Scotland And Europe- How Realistic Are The Scottish Government’s Ambitions?

Scotland And Europe- How Realistic Are The Scottish Government’s Ambitions?

It has been a very interesting week in Scottish and UK politics, with constitutional issues and relationships-between the UK, Scotland and Europe- very much to the fore. Scotland’s First Minister has indicated in her speech to her party’s conference that there should be another referendum on Scottish independence. The First Minister, to the delight of some and the despair of others, has claimed that she has been forced into this action as Scottish Government proposals on Europe, published in December 2016, have not been taken seriously. In response, Prime Minister Teresa May has said ‘now is not the time’ with Brexit negotiations ongoing until at least 2019 and likely beyond, plus presumably a need for transition.

Now as regular readers will know, I’m no fan of the cause of independence, but rather than simply address the raw politics, I wanted to look in detail at the Scottish Government’s proposals. Ostensibly at least, the rejection of, and failure to seriously consider the Scottish Government’s proposals for a differentiated relationship for Scotland with Europe, is at the heart of the First Ministers’ desire for a fresh referendum.  But are those proposals credible or possible? Is this indeed UK government intransigence, or is it the Scottish Government making unrealistic demands in the first place? After all, if they are serious, then perhaps the First Minister has a point. But if there are not credible, then that in my opinion, shows the demands for ‘IndyRef2’ in a new light.

This blog therefore, delves into the complicated world of single markets, customs unions and trade barriers, and tries to answer the question ‘Just how realistic are the Scottish Government’s proposals on Europe’. I hope this will provide some contribution to inform the debate.

 

(Trying To) Explain Single Markets, Customs Unions and Economic Integration and Trade

I’m not a trade negotiator, nor am I a business person, nor have I ever had to export goods or services. So in what follows, I have done my best to tease out some key points amidst the complexity. But if you see something  that’s wrong, or too simplistic, let me know and I’ll try and correct if I agree.

I thought to kick off we should define a few terms, as understanding these is key to understanding the Scottish Government’s proposals.

There are varying degrees of economic integration, from a free trade agreement, right up to a unitary state. Free trade agreements (FTAs) are the basic starting points, giving states freedom on lots of issues denied them as members of say the European Union, but still seeking to remove trade barriers. The UK government currently wishes to negotiate lots of new FTAs when it leaves the EU, which currently the common approaches to such things as a member of the EU prevents.

Next on the ascending ladder of integration are Customs Unions– members of a Customs Union take a common approach to external tariffs with other countries, whilst allowing the free movement of goods within members of the Union. Countries can be members of a Customs Union but not a common market, or vice-versa. If you’re not in a customs unions, then customs checks on your imports, tariffs and compliance with complicated ‘rules of origin‘ likely become a time consuming and potentially expensive issue. If you have complex multi-country supply chains or rely on just-in-time systems, you’ll want to avoid rules of origin and customs checks if you can.

Next, we have a Common Market, the sort of arrangement that the EEC was developing in the 1990s prior to morphing into the EU. Common markets seek to remove most but not all barriers to trade including tariffs, harmonising of product and production standards and freeing up movement of goods, services, capital and people.

Next we have a single market, a combination of a common market with a customs union, and looking to remove both tariff and non-tariff barriers to trade, along with free movement of people across the market. The EU is a single market and the largest in the world with 500 million people, as is the EEA which includes EFTA members. Now EFTA countries (Norway, Iceland, Liechtenstein and Switzerland) are members of the EEA along with the EU members- and in return for complying with the rules and paying a fee, are full members of the single market ( though their ability to shape the rules is severely limited).

The single market, in order to work requires that members fully adopt a set of what is known as the ‘four freedoms’- free movement of goods, services, people and capital.

Finally, some members of the EU (but not all) are members of a further integrated economic and monetary union, whereby they have adopted a single currency.

If you’re still with me, we need to also remember about movement of people, facilitated by borders unions, of which the Schengen Area is the main one in Europe. Neither the UK nor Ireland are members of Schengen, mostly due to the pre-existing agreement following Irish independence, known as the Common Travel Area.

As we can see, it is complicated, with some EU members being full members of the single market and currency union, others outside the currency union, with the single market also having non-EU members in the single market via the European Economic Area and with some non-EU members having harmonised border arrangements, but not others.

Key points are that there is a ‘ladder’ of integration, starting with free trade, moving through customs unions and integration of standards, towards a full single market and currency union, and ultimately of course, a single unified state. As I understand it, the direction of travel of both the EU and of trade negotiation generally, is to move beyond merely eliminating tariffs on goods, towards removal of non-tariff barriers to trade in goods and services, such as the harmonisation of technical and product standards, intellectual property, labelling, licensing and removing services market barriers to enable financial and digital markets.

Actually, the former Deputy Prime Minister Nick Clegg, as part of his ‘Brexit Challenge’ series, lays this out rather well.

 

Brexit Issues and Economics 

Now I should note in passing that I voted to remain, that I think exiting the EU is a very bad idea, that the challenges are immense, and that we seem to be creating the potential for economic self-harm without being likely to realise the promised benefits. But that is a whole other story so I won’t dwell on it. If you are interested then try this from the IFS, this from Wren-Lewis and to explain the background try these excellent papers from Nick Clegg, for example this on food and agriculture, or this on the complexities of the Brexit negotiation. 

For the avoidance of doubt, I agree with those who think Brexit is a bad idea, but the purpose of this blog isn’t to discuss Brexit per se, but rather whether the Scottish Government has made viable alternative proposals.

So, what is the Scottish Government proposing?

 

The Scottish Government Proposals 

The Scottish Government’s proposals on Europe are contained in a 62 page paper published in December 2016. The thrust of the First Minister’s case for a referendum is that the proposals in the paper haven’t been taken seriously. So what does the paper propose?

