhetoric you would be forgiven for thinking that this budget was severely hampered by spending cuts due to "Westminster Austerity" - it may be impacted by that, but the net effect still allows real spending growth.


Note also that Fiscal DEL doesn't include new capital borrowing powers - factor those in (and other adjustments) and Total DEL actually rises by 1.1% next year (the only year we're actually budgeting for here) - see last blog for more detail.


The other thing that jumps out (and has caused me some headaches) is that it appears the actual real-terms Fiscal DEL trend in prior years was nowhere near as bad as presented in the draft budgets. I've spent quite a while trying to work out why, and it seems it's all down to the difference between inflation assumptions used at the time and the actual HM Treasury GDP deflator now known. What matters is the bottom row in the table above - that is the actual real terms year-on-year changes in Fiscal DEL based on the actual nominal figures in prior draft budgets (the known actuals, not the forecasts) adjusted by the most recent HM Treasury GDP deflator (as used for the current 2017-18 budget).

This was been a real pain to pull together because neither the 2016-17 or the 2017-18 forecasts show the actuals for 2014-15 or before (despite showing the actuals for 2010-11). If I was a cynical soul I'd think this was a conscious decision to hide the fact that the real-terms decline in 2014-15 was nowhere near as bad as forecast at the time and that 2015-16 actually saw a real-terms spending rise despite the fall forecast.


The fact that 201-11 data is shown in all cases does give me reasonable confidence that the nominal figures I have deflated here are comparable on a like-for-like basis, but I can't be 100% sure. If anyone has an alternative analysis that contradicts my analysis (using the latest HM Treasury GDP deflator) then I'd love to see it and would be happy to compare notes


But what about the longer term forecasts that are included in the Draft Budget - don't they show we face further budget cuts down the line?  Well, let's just say that the forecast presented is at best extremely crude.

To illustrate, the graph below shows the real-terms discretionary DEL forecasts produced in each of the last four years (indexed to 2013-14):


Note that to be able to see what's happening the y-axis doesn't start at zero - the index makes it easy to scale the movements in percentage terms.

It's clear that the real-terms forecasts used have always turned out to be pessimistic - so despite the rhetoric of "Tory Cuts", in fact what we've seen is more like a real-terms spending freeze. Still painful of course, but not as bad as you'd think if you happen not to be obsessive enough to attempt this analysis yourself.

When it comes to how far forward to forecast, the Budgets are also hugely inconsistent (the longer term forecast has only recently been added as a distraction - sorry "innovation")
  • The 2014-15 budget forecast the budget year + 1 additional year
  • The 2015-16 budget forecast the budget year only
  • The 2016-17 budget forecast the budget year +3 further years
  • The 2017-18 budget forecasts the budget year +2 further years

Look at the differences between the 2016-17 and 2017-18 longer-term forecasts in the graph above and you get a feel for how uncertain they are.  Despite this - per my last blog - the figure focused on in the commentary relates to that 2019-20 forecast relative to 2010-11 actual (despite the fact that this is a budgeting exercise for 2017-18).

You might argue that, however uncertain the forecast, it's reasonable to highlight the speculative longer term view relative to the historic peak. Even if you accept that, it's surely an observation that should be made in addition to not instead of explaining that the actual budget year under discussion is one with real-terms year-on-year spending growth.

Like me, maybe you've started wondering what that longer-term forecast is actually telling us - after all, by 2019-20 the Scottish Government is assumed to be responsible for 46% of that revenue (i.e. 46% of revenue raising powers will have been fully devolved). So you might think this forecast long-term real-terms decline is in large part a reflection of the Scottish Government's assessment of the effectiveness (or not) of their economic strategy and the impact of them using those powers.

But you'd be only partially right. Whilst there are explicit forecast assumptions about income tax, LBTT and Scottish Land-fill Tax, there is no assumption at all about Air Passenger Duty (APD). The commentary would certainly make you think that the planned APD reduction has been allowed for in the forecast: 
"we will introduce a Bill in the first year of the current Parliament to establish the tax which will replace APD in Scotland from 1 April 2018. We remain committed to delivering a 50 per cent reduction in the overall tax burden of APD by the end of this Parliament"
A 50% reduction in APD would amount to a 0.6% reduction in total Fiscal DEL in 2019-20 (before taking account of the economic activity benefits that might flow) - so it's not an insignificant consideration. But the forecast simply uses the OBR assumption for Scottish APD based on current policies because (I'm told) the forecasts can't make assumptions about legislation not yet passed.

The point is: the forecast is of limited value at best and - given this is a budget for 2017-18 - we should really focus on what it tells us about Scottish Spending in 2017-18.

What is tells us is that despite "Tory Austerity", Scottish Spending (whether you're looking at Fiscal DEL, Discretionary Spending Limits, Total DEL settlement from HMT or Total DEL) is rising in real terms.

Simple really.


Saturday, 17 December 2016

Spinning the Scottish Budget

I haven't had time for more than a cursory look at this and am indebted to the ever-diligent Fraser Whyte for pointing out this latest example of presentational spin by the Scottish Government [you really should follow him: @FraserWhyte81].

So taking this step-by-step;

The Scottish Draft Budget 2017-18 has just been published. Chapter 1 (which sets the financial context) includes just two tables of figures:


There are some glaringly obvious questions about how this data is presented:
  • Why is 2010-11 there but not the other years prior to 2015-16?
  • Why are there no year-on-year percentage changes shown, only cumulative?
  • Why are 2010-11 and 2015-16 chosen as the base years for the cumulative percentages?
The accompanying text referring to "UK Austerity" states:
"The UK Government’s approach to public spending is having a significant detrimental effect in Scotland. Between 2010-11 and 2019-20, the Scottish Government’s Fiscal Departmental Expenditure Limit (DEL) from HM Treasury will fall by over nine per cent in real terms"
We can see the -9.2% in the last column of Table 1.02 above. This is clearly the number they want us to focus on, because one of Nicola Sturgeon's special advisors took to Twitter last night (of which more later) to drive the point home
So let's unpack what's going on here.

