Sunday, 21 February 2016

Playing the Long Game

As an adult, do you honour the promises you made to yourself as a child? I do.

That's why you'll sometimes find me lingering a little longer than necessary at the confectionery fixture in a garage forecourt shop. The grown man able to buy any sweets he likes is pausing to allow his 12 year-old self to appreciate the moment. As I promised myself I would.

That's why - after I've climbed into my car and thrown another Curly Wurly onto the pile of uneaten confectionery on the passenger seat - you'll see me pause and smile. I'm allowing the 16 year-old me to appreciate the sense of freedom that comes with being able to drive. As I promised myself I would.

That's why one day I'll stop working for money and start writing for pleasure. The teenager who chose maths and sciences over English - who chose the pragmatic over the romantic, who chose business over pleasure - will finally find time to just sit and write. As I promised myself I would.

The past may be another country, but we shouldn't forget the promises we made when we lived there.


For me, keeping promises-to-self is an important part of "playing the long game". Apart from motivating and rewarding patience and tenacity, playing the long game forces you to think through the long-term consequences of your actions: don't make promises you can't keep, don't make assertions you can't support and don't pursue short-term objectives by offering long-term hostages to fortune.

Which brings us - of course - to the current political landscape in Scotland.

The SNP have famously been great players of the long game, eschewing short-term ambition and personal agendas (some might say principles) in favour of their one over-riding objective of independence for Scotland. But something changed during the referendum campaign when they thought they could see their end-goal in sight: they got summit fever. Like the climber pushing on to the peak despite bad weather closing-in, they dismissed any concerns about how they'd climb back down. The summit was all that mattered, the implications of possible failure were ignored. They stopped playing the long game.

Long after it became clear that the economic case in the White Paper was the stuff of fantasy they pressed on. They gambled the economic future of 5 million people on a set of flaky figures, they had no currency "Plan B", they defended their oil revenue forecasts when it was simply no longer credible to do so. Of course if they'd achieved a Yes vote none of that would have mattered because there'd be no turning back. Disgruntled voters may have come to realise that they'd been duped by a false prospectus, but they'd have no choice but to suck it up.

They didn't seem to care that, in the event of a No vote, they were leaving a hostage to fortune by hanging their case on £6.8 - 7.9bn of annual oil revenues. They may not have expected the out-turn to be as bad as the £0.1bn we're now seeing, but let's be clear: long before the referendum date they knew that £7.9bn pa. was the stuff of pipe-dreams. So in their summit fever they took the risk that they could be left exposed as reckless chancers, their economic credibility in ruins. The only thing that could spare them would be some big, bold, distraction, something to draw attention away from the unravelling of their White Paper forecasts - something like the fiscal framework negotiations.

Because of course the SNP weren't alone in falling prey to summit fever. With polls swinging dramatically towards Yes and the referendum date looming, the major Westminster parties panicked and cobbled together the now infamous Vow. Whether the Vow was necessary to secure a No vote we will never know, but what we can be certain of is that it was loosely defined and wide open to interpretation. As a result it has offered the SNP a life-line, the distraction they so desperately need.

Instead of digesting the scale of economic trauma we'd be facing if the SNP's false prospectus for independence had won the day, instead of focusing on the SNP's extremely patchy record in domestic office, voters are now distracted by a fresh head-to-head battle between Holyrood and Westminster. It's us versus them, it's Scotland versus the rest of the UK, it's the SNP fighting for Scotland's best interests. They're slap bang in the middle of their comfort zone.

Except that even here the expedient political rhetoric they adopted during the referendum is coming back to haunt the SNP, leaving them open to accusations of rank hypocrisy.

They find themselves tenaciously defending the dynamics of the Barnett formula, tacitly accepting that all of the objectively "fair" alternatives are not as beneficial to Scotland as the Barnett formula is in practice. The fact that they have to lean so heavily on an extremely broad interpretation of the "no detriment" clauses gives a lie to the notion that the existing settlement is somehow unfair to Scotland. Of course because they're currently negotiating in the best interests of Scotland (at least from a short-term economic perspective) it's hard to see this causing them too much harm. That said, assuming a deal is reached that preserves the economic insulation offered by Barnett, it'll be interesting to see how they square this particular circle when next trying to ramp up the grievance rhetoric.

But the latest point of disagreement in the fiscal framework negotiations is the one where the SNP really have been hoist by their own petard. The point of contention is the assumed one-off costs of establishing the systems to administer Scottish taxes (and the ongoing costs of running them). This matters because the UK Government is committed to paying a share of these costs, so it's important to Scots that they're not underestimated.