The first two chapters of the paper explain how we have arrived at this point, and the importance of the single market to Scotland’s interests. It is worth noting that the paper (para 34) suggests that a range of fundamental rights and interests of working people, social and environmental interests and wider common challenges such as climate change,may be under threat as the loss of the overarching framework increases the chances of a current or future UK government removing these protections and agreements.

Chapter 3 moves onto ‘protecting Scotland’s interests’ either by keeping the UK in the single market, or by examine ‘differentiated solutions for Scotland’. Chapter 4 then discusses a range of devolution and constitutional consequences of Brexit for Scotland and the UK, some of that discussion assuming that chapter 3 proposals are going ahead, before Chapter 5 summarises.

The paper initially hopes that the UK will seek to remain part of the single market and customs union as the best option for both the UK and for Scotland (and I agree with that). However since the paper was written in December 2016, the Prime Minister in her speech on Brexit, made clear that the option of staying as a member of the single market and customs union was not on the table, although somewhat mysteriously ‘access’ and ‘association’ were. Regardless of what we think of the UK government’s negotiation objectives, this does mean that the Scottish Government’s ‘differentiated proposals’ come into play.

Just before we get to the specifics though, let me say that in general terms the paper undermines its own credibility by not really addressing a fundamental point- the relative size and importance of the UK single market for Scottish trade, relative to the European market. Not only is Scottish trade with the UK market 4 times bigger, but trade with England has been growing far faster for Scotland than trade with the EU over the last 10 years- not the message that either the First Minister, nor the paper itself, seems willing to make clear. I’m sure the authors will point to mentions at various places of the UK single market, but it hardly makes it clear that one is 4 times bigger than the other nor the recent dynamics.

In my opinion this is yet again an example of the problem with the blindness of the independence argument- point out the problems with ‘thing A’ (in this case Brexit) whilst ignoring the problems with thing B (independence). This chart makes the point:

But back to the proposals.

 

What Is the Differentiated Proposal for Scotland?

 

If we accept that the UK is leaving the single market and Customs Union, then the Scottish Government essentially calls for Scotland to be allowed to stay in the single market (but not the Customs Union). This is called for based on the chapter two list of the benefits of membership, and the problems for Scotland if it leaves. I find these claims slightly overdone but convincing.

The key sections start at para 106. The Scottish Government says it is ‘essential’ that Scotland can ‘remain within the EEA and the European Single Market even if the rest of the UK leaves’. The paper claims that there are already differentiated arrangements within the EU and single market framework, nothing that parts of Denmark (Greenland,Faroes) have different relationships, as do the Svalbard Islands in Norway. Similarly the Channel Islands are mentioned, as is Liechtenstein. The paper also makes a version of the argument ‘well everything is already going to change because of Brexit so…’

The core of the proposal (para 117) is membership of the European Single Market, and collaboration with EU partners on key aspects of policy and participation in EU programmes just as Horizon 2020, energy and justice. Para 126 is explicit in suggesting that the proposal will give a comparative advantage to Scottish companies. Para 130 appears to suggest that as a price of single market membership, the ‘four freedoms’ would have to be upheld, implying that EU rules would be paramount in Scotland compared to UK rules (if they weren’t, the four freedoms would be breached and misalignment with the single market rules created over time)

The paper notes the challenges that this option presents- the status of Scotland in international law,legislative and regulatory compliance, free movement of people within the UK and continued free trade within the UK (as part of the UK single market).

The paper notes that only states can become members of EFTA and so proposes that either Scotland becomes an ‘associate’ member or that the UK retains membership of EFTA but then applies a ‘territorial exemption’ to all of its territory except Scotland. The paper appears to suggest this is possible because the Svalbard Islands have some elements of EFTA rules disapplied.

The paper notes that to be a member of EFTA, Scotland would need to attend international fora to ensure compliance and also submit to the jurisdiction of the EFTA Court, and to both ensure UK regulation and policy on competition, procurement and state aid rules complied with EFTA (and therefore single market rules) in Scotland, or that new powers are granted to Scotland (see below).

On free movement of goods and services, the paper appears to suggest that two legal and trade regimes will be operating without undue problems. Firstly, Scottish goods exported to the single market will comply with single market rules, but secondly Scottish goods exported to the rest of the UK will comply with UK rules. Apparently, any changes in trade relations with England will be frictionless.

On free movement, the key problem of course is that much of the Brexit debate was about reducing free movement of people, but the paper appears to suggest that again, two systems can be operated. Scotland will have an open relationship with 500 million people in the single market and accept free movement of people. However at the same time, no hard border for people will exist with England. The explanation for this relies on the precedent set by the Common Travel area I mentioned above, where Irish citizens can travel freely across the UK.

Finally, in order to make all this happen, the paper suggests a long-list of new powers are required for the Scottish Government and Scottish Parliament. Actually new powers are of 3 types:-

– matters which are no longer subject to EU law and that currently are devolved to Scotland (e.g. fishing, agriculture, marine environment, civil law, justice)

– other areas of EU competence that need to be devolved to Scotland to protect over-arching key rights such as health and safety or employment law and workers rights, equalities law, consumer protection

– new powers needed to make the differentiated arrangement work

This latter list is surprisingly long and includes import and export control; immigration; competition policy,product standards and intellectual property; company law and insolvency; social security; professional regulation; energy regulation; financial services; telecommunications; postal services and the full devolution of transport. In addition, Scotland needs the power to take part in trade negotiations, international fora including EFTA mechanisms, and cooperation.

 

Is All This Remotely Credible or Feasible?

 

What are we to make of all this?

Firstly, I think we can safely say that the politics look challenging. The idea that a UK government will proceed to complex negotiations with 27 member states on the terms of Brexit, plus a range of negotiations with countries around the world, whilst also granting one part of its territory an set of exemptions, looks implausible. Not to mention that immigration and control of free movement was a key aspect of the Brexit discussion, but the Scottish Government suggests that will remain for Scotland. Add in the explicit suggestion that differentiation gives a competitive advantage to Scots companies, plus the suggestion that under the deal Scotland takex ovrr its ‘share’ of the previous EU funding contribution and it starts to look almost impossible.