First of all we have to understand the various different DEL (Departmental Expenditure Limits) figures quoted. I created the table below by just taking the key figures in table 1.01 above and showing how the various totals and sub-totals relate

The "Total Discretionary Spending Limits" row is what is used in table 1.02, where these figures are simply adjusted to real 2016-17 cash terms (i,e. adjusted for inflation). So when the budget text states "the Scottish Government’s Fiscal Departmental Expenditure Limit (DEL) from HM Treasury will fall by over nine per cent in real terms"  they are referring to Total Discretionary Spending Limits, where these are defined as:
  • Total DEL
    minus
  • Capital borrowing (i.e. devolved borrowing powers)
    minus
  • Net DEL adjustments (i.e. impact of devolved fiscal powers)
    minus
  • Financial transactions (i.e. effectively borrowing1)
    minus
  • Non-cash DEL (i.e. depreciation charges2)
    equals
  • Total Discretionary Spending Limits
So when the text refers to  "Fiscal DEL from HM Treasury" they are not referring to either "Total DEL" or "DEL Settlement from HM Treasury".

When Sturgeon's SpAd referred to Discretionary Spending Limits as "DEL totals" in that tweet above, it was in direct response to this tweet highlighting the fact that "Total DEL" was not shown in real terms and there were no year-on-year percentages shown (both undeniably true).
It was late, maybe Colin was just tired - but you'd think if you're Sturgeon's SpAd  you'd be careful not to wade in without understanding the figures or reading what was being said.

So now we know what we're looking at, how do we understand and interpret the trends? As Fraser Whyte quite reasonably pointed out on Twitter, it's kind of weird that there are only cumulative percentages and no year-on-year figures. Surely the Scottish Government isn't trying to avoid showing something that doesn't fit their preferred narrative?

Well let's see.

I went back to the 2015-16 Budget to be able to fill in the intervening years and put all figures in the same real 2016-17 terms as used in table 1.02. In doing so I recreated the percentages used in table 1.02, highlighted below in yellow.


If you're struggling to read that, here it is again just from 2014-15 which is really all we need to see

So what did the Scottish Government achieve by not showing 2014-15 as a relevant comparison year? Well firstly they avoided showing that Total Discretionary Spending Limit increased in real terms by 0.4% in 2015-16.

The table above also shows us that the Total DEL Settlement from HMT actually went up 1.7% in real terms in 2015-16 and our Total DEL went up by 2.7%.  I can't think why they would have chosen to present the data in such a way as to avoid this being clear.

Note also that in 2017-18 our total DEL will increase by 1.1% in real terms and cumulatively from 2014-15 to 2019-20 will increase by 1.4% in real terms.

Look at the figures in green showing the year-on-year and cumulative from 2014-15 trend in Total DEL - tells quite a different story from the "over 9% real terms reduction" doesn't it?

The yellow highlighted figures presented by the Scottish Government are true - but they offer at best a partial and at worst a cynically skewed picture of how the capacity for Scottish Departmental Spending is impacted by the HM Treasury settlement.

Is it too much to ask that our Government stops treating us as fools and just presents a fuller, clearer picture?

[I've dug a little deeper, it gets worse > Spinning the Scottish Budget: Part II]

****

Notes

1. Financial Transactions are allocated by HM Treasury to the Scottish Government and can only be used for the provision of loans or equity investment beyond the public sector. Financial Transactions facilities have to be repaid to HMT in future years.

2. depreciation or impairment costs associated with the ownership of assets. HM Treasury rules mean that this element of the overall DEL budget cannot be used to fund pay or procurement costs and as such this budget does not represent spending power for the Scottish Government.

Tuesday, 13 December 2016

Memetic Hogwash

This ridiculous meme first appeared several months ago and was throughly debunked at the time, but I see it's started cropping up on social media again


It is - like crime in a multi-story carpark - wrong on many levels.

"£2.8 billion whisky revenue counted as an English export (because it goes out through English ports)"
  1. No it isn't - not anywhere, not ever. This is simply a made up number, never sourced because there is no source. You don't need to read the other points below because the basic premise is simply made up. But if you're interested in other levels of wrongness ...

  2. There is no government "income" from whisky exports anyway - the economic value of this activity is captured in employment and corporate taxes which are of course correctly attributed to Scotland in the Scottish Government's own GERS figures

  3. Even if we're looking at export activity statistics (which have no direct impact on the £15bn fiscal deficit reported in GERS but would be relevant to an independent Scotland's current account deficit), these are of course unaffected by the port the goods happen to leave the British mainland from. Exports Statistics Scotland (ESS) figures are gathered based on customer locationa: if goods are exported from Scotland via an English port or freight-forwarder they will still be correctly recorded as Scottish exports.

  4. Peeling another layer of the onion and taking us further away from the specific lies in this meme, some suggest that because ESS figures are survey based they might be inaccurate. This is fair - no stats are perfect - but for what it's worth the way these survey forms are filled in makes it far more likely that they will understate "exports" to the rest of the UK than exports to the rest of the world. As a form-filler it's far easier to identify foreign currency export sales than sterling sales that happen to be South of the border

"£39.8 billion oil revenue said to be "unknown origin" added to Westminster balance sheet"
  1. No it isn't - The £39.8bn "unknown origin" figure comes from HMRC Regional Trade Statistics -and has nothing to do with government revenue (as reported in GERS or indeed anywhere else)

  2. There is no such thing as a "Westminster balance sheet" - this is concept apparently invented solely for the purposes of this meme

  3. If somebody was making a case for an independent Scotland's likely current account balance and missed out what would be counted as Scottish export trade by not including oil attributed in HMRC Trade Stats to "unknown region" ... then this would indeed be an issue, but I'm not aware that this has ever happened.

