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On a recent trip home to Islay I picked up a copy of the Ileach (the local paper) and read an article relaying the pro-independence arguments that had been put forward by the Commonweal's Robin MacAlpine at a recent meeting there. Being familiar with the Commonweal's "White Paper Project", I felt compelled to respond.
***

I read with interest Chris Abell’s article in last month’s Ileach describing the Commonweal’s “strategy for winning independence”, as outlined by Robin McAlpine at a recent meeting on Islay.

Let me be clear about where I stand - there is after all no view from nowhere, there are merely different points of view. As Chairman of These Islands, a think tank which aims to encourage well-informed and civilised debate about the constitutional future of the UK, I have no party political allegiance but stand unabashedly for the view that more unites the nations of the United Kingdom than divides them (and I’m familiar with the Commonweal’s “White Paper Project”).

We’re told Mr MacAlpine is “unpersuaded by arguments that Scotland has neither the competence nor the resources for independence”. Unfortunately he is arguing against a straw man of his own making here, because nobody suggests that Scotland can’t be independent, we merely respectfully disagree about what the implications of such a move might be.

Claims that the Commonweal’s plans are “pragmatic and practical” and “do not dodge the difficult issues” deserve to be challenged.

Scotland’s current deficit according to the Scottish Government’s own GERS figures is 7.9% of GDP. The Commonweal assume a Year One deficit for an independent Scotland of 5.5%, similar to the SNP’s own “Sustainable Growth Commission” assumption of 5.9%. These Islands has published a detailed paper (reviewed and endorsed by senior economists) which carefully explains why the assumptions used to reach these figures are not just heroically optimistic but in some cases fundamentally flawed.

Even if we accept these figures, a small independent country starting life with a deficit of more than 5.0% while trying to create its own currency would face huge challenges. For context: the EU’s “excessive deficit” threshold is set at 3.0% and the European Fiscal Compact specifies a 0.5% limit.

Contrast this with where we are today: the UK’s deficit is shared across our entire population, so the people of Scotland are currently only asked to bear their population share of a 1.9% deficit. So even to accept the Commonweal’s 5.5% figure is to accept that independence would make us materially poorer on day one. That difference of 3.6% of GDP is equivalent to over £6bn a year.

If we take the current GERS 7.9% figure as being a more realistic starting point, the figure becomes just over £10 billion or c.£1,900 a year for every man, woman and child in Scotland. That is the effective net fiscal transfer in Scotland’s favour as a result of the Barnett Formula, it is the tangible benefit of UK-wide pooling and sharing. Pointing out the fact that an independent Scotland would lose that transfer is not to suggest that Scotland couldn’t be independent, it is merely to highlight the very real implications for our capacity to invest in public services.

This simple fiscal arithmetic is why the SNP’s Growth Commission concluded that an independent Scotland would require at least a decade of further austerity. Nicola Sturgeon admitted as much in 2016 when challenged by Andrew Neil during a BBC interview: “we would deal with the deficit in the same way as the UK’s dealing with the deficit” she said.

The Andrew Neil Interviews, Election 2017, Nicola Sturgeon - YouTube


So when pressed the SNP tacitly accept that independence would mean an extended period of further austerity. Given the additional challenge of being a new small country creating our own currency, it’s pretty clear that this would need to be far deeper austerity than anything we’ve experienced in recent times.

This context exposes the misleading nature of the Commonweal’s assertion that “nothing need change […] in health and social services, local government and policing”.  A pragmatic and practical assessment that didn’t dodge the difficult issues would address the fact that significant cuts would be required to those public services which affect all of our day-to-day lives. The Commonweal’s paper simply fails to address this inconvenient truth.

After quoting research showing people “hate spinning, sarcasm and name calling and have little patience for negative campaigning and sloganeering”, MacAlpine apparently went on to talk of “the overwhelming shame of being governed from Westminster by a bickering crew of incompetent, lazy and lying politicians” and “their inability to look out for any interests but their own”. It’s a shame to read he resorted to such language, but it’s also unclear why he believes replacing politicians in Westminster (including 59 Scottish MPs) with more politicians in Holyrood would cure this problem – presumably it has something to do with our old friend Scottish exceptionalism?

There’s also an assertion that Brexit means independence is “beginning to make more sense to folk”. In fact for many of us the challenges of Brexit merely illustrate how much more destructive and painful breaking up the UK would be. Scotland is far more integrated with the UK than the UK is with the EU. As well as having full fiscal pooling and sharing (i.e. we share the deficit) we share a currency, defence and international affairs costs and have deeply integrated machinery of state. However bad Brexit may be, breaking up the UK would be an order of magnitude worse; two wrongs don’t make a right.

A final thought for those who suggest that Scotland receiving a fiscal transfer is evidence of economic failure under Westminster rule. The cause of Scotland’s higher deficit is mainly higher per capita spending rather than lower per capita revenue generation. Ileachs should understand this concept: just as Scotland is a relatively high “cost-to-serve” part of the UK, so Islay is of Scotland. Factor in the likes of Road Equivalent Tariff ferry subsidies, the costs of providing services to our remote communities and flights to the mainland for emergency medical procedures and I’m pretty sure Islay would have a higher per capita deficit than Scotland as a whole. The implied fiscal transfer that results is not evidence of an economic failing but of successful pooling and sharing, it demonstrates that we have a spirit of solidarity that goes beyond asking everybody to “pay their own way”.