Beyond the politics though, I think there are more serious flaws. All of the territorial exemptions mentioned above are very small- Svalbard, Liechtenstein, Faeroe Islands- and are very small in trade terms whereas Scotland is a top 50 world economy on its own. Secondly, I find the idea of a territorial exemption applied to 90+% of the UK population- remember the idea is that UK stays but exempts itself from EFTA except Scotland- to be implausible in the extreme. Thirdly, the idea of an ‘association’ from a non-state member seems a non-starter, as Iceland said recently. 

So on political and legal grounds, things look shaky.

But let’s keep going. The paper appears to suggest that in order to stay in the single market, UK rules would have to defer to single market rules and that great swathes of what it is to be a UK unified state would not apply. Remember this affects things as diverse as competition law, energy, production standards and a host more. I find that this strains credibility. I also find that the idea that a single unified state can apply two sets of trade rules across its geography, but also maintain an internal free open border for people, goods and services, to be implausible . The paper says that if the UK succeeds in its Brexit goals, then there should be minimal differentiation between the existing regimes, and the new UK relationships. But of course if that was true, then that removes much of the argument for the differentiated solution. So either, things will be the same (in which case why bother with the complex Scottish solution) or things will be very different indeed, in which case operating two very different systems seems a non-starter.

One point that does appear to have force is the argument that if the UK can agree a special deal with Ireland (a foreign state) on the free movement of people across the UK, then ‘there can be no reason whatsoever that it could not continue to operate between Scotland and the rest of the UK, even if Scotland is in the single market’. But I’m afraid this wording reminds me of the now-dead former currency union plan- the gentleman protests too much. In reality I think there are reasons to think that the Irish and Scottish situation would be different:

– firstly the Common Trade Agreement has been in place since the 1920s and has not caused the concern that EU immigration has (or at least not recently)

– second both the EU and UK recognise the pre-existing agreement and seek means to honour it- whilst neither has given any indication they wish to see more such arrangements. In general the direction of travel is to remove special cases not add to them

-thirdly, the risk of conflict in Ireland is fresh in everyone’s minds, so the animus to get an agreement is much stronger

– fourthly, Ireland is a island separated physically, so the ongoing suggestion is too find a free movement solution that involves more checks at airports and ports, rather than the physical contiguous border- and that doesn’t apply to the English-Scottish border

-finally – we don’t actually know if the Brexit negotiations will succeed in generating a solution that avoids a hard border.

Let’s keep going. At first sight, it appears perfectly reasonable to suggest that any powers ‘coming back’ from the EU to the UK that covered devolved matters, should go straight to Scotland. But not to fast- the issue is that these powers are tied up with complex discussions that need to take place on trade and tariffs and market access- not just the policies themselves. So, as Nick Clegg points out, food and farming policy will need to be thought through not just in terms of CAP-replacement, but also on complicated trade and import issues. So, even the initial list of new powers suggested by the Scottish Government needs pause for thought- its not a land-grab for the UK government to want to think it through, it merely reflects the need to for example, retain bargaining power in trade discussions, and ensure maintenance of the UK single market.

But as we move onto the wish list of new powers in the Scottish Government’s paper, things in my view start to become beyond the point that serious proposals are being made. Recall that even before we get to this point, special legal status for Scotland is needed, UK rules and policies will need to be subverted to single market rules for Scotland, free movement of people with no hard border will need to be agreed, and two complex and different bodies of trade rules will need to be accepted. But that’s not all!

Now we find that the UK will have a sub-section part of it that controls not only trade, but also immigration, consumer law, employment law, imports and export rules, intellectual property, social security, professional regulation, energy, telecommunications policy, financial services and a host more.

I won’t go through why that is beyond implausible. At that level of devolution it should be clear that there are three consequences:

– the UK single market and associated rule book will barely apply in Scotland

– distortions between England and Scotland will appear all over the place with massive potential for conflict and political disagreement

-a state with that level of devolution can barely be called a state, and is one step away from breaking up

So I found it hard to take seriously such a wish list, which I felt could only really be put forward in the expectation of being rejected.

 

Time To Summarise 

 

If you made it this far, ‘well done’. The sheer length of this and the range of issues to be considered does I think show how complex Brexit is going to be. I think we can draw a few conclusions:

– Brexit is going to be an undertaking of unprecedented difficulty and complexity

– The consequences of Brexit for the UK and Scottish economies look severe and ongoing and the Scottish Government is surely right to point them out

– At the same time, the proposals for a differentiated solution for Scotland  by remaining part of the single market don’t look politically feasible, but more importantly lack international precedent at the scale proposed

– the proposals surely fail the credibility test – operating differing trade, immigration, free movement of peoples and other regimes within a single state at the scope and scale proposed just doesn’t add up

– either the timing of new powers demanded is wrong (think agriculture or food), or the scope of powers demanded is just not credible within a unified state.

My conclusion is clear- the Scottish Government proposals do not represent a credible package that any government, not just a UK government, could agree. They lack serious international precedent, they destroy the basis of the unified UK state, and they appear to fall foul of international law.