"I guess that will take care of the £15 billion black hole the Unionist Press goes on about"
  1. The £15 billion referred to here is presumably Scotland's notional deficit as reported in the Scottish Government's own GERS figuresb - that's where the press ("unionist" or otherwise) get the figure from

  2. Neither of the two other figures quoted in this meme have any bearing whatsoever on Scotland's £15 billion GERS deficit. Absolutely and unequivocally: no impact at all.

  3. Apart from anything else, how breathtakingly incompetent would you need to believe the SNP and Scottish Government to be for them to have missed these huge chunks of income when writing the independence White Paper?

"Just two examples of misappropriation of Scottish Income by Westminster"
  1. Neither of these figures have anything to do with income

  2. Neither of these figures are "appropriated by Westminster"

  3. er...that's it


*****



a. see official Scottish Government website here which explains "Export Statistics Scotland (ESS) is based on the Global Connections Survey". I have filled in these forms so I know, but see actual form here and note wording of question 6;



b. If we're being picky: as per 15-16 GERS figures it's £14.8bn so if the meme's using 2015 figures (as it claims) the figure would in fact be £14.3bn. The "black hole" is more correctly defined as how much worse Scotland's deficit is than that we bear by taking a population share of the UK's deficit, a figure in fact nearer £9 billion - but this is to critique this meme at a level of detail it clearly doesn't deserve. 

Wednesday, 7 December 2016

Changing The Rules of The Game

The 1.6 million Scots who voted for independence in September 2014, the 17.4 million Brits who voted for Brexit in June this year and the 62.5 million Americans who voted for Trump last month all share something in common: they want to see the rules of the game dramatically changed.

If, like me, you’re unsettled by this, maybe ask yourself how well the current rules of the game have suited you and – perhaps more importantly - what are you doing to make the rules fairer?

If you’re broadly successful and content with life, chances are the rules have suited you pretty well. That doesn’t necessarily mean you’ve had it easy, that you haven’t had to work hard to get to where you are.  But it probably does mean that you have an aversion to the idea of tearing up the rule book. After all, who wants the rules to change just when they’ve sussed out how to play the game?

It's traditionally been easy to remain complacent about the need for change, because those with voices most likely to be heard tend to be those for whom the current system works. Newspaper editors, media personalities, enigmatic politicians, successful business people – most of them are where they are because they've learned how to play the game well. The reason they’re in a position to be heard - and perhaps drive change - is also the reason why many have a vested interest in maintaining the status quo.

But the truth is we have both a moral obligation and a pragmatic incentive to keep changing the rules of the game so they’re fairer for all. The moral imperative has always been there, but maybe these recent votes will serve to shake the more complacent into pragmatic action. Change is coming, the only question really is who will be the architects of that change?

Take today's speech by Scottish Labout leader Kezia Dugdale calling for a new federal "Act of Union". It will be sniffed at by those on one side who fear change and those on the other who reject any proposal that falls short of full independence. But to resist any change is to ignore the 1.6 million people who voted Yes; to insist independence is the only acceptable option is to ignore the 2.0 million who voted No. The rules of the game need to change - personally I think it's encouraging to see Scottish Labour seeking a constructive solution.

Similarly, those who fight tooth and nail against progressive taxation measures and modest steps to improve wealth distribution would do well to compare the “injustice” of paying a bit more tax with the injustices of, to name but a few: tax avoidance, excessive executive pay, exploitative employment contracts, low wages, the educational attainment gap, food poverty, child poverty and urban deprivation.

Look at the evidence of our recent plebiscites: our failure to keep changing the rules of the game for the better has created a large body of people who feel any change must be better than what they’ve currently got.

This has created an opportunity for Machiavellian chancers to grasp for power by appealing to the disenfranchised and malcontented. The likes of the SNP, Farage and Trump offer voters a chance to dramatically change the rules of the game and take a free swing at the liberal elite into the bargain.

To be fair to them, these narrow-minded, populist policy peddling fundamentalists do genuinely want to change the rules of the game. It's just that their objective is to gain more power for themselves with little or no concern for the price paid by others.

If we are currently ruled by a "liberal elite", let's hope that they realise before it's too late that their failure to keep changing the rules of the game for the better opens the door for the "illiberal elite" to replace them.



Tuesday, 22 November 2016

Defacing the Facts: SNP MP Paul Monaghan

[The text of this article appeared in the Daily Record on 23/11/2016]

The problem with political debate in Scotland is not that people aren’t well informed, it’s that the SNP ensure they’re very well misinformed.

It’s not a sophisticated strategy, but it seems to be an effective one. By using Twitter, official party representatives can basically get away with saying whatever they like by avoiding having to deal with pesky journalists who tend to like to check facts before they report them. On social media, complete lies can be read by tens of thousands of people before they’re exposed and debunked, by which time it’s too late. People seeking to give themselves permission to ignore awkward facts have been satisfied and the tweeter’s mission is accomplished.

Take the example of the Scottish Government’s own GERS figures. When these showed Scotland’s economy being a positive contributor to the UK, they were rightly quoted by the SNP as authoritative statistics. Since the figures started showing Scotland effectively receiving cash from the rest of the UK (roughly £1,700 for every man woman and child in Scotland last year1) the figures have instead been cynically and systematically undermined.

The SNP and their social media mouth-pieces have been so successful with their campaign of misinformation that, whenever GERS figures are debated now, the following points have to be endlessly repeated: there’s no missing whisky duty, there’s no missing export income, the figures aren’t affected by corporate head-office locations, London infrastructure costs aren’t allocated to Scotland and the figures are not guesswork compiled by HM Treasury, they’re qualified National Statistics compiled and published by the Scottish Government2.