Scotland benefits economically from being in the UK and the Scottish Government now has tax raising and benefits powers which would allow them to redistribute wealth very differently from today if they had the political will. Maybe the Commonweal should focus on how these hard-fought-for powers could be used to create a fairer Scotland in the UK rather than campaigning for a poorer Scotland outside it.

***

Wordcount discipline prevented me commenting on the hints about nationalising the Scottish whisky industry, the unfounded assertion that "support for independence has never been higher" or the fact that some of the ideas mentioned either are possible now with devolved powers or would fall foul of EU state-aid limits (the Commonweal is equivocal about future EU membership).

For completeness, this is the Ileach article I was respondong to:






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I've been quiet on this blog recently - here's why.

Yesterday saw the publication of a paper which I authored for the These Islands forum (which I co-founded and chair), which responds to the SNP's Growth Commission in what I think can fairly be described as forensic detail.  You can read the full report here


It offers a very carefully constructed, respectful but thorough analysis of the Growth Commission's output. On this blog I took care to respond to specific Growth Commission claims, recommendations and analyses as these were revealed - the paper offers a more considered view.

If the angry swarm of cybernats on Twitter would do the same, they'd avoid making the rather embarrassing mistake of attacking the paper as the ramblings of a "dog food salesman" - it has not only passed review by the These Islands advisory council but has been explicitly endorsed by highly respected economists.


The Growth Commission (and SNP leader Nicola Sturgeon who commissioned it) asked for their report to form the starting point of a debate. My paper is intended to contribute to that debate and at least the media response has been encouraging, with pretty much wall-to-wall coverage in Scottish print media:


I also appeared on BBC Radio Scotland's Good Morning Scotland [listen from 1:48:30 here] to (frustratingly briefly) discuss the paper.  Unbeknownst to me, SNP MP Kirsty Blackman was allowed an unchallenged reply and I was given no chance to rebut her claims. For the record: she shouldn't really be dismissing analysis endorsed by the people above as "nonsense" and her claims about pensions and HS2 costs were just  a re-run of tired and discredited arguments beloved of GERS-deniers. If she's right about Scotland subsidising UK pensions in the GERS figures (she isn't) then it's really weird that the Growth Commission didn't pick this up during its two year gestation period (they didn't, because it isn't so).

It looks likely that Ms Blackman agreed to appear on condition of responding to me but not debating. This is a presumption on my part, but if I'm right it suggests a rather strange approach to "opening up debate".

I also had a piece published for the New Statesman (which was their "most popular" the day it was published) - I encourage people interested in the nature of political debate in Scotland to read it.


As well as the widespread coverage in the Daily papers, there have been a number of significant online pieces - here's just a selection:
  • "having commended Andrew Wilson two months ago for a serious-minded and valuable contribution to debating Scotland's future, I'll do the same for Kevin Hague." - Douglas Fraser for BBC Scotland
  • "the most detailed response to the Growth Commission report to date" - Business Insider
  • "These Islands published a paper that forensically dissects the SNP's Sustainable Growth Commission Report and its "optimistic" assessment of the prospects for the Scottish economy under independence" - reaction.life
The social media reaction to all of this has been predictably depressing, with an onslaught of personal attacks against me from people who clearly haven't even glanced at let alone read the paper or its endorsements (just google "dog food salesman" if you fancy a laugh).

Zoomers are gonna zoom, but a couple of more high profile reactions are worth highlighting.

This from SNP MP Peter Grant is - well - "interesting"

This from SNP MSP James Dornan - responding to the cybernat in chief - is in a similar vein



And then there's this is from Growth Commission member Iain Docherty who - having incoherently attempted to criticise our "analytical frame" - confessed to having not actually bothered to read the report before passing judgement


What a time to be alive.



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I'm indebted to Fraser Whyte who first spotted this rather significant error in the Growth Commission report and blogged about it here.

I trust Fraser - he's good - but what he identified was such a howler that I wanted to check and, having a bit more time, dig a layer deeper.  Fraser was right - if anything it's even worse than he thought.

So here we go, with references to the Growth Commission report indicated [thus]...

The largest claimed saving is for spending reductions compared to allocated UK government spending of 0.8% of GDP [B4.67]. The justification for this figure in the report is unclear and based on demonstrably flawed assumptions.

The report suggests [B4.57] a comprehensive 2 year review to analyse “where savings could be made where costs need not be replicated”.

The report then [B4.58] seems to declare the result of this proposed analysis by stating “This analysis shows an improvement in the public finances of around £1 billion [...] the equivalent of 0.8% of GDP”

An immediate concern here is that £1 billion is in fact 0.67% of 2016-17 onshore GDP1, but the figure of 0.8% is the one the report goes on to use.

A bigger issue is the way in which the £1 billion figure is justified. It is explained [B4.58] as being made up of savings of £0.4bn and revenue benefits of £0.6bn.

The asserted potential saving of £0.4bn from costs “that will no longer be required” is supported by a few examples that total just £170m2. Even the examples given are not well justified3 and include a sweeping “more than £100m for Whitehall running costs that will not need to be duplicated in Scotland”.