My final comment is this- I do agree with independence supporters on one point at least. Scotland does face a choice, a choice brought on by Brexit. The choice is to stay with the UK and accept a new trading relationship with Europe and the rest of the world, or leave and forge a new state itself. Pretending you have have both is neither sensible not credible.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economic Fantasy,Fiscal Chicanery-Predictions About the SNP’s Growth Commission

Economic Fantasy,Fiscal Chicanery-Predictions About the SNP’s Growth Commission

This week I want to post some more overtly political thoughts, in the run up to the SNP’s annual conference and the impending launch of the SNP’s Growth Commission. Part prediction, part criticism, readers will soon see whether my remarks are on the money or way off. As it will be pretty obvious, I voted and will vote to remain in the UK, but I do try to treat the figures honestly, am happy to also highlight the UK’s deficiencies, and will also be happy to credit where independence brings advantages. For the avoidance of doubt, I don’t claim that it is not perfectly respectable to take a view for identity or other political reasons that independence is desirable (it just doesn’t convince someone like me that prefers the UK and also is concerned about equality and decent public services)

The Background- A Nonsense Economic Case in 2014 

Although always likely to vote no, a private dinner with the then SNP leader Alex Salmond persuaded me at the end of 2013 to have an open mind and to study the case for independence as closely as I could. Eight books, the Yes White Paper and 5,000 pages of reading later, I concluded that the economic case and the claimed fiscal consequences of the Yes campaign were a nonsense, and in fact worse, a giant mendacious duplicity.

That’s because no responsible movement which seeks a better life for all Scots would have made the sorts of self-evidently ridiculous claims that the SNP/Yes campaign did between 2012-14. As I hope previous blogs have shown, I take the responsibilities of the state to its citizens very seriously- and I expect anyone proposing change to start out by explaining to me how the poorest will be protected and decent public services maintained.

It was pretty obvious that Scotland spent more than it earned, that a currency union with the UK would not happen, that oil was central to the case put forward and not a bonus, that start-up costs would be far higher than proposed, that far from being the 6th wealthiest country on earth, that an independent Scotland would face serious challenges, of the sort that blow out of the water the claims that we would have seamlessly transformed into a social democratic panacea, keeping the best parts of the UK and ditching the rest. This analysis ignores other downsides of independence (and of course I’m also putting upsides to one side for the moment).

Others who are far better with economics and numbers than I have shredded these claims- the clearest expositions I’ve seen come from Kevin Hague at Chokkablog, and I recommend reading here  and here for more (which from now on for this post I will take as read that a significant fiscal and economic challenge exists, rather than going through the numbers at length). However this excellent graph from Kevin Hague summarises the picture:

Now many (some?) independence supporters still believe all those claims to be true. But, belatedly, the SNP and its closest and former  advisers have signalled that the former case is dead, and that a new case is needed. Hence the ‘Growth Commission’, which is expected to report soon.

The Commission will need to explain how such a yawning gap can be overcome- which means it will need to talk about how to increase growth in an independent  Scotland, it likely wants to say in some way where and how decisions on tax and spend may be different, how social protections can be maintained, as well as other huge issues like what choice of currency should be made, how future decisions will affect trade and borders and so on. 

 

What The Growth Commission Can’t Do…

So, roughly speaking any independent Scotland will start with a structural deficit of 9-10%, the largest in the western world. The latest GERS figures set out this position very clearly:

Broadly speaking, GDP per head is slightly higher in Scotland (note that’s not the same as actual resources for citizens, or GNP), tax receipts per head are slightly lower, and spending is ALOT higher per head.

Let’s put aside for the moment the fact that current economic growth is fundamentally unsustainable, and work within the existing economic mindset. Let’s also note that Scots tax is take is around 35% of the Scottish economy (GDP), and that Scots spending is around 44% of the Scottish economy, (equivalent figures for the UK as a whole are around 33% tax take and 43% spending to GDP) .**** Correction-@FraserWhyte81 has rightly pointed out the UK numbers should be 36/40%-oops.See OBR: http://budgetresponsibility.org.uk) Correction ends******

 

I am also going to assume that Scotland takes its fair share of UK debt.

So what can’t the Commission do? At least, what can’t it do if it wants to avoid being seen as just another ridiculous paper-thin mouthpiece for ‘existential’ independence.

Well, for a start it can’t indulge in joke facts or conspiracy theories. What I mean is silly claims like the GERS figures are not complete, or that rightful Scottish tax income is somehow not included in the numbers, or that Scotland pays for English only spending,or that start-up costs of a new nation will somehow provide huge savings, or that we won’t have to take on our fair share of debt, or any number of other badly informed memes that are repeated endlessly on twitter or by disreputable crowd-sourced types. No, Scottish exports are not largely disguised as English exports. No, we are not missing ‘whisky export duty’. No, there are not secret oilfields being held back to do Scotland down.

For credibility it should also avoid the claim that GERS tells us nothing about the starting point for an independent Scotland. The Chokkablog deals with this point very well. It should also avoid trying to say that Scotland is a basket case thanks to decades of mismanagement by Westminster, or harping on about how no one thought in the 1970s to put aside oil revenues to create an oil fund a la Norway.

If it was being honest, the Commission would admit that it is very likely that Scotland would face higher costs of borrowing for its debt, simply because it is a new nation, with a large deficit and without the track record of debt management and payments  that the UK has. It would probably also admit that collection costs for taxes would be higher, at least initially, due to start-up costs and loss of economies of scale.

It should avoid implying that cuts to spending which are symbolic for some nationalists, but very small potatoes really, are the key to solving any spending gap- I am of course thinking of Trident, or the costs of repairing Westminster, or no longer paying the Scots share of the monarchy or House of Lords. My rough calculations suggest these save at best £300 million a year, which as we’ll see, is peanuts compared to the challenge faced.

Finally, although I am no currency expert, it seems to me that the commission should avoid wild claims about how the whole of the UK is run just to appease and maximise the benefits to London, or the city of London, or how the pound is kept artificially high and so on. Or how we can simply dictate to our larger neighbour what our currency options are.

 

What the Growth Commission Will Probably Do?

 

Let’s move on to what the Commission is likely to propose. In order to inform that I’ve reproduced from the latest GERS publication (1)  the breakdown of Scottish government revenues, and the breakdown of Scottish expenditures, including both Scottish direct expenditure and calculated costs of UK services provided to Scotland, such as defence.