The problem, of course, is that those who want the comfort of not facing economic reality simply choose not to listen to those who patiently debunk the myths. In a world where many proudly proclaim themselves to be climate change deniers, in Scotland we now have a growing army of GERS deniers.

But this strategy of spreading misinformation through social media isn’t limited to falsely undermining the GERS figures.

Last week many of SNP MP Paul Monaghan’s 15,600 twitter followers were eagerly retweeting this message of his: “Interesting UK Gov reply today on question of proportion of Scottish exports to RUK [rest of the UK] destined for EU. They don't know. My figures suggest 75%.


He went on to make clear that he was referring to exports “passing through rUK on route to EU. The implication is our exports are not attributed to Scotland.”


Now anybody with even a passing understanding of Scotland’s economy or the way our export statistics are calculated will know he’s making an extremely cack-handed attempt to mislead people here.

Export statistics are gathered based on the customer’s location3, so goods exported to the EU through an English port or freight-forwarder will correctly be recorded as EU exports (not rUK exports as Monaghan implies).

It’s also worth pointing out that no competent Scottish business would sell goods to an English customer for that customer to simply sell on to the EU without adding value. Factor in the knowledge that 56% of Scottish exports to the rest of the UK are services not physical goods4 and it’s clear that Monaghan’s 75% figure is complete balderdash5.

Of course it’s obvious why an SNP MP would want to falsely suggest that Scottish export figures to the UK are over-stated and those to the EU under-stated. One of the gaping holes in the SNP’s argument for Brexit as an independence trigger is the fact that Scotland sells more than four times as much to the rest of the UK as we do to the EU3. This means - if Brexit does turn out to mean UK/EU trade barriers exist - Scotland would risk damaging four times as much trade by ending up on the EU rather than the UK side of any such barriers.

So faced with a clear logical flaw in their argument, this SNP MP resorts to the tried and tested strategy of misrepresenting the facts and spreading misunderstanding. Unfortunately for Mr Monaghan, in doing so he exposes an embarrassing level of ignorance for all to see. Apart from showing that he doesn’t understand how export trade statistics work, he also shows he hasn’t even managed to read his own Government’s publication on the topic.

On Twitter he went on to say “the UK Gov told me today just 44% of Scottish manufacturing exports are to the rest of the UK”.


Well yes, they would have told him that by looking at the Scottish Government’s own “Export Statistics 2014” report where that information is found. If Monaghan had bothered to read this himself he would also have known that “just 44%” of Scotland’s manufacturing exports going to rUK is still 1.7 times more than go to the EU4.

You have to wonder: if independence is really such a good idea for Scotland’s economy, why do its supporters so consistently try to mislead us about the facts?


***


Notes
1. for the simplest explanation of this, see The £9bn Fiscal Transfer

2. if anybody still doubts any of these facts, please see this blog post > GERS Deniers

3. see official Scottish Government website here which explains "Export Statistics Scotland (ESS) is based on the Global Connections Survey". I have filled in these forms so I know, but see actual form here and note wording of question 6;




4. These two simple tables provide an audit-trail between the figures in specified tables in the Export Statistics Scotland 2014 publication and the percentages and relative figures used in this blog (highlighted). The minor inconsistency in the tables included in the pdf were not significant enough to send me to the supporting excel tables.




5. When challenged to back-up his assertions Mr Monaghan claimed unspecified "academic research" and blocked me - at the time of writing he has still not offered further support for "his figures" which he ridiculously claims "suggest 75%" for rUK exports "destined for the EU"






Sunday, 20 November 2016

Data Errors in Beyond GERS

I spent this afternoon raking leaves and planting bulbs and all the while GERS and CRA figures were turning round in my head. I was bothered by the fact that base data errors in the "Beyond GERS" report published by Common Weal (see last blog post) were actually harming the case they were trying to make.

My interest has always been in trying to ensure debates around Scotland's future are based on a sound understanding of the data, so - recognising that this helps those trying to use the "Beyond GERS" report to argue for independence - I feel duty-bound to offer the following correction.

In essence the author of "Beyond GERS" has made two mistakes.

The first mistake made is to use 2014/15 data for identifiable spend instead of 2015/16 data - this leads to an understatement of costs of £1.1bn.

The second mistake made is to double-count Scotland's share of the UK's overseas spend - this leads to an overstatement of costs by £2.4bn.

The net effect is therefore a £1.3bn overstatement of Scotland's base costs (before heroically optimistic savings assumptions are applied by the report's author).

The following table offers the simplest audit-trail of this I could manage. The first two columns are actual GERS figures and the fifth column (ho ho) is the middle case as presented by "Beyond GERS". I've broken out the rows needed to explain how GERS and Beyond GERS figures are related - hopefully this is helpful.


To get to these figures I needed to reconcile the GERS figures with the CRA data for the last two years. It's an interesting exercise (if you like this sort of thing) so I share the analysis below
  • The 1st column is Scotland's identifiable spend per CRA
  • The 2nd & 3rd  are UK total overseas and non-identifiable spend by category per CRA
  • The 4th column is a Scotland's simple population share of overseas and non-identifiable spend
  • The 5th column is the difference between the 1st and 4th columns and the last column (which is the figures as shown in GERS)


Basically what this table shows is the "value-added" of the Scottish Government's statisticians in preparing GERS - the 5th column is the adjustments made versus simply using CRA data and taking a population share of overseas1 and non-identifiable1 spend.

So in 2015-16 these adjustments served to reduce Scotland's attributed spending by £1bn. If you read GERS you'll find these adjustments explained - I'm not going to attempt audit-trail them all here (this is my Sunday evening after all).