The revenue benefit of £0.6bn is explained as being associated with £2.4bn of “spending that is allocated to Scotland but takes place elsewhere”. Not only does this £2.4bn include costs that the report has just assumed will be saved (and so can’t be transferred), the assertion that all of this £2.4bn4 of spending currently allocated to Scotland takes place outside of Scotland is simply and very materially wrong.

To illustrate: the £2.4bn includes £484m [Table 4-2] of ‘Public & Common Services’ costs. In 2015-16 the equivalent figure was £467m, a figure we can break down in detail by using the GERS expenditure database.

This shows us that not only does this figure include all of the costs that the Growth Commission has explicitly assumed will be saved5, but that it includes spend which already takes place in Scotland.

The figure includes, for example, £234m6 of current expenditure on HM Revenue & Customs, this being Scotland’s 8.3% population share of the total UK figure7. In fact we know that 12% of HMRC headcount is currently based in Scotland8, so it is simply wrong to assume that Scotland would benefit from transferring this expenditure to Scotland.

In fact, in this specific example it seems likely that Scotland would see economic harm as a result of independence, as a greater share of HMRC employees are in Scotland than Scotland’s population share9.

This reveals another flaw in the analysis: not only are the Commission fundamentally wrong in assuming that no central spending allocated to Scotland takes place in Scotland, they don't consider the mirroring effect which is that there will be costs spent in Scotland that are currently allocated to the rest of the UK.  What the true net effect of this is would require deeper analysis - but we can be sure that the Growth Commission's analysis is simply and very significantly wrong.

So the assumed saving of 0.8% of GDP from spending reductions (compared to GERS allocated UK government spending) falls apart when tested and is clearly heavily overstated.

Two years they spent writing this report.

Two years.



Notes:
1. Using 2016-17 GERS figure of £150,025m for onshore GDP (£1bn is 0.63% of the £159,389m total GDP figure)

2. [B4.58] £50m associated with running costs of the House of Commons & House of Lords, £20m for the Scotland Office and “more than £100m for Whitehall Department running costs”

3. According to the 2015-16 GERS expenditure database, a total of just £36m is allocated for House of Commons and House of Lords; the Scotland Office figure is £23m

4. This figure appears to be made up of total allocated spending [Table 4-2] of £4.7bn less international affairs (£0.8), all economic affairs (£1.0bn), and we presume accounting adjustments and EU transactions (£0.5m)

5. House of Lords & House of Commons (£36m), Scotland Office (£23m) and various “Whitehall Costs” including Cabinet Office, DfID, HMRC, HMT etc.

6. This £234m is categorised as “non-identifiable expenditure” in the database, but this does not mean the expenditure takes place outside Scotland. We suspect this may have been the cause of the Commission’s misunderstanding

7. £2,838m, defined in the GERS expenditure database as: HMR041-S041A003-UK-TES_CUR-Non-ID-CG-SUB010100

8. Institute for Government, “Governing after the Referendum” - Figure 2, page 24

9. Of course to answer this question properly we’d need to know the share of spend, not just share of employment – but the point at issue here is that the Growth Commission’s assumptions are clearly and materially flawed.

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As a quick exercise I wanted to check how the Growth Commission's "peer group of 12 countries" had been selected. The report offer no explanation at all other than by inference - so I used the same data sources they used to create an objective list of comparable small countries.

My criteria are very simple: countries which qualify as IMF "advanced economies", ranked by size. I've added IMF 2016 GDP/Capita ($US) for comparison purposes as this is the primary measure the Growth Commission use. The highlighted countries are those selected for the Growth Commission's “peer group of the 12 most successful small advanced economies”.


The important point to make here is that this cohort has been pre-screened for success. All of those countries that lie within the population extremes of those selected have lower GDP/Capita than Scotland (and indeed at both the higher and lower end, the population extremes conveniently stop just the right side of examples where GDP/Capita is lower than Scotland's).

There is nothing wrong with this as long as we appreciate that the Growth Commission is seeking to learn from successful small advanced economies. What they are unable to do from the analysis presented is draw any robust conclusions about whether or not small advanced economies are somehow intrinsically more successful than large ones.

It's perhaps unfortunate that in the introduction to the report (p10, 2.28) the Chair Andrew Wilson asserts “The evidence demonstrates that smaller countries, partly because of their greater need to respond to global challenges, produce better governance, policy and therefore living standards.” 
This may or may not be the case, but no such evidence is presented in the report.
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I'll keep this brief.

I've just caught up with Andrew Wilson's Sunday Politics Scotland interview from 27/05/2018. If you want to hear the words I'm taking issue with being spoken, watch here from 7:30



Verbatim, emphases mine:
"well in fact, we do the opposite of what the OBR and George Osborne has done because we don't put assumptions for growth into the numbers - we could have just said 'well we've modeled it, we think growth's going to be faster and look here, everything's fine' ... [interviewer interruption] .. well, we assume that over time the average performance of the past is the average performance of the future for inflation and growth, and we say 'what would you do?' - now the point of this Gordon if I may say is, that without making wild predictions for growth we show how over a period of 5 to 10 years - while growing the public finances, rejecting austerity, stewarding growth at the same time - we can bring discipline to the public finances sustainably."
You might want to watch the clip to believe that's what he said, but it is - and it's consistent with his comment to me on Twitter that "there is no growth rate assumption".