In Nicola Sturgeon's latest letter to David Cameron she has stated that, just for the limited welfare powers currently being transferred, the set up costs would be "between £400m-£660m". The obvious problem here is that during the independence referendum the SNP argued that the entire administrative infrastructure for an independent Scotland could be set-up for just £250m. This glaring discrepancy has not been lost on those negotiating on behalf of the Treasury - you don't have to be great exponents of the long game to remember fractious arguments that took place less than two years ago.

It's worth recapping quite how aggressively the SNP fought their corner over this £250m figure at the time. The approach they took was one which was well tried and tested during the referendum. First they found a tame expert willing to sacrifice their credibility for a political cause. As this blog highlighted at the time (Dunleavy and the Costs of Independence), some quite remarkable logical contortions were performed by said expert to deliver what was a frankly meaningless £200m headline figure. Then Salmond went into full Mr Bombastic mode, waving this number as if it was indisputable proof that the Treasury (who had suggested a figure of  up to £2.7bn) were up to no good. He demanded an investigation - of course he did - into the Treasury's "grossly misleading claim" and pronounced that it was "now very difficult for people in Scotland to trust any information on the independence referendum issued by the UK Government."

Without gaining anything like the headline coverage that Salmond's faux outrage did, further work by Oxford Economics suggested the figure was in fact likely to be £1.5 - £2.0bn and even drew an admission from the tame academic Prof Dunleavy that the figure could be up to £1.5bn. The Centre for Economics and Business Research (CEBR) subsequently suggested a figure of "nearly £2.5bn".

It's hard to believe that anybody would have been put off the idea of independence by the thought of a couple of billion of set-up costs, but the SNP apparently couldn't resist picking a fight with the UK Government over this and had no qualms pushing the patently ludicrous figure of £250m. I guess it's in their nature.

Salmond's bombast succeeded in winning the battle of the headlines at the time, but maybe if they'd kept their eye on the long game they'd have realised that playing silly-buggers with important numbers like this could one day come back to bite them.

It normally does.

Friday, 12 February 2016

Unreasonable Negotiation

True Story:

In my early years as a Strategy Consultant I and a colleague were travelling around the Far East whilst gaining an understanding of our client’s International Sourcing operations.  After moving between several countries in just a few days we found ourselves having dinner in down-town Bangkok and decided to get a Tuk Tuk ride back to the hotel.

We were savvy enough to know that we should agree the price for the journey in advance so we hailed our first Tuk Tuk driver and duly started negotiating.  We weren’t going to be taken for mugs and we knew the price in Baht for the journey shouldn’t work out at much more than about £1. We weren't surprised to be offered some outrageous prices but - with a long line of drivers willing to haggle for our business - we merrily dismissed driver after driver as we waited for one to accept a reasonable price.

Eventually we persuaded a driver to accept our £1 and take us to the hotel.  At the end of the journey he pleaded with us for a decent tip, explaining passionately that he had a wife and kids to feed and we really were paying too little for the journey. By this stage, brimming with confidence in our negotiation skills, confident we had paid a healthy full fare and determined not to be taken as a pair of fools at the last hurdle, we airily waved him away and retired to the hotel bar.

Here’s the rub: the following morning we realised that - having been through several currency changes in the preceding days - we had completely messed up our exchange rate calculations. What we had thought was £1 was in fact only 10p.

Apart from the obvious lesson about supply and demand - there was an over-supply of Tuk Tuks which placed us in a very strong negotiating position - this experience taught me something that has served me well in negotiations ever since. We were being unreasonable in our negotiations but because we believed we were being reasonable we stuck by our guns.  If we had known the correct exchange rate - if we'd been reasonable negotiators - we'd have struck a far worse deal.

Note: It's been pointed out that I and my colleague were being dicks in this scenario. I kind of assumed that was obvious but if it needs stating then yes, we were being dicks. Bear that in mind as you follow this analogy through.

I'm reminded of this experience as the increasingly public and fraught fiscal framework negotiations between the UK and Scottish governments drag on. It's clear that agreeing what's reasonable - what satisfies the condition of "taxpayer fairness" while still honouring the Smith Agreement - is the source of the impasse.

The crux of the matter in my view is this: the Scottish Government are not being reasonable, which is a completely appropriate negotiating position to take to get the best deal for Scotland.

If you're not familiar with the background on the Smith Agreement and the dynamics of the Barnett Formula now might be a good time to read my last blog post (Barnett Fair?); from here on I'll take an understanding of these issues as read.