Of course when the 2015-16 GERS report was published the Scottish Government was relying on estimates of CRA data - so for completeness here's the same table for 2014-15. Again the net affect of the Scottish Government statisticians' adjustments was to reduce Scotland's attributed spending by £1bn.



This blog should be read in conjunction with previous blog: Beyond GERS, Beyond Belief



Note
1. In compiling this audit trail I stumbled across something I confess I haven't been able to explain. In the CRA report, page 13 Table A.1 the figures for total "Outside UK" and "Non-Identifiable Expenditure" differ from the sum of those figures in tables A.5 to A.15 (the figures by spend category do reconcile between tabe A.1 and tables A.5 to A.15).  I'm sure I'm missing something obvious - any help would be gratefully received

Outside UK Spend (2015-16)
Table A.1 = £25,712m
Sum of Tables A.5 to A.15 = £15,230

Non-Identifaible Spend (2015-16)
Table A.1 = £83,482
Sum of Tables A.5 to A.15 = £86,293

Saturday, 19 November 2016

Beyond GERS - Beyond Belief


This front-page splash and supporting article in the Nat Onal caused a great deal of excitement among dogmatic proponents of Scottish independence.

It's no surprise that the article itself was the usual garbled nonsense; the Nat Onal know their readers, so the report was spun as a GERS denier's wet dream
  • They describe it as "a new model aimed at replacing GERS figures" (it isn't, it's an attempt to predict Scotland's possible stand-alone finances, something GERS has never claimed to do)
  • They refer to "modest and conservative" calculations (which we'll see are anything but)
  • They offer this quote from Common Weal Director Robin McAlpine: "With this report we think we’ve reached deficit parity with the rest of the UK without cuts to anything other than defence." (which is - to be kind - a creative summary of the report's conclusions)
But those Nationalists who bother to read the report itself (published on the Common Weal website here) will - if they have any critical faculties intact - find themselves bitterly disappointed. I recommend anybody interested in the debate around Scottish Independence to read the report in full and - noting that it's written by an avowedly pro-independence author - ponder what it tells us.

So what does the report actually say?

Well let's start by applauding the author's intention. Some of us have spent the last few years patiently1 making the following point about GERS
"Nobody is arguing that an independent Scotland wouldn't want to and indeed have to do things differently - but GERS does show us the starting point, the run-rate, the pro-forma accounts on which an independence case needs to be built. Those who champion independence have to make a credible for case for how and why and by how much we'd change the GERS figures by being independent. Just saying "the GERS figures tell us nothing" simply doesn't wash - they tell us what happens if we were to keep taxing and spending at these levels (and why we can't)."  - Chokkablog August 20161
Regular readers of this blog will know that the GERS figures show Scotland received an effective c.£9bn fiscal transfer from the rest of the UK in 2015-16.

The Beyond GERS report validates this analysis by recognising that - just to get to "deficit parity" with the rest of the UK - we would need to find £9bn through some combination of savings to the costs and increases to the tax revenues shown in GERS. The author has - to his credit - accepted this challenge and had a go at addressing it.


As an side: we should also applaud how "Beyond GERS" handles tax revenues:
"the starting point is taken to be the latest figure of £53.748 billion extimated by GERS in 2015-16"
Hallelujah! No nonsense about missing VAT revenues or whisky duty, no confusion about export revenues, no erroneous suggestions that corporate head-office locations affect the figures or that HM Treasury is suppressing our tax figures by withholding data. Props are due to Fraser Whyte and Neil Lovatt for their consistent work rebutting these myths - maybe it does make a difference after all?


Business people are often faced with strategic decisions which are hard to robustly quantify. In those situations a useful approach is to work out "what would you need to believe would happen" for a decision to make sense. "Beyond GERS" offers us just such an analysis.

So - remembering that the Nat Onal calls these "modest and conservative" assumptions - here's what Beyond GERS suggests3 we would need to believe would happen for independence to make economic sense
  • We would save £1.7bn by walking away from 61% of our population share of the UK's debt
    and
  • We would save £3.5bn by persuading the rest of the UK to pick up 38% of our pension bill
    and
  • We could cut our defence spending by £1.0bn (as opposed to the £0.6bn saving assumed in the White Paper)
    and
  • We could raise an additional £3.5bn of tax (equivalent to a 29% increase in our total income tax take)
    and
  •  We could raise £0.7bn of revenue through "government re-organisation"
    and
  • There would be no economic downside due to separation from our largest export market and the need to create our own currency

Anybody who reads that list and thinks "yeah, that seems like a reasonable set of assumptions", do please get in touch - I want to sell you things.

There are lots of issues with the detail of the report as it attempts to justify the above list. If it's not obvious to you why these assumption are at best heroically optimistic, most of the reasons are covered by Neil Lovat's excellent blog post here (which saves me a lot of time).

The base data he uses is all over the place. He uses a mix of 14/15 and 15/16 cost data which means he understates identifiable costs by £1.1bn and the accounting adjustment by £0.7bn - but this is more than balanced by the fact that (presumably because he's misunderstood the data) he's actually over-stated "other non-identifiable" and "overseas costs" by more than £2bn4.

** Addendum: I've taken the time to fully reconcile GERS, CRA and "Beyond GERS" here (it shows that the net effect is that "Beyond GERS" atually overstates Scotland's base costs by £1.3bn) **

But let's finish with the positive: I wouldn't go so far as to say the pace is glacial - it's maybe more akin to the speed of continental drift - but this paper does shows that the debate is gradually moving forward. The author has accepted the existence of the £9bn deficit gap and tried to make some assumptions to close it. In the process he has - perhaps unwittingly - provided a compelling illustration of the scale of the problem supporters of independence face.