So let's quickly unpick the bizarre logic of the first half of this extract before turning to the assertion in the second half.

He states "we don't put assumptions for growth into the numbers" before then describing the assumptions for growth they put into the numbers: "we assume that over time the average performance of the past is the average performance of the future for inflation and growth".

So they do put assumptions for growth into the numbers - which is obvious because without assumptions for growth they couldn't make the assertion he then goes on to make.

We know this anyway because the report is explicit about the assumption used to drive the analysis that AW refers to when he says "we show how over a period of 5 to 10 years [..] we can bring discipline to the public finances sustainably". He's referring to the analysis behind this graph (note how 9 years has become "5 to 10 years");


It's genuinely baffling to me that AW would say "we don't put assumptions for growth into the numbers" when the assumptions that are required to support the assertion he goes on to make are explicitly laid out in the report itself


[These aren't always easy to read: B12.18 makes explicit a 1.5% pa real GDP growth assumption]

I've been through detailed analysis of this in other blogs (eg. here) but in essence the sums are really simple (and by the way don't require any inflation assumptions at all, presumably they're in there just to allow better sounding nominal figures to be quoted).

You only need a three row spreadsheet to show that if you grow Spend 1% slower than GDP then - all other things being equal - a 5.9% deficit would indeed become less than a 3% deficit after 9 years (because spend/GDP necessarily declines). If you like, here's that in graph form and in the context of historical actuals and the various deficit figures you will see quoted in the report (more detail here)


By rights we should show this graph based on onshore GDP only, although it doesn't materially change the conclusion


OK, so we know that in fact AW has made an assumption for growth to make his statement stack up. 1.5% assumed real GDP growth means that, if spending growth is 1% less, then that's 0.5% real spending growth - which allows AW the soundbite of "growing the public finances, rejecting austerity" because real spending is increasing.

In that clearly well-rehearsed sound-bite he also says "stewarding growth at the same time" - I think maybe he should have said assuming higher growth at the same time.

So he's made a growth assumption and it's a really important one - if that assumption was less than 1.0% then he'd be advocating real spending cuts to "bring discipline to the public finances sustainably".

So let's look at some actual real GDP growth rates

  • Over the "austerity decade" from 2006-07 up to 2016-17, Scottish onshore GDP showed average real growth of just 0.8% pa
  • The latest forecast from the Scottish Fiscal Commission (published 31/05/2018) is for GDP growth in 2023 to be running at 0.9% pa

Hold on. If real GDP growth is less than 1.0% then applying AW's fiscal rule of getting the deficit down to below 3% within 10 years would require public spending cuts - would require austerity far and above anything we've seen while being in the UK, as this simple graph illustrates;



Now to be fair, it's true that if you go back long enough (I reckon 14 years) then you can get to an historic average real onshore GDP growth rate of 1.5% - but that takes you back to when the economy was booming. Making assertions about how you would "reject austerity" if the economic conditions were such that even George Osborne would not be suggesting austerity is hardly a meaningful contribution to the debate.

What matters is what you do when times are harder than average, when real GDP growth is less than 1.0%. Andrew Wilson works hard to be distinctly unclear about this (as did Commission member MSP Kate Forbes on Question Time) , but the Growth Commission report is clear for those who can be bothered to read it: if GDP growth was as sluggish as it has been for the last decade or as slow as the Fiscal Commission forecast, the Commission recommends embracing austerity as enthusiastically as any Tory chancellor.



* Addendum *

This is astonishing - I've just seen what Nicola Sturgeon said at FMQ's on Thursday (from 12:41)


Verbatim, emphases mine:
"I've got some analysis here which I'm going to share with the chamber, and hopefully it'll be ... it'll be of embarrassment to the Tories, hopefully it'll be of interest to Labour. If the spending recommendations of the Growth Commission had been applied over the past ten years, the £2.6bn real-terms cuts imposed on the budget of the Scottish government by Tory governments at Westminster would have been completely wiped out, it would have eradicated austerity in Scotland. That is the reality"

Anybody who has read this post or indeed my post on similar claims made by SNP MSP Kate Forbes on Question Time  will know that that very much is not "the reality" - that is in fact a big steaming pile of horseshit.
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Kate Forbes MSP sat on the SNP's Sustainable Growth Commission (see blogs passim).

I was just catching up with Thursday Night's Question Time and was taken aback when she made the following statement (about 31 mins in);
"Over the last 10 years the Scottish Budget has been cut by 8.5%; in contrast, this report predicts that if we had been an independent country our spending could have increased by 5% over those 10 years. Minus 8 to plus 5."
Now.

I've spent a fair amount of time with the numbers in the Growth Commission report and I didn't recognise the figures she quoted at all. I went back and had another look, I searched (based on the quoted figures and likely phrases) but with no joy. I asked around - an opposition MSP friend said he'd heard SNP members making similar assertions in the Chamber during FMQs. I was curious.

So I tweeted Kate (and the report's author Andrew Wilson) asking for a page reference ... and then ploughed ahead anyway trying to work how she could possibly justify that statement.

To her great credit, Kate DM'd me just as I'd finished this piece (late on a Friday night) and offered me her brief explanation which I'll *reveal* as we go - so do stay awake.