 

I also thought it might be useful to provide a breakdown of the contribution of tax payers to revenues in the UK by income deciles, for the last year I could easily find (2012-13)(2) :

So, remember that the Commission is looking for ways to grow the economy, improve government revenues, and make different tax and spending choices. Independent Scotland would need to reduce its deficit from 10% to around 3% over time, or make up the gap from the loss of the UK fiscal transfer. Spending is around £68bn per annum, revenues are around £53 billion per annum, a gap of £15,000m. Now governments can live over the long-term with annual deficits no more than around 3% using conventional economics, which is our framework, so in reality the Commission needs to find around £10,ooo million a year from a combination of:

Higher Growth+Lower Spending+Higher Taxes+More Borrowing

What might it propose?

Different Tax and Spending 

The first very sensible and entirely appropriate thing it might say is that the point of an independent Scotland is to make different tax and spending choices. That is surely true, and the suggestion from many in the independence movement is that Scotland needs to follow a different economic and political path to England. The suggestion is often that cuts to public spending, although the lowest in the UK, are too high and that more expenditure on social protection, welfare, education and a host of other desirable things is needed.

But hold on, an independent Scotland will face the loss of the UK fiscal transfer of approximately £9-10,000 million a year or £1800-2000 per every person in Scotland. So, it is not credible to say that from day 1, Scots will start to spend more freely on a bunch of desirable things, without saying where the cash comes from, and even more importantly, where the substance comes from to plug the loss of the UK fiscal transfer. Looked at another way, a deficit of 10% per annum is miles from being sustainable, indeed a similar number in 2010 caused the UK a crisis from which is is still trying to recover. Either looked at as a need to get that deficit down, or as a need to plug the loss of the UK fiscal transfer the Commission will surely need to ‘fess up and admit that around £10,000 million a year of new government income, higher taxes or lower spending, or higher borrowing is needed.

So let’s finally get started on the detail. It seems clear that one thing on the minds of independence supporters is that there is a lot of unnecessary UK-led spending that Scotland currently pays for, but which add little or no value and are mere hang-ups of empire.

I predict that the Commission will gently suggest that defence spending can be cut- but will want to be vague about the level of it since that is a difficult political message to sell. Total defence spending is around £3,000 million a year including Trident. Your guess is as good as mine but let’s be generous to the Commissioners and suggest they may go for a maximum 50% cut, saving £1.5 billion a year. GERS tells us that roughly £2 billion more comes from various UK services such as foreign aid, diplomacy, embassies and the like. Let’s be generous and assume they can be cut in half and that the Commission may find them a tempting target as a UK reserved, slightly remote set of ‘things’. Of course the reality is, slashing things such as foreign aid, embassies and the like is hardly the actions of a social democracy but we’re being kind. So, maximum another £1 billion a year saved.

Well, this is getting hard isn’t it? We’ve cut defence and national services by 50% but we’ve only managed to shave £3bn off spending.

So, perhaps the Commission will move onto tax? Many on the left of the independence movement think taxes are too low in the UK and that we should move to the Nordics model of much higher taxes and much higher public expenditures as a share of GDP. Politicians know though, that raising taxes is always difficult, especially when we face the worst decade on record for personal incomes since the Napoleonic wars. Doubly difficult if you are trying to persuaded undecideds to vote for independence.

Another difficulty comes from my graph above on the relative contribution of income tax payers to government revenues. In a nutshell the top 10% pay hugely more as a proportion towards income tax revenues, and that trend is accelerating with higher income growth at the top of the scale and widening of the personal allowance at the bottom. Very difficult if you want to raise the taxes for the rich, whilst maintaining an open border to England.

So, whilst the obvious solution is to raise taxes, my bet is that the Commissioners will skirt the issue. The Commission will waffle on bit about differing economic models and the attractions of a Nordic style set-up of high taxes, high services. They will also point to Laffer-Curve economics, purporting to show that low taxes generate higher revenues. They will probably hint at higher taxes but not have the gumption to call for them. They will almost certainly claim that Westminster has ‘mismanaged’ Scotland’s finances, and that savings can be found from efficiency, new arrangements and the chance to start afresh with new agencies and new systems. They may well make some vague noises about tax evasion and how the post-Brexit UK wants to be a low tax, off-shore tax haven, and how independent Scotland will be having none of that.

I suspect given the currency of the topic, that the Commission will also make some vague positive noises about new forms of taxation and new sources of revenue- probably including looking at property and land taxes again, a Land Value Tax, possibly taxing renewables differently and possibly green taxes in the form of Ecological Tax Reform.

So, I’m not expecting too many tax specifics from the Commission- rather alot of generality about new models and new forms of revenue.

One thing that will be fascinating is how the tug-of-war between high tax, high spend nationalists and those seeking a low tax, high growth model, will resolve themselves.

Higher Borrowing

The Commission will probably gloss over higher borrowing for a number of reasons. Firstly its a common independence meme to have a go at the high debt of the UK, so calling for more debt for independent Scotland looks tough. Secondly, its pretty clear that challenging demographics and higher service costs means that Scotland already faces a debt challenge.

Thirdly, being realistic, independent Scotland will likely face higher costs of borrowing and with a 10% deficit, rapidly increasing debt burdens- doubling as a percentage of GDP every 10 years if left unchecked, and reaching a gargantuan 300% within 20-odd years. So, my bet is that the Commission will say that a measure of extra borrowing will be required ‘in the early years’ as part of a ‘prudent’ approach to an ‘integrated economic growth strategy’ as well as a new fiscal rule to only borrow to invest for the long-term in due course.

I firmly predict that the Commission will elide borrowing for the long-term into just borrowing, whilst having a free pop at the UK government for being irresponsible and clueless.

Higher Growth, The Multiplier!

Now here is surely where the Commission will focus. If cutting spending to reach the magic £10,000 million a year to just keep us where we are relative to the UK is hard, if proposing to raise taxes to plug the gap is also hard. If borrowing sends the wrong signal and is anyway expensive and unsustainable, then what do you have left?