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



Notes
1. Well, mostly
2. I really have been very consistent about this - the following from this year alone
"Nobody is arguing that things would remain the same. Those of us who argue for rational debate simply ask for those making the case for independence to actually explain coherently what the different "economic strategy" would actually be and provide a realistic assessment of how (and by how much) it would change the figures compared to those of Scotland being within the UK." - Chokkablog August 2016
"We should be very clear about what this analysis of historical fiscal data can and cannot tell us. The figures only tell us how an independent Scotland’s finances would have looked if we had already been independent but were still raising taxes and incurring public spending (including reserved expenditure) as we have been as an integral part of the UK. We are looking at what in financial accounting terms would be considered pro-forma accounts. The figures do not tell us what the future accounts of an independent Scotland would look like. They do however describe the starting point (the “run-rate”) from where we can start to consider the possible impact and fiscal implications of independence." - Chokkablog March 2016
"All I have been attempting to do is ensure we have clarity around our starting point. Were we to be independent or fiscally autonomous now, what would our pro-forma accounts look like? What is our economy's run-rate? This frames the debate, shows the size of the challenge. If we are all honest about this starting point then maybe we can have an interesting and constructive debate" - Chokkablog June 2016
"This onshore deficit gap matters because it is revealed - it becomes real - as oil revenues decline. This is not to say that were Scotland to be independent this gap would remain; it might narrow, it might widen. It merely gives us an idea of the run-rate relative disadvantage we would be starting with if we sacrificed the benefits of UK-wide pooling and sharing (assuming the days of significant oil revenues are indeed behind us). If you like, it's the head-start we'd be giving to the rest of the UK." - Chokkablog February 2016

3.  The table below shows the audit-trail I've used to understand how the "Beyond GERS" middle case compares to actual GERS figures.

Beyond GERS uses PESA data whereas GERS traditionally uses CRA data - I don't claim to have reconciled them fully but merely observe the following;

  • The 2015-16 GERS figures were (for the first time) produced before the CRA data were published. These data now exist (as detailed in my last blog post here) so I have assumed identified expenditure in GERS = now available CRA data (in reality I expect GERS 2015-16 figures will be restated to reflect these actuals, so this is a source of likely reconciliation error)
  • At first look I don't understand why Beyond GERS has such a big figure for "other non-identifiable". This could possibly be due to PESA/CRA differences, but even netting the grey "opaque" figures off against each other I see £1.3bn of cost in Beyond GERS that I can't explain.
Frankly I don't think it's worth my time to go any further explaining and reconciling somebody else's figure

*** ADDENDUM ***
4.

I couldn't let it lie - I hate being me.

So ... Beyond GERS uses 14/15 cost data from PESA (see page 158) and 15/16 revenue data from GERS - which is simply wrong. The 14/15 identifiable cost data in PESA he uses matches the 14/15 identifiable cost data in CRA (see page 15). The 15/16 cost data in CRA (which he should be using, although to be fair it's only just published) is £1.1bn higher (per my table above).

So he starts off £1.1bn low on costs.

He uses the GERS accounting adjustment for 15/16 and applies it to 14/15 cost data - again this is simply wrong. The accounting adjustment in 14/15 was £4.6bn versus the £3.9bn he uses.

So he's another £0.7bn low on costs there.

I think this is incompetence on the author's part (rather than an active attempt to deceive) because his £2.35bn on "other non-identifiable" looks awfully like a double-count to me (i.e. it's costs that are already attributed to Scotland in the CRA analysis). If not he's suggesting GERS is £2.2bn light on costs! So he seems to have double-counted £2.2bn of costs.

I've tried to be polite and constructive throughout this blog post - so let's just say the report's intentions may be admirable, the analysis less so

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



Thursday, 17 November 2016

Does Scotland Simply Spend Too Much?

Today saw the release of the latest HM Treasury Country and Regional Analysis (CRA) report which looks at public spending levels across the UK.

From a Scottish perspective the figures suggest a simple and powerful headline message: "Public spending in Scotland ‘£1500 higher than UK average’"

This is of course not news. In a post-indyref world, surely most Scots are aware that Scotland enjoys higher public spending than the average of the rest of the UK?

Regular readers of this blog will know there are nuances aplenty and some caveats needed (which we'll come to) - but the simple maths is easy to follow: £1,500 per person higher spending on 5m people = £7.5bn. That's the lion's share of the current c.£9bn effective fiscal transfer Scotland receives from the rest of the UK - so the transfer is largely explained by the fact that we spend more, not that we generate less.

Those who react to observations about the scale of Scotland's notional* higher deficit (and the resultant fiscal transfer from rUK) with "this just proves we suffer under mismanagement from Westminster" have overlooked this very simple fact: we have a bigger deficit because we enjoy higher levels of public spending. These are levels of public spending that (as I frequently tire of pointing out) would be simply unsustainable without either ongoing fiscal transfers from the rest of the UK or - were we to be independent - new windfall revenues (like another oil boom) or decades of spectacular economic growth.

* notional, because the whole point of being in the UK is that this deficit doesn't actually exist - Scotland's spending doesn't have to be met by Scotland's tax revenues and our population share of the UK debt alone, we get to pool and shares across the UK (if you like, this support for our higher spending now is merely fair reciprocation for sharing "our" oil revenues in the 1980s)

So few people should be surprised to hear that Scotland has relatively high levels of public spending. The absolute size of the difference may, however, cause raised eyebrows among that small cluster of people who are familiar with the Scottish Government's own Government Expenditure and Revenue Scotland (GERS) figures
  • GERS 2015-16 showed Scotland having £1,2141 per head higher Total Managed Expenditure (TME) than the UK average
  • This CRA report shows Scotland having £1,4602 per head higher Identifiable Expenditure
That's a difference of £250 per capita or £1.3bn - so not an insignificant amount.

