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

 

 

 

 

 

 

 

 

 

 

 

Author: DaveGorman

An Englishman longtime in Scotland, interested in new ideas for liberalism that recognise our challenges in the 21st century. Loves clouds, ideas, environment and applying liberal thinking to make things better. Speaking in a personal capacity of course.

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