What is the latest on the economics of independence for Scotland?

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The issue of the economic case for independence for Scotland is a ball has been batted furiously between the Better Together and Scottish National Party over the past few months. Last week saw both sides declare expected dividends should their option be chosen.  Of course both cannot be true! So the water becomes ever more muddied.

The Better Together Campaign opened this phase of proceedings with this claim.

The analysis concludes that the benefit for people in Scotland of remaining part of the UK – the ‘UK Dividend’ – is worth around £1,400 per person per year over the 20 years from 2016 to 2017. This is the amount per year that each person in Scotland would be better off by, from lower taxes and sustained public services as part of the UK.

If we look for how this might be achieved we see something familiar from the Better Together campaign.

Largely as a result of a 40 per cent annual fall in oil receipts, Scotland’s budget deficit in 2012-13 was around one percentage point of GDP larger than for the UK as a whole.
And oil receipts fell by a further 25 per cent in 2013-14.

They consistently push the view that Scotland’s oil and gas will not be as valuable in the future as their opponents think. So doing means that the public finances are stretched more thinly and hey presto they end up with an annual dividend. They also argue that Scotland has weaker demographics than the UK average. But the essential point is that changes in the value of Scottish oil and gas via new fields or extraction methods or higher prices would give a completely different view. In other words as we so often find in forecasts, the future is mostly determined by the assumptions made.

Before I look at the Yes case it strikes me as curious to say the least that these matters have not been settled.

In the event of independence, the allocation of North Sea oil and gas revenues would be subject to negotiation.

In the event of independence, the allocation of the national
debt would be subject to negotiation.

Personally I think that the two opposing camps should be sorting these matters out so that the voters have a clear choice in September. Also I do not know about you but it makes me uncomfortable to see an official body -in this case HM Treasury- brought in to provide credence for what is a political case.

The Yes case

This is subject to the same critique as I note that the Scottish government is brought in to add credibility. This time around we are presented with numbers which show a gain for Scots if they vote for independence. From Reuters.

But Scotland’s First Minister, Alex Salmond, also claimed that Scots would be better off after independence, saying it would bring benefits of around 1,000 pounds per head a year by 2029.

So is this a case of heads Scots win and tails Scots win? Actually possibly but not via this route as we see here that the value of Scottish oil and gas is considered to be much higher than seen above. For example an oil price assumption of US $100 per barrel is replaced by one of US $110.

Weaknesses evident

As we move forwards we see that the assumptions made by both sides determine the answers which, in what is no great surprise, are the ones that they respectively want! Also both sides had some outright questionable statements in their reports.

Better Together stumbled on the issue of the costs of independence.

1 per cent of Scottish GDP in 2012-13 is equivalent to £1.5 billion or around £300 for every person in Scotland.

Actually they also floated £2.7 billion at one point. Sadly for their credibility, the author of the work quoted, felt it had been misrepresented as he had also said the costs could be 0.4% of GDP or more like £600 million.

The Yes camp has something which governments have used regularly over the years to make economic forecasts look better.

A 0.3 percentage point increase in our long run productivity growth rate, which will narrow some of the gap with our competitors, could see tax revenues increase by £2.4bn a year by 2029-30;

What about a 0.4% or a 0.5% increase? My point is that you can assume whatever you like but to be taken seriously there needs to be some basis and justification behind it. The more cynical will note the “long run” bit which of course means that it will be quite some time before it can be challenged. Such ruses have been a regular feature of the Euro area crisis which is one of the reasons why the future when it has arrived has regularly disappointed. Also we have a backdrop where overall UK productivity has struggled and at times fallen post credit crunch.

The Institute for Fiscal Studies

We hope for a more balanced and nuanced view from the IFS. It opens with a troubling view on oil revenue trends.

Offshore oil and gas production contributed £6.6 billion to the UK Exchequer in 2012–13, lower than the £11.3 billion raised in 2011–12.

Quite a drop is it not? As a counterpoint the UK trade figures so far in 2014 seem to be showing a pick-up in oil production as we recall reports of rigs out of action for maintenance. So it may not be all that it seems.

This matters because of this situation calculated by the IFS.

Public spending per person, especially on public services (as opposed to benefits) is substantially higher in Scotland than in the rest of the United Kingdom.

Taxes generated onshore are, if anything, slightly lower per person than in the rest of the UK

So fiscally if we ignore the oil and gas the position is weaker than the rest of the UK. The IFS  go on to project that this will be the case.

an independent Scotland’s public finances would be in a substantially weaker position than those of the UK,

I am somewhat more sanguine than that because as I have noted above the oil and gas position has shown signs of an improvement so far this year. Oh and the extra public expenditure in Scotland compared to the rest of the UK (rUK) is due to this.

However, in other areas – such as enterprise and economic development, and housing – the Scottish government spends considerably more per person than is spent across the UK as a whole.

This style of analysis leads the IFS to conclude this for Scotland’s fiscal deficit.

However this is around 3% of GDP larger than the UK’s deficit in 2018–19.