In her quote she rhetorically compares actual figures for the "Scottish Budget" to what sounded like some weird predicted-historical figure for "our spending".

I don't want to disappear down a rabbit-hole of different Scottish Budget line definitions (have a burrow here if you're really interested) - but instead I'll focus just on total Scottish Spending, as that's what matters and it's what the Growth Commission focus on. [first reveal: I now know that this was indeed the figure Kate was referring to for her "plus 5"].

The Growth Commission rightly uses GERS as its main source and so should we.

The Growth Commission states:
"real increases in public spending should be limited to sufficiently less than GDP growth over the business cycle to reduce the deficit to below 3% within 5 to 10 years" [3.187]
Given how big our notional deficit was in these last 10 years (peaking at 10.0%) I think we can safely assume that the report would "predict" - if it did, which it didn't, but if it did it would - spending growth slower than GDP growth.

So let's look at the Scottish figures for the last 10 years (2016/17 vs 2006/07)
  • Real GDP Growth (inc N Sea): -1.9%
  • Real GDP Growth (onshore only): +8.0% (or +0.8% pa)
Clearly the Growth Commission is focusing on the onshore economy, so applying their rule would suggest that we "could have" increased our total spending by something "sufficiently less than" 0.8% pa.

The Growth Commission suggest spending growth at 1.0% pa less than GDP growth [see their Fig 12-2 and point B12.18] and illustrate (correctly) that this would reduce a 5.9% deficit to a 2.9% deficit over 9 years.

Note that in 2009/10 our deficit was in fact 10.0%, so at that point one would argue we'd have needed a far more aggressive rule, but we'll let that pass.

If we applied the "1% less than GDP growth" rule over the last 10 years, then we would have needed to see an average annual real decline in spending of 0.2% pa - or a decline over 10 years of 2%.

What we actually saw - per GERS - was a real spending increase over those 10 years of  10.1% (an average increase of +1.0% pa).

So in Kate's terms: applying the Growth Commission's "prediction" to the last 10 years would see what was actually a 10.1% increase in spending become a 2.3% decrease. Plus 10 to minus 2.

Kate claimed "minus 8 to plus 5" - following the logic above, a fairer statement would have been  "plus 10 to minus 2" - almost the complete reverse.

So what's going on here?

Two things;

1. Kate is not comparing like with like. The Scottish budget is a subset of total Scottish spending - the Growth Commission rightly focuses on total Scottish spending, so should Kate when she talks of what could have happenend and so should we. [I also suspect her -8.5% figure includes budget forecast out to 2019/20 rather than purely historic data, but I honestly can't be bothered to check]. Basically the "minus 8" is boohickey.

2. [second reveal] Kate has been good enough to tell me that she arrived at her +5.0% "based on what the GC recommends in terms of increased public spending in Scotland over a 10 year period (by 0.5% per year)"

I'm incredulous.

She's compared a non-comparable subset of our historical public spending over a period during which average onshore GDP growth was actually 0.8% pa with a projection that assumes real GDP growth of 1.5% pa!

The very simple point which Kate (a Commission member, remember) has apparently misunderstood is that the figure of  0.5% pa is most definitely not the GC's spending growth recommendation - it's an illustration of how you could get the deficit down to 3% within 10 years if real GDP growth was 1.5% pa

But over the last 10 years real GDP Growth wasn't 1.5% pa, it was 0.8% pa - so to have got the deficit down at the rate the Growth Commission recommends, we'd have had to reduce public spending in real terms by 2% over those 10 years.

In fact - due to pooling and sharing within the UK, due to not having to focus on getting Scotland's deficit rapidly down to 3% - we were able to increase our public spending by 10% over that period.

The precise opposite of what Kate claimed is true.



Read the quote again:
"this report predicts that if we had been an independent country our spending could have increased by 5% over those 10 years"
She asserts that the report says something about what could have happened over the last 10 years. It simply does not.

She implies that the report's recommendations - if applied to the economic conditions we experienced during the last 10 years - would have led to 5% spending growth. They would not have.

Hell, even if you very generously interpret her statement as suggesting that the report predicts 5% spending growth over the next 10 years, that isn't true either.

The Report's Chairman has pointed out to me that the report makes no growth forecasts (see here) - so it can't be making any predictions about spend levels other than spend relative to GDP.

I think we're meant to understand that when the report [B12.18 and Fig 12-2] assumes 1.5% real GDP growth and 0.5% real spending growth, this is merely illustrative of how one could get a deficit down from 5.9% to below 3% within 10 years. I certainly hope so, because just yesterday the Scottish Fiscal Commission forecast that our GDP growth would be 0.9% in 2023 - on that basis the report "predicts" that spending growth would need to be 0.9% - 1.0% = a decline of 0.1% pa for a decade.

Still, the statement sounded good on Question Time and way more people watch that programme than will ever read this blog - so Kate can be happy, safe in the knowledge that she's done her bit to ensure the "new debate about independence" will be as fact-free as the last.


***

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There appears to be be some confusion about the SNP's Sustainable Growth Commission recommendations when it comes to austerity. Let me attempt to quickly clear that up.