Both parties agree that a Block Grant will remain and it will be reduced by an appropriate amount on day one to ensure that the first "no detriment" principle is met. The Block Grant's year-on-year changes will continue to be calculated according to the Barnett Formula which ensures another key principle of Smith is delivered: the Barnett Formula remains.

The stumbling point in the negotiation appears to be how the amount by which the Block Grant is initially reduced is indexed over time.  This figure is termed the Block Grant Adjustment (BGA) and all Smith said about this was that it should be "indexed appropriately" and that this should be "fair" to both parties.  It's critical to the understanding of what is reasonable here to be aware of two points;
  • The "no detriment" principles outlined in Smith related to the initial transfer of powers and the knock-on implications for one country of another using those powers. There is nothing in Smith that suggests there should be no detriment as a result of reducing the scale of the (spend indexed) Block Grant in return for giving Scotland the upside (and downside) of complete control and retention of further revenues

  • The issue being negotiated is not how the "revised base" Block Grant is itself adjusted (this continues to be calculated using the Barnett Formula with all of its inherent flaws and weaknesses), the point at issue is the indexing of the Block Grant Adjustment

Quite simply: the Smith Commission left this indexing open to negotiation and the only guidance given was that there should be an "appropriate" index and that it should be "fair" to both parties. 

So, recognising that this is not the same as being wrong in their approach to negotiation, it does appear that the SNP are being unreasonable.  The "no detriment" principle was specified clearly enough for it to be pretty clearly unreasonable to claim that it's fair to apply it to indexing of the Block Grant Adjustment. 

Again: "no detriment" was specifically defined to apply to the impact of "initial transfer" (i.e. day one) and "policy decisions that affect the tax or expenditure of the other". There was nothing to suggest that shifting the mix of revenue from Barnett indexed to retention and control of own taxes should in itself be designed so as to ensure "no detriment". Indeed it could be argued that the whole point of devolving greater control and responsibility is to make us more exposed to and aware of the impacts of our particular demographic challenges.

To sum up where we now stand;

  • The SNP's negotiating position is unreasonable - they are attempting to appropriate the "no detriment" clause and apply it in a way it was never intended to apply.

  • The SNP's negotiating position is hypocritical - they are arguing to retain some of the benefits of pooling and sharing that they've spent their political lives claiming are non-existent.

  • The SNP's negotiating position is nevertheless appropriate - it's a negotiation and their job is to get the best deal for Scotland; being unreasonable (and hypocritical) is probably necessary to achieve that

Of course the SNP can't lose here. If no agreement is reached they can unreasonably (but credibly) accuse the UK Government of reneging on the Smith Agreement; if they succeed in getting an unreasonable deal it will be in Scotland's best interests - so they'll be applauded for negotiating the 10p Tuk Tuk ride.

Nobody said life had to be fair.

Wednesday, 10 February 2016

Barnett Fair?

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

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

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

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

Even if you don't read the Smith Commission Report in full, I strongly recommend you read paragraph 95 from which I extract the following snippets (bold highlighting is mine);
95 (3): No detriment as the result of the decision to devolve further power; the Scottish and UK Governments' budgets should be no larger or smaller simply as a result of the initial transfer of tax and/or spending powers, before considering how these are used.
95 (4): No detriment as a result of UK Government or Scottish Government policy decisions post-devolution
(a) Where either the UK or the Scottish Governments makes policy decisions that affect the tax or expenditure of the other [...]
(b) Changes to taxes in the rest of the UK, for which responsibility in Scotland has been devolved. should only affect public spending in the rest of the UK. Changes to devolved taxes in Scotland should only affect public spending in Scotland. 
So there are in fact two "no detriment" clauses in Smith.

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

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

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

First of all let's clear up a surprisingly widely held misconception: this does not mean that the block grant would get reduced if Scotland raised more taxes by using one of its powers (increasing income tax for example). This point should be self-evident (there would be no incentive to use powers to raise more taxes if any increase was offset by a block-grant reduction) but Lord Smith himself felt the need to offer the following clarification in the House of Lords in November 2015;
We arrived at a principle whereby, when taxes are raised, the money is kept and is available ...3
The tricky point this clause is trying to to address is the knock-on effect of changing a tax in one country on tax or spend in another. Here are just three illustrative examples (there are many more);

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

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

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

Clearly isolating and robustly quantifying effects like this will be extremely difficult if not impossible. The presence of these types of effects (whether intended or unintended consequences of Scotland using its devolved powers) is one of the main reasons why some of us counselled against the rush to devolve more powers. I covered many of these arguments while the Smith Commission was deliberating in 2014 and - having argued against devolving income, corporation and capital gains taxes or the minimum wage - I concluded
"... whilst "more powers" is a superficially attractive concept, the devil as always is in the detail.  "More powers" could - if not carefully calibrated - lead to the dismantling of the very benefits of Union that the Scottish people voted so overwhelmingly in favour of retaining."
But we are where we are. The Smith Commission agreement has to be honoured and the issues above should be resolvable by pragmatic political negotiation. As we'll come on to see; it's not as if the existing Barnett arrangement is flawless4.

