Fairy Tales

diagram from Flip Chart Fairy TalesI’ve been following a blog for the the last few months called Flip Chart Fairy Tales, written by a business insider called Rick.

His strapline is “Business bullshit, corporate crap, and other stuff from the world of work”, and from what I’ve read so far you get exactly what’s advertised: straightforward analysis of of business and economic issues.

Today’s post – “Are We Really About To Split Up Our Country?” – looks at the prospects for Scotland and the UK, separate and together, in terms of government revenue, spending, and deficits.

For those of you who are still hazy about what the deficit is, it’s what the government has to borrow each year, over and above what it gets from taxation, in order to meet all of its spending commitments. This year’s deficit gets added to all of the previous deficits to make up government debt.

Enthusiasts for Scottish independence will hate what Rick has to say and many will dismiss his reliance on the likes of the IFS for forecasts of how an independent Scottish economy might fare.

But we all need to pay attention to Rick’s discussion of the public spending conundrum that’s laid out so clearly in the Venn diagram above.

If a government pursues any two of the three policies the consequence is shown in the overlap between the two circles. For example, the current UK government has decided to try to eliminate the deficit by 2019 without (overtly) increasing taxes. The consequence is a collapse of some public services, the early signs of which are apparent across the UK.

The intersection of all three circles is labelled “La La Land” because pursuing all three policies at the same time is impossible .

If the people of Scotland vote for independence there’s a very strong chance that the Scottish National Party will win the general election in 2016 and form the first independent Scottish government. The SNP’s vision of an independent Scotland is set out at some length in its white paper, Scotland’s Future. So let’s have a look at what policies are being proposed with regard to public services, taxation, and deficits.

The bulk of public spending goes on health, social security and education which are covered in Chapters 4 and 5 of the white paper. Nowhere in these chapters is there any suggestion that an SNP government would cut the funding of any of these services. In Chapter 5 all of the “immediate priorities for action” that are listed will require additional spending, and in Chapter 4 there are unspecified commitments to investing more money in education. So SNP policy is firmly in the green circle: no more cuts to public services.

Taxation is covered in Chapter 3 of the white paper where four out of six of the “priorities for action” are effectively tax cuts. The other two priorities (ending tax allowances for some married couples and designing a more efficient tax system) might provide enough additional revenue to make up for what’s lost from the first four but they certainly won’t deliver any net revenue increase, which puts SNP policy in the purple circle: no tax increases.

The consequences of pursuing the green and purple policies are “increased debt and debt repayments”.

Public borrowing is covered in Chapter 2 of the white paper. Depending on how negotiations go on Scotland’s share of UK public debt the SNP calculates that the deficit will be somewhere between £2.7bn and £5.5bn, which means that an independent Scotland will have public debt, which will get bigger every year.

There is no explicit commitment in the white paper to reduce public debt but this paragraph suggests the intention is to follow the UK lead in attempting to reduce the deficit:

“Sound public finances will be an important part of the agreements underpinning a Sterling Area arrangement with the rest of the UK and for demonstrating our credibility to financial markets.”

Which is reinforced by these statements in Chapter 4:

“The Scottish Government recognises that a sustainable fiscal framework is important no matter the currency arrangement. However, it is particularly important in a well-functioning monetary union to avoid significant divergences in fiscal balances.

That is why such a monetary framework will require a fiscal sustainability agreement between Scotland and the rest of the UK, which will apply to both governments and cover overall net borrowing and debt.”

So in addition to pursuing the green and purple policies the SNP appears to be proposing to follow the UK policy of attempting to eliminate the deficit by 2019, which dumps us squarely into La La Land.

Independence enthusiasts will, at this point, direct me to the many paragraphs in the white paper that suggest increased economic activity in an independent Scotland will deliver the missing millions as additional tax revenue.  This is the same “trickle down” economics that has been punted by neo-liberals for the last three decades despite all the evidence showing that wealth trickles in precisely the opposite direction. Regardless of your belief in the direction of the trickle, the GDP growth required to deliver enough tax revenue to eliminate an annual deficit of even £2.7bn is not credible.