My prediction is that you have 3 things. Firstly, you have a general lecture of the sort that civil servants like to write, or that appear in economics textbooks, setting out the range of new powers and choices that an independent Scotland would have. These are the famous ‘levers’, and include control of total spending, total taxes, total borrowing, currency, competition policy, industrial policy, education and training, infrastructure, and so on. Quite a lot will be said on that, trying to imply that no one else in the world, including and especially the UK government, have ever thought of this, and that mere possession of the magical powers means you are well on the way to solving the problem.

Of course the reality is that all government’s are trying to raise growth all the time, using these same powers but let’s move on.

Secondly, we can expect a variety of cherry-picked examples, somewhat inconsistent in their intellectual underpinnings, showing a ‘bonus’ from independence and plucked from across time and space, scales and geographies, sectors and tax takes. Possibly at this point the Commission choses to include a plea for better statistics on the Scottish economy, especially macro-economic statistics, and with exports and import statistics separated out. There will likely be an invoking of the ‘known unknowns, or unknown unknowns’ and darkly implying that although this is a serious Commission, its work has been seriously hampered by a lack of statistics that must be improved, with language implying that probably Scotland is being shafted in some way.

This list of examples will also include a rather irrelevant list of current Scottish economic strengths, by sector and by export size, with some carefully picked examples of where Scotland does better than the UK, thus implying that we’re just better overall. The list will include oil and gas, whisky and food, universities, renewables , financial services and medicine/life-sciences, and probably farming and creative industries and gaming as well.

Thirdly, in general terms the Commission will speculate on the level of increased growth needed and how that might be done. This should of course be the major part of the report, but I am willing to bet that it says interesting but underdeveloped things that you would enjoy reading about in theory, but wouldn’t bet the future of the country on. As Kevin Hague says,  at the level of bonus from independence set out in the 2014 white paper (0.1%) you’d need more than 100 years to get back to where we are now with that level of ‘bonus’.

So, expect the Commission to talk about new growth models, and to ‘raise the ambition’ to outperform the UK annually to make up the slack within a period of say 10-15 years. Now currently ‘average’ UK has been in the 2-2.5% range, though Brexit may make it lower of course. And Scots growth, particularly recently, has been lower than that. We need to bridge the gap between revenues and spending by our £10,000m minus the spending cuts above of £3,000m or roughly £7,000 million per annum. Scots GDP is around £150billion a year and assuming we don’t raise the tax take proportion , then around 35% is captured in new taxes. So, essentially we can calculate the additional growth rate needed either by taking Chokka blog’s 16% additional growth needed relative to UK, or by dividing £7Bn/0.35= £20,000m of new ‘GDP’ needed or growing the economy by around 13% in real terms. Remembering my number is lower because I assume some spending cuts, and also remembering this is per head overall and so not counting growth just due to inflation or immigration.

Now, normally a government would be delighted if it raised trend annual growth by 0.5%, which is 5 times larger than the bonus assumed in the white paper. Additional growth of 0.5% a year means you’d need roughly 25-30 years to catch up to current levels. Meantime you’d have incurred around £200 billion of new debt and debt to GDP will have reached 200%. If you want a faster transition, say 10 years or less then my simple arithmetic suggestions if you raise Scottish growth from less than 2% per annum to 4% then you need only 3-5 years, during which time your debt is only raised by 25% of GDP. But doubling economic growth sounds easier than it is (ALOT easier).

For these reasons, I think the Commission will either just stick with ‘growth generality’ of which I’ll say more in a second, or plump for a additional growth bonus without attempting to justify. I’ll go with a guess that the Commission will call for ways to ‘explore’ raising Scots growth to 2.5% in the short term and 3% over the medium term, using cherry picked examples as above.

Finally, the Commission will almost certainly list a range of opportunities and priorities and no doubt these will include:

-renewables as a low cost sustainable future energy source, a possible source of tax revenue and a competitive advantage and a source of exports and jobs

– some generalities on the benefits of infrastructure including some blame to Westminster for under-investing and a call to arms to invest in Scotland’s schools, roads, ports, airports, water and sewerage systems

– some flirting with the idea of more state control of key industries including perhaps nationalising the railways or setting up national or regional investment banks. Expect this section to be needed to calm left-leaning supporters worried about the focus on economics and low tax, as well as too good an opportunity to have a pop at (albeit mostly stupid) Tory privatisation and private involvement in public services, as well as appealing to the small but vociferous radical independence people with empowered local economic development

– one of the SpAds will have read something about cities and there will be a need to compete with Westminster’s city deals process, so expect some generality on the opportunities arising from cities, as well as a few mildly interesting points on digital, low carbon transport, informatics and big data and new tax mechanisms like TIF

– Expect some vague calls to explore decentralising to unleash a ‘double dividend’ of growth at Scottish and local level, but carefully vague so as not to make any commitments

– Expect something about how great the opportunity to decommission all those oil and gas platforms will be, with a big number and little to say about economic value and the moral responsibilities of the big oil majors, but lots about how Scotland can lead the way on this

– Do expect an invocation of the history of Scots innovation at some point- especially on manufacturing, engineering and the like. This gives an opportunity to quote how Scots manufacturing has declined shamefully at the hands of the UK government, as well as claiming a new opportunity for the future

– Expect some generality about new models needed for housing , and calls to innovate to fund these houses, including entirely obvious calls to deploy institutional investors and tempt mobile capital in search of returns etc. etc.

– Expect a list of other opportunities that will pour forth once we are independent- the list designed to impress you with the sheer range of things that can be done, with no real analysis of how or whether they really boost growth, fit into an overall strategy or can be achieved without heavy new spend. This list to include vocational training, energy and heat, green technologies and the circular economy, tourism etc.

– Of course expect a heavy emphasis on Brexit and how bad that will be and how it will create a whole series of opportunities for companies itching to move to Scotland to access the single market- from financial services to car manufacturers, from service companies to exporters.