There are a few factors that can explain the difference ;
  1. The CRA headlines are based on identifiable expenditure only - but given the vast majority of non-identifiable spend is allocated in GERS on a per capita basis, it seems unlikely that this would explain the difference3
  2. Timing: by publishing GERS earlier than in previous years, the Scottish Government had to rely on their own estimates and analysis rather than using the published CRA figures as they were able to in prior years4. We'll probably have to wait to see how the GERS 2015-16 figures are restated in the 2016-17 publication to find out the extent to which this led to inaccuracies.
  3. Methodology: the Scottish Government make various adjustments to the CRA spending data when compiling GERS - for a combination of technical and/or judgement-based reasons5.
I haven't fully reconciled the figures - life's too short - but overall it seems like overall identifiable expenditure matches reasonably well between Scottish Government GERS and the CRA report - with a net difference of only about £90 per capita (with higher spend in the CRA analysis)6. We'll use the detail of this analysis to apply caveats below - read the note if you really want to follow the data trail or just trust me; it's up to you.


The balance of the difference between GERS and CRA (£160 per capita) must be explained somewhere among the world of pain that is "accounting adjustments" - we'll leave those for another day8.


So armed with the above knowledge and caveats, here's what the CRA analysis shows us.

First of all there's the age-old question of whether we compare our spend per capita with UK average (including Scotland) or with the rest of the UK (rUK). Personally I find it easier to think in "vs rUK" terms, on which basis our (CRA analysed) spend is in fact about £1,600 higher.


As an aside: those who think that HM Treasury are always spinning against Scotland might ask themselves: if that's the case, why they don't use "versus rUK" comparisons for their press-releases?


Looking at the breakdown by spend type in the table below it's clear Scotland  spends more than the UK average in all spend categories (as we have aleady observed through the GERS figures in blogs passim).

Figures we can trust: materially consistent between CRA and GERS
The £ figures in these bullet points are how much higher Scottish annual spend per capita is than the rest of the UK, the percentage is that figure vs the rUK per capita spend
  • £331 (+8%) on Social Protection (mainly pensions & benefits) 
  • £195 (+15%) on Education & Training (primary, secondary, tertiary)
  • £149 (+7%) on Health 
  • £131 (+168%) on Enterprise & Economic Development
  • £99 (+105%) on Public & Common services (executive & legislative etc.)
  • £93 (+154%) on Agriculture, Forestry & Fisheries
  • £90 (+82%) on Recreation Culture & Religion (sports & culture)
  • £79 (+19%) on Public Order & Safety (police, fire, law courts, prisons)
Figures to treat with Caution as CRA vs GERS differences are material
  • £68 Transport (road, rail, other) - GERS suggest even higher?
  • £91 Environment Protection (mainly waste management) - GERS suggests not that high, (nuclear related?)
  • £239 on Housing & Community Amenities - but big caveat as GERS suggests a far smaller figure (Housing Association7 accounting treatment related?)
It's pretty straightforward really - even with caveats around methodology and even if we accept the (kinder on Scotland) Scottish Government GERS assumptions - Scotland, as it's governed today, is an expensive country to run.

The extent to which this relative high cost is a structural issue (remote and island communities, demographics that mean a relatively high dependency ratio, areas of chronic deprivation etc.) or are a result of a Scottish Government that's keen to spend the Barnett Formula money on freebies that win votes (no tuition fees, free prescriptions, scrapped tolls etc.) is a debate that will run and run.

This analysis is a timely reminder that there would be one easy way for the SNP to further the cause of Nationalism: they could ask for the fiscal framework to be scrapped so that Scots could get used to the lower public spending we'd need to endure while we waited for the miracle of independence to produce exceptional economic growth ...








NOTES

1. GERS 2015-16 page 4 table S.4 shows this rounded to £1,200 - precise figure from back-up data tables

2. CRA Report page 14 table A2 - per capita spend figures: UK £10,536 - Scotland £9,076 = £1,460

3. The three largest non-identifiable spend areas are public sector debt interest, defence and international services. Between them these account for more than 80% of non-identifiable expenditure. All of these (and many others) are allocated to Scotland in GERS on a per capita basis (they therefore can't explain any per capita spend difference between Scotland and the UK average)

4. GERS page 25:
"This edition of GERS sees a change in methodology to allow earlier estimates of expenditure to be produced. Whilst expenditure for years prior to 2014-15 continues to be based on the CRA, the 2015-16 estimate is primarily based on data from the Scottish Government accounts system combined with data from HM Treasury‟s Public Expenditure Statistical Analyses"

5. Detailed Expenditure Methodology Paper page 10
"A number of adjustments are then made to this spending estimate.
1. Public sector debt interestIn 2015-16, UK public sector debt interest includes expenditure associated with English Housing Associations. Scotland is allocated none of this expenditure in GERS. This decreases the Scottish share of HM Treasury current expenditure on public sector debt interest.
2. Network RailIn 2015-16, spending by Network Rail has been moved from an accounting adjustment into TES. The shares from GERS 2014-15 will not reflect this spending. Spending associated with Network Rail has therefore been added into Scottish spend estimates. This increases the Scottish share of Department for Transport current and capital spending on transport.
3. Social protection expenditureScottish social protection expenditure by the Department for Work and Pensions and HMRC is estimated directly, rather than apportioning shares of the UK total. Spending by the Department for Work and Pensions is estimated based on data from the tabulation tool and UK spending data. Spending by HMRC is based on HMRC spending data and HMRC geographical award statistics."
6.


7. GERS page 2.
"The ONS reclassified English Housing Associations (HAs) into the public sector on 30 October 2015. In 2015-16, this increased UK public sector revenue by £6.9 billion and UK expenditure by £10.8 billion, resulting in a £3.9 billion increase in the UK net fiscal deficit. A similar impact is seen in earlier years. Scotland is apportioned none of this additional revenue or expenditure in GERS. The ONS have not yet announced a decision on the classification of Scottish Housing Associations."