Nicola Sturgeon has taken to Twitter to make clear that the report "explicitly rejects austerity" and "recommends above inflation spending growth each year"


Unfortunately, Sturgeon goes on in that same thread to then assert that the report's "projections about deficit reduction [...] make no assumption about higher growth"


These two statements can't both be true - at least not without making some extremely contorted semantic distinctions between recommendations, projections and assumptions.

The following quotes are extracted directly from "Part B: The Framework & Strategy for the Sustainable Public Finances of an Independent Scotland"
"For the initial consolidation period, we recommend modest real terms increases in public sector expenditure" [B12.17]
"At Scotland's long-term trend GDP growth rate of 1.5% and inflation of 2%, this would mean that nominal increases in public spending of 2.5% would reduce the inherited deficit from 5.9% of GDP to less than 3% of GDP by year 9 (figure 12-2)." [B12.18]
"This rule would also have the same effect of reducing the deficit to less than 3% of GDP, at different levels of growth ..." [B12.20]


That section of the report is making assumptions about growth to be able to make a projection about deficit reduction that could be achieved while accepting the recommendation of modest real terms increases in public sector expenditure.

In fact for the deficit/GDP analysis shown here you don't need to make any inflation assumptions: as the sub-title of the graph shows, this illustration only needs to assume "Spending Change 1.0% less than Growth Rate". I've recreated the analysis (details here) to perhaps illustrate more clearly what it implies


Here's the problem: while all that's required to draw this graph is an assumption that spending growth will lag GDP growth by 1.0% (hence "would also have the same effect [..] at different levels of growth"), for that to translate into the recommended "modest real terms increases in public sector expenditure" we obviously have to assume real GDP growth of over 1.0%.

At the risk of labouring the point: to get the deficit down at this rate the report assumes that [Real Spend Growth] = [Real GDP Growth - 1.0%], a number that can only be positive if Real GDP Growth is more than 1.0%.

That's why in B12.18 the report assumes a real GDP growth rate of 1.5%, because spend growth at 1.0% less than that would still lead to "modest real terms" spending increase of 0.5% pa.

Let's compare and contrast these two statements
"During the transition period real increases in public spending should be limited to sufficiently less than GDP growth over the business cycle to reduce the deficit to below 3% within 5 to 10 years" [3.187]
"For the initial consolidation period, we recommend modest real terms increases in public sector expenditure" [B12.17]
The second statement above can only be consistent with the first statement if we assume real GDP Growth of c.1.5% pa or greater (as the report does for its illustration in Fig 12-2).

But, when I asked him for any comments on my previous blog on this topic (Growth Commission: Embracing Austerity), the report's Chairman Andrew Wilson was very clear:"There is no growth rate assumption"



Let's be clear: you can't say the report "recommends above inflation spending growth each year" (Sturgeon's words) or "recommend modest real terms increases in public sector expenditure" (the report's words) while also recommending "public spending growth  limited to significantly less than GDP growth [..] to reduce the deficit to below 3% within 5 to 10 years" (the report's words) without making a growth rate assumption - or at the very least, without making a minimum real growth rate assumption.

So I'm sorry, but to assert that "there is no growth assumption" at the same time as making claims that the report "rejects the austerity model" while recommending to "reduced the deficit to below 3% within 5 to 10 years" is, at best, carelessly inconsistent. At worst, it's a cynical attempt to mislead.

***

Let's finish by returning to the illustration the report uses to show how they assume we could get the deficit down to 3% of GDP within 10 years.

As discussed here, to create this illustration the report makes no assumptions about economic disruption caused by separation from the UK, makes heroically optimistic assumptions about cost savings we'd achieve to calculate our "legacy deficit" starting point and brushes over the practical challenges and implications of their sterlingisation recommendation - but let's park all of that and look only at what "Spending Change at 1.0% less than Growth Rate" would look like in the context of our actual historical spending levels and GDP growth rates.

The graph below shows two lines: actual real-terms Scottish Spending per GERS and what that figure would have been if from 1998/99 we'd applied the Growth Commission's Fig 12-2 assumption of  "Spend Growth 1.0% less than GDP Growth":



So there we have it. If applied in the recent past, the assumption the Growth Commission uses to illustrate how we could achieve their recommendation of getting from their "legacy deficit" to a deficit of under 3% of GDP within 10 years ... would have produced slightly lower levels of public spending for Scotland than "Westminster austerity" has actually delivered.

Of course if you assume higher GDP growth then that would change this picture - but as the Report's Chairman makes clear: "There is no growth rate assumption"



** ADDENDUM **
I'm indebted to @blairmcdougall for pointing out to me that the Scottish Fiscal Commission forecasts published today are for 0.9% pa long run GDP growth

On this basis, to achieve the deficit reduction at the pace the Growth Commission assumes in it's illustration, we would have to be cutting real terms public spending by 0.1% pa (presumably by more than that on a per capita basis). Austerity for the long-run then.
** ENDS ** 

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Recap on Growth Commission GDP/Capita Growth Rate Assumption

In previous blogs we've seen that the Growth Commission assumes an independent Scotland would achieve a GDP/Capita growth rate +0.7% pa greater than it would if remaining in the UK.

The justification for this figure is extremely tenuous, relying on including Hong Kong and Singapore in their comparison set despite explicitly rejecting those countries' low tax, high income-inequality economic models.