But there is another far larger stumbling block to negotiation which has been raised by the SNP. In Nicola Sturgeon's letter to David Cameron (see page 2 below) she states;
"we are not about to accept risks [...] about which Smith made no recommendation"
So she explicitly accepts the points she's about to raise are not covered by Smith's recommendations before going on to say;
"The UK government's proposals for adjusting the block grant would require Scotland to grow receipts from devolved taxes more rapidly than the corresponding receipts in the rest of the UK simply to ensure its budget is not reduced. This does not meet the Smith Commission's no detriment principles.
We'll come back to this, but we've see what the Smith Commission explicitly covered in their "no detriment" principles and - particularly given she has already accepted that Smith "made no recommendation" about this area - the last sentence here is an unfounded assertion. She goes on to elaborate by saying;
In addition* we could not accept the risk that Scottish funding might be reduced below what it would have been under current funding arrangements simply as a result of differential population growth [...] We could not accept that relative demographic trends within the UK [...] should lead to a reduction in the Scottish budget
* I don't think this is actually "in addition", I think she's explaining why the highlighted problem arises

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

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

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

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

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

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

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

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

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

There are three lines in Smith that seem relevant here
95 (1): ... the block grant from the UK government to Scotland will continue to be determined by the Barnett Formula
95 (3) (c): The future growth in the addition to the block grant should be indexed appropriately
95 (6): ...the arrangements should [...] be seen as fair, transparent & effective

Well that's not a massive help really is it? As the IFS have pointed out
"it is impossible to design a block grant adjustment system that satisfies the spirit of the ‘no detriment from the decision to devolve’ principle at the same time as fully achieving the ‘taxpayer fairness’ principle: at least while the Barnett Formula remains in place." 
For what it's worth I think the IFS reach this "impossible" conclusion because they are applying a broader interpretation of "no detriment" than that  intended by Smith. It seems clear to me that the specific demographic trend benefits of the Barnett Formula can only be retained in proportion to the block grant. A proportion of the currently "locked in" benefit of Barnett must surely be sacrificed in return for transferring funds out of the block grant when devolving control/retention of more taxes.

So what?

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

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

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


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

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

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

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

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

Saturday, 6 February 2016

What's £8bn Between Friends?

£8bn - Eight billion pounds - £8,000,000,000

It's meaningless isn't it? Just a big scary number that's bandied about among other big scary numbers. Except this particular big scary number (allowing for a bit of rounding here and there) is central to the ongoing Scottish constitutional debate.

Let's start with some historical actual figures. This blog has shown that - using the Scottish Government's own GERS figures and applying a range of possible methodologies - the onshore deficit gap between Scotland and the UK has historically consistently been between £8bn and £9bn.

It's worth being clear about what this number means: it's a measure (pro-rata on either population or GDP) showing how much worse Scotland's deficit would have been than that we share with the rest of the UK if we hadn't had North Sea oil.

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.

For the avoidance of doubt: this is not Scotland's deficit without oil & gas; it is how much worse than our shared UK deficit Scotland's deficit would be without oil and gas.

So GERS figures show we've historically run an onshore deficit gap versus the UK of over £8bn pa.

When the IFS analysed the projected fiscal gap between Scotland and the UK they concluded that there would be a gap of £7.6bn in 2015-16. At that time they were assuming £0.6bn of oil revenue, so without oil revenue that shows an onshore deficit gap of £8.2bn.

So the IFS projected our onshore deficit gap versus the UK for 2015-16 would remain around £8bn pa.

The NIESR recently analysed the difference between the Scottish and UK economies using the generational accounting method (which among other factors models the net fiscal implications of different population age profiles over time). The NIESR used the latest OBR assumptions for oil & gas revenues, which in this context are effectively zero (£0.1 - 0.3bn pa. in coming years). Their conclusion was that in the long-term a fiscal gap exists of £9.5bn to £10.7bn pa.

