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.
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.
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.