Beyond GERS:- A Response to Comments

And if he is compelled to look straight at the light, will he not have a pain in his eyes which will make him turn away to take and take in the objects of vision which he can see, and which he will conceive to be in reality clearer than the things which are now being shown to him? – Plato, The Republic. Book VII – The Allegory of the Cave

I probably should have foreseen the level of engagement that my latest article for the Common Weal White Paper Project – Beyond GERS – has generated.

Most of it has been positive and the best of the critical response has at least been constructive.

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(As flattered as I am by the attention, I don’t particularly include this comment in either of those categories)

Spurred on by the mention of the paper by David Torrance in The Herald, I’ve become aware of several misunderstandings and misconceptions surrounding a few of the comments which have been made so feel that these must be addressed in a constructive manner. This paper represents a large leap away from where the independence debate has stood – more or less stationary – for the past two years so some further explanation of some of the points is warranted.

1. The Data Source is Wrong

This first clarification comes off the back of Kevin Hague’s article here which examines some of the figures used to back my arguments. His chief objection is that I used PESA 2016 (which covers up till financial year 2014/15) as the basis for my disaggregation of UK and Scottish geographic spends and that I should have used CRA 2015/16 instead (and, to his great credit, he makes the case that doing this strengthens our case from a financial perspective). Whilst this is a point to which I would not necessarily object I can only remind that Hague also admits that the latter source wasn’t actually published until after Beyond GERS thus was unavailable at the time of writing and that my conclusion makes it quite clear that this publication should be considered as a first step – to be updated as new data develops.

We must remember that the data for 2015/16 will continue to be updated and refined for several years from now – most of these documents will show refinements and adjustments running up to five years before they “drop off” the table. We must also remember that whilst this study assumes the case of Scotland becoming independent today, the simple fact is that we are not, we will not be and it will be several years at a reasonable minimum before we are. Despite the efforts of some economic analysts to divine the state of the economy several years hence, quite probably the only certain conclusion one can reliably reach on such things is that these predictions will be wrong to greater or lesser degree, one way or the other.

Would using GERS 2014/15 have made for a neater comparison? Possibly. Certainly though the baseline deficit was relatively similar so the task at hand not significantly different. But I’ll give you 20 £Scots to whatever that would be worth in £Sterling that the more shrill objectors I’ve encountered would have immediately demanded to know from where I was conjuring up £1.8 billion of oil revenue.

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(Of course, given that the 2016 Autumn Statement is now projecting >£1.5bn of oil revenue per annum in coming years, maybe I could have just claimed extraordinary prescience…)

On one particular point of attention, Hague wonders if I have overestimated the effect of overseas spending to the tune of £2.4 billion. This number was reached via a share of the total UK’s total overseas spend rather than the more modest figures assigned in CRA which applies a “who benefits” formula to spending where possible and a population share where not. The rationale for this choice being that, as outlined in the paper, one of the arguments used directly against Scottish independence was the breadth and reach of the UK’s diplomatic service. Whilst a credible case is made that the UK’s diplomatic service is, while broad, rather more inefficient than it need be I am left feeling comfortable with the idea that others who do not necessarily support independence would now surely recognise that if Scotland wanted to replicate that reach then it would be within our budget to do so. If it’s strictly an overestimate, that’s fine. I’d rather think of it as a potential for investment into Scotland being a genuine force for good in the world.

2. This Means Cuts to Scottish Defence

In two of the cases mentioned, Spending according to the EU average or at NATO target levels, this represents an INCREASE in the amount of spending within Scotland, along with estimations of the economic impact caused by this increase. Only in one of the cases – a level of spend similar to Ireland and in accordance with their policy of neutrality and involvement in UN Peacekeeping missions – would this represent an actual cut to defence. If one were to consider reducing actual in-Scotland spending on defence and were to do it in such a way as to risk jobs – then it would be absolutely right to consider how those savings could be invested into other sectors of the economy which may carry with them far higher fiscal multipliers than defence spending does. As the IMF have noted more than once, rational defence spending levels are rarely decided out of “concerns about the state of the economy“.