So the NIESR highlighted structural reasons why the deficit gap between Scotland and the UK would widen over time to well over £8bn pa.

The Barnett Formula is the mechanism that currently allows Scotland to benefit from higher public spending per capita than the UK as a whole. It involves notoriously complex calculations and is increasingly complicated by increased devolution of revenue raising powers ... but if we want a simple indication of "what's Barnett worth to Scotland" we need only look at how much greater public public spending per capita Scotland receives than the rest of the UK. In the most recent available GERS figures Scotland received 11.6% higher expenditure per capita than the rest of the UK (table 5.7); in cash terms that works out at £7.7bn.

So the Barnett formula currently benefits Scotland to the tune of about £8bn pa.

The fact that this £8bn figure keeps recurring is not coincidental. The Barnett formula predates the 80's oil boom which is why it protects our public spending when oil revenues decline. It's worth c.£8bn to us because it fills the onshore deficit gap; that onshore deficit gap is largely caused by the higher spending that Barnett enables.

So hopefully it's becoming clear that this £8bn figure is central to the debate around independence (or indeed Full Fiscal Autonomy). Again: it's not how big our deficit would be; it's how much bigger our deficit would be (than the one we currently share with the rest of the UK) if oil revenues go and if we lose the Barnett formula delivered benefits of UK-wide pooling & sharing.

But of course it's only how much worse off we'd be if all else remained the same - if all else remained the same, what would be the point of independence?

I don't want to retread the well-worn path of why independence might in fact make things relatively worse (minor issues like what currency we'd use and within what fiscal constraints, business and capital flight etc.) or why some of the claims for why things might get better are - how can I put this? - somewhat less than logically compelling.

Instead let's simply look at the White Paper: "Scotland's Future: your guide to an independent Scotland" and consider how that dealt with the £8bn problem.

This 649 page document found room for just the one page of financial projections: an estimate of Scotland's financial position in 2016/17 "under current constitutional arrangements" (page 75). The figures used were basically a merging of GERS figures and OBR projections with a few choice adjustments.

Imagine putting this page together and having to defend these numbers. You want to be able to say "oil is just a bonus" but without admitting that without oil you've got an £8bn gap to fill.

The best you can cobble together through assumptions about "savings or increases in revenues" is £0.6bn a year (p.78). To get to this figure you've played your defence and security spending joker (the Trident card), you've had to accept that GERS figures already exclude expenditure that the Scottish Government judges we don't get any benefit from (Olympics, Crossrail, London Sewers etc.) and you've made some heroically optimistic assumptions about the costs that will be required to replace the administrative functions currently shared with the rest of the UK. And yet you've hardly dented the £8bn.

So you're back looking at oil. You've largely relied on the OBR for forecast figures (see White Paper notes 42 and 43) but they're forecasting only around £3bn for offshore receipts. So what do you do? You ignore the OBR oil forecasts and bung in assumptions for offshore revenue that range from £6.8bn to £7.9bn pa.

So the White Paper solved the £8bn problem by assuming oil revenues of up to c.£8bn.

Who'd have thunk it?

Anybody who doubts that the "oil is just a bonus" claims were rhetorical nonsense need look no further than the White Paper itself: if oil was just a bonus, why did the economic case for independence rely on it?

Of course some will argue that the existence of the £8bn onshore gap is somehow proof of the fact the the UK is failing Scotland. This overlooks the blindingly obvious fact that this gap is a result of higher public spending in Scotland far more than it is lower onshore tax generation (a topic covered in depth in the blog post FFA for Dummies).

So this £8bn figure really matters - and with the OBR now expecting oil revenues to be around £0.1bn - £0.3bn pa. it's a number that isn't going away anytime soon.

So £8bn isn't just another number being thrown around in the debate; it is in fact the crucial number in the debate. So it's worth getting our heads around what £8bn actually means;

  • We have a population of 5.3 million: so £8bn is £1,500 every year for every man, woman & child in Scotland

  • There are 2.7 million Scottish tax payers: so £8bn is £3,000 every year for every tax payer in Scotland

  • Scottish Tax Payers pay £11bn income tax on £68.7bn of income: so to raise £8bn through income tax alone would require an additional 11.6% on everybody's income tax rates (or for those who prefer to present it this way: a 73% increase in our total national income tax bill).

  • Our onshore GDP in 2013-14 was £135bn (£153bn including oil): so if we wanted to just carry that £8bn as higher deficit this alone would account for an additional deficit of 5.9% of GDP (that's in addition to any underlying deficit we would have by tracking the rest of the UK). To put that figure in context, the EU stability and growth pact sets a total deficit target of less than 3% of GDP.