– There will of course be something (rightly) on how independence means Scotland can shape a new approach to immigration policy more tailored to its needs. In reality though, immigration would need to be huge to really make a difference to the growth gap- its no use increasing the sheer size of the economy, its the size of the economy per head that matters. The SNP will be well aware that despite all the body politic noises about civic nationalism and immigrants being welcome in Scotland, that’s arguably because immigration is so low. There will be a nervousness to place too much emphasis on large scale immigration, so the Commission will stick to saying its a good thing, that they want to be part of the EU and free movement, and to look for ways to tempt foreign talent in short supply and compete with negative, neoliberal post-Brexit UK

– There will have to be something about a new industrial strategy, but I’m not sure exactly and I do look forward to seeing if there is anything new in that. I suspect it will just be a rehash of known points about training and education, infrastructure, public research, universities, infrastructure, and start up and commercialisation support plus a dash of low carbon transition. The problem is, that anyone can write that- it requires time, energy, money and new standards and laws to achieve it and that is hard in a newly independent small nation. But I’ll wait and see

– Finally, I’d expect the whole growth strategy to be underpinned by an inclusive growth agenda, which would be very welcome, although possibly with more emphasis on new costs to business, rather than new ideas on raising growth. So, very welcome things like equality duties, workers rights, possibly exploring basic income, workers on boards, gender quality on boards, women in STEM subjects, providing more public services for free, improving the life of the precariat and so on.

In passing, I’m sure the Commission will have something to say on the thorny issues of currency and open borders, how to manage capital flight and how to raise taxes whilst having an open border with England, when England might be outside the UK. But I’ve gone on long enough, and need to finish.

 

Why the Growth Commission and Economic and Fiscal Case Remains Fantasy and Chicanery

Even going on this long, and in a rather jaundiced way, I’ve barely touched the surface. I have considered it, and I cannot see an easy or even credible way for an independent Scotland to maintain its current standards of living, public spending and tax rates, without high levels of disruption.

I’ve said why I think the Commission will struggle as well. To recap:-

-it might suggest some spending cuts that aren’t contentious but the ‘easy’ ones aren’t easy or credible and are anyway nowhere near enough

– raising taxes looks difficult, if they are really honest they will call for it,but I think they will only hint and mostly dodge

– the Commission will be tempted to list things like new economic powers or new approaches, in the hope that these sound impressive enough to the average voter

– the Commission will definitely want to say why inclusive growth+ Brexit plus all these choices= happy days for Scotland,though I doubt its little more than a wishful thinking guess or bet, that may or may not come off

– the Commission will surely want to say that growth needs to be higher but at best will pluck a bonus for growth figure from the air, and avoid the central problem that implausible levels of additional growth are needed and avoid proper analysis- I hope I’m wrong

So I fear dear reader, the Commission’s report will be nicely written with a few nice new ideas and things to put in the public domain for debate, but continuing to suggest things can be straightforwardly managed, and it is all achievable with just a soupcon of trouble.

Even if all of the Commission’s wish list comes to fruition, just how we get there avoiding capital flight, recession, loss of living standards, avoiding tax rises and austerity cuts on steroids, and avoiding piling up massive public debt, will be beyond them. Why? Because in my view this is simply one problem that can’t be solved without pain, and pain that I think is entirely unnecessary. Thanks for reading- you won’t have long to wait to see if I am right.

 

Notes

(1) Government Expenditure and Revenue Scotland 2015-16 Scottish Government August 2106

(2) House of Commons Library Briefing Paper Number 06569 June 2015 Income Tax:Increases in the Personal Allowance 2010-2015

 

 

 

 

 

 

 

 

 

 

 

Modern Life is Rubbish- Ten Ways That Poorer People Are Treated Unfairly In the UK

Modern Life is Rubbish- Ten Ways That Poorer People Are Treated Unfairly In the UK 

‘Em… Hang on a minute.’

 

I am conscious that, to date, many of my posts have been rather long, and rather abstract. So this time I wanted to say something more tangible- about how it seems to me that modern life in the UK is tilted towards unfairness if you are poor. Let me list 10 obvious ways, and then draw some conclusions.

Unfairness Number One- Energy Costs and Energy Transition

If you are poorer, you are more likely to have to use a pre-payment meter, which costs you more. You are also much more likely to be fuel poor, unable to heat your home properly, possibly suffering bad insulation, bad heating and more expense. And to add insult to injury, any taxes you pay or any surcharge on your bills to allow the much needed transition away from fossil fuels to low carbon and renewables, is unlikely to benefit you as lower income families don’t have the resources to hand to take advantage of subsidies home renewables.

 

Unfairness Number Two- Banking,Savings and Money 

The tendency is that poorer people will pay more for credit and loans, sometimes a lot more, and even if it is for basic services. This report from Save the Children  and this report explain in more detail- this table is from the Save the Children report:

Either because you don’t have the internet and/or can’t pay by direct debit, or your credit history is affected by poverty, or because you can’t afford large one off-purchases, if you are poor the evidence suggests you pay a lot more for big-ticket items. Oh, and your pay-as-you-go mobile service will be more expensive too. You may live in a less desirable area so you risk you’ll pay a lot more for insurance and car insurance too. Though action has been taken to cap the worst excesses of pay day lending, you’ll still end up with a much more poorer deal on credit and loans.

 

Unfairness Number Three- Access to Wealth and Investments 

Because you are poor, chances are you will have no or little savings and no or little wealth. That means that any returns you do make will be modest, whether that is on your savings account, modest private pension or dividends. You’ll likely not have a house of your own so the natural growth in housing value won’t accrue to you. Unlike rich people, you can’t afford investment advice to take advantage of complex investment opportunities. Even if you could, your small pot means you can’t compete with the much higher returns that people with capital secure.

 

Unfairness Number Four -Wealth and Your Start (and end!) in Life 

The last Labour government in the UK introduced Child Trust Funds, a form of asset based policies. 