This said, defence is an issue which is very much bound up in policy and it is a subject that we really need to have a serious discussion about. Scotland’s defence requirements post-independence are likely to be very different from that of the UK as a whole or even Scotland within the UK.

If, for example, you believe that Scotland’s defence threats are, in order:
1) Nukes from Russia
2) Tanks from Russia
3) Terrorism
4) Troops from Russia

Then you’re likely to end up creating a defence force entirely inadequate at tackling the actual threats to our national security (The top four of which probably look more like: 1) Climate Change. 2) Internal unrest 3) Terrorism. 4) Cyber Attack. None of these need aircraft carriers, outward force projection or nukes to effectively combat). Common Weal will soon be producing our vision of what defence actually means in structural and strategic terms.

3. Closing the Tax Gap = Raising Income Tax

One of the implications made by Hague – and which was picked up by Torrance – was that closing the tax gap to raise an additional £3.5 billion could be equated to a ~30% increase in income tax level. This is a particularly misleading way of representing this particular point, not least because the research quoted in the paper makes it clear that the inefficiencies, loopholes and avenues for avoidance and evasion lie far more within the realms of VAT, corporation tax, capital gains and inheritance tax. The fact that these taxes are all currently reserved to Westminster aside, the implication that closing the tax gap automatically means an increase in tax rates for those who already pay their full share and obligation is simply wrong.

This mode of thinking, I believe, is symptomatic of the main problem that this paper is trying to tackle. Too many political commentators (on both sides of the debate) have gotten far too used to thinking about Scotland strictly in terms of being a wee region of the UK with limited powers. When just about the only major tax power Scotland has control over is income tax, perhaps it’s tempting to think of solutions purely in terms of that one tax but if you want to think about Scotland as an independent country – even if you’re against the idea and want to attack it – you must think about Scotland in terms of BEING an independent country. An independent Scotland would, of course, have full control over all of the taxes currently employed. Most importantly, it would be fully in control of the power and opportunity to completely dispense with the UK tax code and start again with a better, more efficient, more effective one designed explicitly for the Scottish economy. If a pro-Union commentator wishes to fight on this point then they have to be prepared to defend the current UK system, explain away its flaws and why we’re not getting any of the solutions that folk like Tax Research UK can identify as well as attacking any proposals that we push forward.

4. We’d Be Defaulting on the UK’s Debt

The stated objective of the Westminster government in the 2014 campaign was to have the rUK recognised as the “continuing” or, at least, the “successor” state to the United Kingdom (the difference is largely semantic. In the former, the UK would continue unchanged in law but with reduced territory and perhaps a change of name. In the latter, the UK would strictly cease to exist but rUK would inherit all of the rights and obligations of the former state) and for Scotland to be recognised as a “new” state (The link prior went so far as to claim that the 1707 Treaty of Union “extinguished” the country of Scotland as a legal entity despite the UK describing itself to the UN 2007 as being composed of “two countries [Scotland and England], one principality [Wales] and a province [Northern Ireland]“). This state of affairs would carry with it significant advantages for rUK – notably, it would lessen any serious challenge towards their holding the UK’s permanent seat on the UN Security Council which was the case when Russia became the successor to the USSR – but carries with it many obligations also. The historical precedents are clearly laid out and extensively referenced in my paper Claiming Scotland’s Assets but readers should also consider G.F. Treverton’s book on the subject Dividing Divided States.

Essentially, where one country successfully claims “continuing” or “successor” status then it accepts that all of the mobile debts and assets of the former state belong solely to it (non-mobile assets like mineral rights, military bases and public buildings – including public companies and any mobile assets deemed essential to their running – are almost always split geographically). This means that a “continuing” rUK owns all of the UK’s debt in its own name. Scotland can no more default on them than can a former lodger default on your mortgage.