8. I confess to being flummoxed by the fact that the non-identifiable cost totals in table A.1 are not explained by summing the figures given by spend category - see figures highlighted amber


Saturday, 5 November 2016

The £9bn Fiscal Transfer vs The £15bn GERS Deficit

I've noticed there still seems to be a lot of confusion about the difference between the GERS deficit, the deficit gap between Scotland and the rest of the UK and the effective fiscal transfer that the rest of the UK currently makes to Scotland.

So here's a very simple exhibit which explains the difference between the £15bn1 GERS deficit for 2015-16 and the £9bn2 effective fiscal transfer Scotland receives from the rest of the UK. The effective fiscal transfer is as a result of the fact that we pool and share our deficit (hence debt, hence debt interest in GERS) on a UK-wide per capita basis.

1. £14.8bn
2. £8.7bn


Thursday, 27 October 2016

Crazy Horses

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


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

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

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

Each speaks to different constituencies

1. Andrew "Acceptable Face of Capitalism" Wilson

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

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

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

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

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

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

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

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

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

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

Andrew has his work cut out.

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


2. George "Smash the System" Kerevan

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

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

It appears that time at Westminster has done nothing to dampen George's revolutionary ardour. Let's look at some highlights of Citizen Kerevan's outpourings over the last few months:
  • In July - he accepted the need for spending cuts under independence: "a separate Scottish currency pegged to sterling would necessitate fiscal consolidation to assuage the foreign exchange markets. It would certainly be doable, but would require independent Scotland to cut its budget coat to fit its fiscal means." - Cityam
  • In August - he called for a revolution:"Popular, if often incoherent, opposition to this mad, mad system has suddenly boiled over into open revolt. Not enough revolt, in my opinion, but a line has been crossed. [..] The neoliberal order needed dismantling"The National
  • In September - he denied the need for spending cuts, converting instead to the growth cause (while suggesting that the higher public spending we enjoy in Scotland is due to "incompetence of Westminster"): "Growth is the only sure route to closing any temporary budget deficit bequeathed to Scotland by the economic incompetence of Westminster." - The National
  • In October - he abandoned the growth cause and shifted into full-on "smash the system" mode (volunteering the Scots to be used as lab-rats in the process)
“a new political economy using Scotland as a laboratory – an agenda that rejects not simply the neo-liberal variant of capitalism but the entire system itself. [..]  to embed a non-capitalist economic practice [..] Such an outcome will not be stable. There will be social friction and resistance from the prevailing capitalist order
The era of neoliberal tax cuts and low interest rates is over", corporation tax should not be used as “a crude bribe to secure inward investment” there should be greater taxes on wealth, despite “an inevitable response from the business class and rich that such a move will hurt ‘incentives’, discourage inward investment and ‘force’ high net wealth individuals to migrate”  
- the Herald Oct 2016
Of course anybody vaguely paying attention knows that in fact the SNP embrace capitalism and are fans of "neoliberal tax cuts". The only significant tax moves they've suggested recently have been to cut taxes (corporation tax, Air Passenger Duty, VAT on tourism, "use the tax system to improve incentives for investment" etc.)7 and they balked at the idea of raising the top rate of tax to 50p (as Scottish Labour and the LibDems proposed).

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


3. The pantomime horse


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

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

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

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



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

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

**********




Notes


1. Growth Commission Membership - SNP/Yes Scotland members

2 x Former SNP politicians
  • Andrew Wilson (Chairman)
  • Jim Mather
5 x Current SNP politicians
  • Kate Forbes MSP
  • Derek Mackay MSP
  • Shirley-Anne Somerville MSP
  • Roger Mullin MP
  • Cllr. Marie Burns
2 x Former Yes Scotland activists

2. Growth Commission Membership - Academics
3. Growth Commission Membership - Businesswomen

4.  Price of Independence


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

5. Scotland's GDP growth


6. The Scottish Government's own White Paper: Scotland's Future: Your Guide to an Independent Scotland had a go at scaling how much faster an independent Scotland might grow when no longer shackled to the UK. In fact they were so pleased with their analysis that they quoted it five times (pp 23, 43, 88, 375, 619). Here's the wording from page 23;
"Similar countries to Scotland have seen higher levels of economic growth over the past generation. That is because they have the bonus of being independent and are able to make the right choices for their nation and economy. If Scotland had matched the levels of growth of these other independent nations between 1977 and 2007, GDP per head in Scotland would now be 3.8 per cent higher"
I think we can safely assume that the countries and timescale used were selected to make the strongest possible case - after all, why stop at 2007 when more recent data was available? - and just in case you doubt if that is a cumulative 30 year figure, it's clarified on page 619:
"The average rate among small European countries was 2.61%, a gap of 0.12% each year. Over a 30 year period the compounded effect of this gap totals 3.8% of GDP"
7. SNP tax cutting proposals
"giving Scottish businesses a competitive edge by providing a clear timetable for reducing corporation tax by up to three percentage points; and improving international connectivity by cutting Air Passenger Duty by 50 per cent" - White Paper (p.6)
"One option for future governments to support manufacturing and boost innovation will be to use the tax system to improve incentives for investment, for example through more generous depreciation allowances for key growth sectors in Scotland." - White Paper (p.88)
"Tax based incentives that are aimed at encouraging investment in innovation activities can be applied to either expenditure (related to R&D) or income that results from investment in R&D. Following independence this Government will examine how best to develop and target such tax relief to encourage Scotland’s innovative industries" - White Paper (p.102)
 44 SNP MPs call on Treasury to reduce tourism VAT

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


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