Rick’s conclusion on voting for Scottish Independence (“It’s absolute madness!”) might be an overstatement but if you’re an undecided voter and are worried about the economic implications you should probably vote No. This won’t save Scotland from falling into economic chaos, but it will probably delay the descent. The UK economy is ten times the size of Scotland’s and this bulk means it can more easily absorb the idiocy of government policies until someone comes along with a plausible plan for redesigning our financial and fiscal systems.

In the meantime none of us are independent from the logic of the Venn diagram. If we stick with our current way of doing things it doesn’t matter whether we vote ourselves into an independent Scotland or stay in the UK, the only way to maintain our public services is to pay more tax or take on more public debt.

Anyone who tells you different is spinning fairy tales.


8 thoughts on “Fairy Tales

  1. “The UK economy is ten times the size of Scotland’s and this bulk means it can more easily absorb the idiocy of government policies until someone comes along with a plausible plan for redesigning our financial and fiscal systems.”

    That is illogical, Jim.

    The UK economy is ten times the size, but it operates essentially on ten times the scale: ten times the debt, ten times the borrowing, ten times the repayments, ten times the tax, ten times the spend, ten time the productivity, ten times the labour…

    So how does that give any extra buffer zone?

      • One of the things that worries a lot of people about economics is the application of arbitrarily chosen physical laws without any clear justification as to why such a law applies, or indeed any clear indication that the economist understands the laws in question.

        For example, can you tell me why you are using an absolute force (measured in Newtons) instead of a proportional force live gravity (measured in Newtons per kg)? Gravity affects us all equally in terms of acceleration, because gravity acts equally on every kilogram, every gram, every atom in our bodies.

        So a feather and a block of plutonium will (in the absence of outside forces) continue to accelerate at the same rate under the force of gravity as each other. While they will both be gaining speed at the same rate, the plutonium will be increasing in inertia at a vastly higher rate.

        A change in the price of oil is analogous to a proportional force, as it will effect every barrel, every litre, every drop, every *molecule* of oil equally. Inertia cannot resist a proportional force, it can only be changed by it.

        • A slump in the oil price has a proportional effect on the buyers of the oil but an absolute effect on the revenue collected by the government.

          If oil revenue typically represents 10% of annual revenue then a slump in the price is significant. If oil typically accounts for 1% of annual revenue then the slump is mach easier to absorb.

          Larger economies are more likely to be more diverse, which bolsters the argument. If we have 100 revenue streams each of which contributes 1% we’re going to be more resilient than an economy with 50 revenue streams contributing 2% each.

          There are some good arguments for independence but this isn’t one of them.

          • I wasn’t arguing for or against independence, I was just challenging your logic.

            The argument you should have been using was one of diversity, and it took me attacking your logic twice for you to finally start using the correct argument instead of oversimplified maths and invalid analogies to physics.

            Yes, a diverse economy is more resilient to changes in any single market than one with a heavy reliance on that particular market. But there’s a difference surely between being having a large share of that market and being reliant on it. We still have our farming, tourism, whisky etc. We are almost as diverse as the UK as a whole, so while we’d have a proportionally bigger oil sector than we do now, we wouldn’t be “relying” on it.

            This is why the oil is described by many as a “bonus”.

  2. Whilst Rick’s analysis is correct if you assume a static economy, there is another way to avoid La La land and that is to improve productivity within the economy which means that the total tax take increases (and incidentally things like the welfare bill decrease) and hence the desired outcome is achievable, particularly if one of the public sector cuts is Trident. If Scotland performed as well as (say) Ireland, we would see a 19% improvement in GDP per head of population.