Now, if the side negotiating on behalf of the UK wishes to make the case that Scotland should take on a share of debts, perhaps by offering a share of assets to their value, then this is something that Scotland could consider, accept or refuse. There is a very good case to be made that Scotland doesn’t actually need or want a population share of the UK’s mobile assets. We may need a few £billion worth of military equipment – assuming we can’t buy newer or more appropriate equipment elsewhere. We may need a couple of £billion (those stalwart supporters of independence, Scotland in Union, estimated not more than £1 billion) to set up essential government departments currently lacking – assuming we can’t borrow the money at better rates on the open market. We may need a couple tens of £billions to support our new currency and set up the investment banks we’ll need to start rebuilding our economy. After that, it really does start to become a stretch to consider what other assets we would actually need which would justify accepting over £130 billion worth of debt. Answers on a postcard on that one please.

5. rUK Won’t Pay Pensions to People in Scotland

The current rules regarding the UK state pension are quite clear. If you meet the requirements for one, including paying up to 30 years worth of National Insurance, then you are entitled to a UK state pension when you retire. Should you retire outside of the UK then, depending on which country you retire to, you may or may not receive an annual increment to that pension and changes to things like exchange rate and purchasing power may erode or enhance the value of that pension but the basic premise is laid out. In the absence of an agreement to the contrary, if someone has reached their 30 years contribution before I-Day or has even already retired then they can expect their full UK pension. If, for example, they end up paying 25 years UK NI and then 5 years of Scottish NI (or equivalent) then they can expect both governments to pay according to those shares. If someone lives their entire working life in an independent Scotland then the full share of that pension lies with Scotland. By this logic, at the point of independence, the full component of pension liabilities would fall on rUK as, at that point, no Scottish NI would have been paid.

This should not be a controversial point as this was precisely the stance that the UK government itself took during indyref1 and is entirely consistent with the stance laid out above that rUK would act as the continuing state to the UK.

At least one commentator has suggested that the UK could “change the law at the stroke of a pen” to block payment of extra-rUK pensions. I guess they could. It’d be a “brave” move though. I doubt they’d be able to pass that bill over the howls of horror from all the other British emigrants currently drawing that pension. I’d also love to hear their explanation to both rUK citizens who choose to move to Scotland at some point after independence as well as to their core voting base of those British nationalists who would certainly seek to retain their UK citizenship post independence and may even reject the offer of taking Scottish citizenship to which they may be entitled.

That same commentator also suggested that, rather than a blanket ban on extra-rUK payments, the blockade could be limited solely to Scotland. I find it extremely difficult to suggest a way in which that this could be done which wouldn’t be seen as a blatantly discriminatory attack on pensioners based solely on place of residence.

“You can have your pension paid to you anywhere on the planet*”
*except Scotland

I’m far from a legal authority but I’m fairly sure that one could be challenged in the courts.

Now, if an agreement over pensions liability sharing IS reached then this may change and, being that it is entirely a political negotiation, it’s difficult to predict ahead of time what that agreement would look like. Common Weal will soon be producing our own suggestions about what a Scottish pension system may look like and how it would interact with the rest of the social security network. This may include some form of cash settlement from rUK to Scotland to compensate Scottish residents for the NI they’ve paid into the UK system over the years. More on that in good time.

It is true that the Scottish Government claimed in the Scotland’s Future White Paper that they would take up the pension liabilities. This was part of their stance that Scotland would share UK successor status with rUK and would share assets and debts. Remember that it was the No campaign which originally claimed that this wouldn’t be possible. If this has changed; if the pro-Union campaign wants now to seriously suggest asset and liability sharing. Time to make us a serious offer. We may even agree to it.

6. But the SNP said ‘X’ in their White Paper!

Whether on pensions or currency or any other campaign point this is the comment which, to my mind, represents a total vindication of what Common Weal are trying to achieve through our White Paper Project. That we’ve moved the debate on so much that these segments of No campaign have now flipped from saying that Scotland’s Future was utterly without merit and should be scrapped in entirety to now demanding that its proposals should be accepted in full we’ve revealed that their own case for the Union yet to move on one iota from their position two years ago. They haven’t adapted their arguments to the new circumstances caused, especially, by Brexit and they haven’t even considered the possibility that when they demanded that the Yes campaign drop a previous campaign point and adopt a new one that we might actually do it. They’re still stuck in the Cave, blinking at the light and yearning for the shadows they sneered at two years ago.