Looking further ahead the IFS repeats a conclusion I have reported before.

Our previous work, which projected the fiscal position for an independent Scotland over the next 50 years, showed that Scotland will face significant fiscal challenges in future –requiring tax increases and/or spending cuts after independence to ensure that debt will be on a sustainable course over the longer-run. Whilst the rest of the UK faces a similar challenge, our analysis suggests that the challenge facing an independent Scotland would be larger.

Having pointed out that the shorter analyses above depend very much on the assumptions it is right to point out that analysis over 50 years depends on them even more. So you might like to take this with rather more than a pinch of salt and perhaps the whole salt cellar.

Comment

In one way, the latest on the economics of Scottish Independence is that the standard of the debate still regularly disappoints. It would be helpful if the various interested parties were to highlight that each of their forecasts are based on assumptions which suit their particular case, but I will not be holding my breath for this! Perhaps the most damning critique of it all is that neither of the oil and gas or national debt matters have been settled.

In essence so much depends on the value of Scottish oil and gas. For that I am more optimistic than the various UK bodies. It has been regularly noted on this blog that the price of a barrel of Brent crude oil seems to be fixed by a tractor beam to the US $108 level (US $109.34 as I type this). Also we rarely find out how much is left in the ground until it is believed to be running out at which point the effort to maximise it really begins. Against that the volatility of Scotland’s position both good and bad would rise post Independence. For example a Scottish recession combined with a world-wide one (and a lower oil price) would have a double-impact.

 

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  • Forbin

    Hello Shaun,

    “..For example a Scottish recession combined with a world-wide one…..”

    Sometime I think we’re not out of recession at all. all thats happened is that the GOP has Gerry Mandered the GDP growth by “creative” if not “hallucinogenic ” accounting ….

    the stability of oil at the $110 mark is striking , in that vast new supplies have not materialized as per economic text books

    but then again I see that economics isn’t what it used to be 10 years ago….

    more interference in a so called “free” market ….

    As far as it goes Scotland independence it should be left to how you feel your country should be run , and by who.

    Iceland works , so do many others smaller countries around the world. – its when you’re attache to a big conglomerate like Greece and Cyprus are that you get “issues” :-)

    Forbin

    Free Scotland , Free popcorn!!

  • DaveS

    Actually Forbin new supplies have materialised, but in US not in Scotland.

    $100 oil has fuelled the truly gigantic drilling effort to extract tight-oil in the US. There are tens of thousands of drilling rigs that wouldn’t be there without $100 oil – each rig sucking up tiny quantities of oil compared to the old style gushers we are more familiar with. They are literally lighting up the night sky in in the western deserts of Texas.

    http://www.caller.com/news/2012/dec/13/eagle-ford-shale-lights-up-south-texas-as-boom/

    Its added 3M barrles per day to US production – add in gas liquids from shale and ethanol (also booming with $100 oil) and US imports have dropped dramatically – which is good news for the rest of us – oil might be way above $100 otherwise. How long this immense effort lasts in another question…..

    For Scotland their future depends on North Sea production – that much is clear. You can be an optimist or a pessimist but the facts are production has dropped from peak near 3M barrels per day to below 1M barrels per day in 14 years. But in same time oil price has gone from $25 to $110. There is maintenance every year, normally in summer months, short term oscillations aren’t relevant.

    http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=50&pid=53&aid=1&cid=&syid=1999&eyid=2013&freq=Q&unit=TBPD

    Much of he North Sea infrastructure is 30+ years old and rusting – you can’t deploy thousands of nodding donkeys like you can in the deserts of Texas and North Dakota. Its also one of the most heavily explored basins in the world. But yes more deposits will be found, oil might rise to $200 – Scotland might even be better off – who knows ?

    But UK is bankrupt anyway so really does it matter what they vote ? (Actually I find the evil part of me hoping they vote for independence cos its going to be a fantastic popcorn moment)

  • Anonymous

    Excellent analysis Shaun!
    I conclude that anyone whose only, or primary, concern in the independence debate is the economic impact on Scotland might as well toss a coin or stay at home on polling day.

  • Forbin

    Hello DaveS ,

    aye all this is true but the question becomes of how fast we get to $200 oil and what economic impact it has on the USA, the Western economies and Chinindia .

    Also the shale “revolution” was for not new fields but ones that existed but needed a high oil price to exploit ( for others dont get fooled by all the that “new teccy” guff , the price was the key )

    As far as the economics of the North Sea in general goes , its expensive and we find smaller and smaller fields whilst decline relentlessy goes on in the old fields .

    As far as independence goes I have no doubts that Salmond will take the Scots into the euro as fast as he can – better to be the big boss of a country than a little boss of a region !