    Another big issue is that whilst we are told that Scotland runs a deficit at present, there is no way of knowing this. Why? Because VAT, corporation tax, fuel and other duties are not accounted separately within the UK – there is no box on a VAT return to say how much turnover relates to Scotland as opposed to the rest of the UK – and hence there is no way to demonstrate that Scotland actually receives back all of the tax which is raised as a result of economic activity in Scotland.

    If we look at some pointers however we can draw conclusions from elementary maths. Scotland’s GVA (excluding any oil revenues) per head of population is only just below the UK average and on a regional basis is second only to the South-East of England which is skewed heavily by the City of London. If the City were removed from the equation (equivalent to removing oil revenues from the Scottish figures) then Scotland’s GVA is significantly higher per head than the rest of UK. This being the case (Fiscal Commission Report table 4.03) then is it really likely that Scotland runs a higher deficit than the rest of UK? Answer is no – not if you account properly for all taxes raised on economic activity in Scotland.

    As for diversity, I would rather rely on oil (which we know for certain is a limited resource which the world desperately needs) than rely on a financial services sector (the engine of the South-east) which as we have seen is volatile and if Malcolm has his way would be eliminated!

    Finally, the only purpose for constitutional change is to improve the way we are governed so that we can improve how our economy performs and then distribute wealth more fairly. The arguments put forward by the No camp are all founded on the premise that Scotland’s economy will not be improved under independence whereas the Yes camp arguments rely on improvement. Both sets of arguments stack up given their respective underlying assumptions. My instinct is to opt for the strategy that tries to make things better and assumes success rather than the strategy that accepts mediocre performance and lacks ambition to change or improve. Is it really acceptable that Scotland’s GDP per capita is only 81% of that of the Republic of Ireland (2012 figures, source OECD http://stats.oecd.org/index.aspx?queryid=558) – not to me its not! Better Together? – aye right!

    • Simon,

      If we make the generous assumption that tax revenue increases more or less in direct proportion to GDP, based on GERS 2012-13 data and the white paper’s estimates of the lower and upper limits of the annual deficit, an independent Scotland would have to achieve GDP growth of between 5% and 10% in a single year in order to raise enough revenue to eliminate the deficit.

      According to OECD stats, in 2012 the highest rate of GDP growth among European countries was 2.9%. This was Norway and was an exceptional performance last achieved in 2004. The next best was Poland at 1.94%. The UK managed 0.28% and Ireland 0.16%.

      The proposition that iScotland will eliminate the deficit via productivity gains is not credible.

      Ireland’s GDP per capita figures are impressive but they don’t translate into greater prosperity for the people of Ireland.

      Disposable income per capita in Ireland is significantly lower than the UK ($24.5k against $27.4k), and it contracted at a cumulative rate of -8.19% between 2010 and 2012. Over the same period UK households saw disposable income rise by 2.43%.

      GDP is a poor measure of general prosperity and Ireland’s economy is performing well for someone other than its citizens.

      My argument is not against independence. It is against the cavalier approach by the Yes movement in general and the SNP in particular to our economic security. Thanks to the lack of planning we’re in for a rough passage, at best, during the first few years of independence.

  3. Well you are right we don’t know exactly what will happen. (but when do we ever know what’s going to happen with UK politics and the economy) Rick is only spouting a theory and I guess we’ll just have to find out. At least if a Scottish government screws up (bankers, expenses, etc) WE will be able to vote them out and decide where to go from there. To me it has to come down to that. Should we continue to turn up at every general election knowing no matter who we vote for it wont matter anyway? Accepting as a liberal country we could still be saddled with more Tories or even the bloody UKIP ffs. Looking at what Scotland votes for against what England has voted for over the past few decades just illustrates that both countries are not politically compatible and it totally nuts to share a government. We could trudge on pretending this isn’t the case but we have a chance now to actually go off in the direction we’ve been pulling for decades. I think it’s worth a go. Who knows what’s around the corner in this ‘best of both worlds’ anyway. Not sunshine and roses anyway I’m sure 😉

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