The independent National Institute of Economic and Social Research has just produced a series of six research papers looking at aspects of the fiscal challenges and opportunities for an independent Scotland.
For Argyll is working its way through these papers and will publish on particular pictures and issues arising from these papers.
The first one – Fiscal challenge and opportunities for an independent Scotland [by Crawford and Tetlow] – is manifestly apolitical and fair.
While its analyses and conclusions may not be what those favouring independence would hope to see, this open-minded paper carries much of interest and we recommend its reading.
The fiscal picture it presents of the next 50 years for the UK as it is currently constituted and for an independent Scotland, is more capable in its economic modelling than is the current model used by the Office for Budget Responsibility [OBR].
Some interesting insights
The report opens up for everyone a series of accessible insights into how an economy works, where balance has to be maintained, what instruments are used to address particular threats – and gives a sense of the interrelatedness of elements of a national economy.
For instance, it shows that in Scotland, while the forecast ageing population will pull with it increased budgetary needs, a population shifting its weight in that direction means fewer younger people – and lesser budgetary demands for education.
This might not be – and is not – the demography a thriving nation state would need, but the balance of these two budgets is nevertheless an interesting insight.
Moreover, the fact that Scots are less healthy than their peers in the rest of the UK is both a concern and a bonus. Since we die earlier, Scotland has fewer of the oldest old, making pensions easier for the state to pay for, in the context of an ageing population.
On the question of benefits, the paper is forensic in pointing to the fact that Scotland’s spending on benefits differs from the rest of Great Britain in two fields: we spend substantially more – 22% more – on disability benefits; and we spend 12% less on housing benefit.
We spend more on disability benefit because of our ageing population and because of our lower levels of health. 20.7% of Scots of working age ‘report having a health problem that limits their daily activities’, where the equivalent figure for the rest of Great Britain is 18.1%.
The percentage of families qualifying for housing benefit is much the same in Scotland as in the UK as a whole – but the average entitlement per family is lower because our average rents in the private and social sector are lower; and because more housing benefit claimants here live in socially rented properties whose rents are, on average lower, than for privately rented properties.
A central contradiction
This paper throws up a paralysing confrontation of plans for Scotland’s future which it does not itself remark upon at all because it is not concerned with questions of currency. These are the subject of another paper in the series, also now published.
This paper notes that one of the opportunities independence would offer Scotland would be the ability to enable different national priorities through its own balancing of taxation, spending and borrowing.
The trouble here is that these are the very powers that would have to be retained by the Bank of England and the UK Treasury, should a common Sterling zone be achievable. So an opportunity open to an independent Scotland to configure the use of its fiscal levers to enable the development of the sort of country it wanted to be, would be neutered by the commitment to negotiate membership of a Sterling zone.
Spending on public services
The report notes that there is a substantial difference between Scotland and the UK as a whole in spending on public services.
Where Scotland spends virtually the same per capita on education and training, it spends very much more on transport – 56.5% per capita. Our topography and our small and dispersed population drive this spending pattern.
A pretty stand out point is that Scotland spends three times as much per capita on enterprise and economic development – a statistic that mightily underlines the inability of our enterprise agencies and our strategies for economic development. Weaknesses in these areas have always been obvious at the sharp end of results, but this picture makes it plain that the problem is not inadequate spend.
The report points out that these specific difference between Scotland’s and the overall UK’s spending on public services have widened under devolution – indicating that Scotland’s priorities are different.
Tax revenues
On average, tax revenues per person are higher in the UK as a whole than in Scotland.
This is because Scotland has substantially fewer high income individuals than does the UK as a whole – with most of these individuals based in London.
The fact the report gives – that in 2011-12 the top 1% of earners together paid 27.5% of the the UK’s total income tax revenues.
This shows the distortion of the complaints about the magnetic pull of London, suggesting that it is draining the rest of the UK.
The reality is that it is paying for a great deal of the rest of it.
Tax revenues from oil and gas
In 2011-12, where revenues from oil and gas were, at 7%, ‘quite high by recent standards’ as the report shows, had Scotland had a geographic share of such revenues, their addition would have more than covered Scotland’s higher per capita spend on public services.
This would also have meant that Scotland would have borrowed less than the UK as a whole – £1,457 per capita as compared to £1,961.
The trouble here is that oil and gas revenues are not projected to be stable and indeed, in the nature of the finite resource and of the industry, cannot be stable over time.
The report points out that, for this reason, it is very important that Scotland’s economic planning allows for what it calls ‘the future evolution of revenues from oil and gas production’.
As the report underlines, revenues from this industry ‘will not be driven by demographic changes’ but by three key factors:
- the availability of oil and gas reserves;
- the technology available to exploit them;
- and global demand for this source of energy.