    Forbin

    PS: a yes vote would be definitely be a fantastic popcorn moment !! ;-)

  • Pavlaki

    An interesting analysis however I am always disappointed that the arguments for or against independence is a financial argument. I can’t think of another country that has fought for independence who gave any thought as to what currency they would have or if they would be a bit better or worse off. Independence is a MUCH bigger issue and I believe that the Scots should put all this to one side and simply decide – do they want to be independent? In is in the interest of Scotland and England to sort everything out amicably afterwards. I would rather have an independent Scotland as a happy neighbour than an disgruntled Scotland that only voted to stay with us for financial reasons.

  • dutch

    Well said Pavlaki,although,one could argue that the English/Welsh/Irish should be allowed a say on whether they want an independent Scotland as well.

  • Jim M.

    I could forgive the emphasis on the financial aspects and implications of Independence if it were only considered on a national level, but politicians know too well that if you want it to appeal, then you make it personal. Thus we end up with a price per head figure that has been arrived at by whichever particular assumptions each side has brought to bear.
    £1000pp?
    £1400pp??

    Why not go the whole hog and price it in Euros?? It’s a prettier figure after all… €2000 .

    Perhaps we actually need to stop voting into power the type of politicians that think this level of argument is acceptable.

  • Jim M.

    Scotland votes “Yes!”
    UKIP gain some momentum, get a little representation and the UK quits Europe.

    We all shake or nod our heads sagely. (depending on how we feel that day)

    Popcorn sales go through the roof!!

  • therrawbuzzin

    1) Why would last year have seen a record level of investment in our oil industry if it was felt that prices, and hence revenues were likely to decline?

    2) The Govt’s. (DECC) figure for future oil price is 50% higher than the Chancellor appointed OBR’s,

    http://wingsoverscotland.com/wp-content/uploads/2013/10/oilproj-460×290.jpg

    3) The IFS is pro-Union, and circulated similar scare stories around devolution.

    4) The seas around our coasts, including the North Sea will be split geographically, according to International law, which will give Scotland 95% of those resources. It’s not a matter for negotiation.

    5) In the speech in Edinburgh, where Gideot “ruled out” a currency union, he also accepted rUK responsibility for ALL UK debt.

    What is to be negotiated, is Scotland’s share of non-geographic assets in RETURN for assuming a proportion of that debt.

    6) There has been a decade’s supply of North-Sea oil left for 35 years.

    7) Scotland is a huge net exporter of energy without oil.

    As for the Treasury, Prof Dunleavy, whose work was “projected ludicrously” by the dept, has this to say,

    ” Every time I go there, (the Treasury) the staff seem to be aged about 23 or 24, and to not know a great deal about the issues that they are handling!!!”

    http://www.bbc.co.uk/news/uk-scotland-27613876

    Nick MacPherson’s view of Currency Union?

    http://www.bbc.co.uk/news/uk-scotland-scotland-politics-27500436

    Make no mistake, civil servants have been inveigled

  • Anonymous

    Hi Forbin

    There is a much higher chance of a Free Scotland than free popcorn! Although the corn price has had another dip to US $4.57 today.

  • Anonymous

    Hi therawbuzzin

    Point two is especially apposite I think. A more up to date version of the DECC forecasts can be seen below but its central oil price forecast rises every year. Thus we get gentle rises taking us to US $119.7 per barrel in 2020 and US $127.1 in 2025.

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/212521/130718_decc-fossil-fuel-price-projections.pdf

  • therrawbuzzin

    Thank you for the update.

    Not only does it show the UK Govt’s selective blindness, but also IFS’s:

    http://www.bbc.co.uk/news/uk-politics-24987185
    http://www.bbc.co.uk/news/uk-scotland-scotland-politics-27690028

    “Based on the latest DOWNGRADED!!!! forecasts on North Sea oil revenues by the independent Office for Budget Responsibility, the IFS has now predicted a slightly weaker position with a fiscal gap of £8.6bn in the first year of independence.”

    Compare the nonsense then, with the nonsense now:

    http://www.bbc.co.uk/news/special/politics97/devolution/scotland/news/280897CBI.shtml

    Robert Chote shows that a tame IFS can have its rewards.

  • Anonymous

    I agree with you completely, Pavlaki, but it’s not Shaun’s fault, since he runs an economics blog. I will never forget a column I read by Pierre Foglia of the Montreal newspaper La Presse. He said he believed everything that he read about how Quebec would be much better off with an economic union with Canada instead of maintaining the federal union as it was and voted yes in the 1995 referendum accordingly. Later he read that all of the economic claims made by the sovereignists were garbage and maybe they were. He really didn’t much care. All his life he had always felt like a Quebecker and never felt like a Canadian, so he would always vote for Quebec sovereignty even if he didn’t care much for the wording of the question he was asked to vote on. I suspect there are a lot of Scotsmen who feel the same way about Scottish independence. It isn’t really productive to antagonize them, and pretend that they are stupid people who just don’t understand economics. Their attachment to Scotland rather than the UK isn’t based on economics, but on sentiment. It would be better to try to make more Scottish people feel a pride in being part of the UK. It shouldn’t be so hard. I am a great admirer of the UK and I have never even lived there. Andrew Baldwin

  • therrawbuzzin