Finally

I completely welcome comment and scrutiny of this and other work that we produce. I am more than open to adopting suggestions where they contribute to the project and to updating figures as data are refined or as time moves circumstances on. I shan’t accept some of the more blatant misreadings of this report and I certainly shan’t accept some of the more low-brow comments dismissing this work based on my own academic credentials (as if one is incapable of utilising transferable skills or of ongoing learning after graduation) and as if this is an entirely solo effort with no more thought put into it than a casual personal blog rather than the extensively referenced, collaboratively researched and professionally peer reviewed work that it is.

I’ve often found in this “post-truth” age that those who’ll gleefully tell us not to listen to “experts” when they disagree with them are all too often the same people who demand that we only listen to “experts” when others say the same thing. I’d like to hope that all of us can put that attitude behind us and start discussing the actual issues.

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Beyond GERS

Today has seen the publication of my latest contribution to Common Weal’s White Paper Project. Click here to take you to the launch page or on the image below to take your directly to the paper. Further coverage can be found here and here in The National.

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Preface

GERS (Government Expenditure and Revenue Scotland) 2015/16 reported Scotland’s fiscal deficit to be in the region of £14 billion per year, portraying Scotland as the country experiencing some of the most challenging financial circumstances in Europe.

However, this study must be viewed firmly in the light of Scotland being a member nation of the United Kingdom and, as such, any attempt to use them to project the finances of an independent Scotland must be treated with caution and qualification.

The very act of independence will result in significant redistributions and reallocations of government resources which will likely result in economic benefits accruing to Scotland. Additionally, decisions on how to establish and govern new Scottish state institutions will also improve Scotland’s budget at the point of set-up, further strengthening the fiscal position vis-à-vis that presented in GERS and that of the rest of the United Kingdom.

Key Points

• The act of independence brings with it many structural changes which will significantly benefit Scotland’s fiscal position to the effect of several billion pounds equivalent per year.

• By shifting the focus of defence from one of outward projection and nuclear deterrent to one more in line with modern European nations, savings of approximately £1.1 billion per year can be realised. Even in the event of Scotland committing to NATO member defence spending targets of 2% of GDP, the increased spending within Scotland can be expected to have additional economic benefits resulting in tax revenue increases of around £300 million per year compared to the status quo.

• A reasonable case for the debt and asset negotiations due to independence will result in Scotland saving up to £1.7 billion per year in debt interest repayments.

• The legal requirement of the UK Government to provide the UK State Pension for all those who have met the criteria would likely have to be the subject of negotiation post-independence, but the expectation would be that this would lead to billion-pound savings for the Scottish Government in at least the first year.

• A substantial fraction of unidentifiable spending accounted to Scotland is, in all likelihood, spending to cover UK wide government functions which Scotland may or may not choose to replicate or reproduce in some form post independence. Whilst savings will be made by reason of lower running costs and wages in Scotland compared to London, the additional economic benefits of spending in Scotland instead of elsewhere in the UK could result in additional tax revenues of approximately £719 million per year.

• The opportunity for an independent Scotland to redesign the tax code from the ground up, eliminating built in inefficiencies, loopholes and exceptions will help reduce the “tax gap” by approximately one-third, increasing revenue by about £3.5 billion per year.

• Whilst the UK’s tax revenue as a percentage of GDP is around the OECD average, many countries neighbouring it successfully maintain higher rates of tax revenues which, if replicated in Key Points: Scotland, could further improve the financial situation by several billions per year.

• Even without increasing tax revenue as a percentage of GDP, an independent Scotland could be placed in a position of relative “deficit parity” with the current UK budget.


Regular readers will know now that Common Weal has been very hard at work looking at the issues surrounding the independence debate, especially those arguments which just simply didn’t convince a certain segment of voters. We were all hoping that ‘someone else’ would come along and do this right after the last referendum but, for various reasons, it hasn’t happened. So Common Weal has decided to just roll up our collective sleeves and do it.