The situation here, as For Argyll itself has shown, is that:
- there are unswept assets in the North Sea – but these are the heavy crudes and ultra heavy crudes that British and European refineries are not equipped to handle;
- the technology available to exploit these resources is being continually developed – but is often untried and is expensive – driving up production costs and making products uncompetitive in price for some time;
- global demand for this source of energy will continue, if we read ‘source of energy’ as this particular energy-creating commodity; but reading ‘source of energy’ here as being the North Sea area is a different matter. America is starting to export not only the volumes of sweet crude it is producing from its massive shale reserves; but is about to start exporting gas from this source as well. These resources coming to market – with much lower production costs than are the case in the North Sea – will inevitably [for as long as they last] – be highly price competitive in relation to North Sea output. Moreover, the heavy crudes from the North Sea face price competition from Canada’s Alberta oil sands, where production costs are much lower. Together, these factors mean – for the time being – lower production levels and therefore lower tax revenues from the North Sea.
The report’s conclusions
The model used by the researchers producing this report indicates that, without changes in fiscal policy, ‘both the UK as a whole and Scotland, in particular, would face an unsustainable long-run fiscal position’.
It shows that both countries would see debt spiralling upwards within the target period of 50 years. The fiscal policy changes needed to avoid this outcome would be more spending cuts and/or increases in taxation.
The report describes these measure as ‘fiscal tightening’, with their modelling showing that the UK as a whole would need to implement such ‘tightening’ by 0.8% if its was to be able to get public sector net debt back to 40% of GDP by 2062-2 – the end of the 50 year projection period of the report.
In terms of projecting the position for Scotland alone, the report notes that: ‘There is great uncertainty about how the Scottish economy and public spending and revenues will evolve in Scotland if it remains in the union, and even greater uncertainty about how these would evolve under independence, since we do not yet have full information about what policies would be pursued and exactly what the independence settlement would involve.’
The assumptions made in the modelling to allow for this situation produce a much larger ‘fiscal tightening’ for Scotland – 4.1% of GDP, as opposed to the 0.8% for the UK as a whole.
However, the report considers the impact of specific variable assumptions on this projection, each reducing the percentage of GDP to be clawed back from debt by the ‘tightening’ measure of spending cuts and tax hikes.
It also puts into the model a cluster of optimistic assumptions, some it says are more optimistic than is the Scottish Government’s White Paper on Scotland’s Future, to see what the best possible picture might be, should all of these optimisms come to pass together.
These positive assumptions are:
- that Scotland manages to negotiate a 40% of GDP share of the national debt in an independence deal – instead of the likely population share of 71.8 % of GDP;
- that it gets the high immigration levels that would drive its economic development;
- and that it gets the high levels of oil and gas revenues over the next few years that match the Scottish Government’s most optimistic forecasts.
Even with these highly favourable assumption all simultaneously acting in the model, the result shows that an independent Scotland would ‘require a fiscal tightening of 1.9% of GDP’ to get its debt back to 40% of GDP by 2062–3.
This is over twice as high as the 0.8% of GDP of fiscal tightening that the report calculates would be required for the UK as a whole.
Crawford and Tetlow, in referring to the Scottish Government’s White Paper, point to the fact that the specific policies that it proposed ‘contained greater giveaways than they did takeaways’. They go on to stress that: ‘Ultimately this balance would likely need to be addressed if an independent Scotland was to achieve fiscal sustainability.’
Overall, in its own words, the report concludes:
‘The broad conclusion of our modelling is that Scotland would face a tougher fiscal challenge over the next 50 years than the UK as a whole.
‘This conclusion is largely the result of two factors.
‘Scotland currently enjoys higher levels of public spending per person than are experienced on average across the UK. In 2011–12, this higher spending was more than matched by higher tax revenues, if one allows for a geographic share of revenues from offshore production to be allocated to Scotland.
‘However, over the next 50 years, reserves of oil and gas are likely to be depleted and thus revenues from this source are likely to dwindle.
‘These higher levels of spending and declining revenues will put pressure on Scotland’s fiscal position; this will happen to a far greater extent for Scotland than it would for the UK as a whole, since oil and gas revenues, while not insignificant, are a far smaller share of total UK government revenues.’
Editor’s Note: Anyone disappointed by the findings of this report should read it before being tempted to describe it as ‘scaremongering’. It is clearly objective and fair – underlining structural weaknesses in the economy of the UK as a whole; and often admiring of the individuality of the way Scotland defines itself and manages its budgets to support priorities different from those of the UK as a whole.
It is not overly long. It is lucid and accessible, rewarding time spent in reading it. It is neither a condemnation of anything nor a message of despair. It is more a set of signposts to pitfalls that need to be understood.
Here is the link to the full text of the NIESR report: Fiscal challenge and opportunities for an independent Scotland, by Rowena Crawford and Gemma Tetlow.