Remove Hong Kong and Singapore from the comparable countries' growth rate analysis and +0.7% becomes 0.26%. If this were the case, instead of the 25 years the Growth Commission assumes it would take to generate an additional £9bn pa of revenue, it would take 67 years. £9bn is of course less than the £10.3bn effective fiscal transfer Scotland received from the rest of the UK in 2016-17, something we would of course lose on day one of independence.

To test that assumption further: if we look back at the Independence White Paper, the equivalent figure used then was in fact only +0.12% pa - on that basis it would take over 140 years to achieve the aspired-for increase in GDP/capita.




Finally, if we look at the performance of the three countries the Growth Commission explicitly cites as being those they seek to "learn in particular from" (Denmark, Finland and New Zealand) then the superior growth rate (using the Growth Commission's chosen data source and time period) becomes an immaterial +0.06%.  It's a daft calculation of course, but on that basis it would take nearly 300 years to achieve the Growth Commission's target for superior GDP/Capita.


Implications for Austerity in an Independent Scotland.

The Growth Commission doesn't do us any favours when it comes to "showing their workings", but the projected deficit figures in section B are relatively easy to recreate because the analysis they use is not much more than "back of a fag packet" stuff anyway.

I've recreated all of the deficit/GDP figures used in the Growth Commission report (by going back to the source data and applying their stated assumptions) and - because I'm nice like that - I've put them in an easy to understand graphical format.

What we're looking at here is historic data per GERS, forecast to 2021/22 per IFS and then the Growth Commission's forecast to their Year 10 (per Figure 12-2).  The black line is revenue/GDP, red is spend/GDP and therefore the gap between the two lines is deficit/GDP.



The step-change between IFS and Growth Commission figures is a function of the Growth Commission factoring in some additional Brexit downside (per the Nov 2017 OBR report), removing the relatively small amount of Oil revenue that was in the IFS figures (£0.7bn) and then making the very optimistic assumption that Scotland would save c.£2.8bn1 compared to spending allocated in GERS.

This £2.8bn assumed saving is more than 4x the £0.6bn that was assumed in the (notoriously optimistic) Independence White Paper and relies on some heroic assumptions1 which we may come back to in another blog.

More importantly: no allowance at all is made for any "economic-shock" effects of Scotland separating from the UK. If the UK leaving the EU has negative economic consequences (as the Growth Commission assumes), it's frankly ridiculous for them to create financial projections that don't allow for any economic shock from Scotland leaving the UK (a market we trade 4x more with than we do with the EU).

Now look at what the graph shows: the closing of the deficit comes pretty much entirely from reducing spend/GDP.  Of course there's a numerator and a denominator effect here: the Growth Commission asserts that this can be achieved without real-terms spending cuts because GDP (the denominator) will be growing faster in real terms than spending (the numerator).

The assumptions made are in fact extremely crude . They don't even refer to the +0.7% superior GDP/Cap growth rate analysis from earlier in the report, which makes me wonder if that analysis was added later as they scrambled to find some tabloid-friendly headline figures?

The Growth Commission's assumption is simply that real GDP growth will be 1.5% pa and real Public Spending growth just 0.5% pa. Of course this means the numerator (spend) is growing more slowly than the denominator (GDP) and so spend/GDP reduces, as we see on the graph.

This is really important: if GDP growth drops to 1.0% pa or less, the Growth Commission is implicitly assuming that spending would be cut in real terms (to maintain the rate of reduction in Spend/GDP they project). This is why so many commentators have referred to the Growth Commission "embracing austerity";
  • They assume we inherit another 5 years of austerity spending measures and yet don't seek to reverse those cuts on day one - implicitly accepting that today's cuts are necessary to get our economy on a path to being fiscally sustainable
  • They assume that we will continue to drive towards achieving a deficit of  under 3% of GDP through reducing spend/GDP, rather than by increasing the tax take (revenue/GDP)
  • A corollary of this is that they don't assume we can increase spend/GDP to grow the economy. This is a realistic assumption give their "sterlingisation" recommendation, but one that will cause a lot of head-scratching among SNP supporters who bought into their "anti-austerity" rhetoric

But the point here is not just about whether or not we will be able to achieve real spending increases while pursing the Growth Commission's economic model (i.e. whether or not we can achieve the GDP growth rates they assume). It's also about what their hoped for 0.5% pa real-terms spending increase would actually feel like for the people of Scotland.  To provide some context: over the 11 years between 1999/00 and 2010/11, average annual real spending growth in Scotland was 4.0% pa; in the 6 years of austerity between 2010/11 and 2016/17 average annual real spending growth has been 0.0%2 pa.  Basically, 0.5% really isn't very much at all.

It gets worse though, because the figures the Growth Commission projects are absolute GDP based3 not GDP/Capita. Given the recommended push for greater net inwards migration, the impact on a per person basis of this hoped for growth would be significantly diluted.

I'm really just playing with numbers here now, but 400,000 has been quoted as a net migration target: to achieve that over a decade would imply 0.7% annual population growth in Scotland, enough to turn a 0.5% real spending increase into a real decrease in spend per person.

However you cut it, even if we were to achieve the optimistic growth rates and spending cuts the Growth Commission assumes, their commitment to fiscal prudence means the people of Scotland wouldn't see the benefits in terms of meaningful public spending increases.