We’ve already published a paper reopening the currency debate, debt and assets, a proposal for a National Investment Bank and others. We want to produce further papers on pensions, defence, customs and excise, a detailed paper on the role of the Central Bank of Scotland, and others. All working up to a paper not just showing the limitations of accounting exercises like GERS but doing away with it entirely and building a case for an independent Scottish budget built from the ground up to suit our needs, rather than just being a tweaked version of what the UK does.

We are incredibly under resourced for this work but we think it’s work worth doing.

If you do too, perhaps you’d like to consider a donation to Common Weal to help us on our way: www.allofusfirst.org/donate
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Trump Tops It

Nemo autem regere potest nisi qui et regi.
No one is able to rule unless he is also able to be ruled. – Seneca, De Ira – On Anger.

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So Donald Trump will become the 45th President of the United States.

A sentence that I hoped I’d never have to actually write in a non-fictional article.

I’ll leave much of the “what went wrong” analysis to others except to say that maybe the “centre-left” (however broadly you want or need to define it) will finally come to realise that the short term gains of triangulating towards your right-wing opponents and just banking that your left wing base support will carry you through because they have no-where else to go has hit its limits. It didn’t work for Pasok. It didn’t work for Labour. It hasn’t worked for the Democrats.

Because, of course, the base does have somewhere else to go. They can choose to simply not vote or they can vote for the charismatic but context free option. Both of these choices happened last night. (Of course, there are other factors too. There seems to have been a very significant “Urban vs Rural” split just to name one).

What’s done is done though and now we need to adjust to our new reality as best we can. Scotland will feel the impact of this vote, so we need to have a think about where and how we can react.

TTIP

As with so many things, Trump has made deeply conflicted statements regarding his view of international trade agreements. He has both come out strongly against TTIP, TPP and NAFTA (mostly because Clinton was in favour) whilst also saying that post-Brexit UK would be “front of line” for a trade deal (mostly because Obama said we wouldn’t be).

For opponents of TTIP it may well be that the final nail in the coffin could come from an unlikely ‘ally’ indeed. Of course, if Trump manages to square his circle and fulfill both of his promises then independence may well be our bolthole to get away from them.

Climate Change

Trump is about to become the most powerful climate change denying leader on the face of our planet. I really do feel pity for folk in places like Florida who have voted for a series of polices which may well erase significant chunks of their state from the map.

Scotland should absolutely become the counter-example to his fossil energy expansion plans. If America is not going to be the world’s hub for renewable research, development and deployment then we should take it on (we’ll even welcome immigrant scientists and engineers who want to come and help us do it!).

We absolutely cannot sustain a fracking economy in the face of this. For a start, if Trump goes full frack then it may depress prices below the point of sustainability without subsidy. This is my warning to anyone hoping to kick the Scottish fracking can down the road till it’s safely after indy. There’s no mountain of cash for Scotland here. Turn away.

NATO

Trump has made several rather worrying comments about NATO. It looks greatly as if he will push hard for all members to raise defence spending up to the target level of 2% of GDP per annum (amongst other requirements). Right now, the UK is one of only a few member countries to do this (despite slashing spending within Scotland…but that’s a story for another time). More worryingly is Trump’s threat to hang NATO allies and even members out to dry should they “fail to pay”. I believe it is time for Scotland to revisit the discussion on our independence being predicated on NATO membership. For our own security, could it be that the EU’s proposed joint defence plans offer better security than the uncertain and unreliable ‘protection’ offered by Trump? Would Scotland be a better force for good in the world if we placed our efforts into UN Peacekeeping missions rather than by being part of an alliance built up to bulwark ourselves against a Warsaw Pact which no longer even exists?

Final Thoughts

These are, of course, the earliest of days and we’re going to have to wait to see both how President Trump differs from Candidate Trump (if, indeed, they do). Who Trump places in his cabinet (I’ve heard from friends in the States that VP Mike Pence may well be the one who does most of the day-to-day work behind the throne…except his record as governor of Indiana is far from stellar both within the economic and in social policy).