Given the attacks of the vapors suffered by SNP MSPS's at Labour's suggestion that we might offset "Tory cuts" by raising a mere £0.5bn through income tax, you have to wonder how on earth they would have coped with the prospect of plugging the £8bn fiscal gap a Yes vote vote would have left us facing.

Fortunately we voted No and can reasonably argue that £8bn pa. isn't that much between friends ... when our friends are 10 times our size and we shared "our" oil revenues with them in the boom years. But if we continue to indulge in the politics of unjustified grievance, we might end up losing our friends and finding out the hard way quite how big a deal £8bn is.

Tuesday, 2 February 2016

SRIT: Scottish Labour's Proposal

A remarkable thing just happened.

With one bold policy announcement Scottish Labour have given voters a chance to vote for an alternative to Tory austerity, a chance to vote to actually use the powers that Holyrood has, a chance to choose an alternative to four more years of just bitching about Westminster. They are suggesting that we actually use the Scottish Rate of Income Tax to apply a small, progressive tax increase as an alternative to cutting public spending.

Followers of Chokkablog will be aware that - despite John Swinney's previous assertions to the contrary - the simple act of increasing the Scottish Rate of Income Tax (SRIT) would be a progressive move. Tax free allowances mean that the more you get paid, the higher the proportion of your income that is taxed - so a "flat" increase of 1% on all tax bands hits the higher paid proportionately more. If you still need convincing, please read SRIT: A Blunt but Undeniably Progressive Tax.

The strongest argument against using the SRIT is not that it isn't progressive (it is) but that it still has a direct negative impact on the take-home pay of the lowest earning tax payers. The obvious counter-argument to that is to simply point out that the taxes raised do not disappear into the ether; a competent government would be expected to use the funds raised to prevent cuts that would hurt the worst off (including those lower earning tax payers).  The logic of this may be sound, but the indirect nature of the "avoided cuts" benefit makes it a hard sell to a low-earner seeing their take-home pay decrease even by a relatively small amount.

Which is where we come to today's announcement by Scottish Labour: they would add 1% to SRIT but make a direct1 £100 "refund" to lower earning tax payers to guarantee that they won't be worse off. In fact, all of those earning less than £20k would be slightly better off. There will I am sure be some devil in the detail of administration, but on the face of it it's a simple, pragmatic solution - it allows us to use the SRIT while protecting the lowest earners from any economic downside.

Labour's proposal to actually use the SRIT is in stark contrast to the SNP's proposal to simply do nothing, to passively mirror Tory tax policies. In effect the SNP have thrown their hands in the air and said "if we can't do everything we aren't going to do anything" whereas Scottish Labour have rolled up their sleeves and said "right, how can we use this power to offer an alternative?".

While the SNP have been focusing their considerable political muscle on stirring grievance with Westminster, the Scottish Labour Party have been thinking about how they could constructively use the powers the Scottish Parliament has, have been focusing their efforts trying to work out how to actually prevent the worst of the cuts and to spread the burden of austerity more fairly.

This is a highly significant policy announcement. The proposed 1% increase in SRIT would be expected to raise £0.5bn2 - that's almost enough to completely wipe-out the £0.6bn cuts to Scottish DEL (Departmental Expenditure Limit) proposed in the draft budget for 2016/17.

I have no doubt that some earning £60k pa. will feel paying an extra £10 a week to help prevent £0.5bn of public expenditure cuts is too high a price to pay for "social justice", that some on £150k will honestly believe that paying £29 a week to protect vital public services is simply too much to bear. If that's your view I guess you vote Tory.

But for those who heartily denounce "Westminster austerity", for those who rallied behind the banner of "social justice" during the independence referendum? Well Scottish Labour are now offering them a real choice come May 2016, a chance to actually choose a different path on tax and spending.

I wonder how many will follow their conscience and vote for the progressive option?


The following table and charts illustrate the impact of Scottish Labour's proposals on tax and take-home pay for those on different salary levels:


1. The precise mechanics of how this would work are unclear to me; the Press Release simply states "We would establish, with local authorities, a £100 annual payment to boost the income of low paid taxpayers."

2. The fact that using SRIT is a progressive step is neatly illustrated by the fact that the cost of the £100 bonus to all tax payers earning less than £20k (which more than offsets the impact of the 1% increase in SRIT on those tax payers) is estimated to be just £50m.