To illustrate the aggressive nature of the Growth Commission's Spend/GDP assumption, we can plot the graph above on an "onshore economy" basis only (to exclude N Sea oil volatility from the historical spend/GDP data)



The picture is pretty clear: the Growth Commission assumes that we'd be investing a lower proportion of our onshore GDP in public spending in 2030/31 than we were even in 1999/00 - in any practical sense of the word, this means continued austerity.

George Osborne would have been proud.


***

Notes
1. These are not clearly laid out, but the assumption is £0.7bn of effective debt interest saving, £0.7bn from defence,  and £1.4bn from allocated UK Government spending (Whitehall costs etc) - so a total saving of c.£2.8bn.  It's worth noting that the equiavlent number in the Independence White Paper was £0.6bn


2. Per GERS 2016-17 and applying the UK GDP deflator, see Chokkablogs passim
3. see page 96, B12.18
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Having written a couple of work-in-progress blogs on this topic (here and here), I thought it might be helpful to summarise what we've been able to conclude so far about the claims made in the SNP's Growth Commission report.

To be absolutely clear: this is not a critique of the ideas in the report , it is solely a critique of the GDP/Capita and growth rate assumptions the report uses to make its economic case.

1.  The £4,100 "independence boost for every Scot" claim used in headlines is nonsense
  • That's a GDP number - the related Government revenue number the report itself uses is c. £1,600 per person1
  • The justification for that number is "if we had the same GDP/Capita as the Netherlands". Hard to believe I know, but there is no more justification for the figure than that2
  • The Netherlands is not even among the countries the report name-checks when it says the report "learns in particular from Denmark, Finland and New Zealand"
  • That figure is anyway only enough to nearly off-set the loss of the fiscal transfer that currently results from pooling & sharing within the UK3 - something we would of course lose on day one of independence

2.  The report claims it would take 25 years to achieve this, based on a GDP/Capita growth rate 0.7% pa superior to that we'd achieve remaining in the UK . The analysis behind the 0.7% assumption is, to put it mildly, not robust
  • That figure is arrived at by comparing the long run GDP/capita performance of a list of countries including high growth countries Hong Kong and Singapore
  • The report explicitly rejects the low tax, high income-inequality models that HK and Singapore pursue - but if we remove them from the analysis the 0.7%4 figure immediately drops to 0.26%
  • This alone would change the 25 year time horizon (to achieve a figure we've already seen is based on a crudely simplistic comparison) to 67 years
  • If we look at the average growth rates of the three economies whose economic models the report actually suggests we most seek to emulate (Denmark, Finland and New Zealand) ... well in fact they don't show superior growth rates to the "large advanced economies" at all5
  • The entire economic case in the report is built on the foundation of this 0.7% figure - it is a figure that frankly isn't credible
  • At the very least the report should have shown a sensitivity analysis to highlight what would happen if that 0.7% turned out to be 0.26% - or indeed if it turned out to be the 0.12% figure the independence White Paper previously used. Of course we know the answer because it's a linear relationship; 25 years becomes 67 years becomes 146 years!

3.  The report does not present a case for independence because many (possibly most) of the recommendations in the report could be implemented using existing devolved powers or - in the case of immigration in particular - modified powers. 
  • The economic case presented is already (per the above) extremely optimistic 
  • Even then, we certainly can't attribute all of the benefits of the economic model suggested to independence because as the report itself concedes "many of our recommendations could be agreed and implemented [...]6 either with existing or enhanced policy responsibilities for Scotland's Parliament and Government"
  • But the problem around currency that the report seeks to address (with the much-maligned sterlingisation recommendation) is a problem that is only created by independence
  • The report implicitly recognises that creating a Scottish currency would require economic sacrifices that would be unpalatable to voters - but the sterlingisation model recommended implies a very compromised version of independence 
  • The report fails to quantify any of the Brexit-esque downside of independence - if separation from the EU single market damages us, separation from the UK single market would logically damage Scotland's economy far more
  • To take one high profile example: the report recommends that "the headline rate of corporation tax should not rise above the level prevailing in the rest of the UK" - so, unless we want Scotland to start competing as a low-tax regime, there isn't even an argument here for devolving corporation tax powers
So there we have it: the "the economic boost" headlines spun from the report are ridiculous, the report's assumptions on growth rates (and hence the 25 year timescale to achieve) are extremely optimistic and based on poor quality analysis ... and the report doesn't make a case for independence anyway.


Notes
1. £9bn pa is actually quoted in the report, which using today's population would be £1,665 per person - but in my attempts to replicate the figure it looks like the £9bn is a rounded-up number
2. I detail the full analysis here - basically the Netherlands is the median country you find if you rank their arbitrarily defined list of "small advanced economies" in order of GDP/Capita 
3. Based on the most recent figures, I've calculated this figure to be £10.3bn - details here
4. Actually 0.65% if we're being fussy - full analysis including effects of cohort selection blogged here (where I also recreate the analysis using the somewhat different cohort used in the independence White Paper)
5. Using the same data sources and same time periods for comparison as the Growth Commission, as detailed here - a point rather nicely illustrated here


6. From p.9 - The words I've taken out here are "in advance of independence", because those words are redundant unless you assume (as the report does) that independence must be the ultimate goal no matter what the economic case suggests
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