My slight hope is that Trump ends up surrounded by a very thick layer of advisors who are able to..”filter”..his outbursts and orders into something that’s a little more suitable for humans living on planet Earth. If that happens, maybe we’ll just about get through this.

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Postscript:- At time of writing, Clinton is still (marginally) AHEAD of Trump in the popular vote despite Electoral College going decisively to Trump. Come on America. It’s actually quite hard to create a voting system which is even worse than FPTP for selecting a single nationwide seat but somehow you’re still clinging on to it.
(Before anyone asks, my pre-result gutfeel prediction was that Clinton would win the EC and Trump would win the Popular Vote, the exact opposite of what appears to have happened. Rant still stands.)

Brexit Means…?

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Today sees the news that the High Court has ruled that the Prime Minister cannot declare the triggering of Article 50 of the Treaty of the European Union ex cathedra and must seek the approval of Parliament before doing so.

This news triggered a spike in the value of the beleaguered pound…for all of six minutes before it fell back to a baseline rise in preparation of the Bank of England’s inflation and interest rate report 90 minutes later.

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Of course, the UK Government will protest this ruling and likely appeal it to the Supreme Court which may overturn the ruling but assuming it does not, what can Parliament do to Article 50?

Already there are murmurs of the possibility to the House of Commons voting against the possibility of triggering Article 50 at all and effectively canceling Brexit altogether. Whilst this could be legal – the EU Referendum was entirely a consultation and conferred no obligation on the government one way or the other – I can’t possibly fathom a situation of this happening without there being actual riots in the pro-Leave streets of England and Wales.

Whilst Scottish and Northern Irish MPs may well have a mandate to back such a move on the grounds that those nations voted to Remain there is perhaps a wiser mode of opposition, one which could be adopted by pro-Remain or at least pro-NotADugsBrexit MPs.

Instead of opposition to Article 50 entirely, there should be a principle of opposition to an Article 50 trigger which takes us into negotiations without the foggiest clue of what we want to negotiate.

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Imagine we tried to pull that trick in indyref1

Four months on from the referendum it’s clear that “No Running Commentary” has been code for “We Have No Plans”. That’s completely unacceptable now. It is time to see the Brexit White Paper. Both Government and Opposition should bring to Parliament a list of their goals, objections and red lines and fashion them into an initial statement of will to take to the EU negotiating table. Sure, there will be compromise and change after that and yes, there may be “no running commentary” throughout the process but the people of the UK must be able to judge what we come out with against what we went in with so that we may decide if the negotiations are successful enough to accept the deal offered.

There may well be a Parliamentary vote – or perhaps even another referendum – on that said deal in due course although it should be noted that once Article 50 is triggered there’s no very clear way back in – although the door is being held open by the EU. Any such vote will not be based on the “deal” versus “Stay in the EU, no harm, no foul”. It’ll be between the ‘deal’ and ‘the hardest of all Brexits’.

So that’s my challenge to the various UK parties – both Leave and Remain. What does Brexit mean to you?


Regular readers will know now that Common Weal has been very hard at work looking at the issues surrounding the independence debate, especially those arguments which just simply didn’t convince a certain segment of voters. I think we were all hoping that ‘someone else’ would come along and do this right after the last referendum but, for various reasons, it hasn’t happened. So Common Weal has decided to just roll up our collective sleeves and do it.

We’ve already published a paper reopening the currency debate, debt and assets, a proposal for a National Investment Bank and others We want to produce further papers on pensions, defence, customs and excise, a detailed paper on the role of the Central Bank of Scotland, and others. All working up to a paper not just showing the limitations of accounting exercises like GERS but doing away with it entirely and building a case for an independent Scottish budget built from the ground up to suit our needs, rather than just being a tweaked version of what the UK does.

We are incredibly under resourced for this work but we think it’s work worth doing.

If you do too, perhaps you’d like to consider a donation to Common Weal to help us on our way: www.allofusfirst.org/donate
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