It seems to me this was a great idea- it recognised that one glaring unfairness in life is that richer people often have more choices and do better because they have independent wealth, and that perhaps the state could start to rectify this with a savings based approach. Sadly, the coalition government scrapped the policy in 2010.

So, no only do some people start out with far more advantages in life, they can use their wealth and capital to secure even more advantage. Often the tax system rewards them- from higher rate tax relief on private pensions, to capital gains tax treatment, to (now much more generous) inheritance tax treatment. So, just so readers understand- not only do poorer people have no savings or wealth, but the tax system and lack of asset based policies mean any tax they do pay partly goes to subsidise tax reliefs for people who have way more wealth and opportunity. And the chances of a poorer person ever ‘catching up’ are very modest indeed.

 

Unfairness Number Five- Food Availability, Cost and Quality

Apparently food poverty affects 4 million people in the UK.

‘Food poverty is worse diet, worse access, worse health, higher percentage of income on food and less choice from a restricted range of foods.  Above all food poverty is about less or almost no consumption of fruit & vegetables’
Tim Lang, Professor of Food Policy at City University.

In a nutshell, if you’re poor your food costs you proportionately more, you have less choice, lower quality and worse health outcomes as a result.

Speaking of health…

Unfairness Number Six- Health Inequality

If you are poorer, you are far far more likely to be less healthy over the course of your life, to suffer higher burdens of diseases and to die younger. The gap between poorer people and richer people on health is wide and widening. In the interests of brevity I won’t dwell on this, but the statistics are shocking and unacceptable. 

Pioneering work in Scotland also shows how poverty affects your psychological well-being, with increased anxiety and negative physiological reactions.

Which reminds me, it’s also worse for you environmentally…

Unfairness Number Seven- Poorer Environment 

Dear reader, I don’t have the time to assemble the evidence I should here- perhaps you will accept my special pleading that as an ex-senior manager for a national environment agency, I do have some understanding in this area. For now, I’ll rely on a wikipedia definition of environmental inequality 

It has almost always been the case that the richest lived in better environmental conditions than the poorest and things have not really changed. Think how, in the days of really bad environments full of fumes, and odours and fogs, richer people lived upwind of the prevailing wind, or on raised ground. Sadly things have not changed as much as we might have hoped. If you are poorer, you are more likely to live next to a factory, to a noisy environment like a road, to live with poorer air and water quality, you’re less likely to live next to green space (in urban environments), you’re more likely to live in areas that flood, more likely to live next to incinerators or landfills, and more likely to have ‘disamenities’ such as graffiti, dog fouling, litter, vandalism and derelict land in your local environment.

 

Unfairness Number Eight– Access to Education

This blog is already rather link heavy, so let me just state that the evidence is that you are more likely to go to a poorer performing school if you are poorer, less likely to see a societal valuing of and governmental focus on your technical and vocational skills if that is your path you want to chose, more likely to incur the highest debts if you are a poorer student in Scotland, and much less likely to go to University if you are a poorer student anywhere in the UK. In Scotland if you are a poorer, older learner, you’ve also seen severe cut backs in part-time places for life long learning. Overall, in a modern economy and life-style where education is the key to many things, if you are poorer you’re less likely to be able to access it and its quality may be poorer.

 

Unfairness Number 9- Access to Legal Services 

A key means to play a full part in society is the ability to defend your reputation, access courts for family disputes or government maladministration, have the ability to right wrongs done to you, and take action the things that matter to you and your community. One might call that access to justice. Sadly, if you are poor, your access to legal advice and the courts is likely to be much worse than a rich person’s. And sadly, that ability seems to be declining. 

 

Unfairness Number 10- Differences in How The World of Work and Business Treats You

For many well off people, it seems self-evident to them that they need a stable environment, the ability to have a stable legal and governmental system to plan their investments around, and proper incentives to work and to keep a fair share of their income. For some reason though, that position is reversed for how we manage to treat poorer people- from punitive and ineffective welfare sanctions, to lack of workplace rights and security to zero-hours contracts, poorer people tend to form the bulk of the precariat.

 

Conclusions

When I started to think about this, I must admit that initially I thought about just pre-payment meters. But as my list shows, everything from the cost of your energy, to the quality of your food, to your mental health and life expectancy, and onto your access to legal services, education and stable work, is most likely worse if you are poorer.

Now, some on the right of politics may response by saying ‘look, it’s to be expected, no one wants to see poorer people do less well, but its to be expected- resources in life are a function of ability and the just rewards of the market and we should accept that and mitigate where we can’

Sorry, I reject that view for two reasons. Firstly, as I set out in my blog on societal risks, I believe that some of these risks are entirely foreseeable, a result of systematic problems, poor policy and lack of planning. I believe government has a duty to do something about them. As I said in that blog:

We are searching for things that the state owes an obligation to its citizens to address, across the full range of socio-structural, socio-technological and socio-cultural risks discussed above.

We are searching for things where the state has made decisions between options, and those decisions have consequences for individuals. We are looking for decisions and risks that violate basic rights, and where something can be done about that. We are excluding on the whole individual decisions where a choice was made and it didn’t work out. We are particularly looking for those risks that, absent substantial wealth and resources, it is difficult for an individual to foresee, to manage via self-help alone, and where reasonable efforts are  or have been already made by the citizen to address the risk.’

I think every one of those ‘unfairnesses’ that I list above fall into the risk categories I mention.

More fundamentally, I’m back to the basic structure of society and the principles of a fair and just liberal society. In my blog on this I set out principles to judge such a society, the most challenging of which is the Rawlsian difference principle:

‘Principle 2- Social and economic inequalities are to be arranged so that they are both:

(a) to the greatest benefit of the least advantaged, consistent with the just savings principle, and

(b)attached to offices and positions open to all under conditions of fair equality of opportunity.’

I don’t think anyone could read through that list of unfairness towards the poorer members of society and pretend that we are meeting this test. So, we need to do better- it’s a fundamental test of our claim to be a decent society and we are currently failing it. As ever, thanks for reading