Discussing Danish Debt

There’s an interesting wee story doing the rounds that moment regarding Denmark and their foreign debt.

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I’ve seen a few folk get a bit over excited about the story and have misinterpreted it as saying that Denmark is now debt free. First up, it’s not. Their national debt is at about 38% of GDP (compared to the UK’s 85.4%). This isn’t about the Danes paying off all of their national debt, it’s just saying that they no longer have any debt which is denominated in foreign currencies. All of the Danish national debt is, for the moment, denominated in Danish krone.

There’s a more interesting story under here about why it has happened though. It’s the story of managing one’s currency and maintaining a currency peg with regard to another. This is something that folk in Scotland should be watching closely as our own debate about currencies heats up again.

Not long ago I wrote an article on defending one’s currency against speculative attacks but many of the lessons also apply to more gradual changes in currency value and the effects are being borne out in Denmark as we speak.

Recently the instability in the Eurozone and reduction in confidence in the euro has seen investors selling euros and buying krone, seeing it as a safer investment. This is pushing up the value of krone which, if it was freely floating, would affect the exchange rate between it and the euro. But Denmark seeks to maintain a stable exchange rate between the krone and the euro (At a rate of 7.46038 DKK/EUR ± 2.25%) so its central bank must intervene to prevent the rise in value. It does this by cutting interest rates (to make further purchases less attractive) and selling DKK and buying foreign currencies. This influx of foreign currency has allowed it to pay off foreign denominated debt but has also caused its foreign reserve holdings to boom from 200,000 million krone in 2008 to over 400,000 million krone today.

If the opposite case had been true, if the DKK was weakening with respect to the EUR, we might expect the levers to be pulled in the opposite direction. Interests rates would increase to attract investment and foreign reserves would be drawn down as foreign currencies were sold to buy up krone holdings and support the value of the currencies and we might see the central bank issue bonds marked in foreign currencies rather than paying them off.

It may well be that Denmark can continue do defend its currency peg for some time, although some have eyed the possibility of a break similar to the one Switzerland went through in January 2015. A couple of years on from the Swiss break the risk of Denmark following suit appears to have receded for the moment.

All in Denmark – currently the 2nd happiest county on Earth – is showing what happens when a small country of 5-and-a-bit million people, its own currency and the will to manage it can do and whether or not Scotland specifically chooses a path similar to this (by pegging a £Scot to the GBP or, indeed, the EUR), Denmark should be taken as an example of what can be done. A small island of light and clarity in a world where the people of Scotland are about to be told repeatedly and in detail what some folk think we can’t do.

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Tread A Common Path

We’re not independent today because too many people had too many unanswered questions. Let’s not make that mistake again

This is a personal appeal. Now that it’s confirmed that the new independence campaign will be kicking off and we’ll be having another referendum sometime in the next 18 to 24 months, we need to get cracking with our plans.

Last year I was fortunate enough to get involved with Common Weal and helped them write a paper on Scotland’s currency options. This sparked the inspiration to start the White Paper Project. Our plan for the essential institutions that an independent Scotland would need to become a viable, independent country. It aims to provide all of the answers that you need to take on the questions that you are hearing from the doorsteps, from your friends and from your family.

Now we need your help. We want to raise £25,000 so that we can fund the time, the resources and the people we need to complete the White Paper before the next referendum.
(And yes…this includes feeding a certain laser physicist who’s been writing a good chunk of the work.)

 We’ve already published Version 1.0 of the White Paper and a library of research underpinning its claims. So far we’ve published papers on currency options; how to launch our own £Scot; options for debt and asset negotiations; projections of Scotland’s finances which goes Beyond GERS; principles for border and customs control; the demographics of the independence campaign; a proposal for a national investment bank and a proposal for a Citizens’ Assembly to replace the House of Lords.

To add to this we want to produce papers on reform of social security, how to manage our energy grid in a way which benefits a 21st century country, how to manage our government IT systems in a modern, streamlined manner, what Scotland’s defence sector could look like and quite a bit more.

We’re also dedicated to getting out to the campaign groups to present our information to you and our presentations so far have always been met with the highest praise and enthusiasm.

We want to provide the answers you need to help us win our independence. If you’d like to help us do that then please consider a donation if you can, either a one off or a recurring monthly payment. If you can’t then please share this around.

Thank you.

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Beyond The Headlines

“[I]f there is to be meaningful debate on this issue then the SNP have a lot of work to do to produce best possible data. The last thing they should do is trust that from London.” – Richard Murphy

Tax expert Richard Murphy, who is currently most notable for exposing the UK’s massive £120 billion per year tax gap, has written an article warning of relying on UK economic data to make the case against Scottish independence.

Murphy

Before he gets attacked too badly by hacks telling him that the Scottish economic data is produced by Scottish civil servants (Edit: I may already be too late on that) I thought I’d write a parallel piece pointing out what those civil servants have told me about the limits of some of their stats.

The first thing to remember in all of this is that the UK is not a federation or a confederation, it considers itself to be a unitary state of which Scotland is just one region of twelve (plus the “extra-regio” offshore regions). Therefore there is currently no real obligation to even gather the distinct statistics for Scotland and it really only has become important because of the independence campaign.

Tax Revenue

As I’ve pointed out in my paper Beyond GERS, the issue of apportioning tax revenue is fraught with subtle difficulty. GERS itself has updated its methodologies multiple times over the years (particularly since the SNP took the government in 2007. The GERS of today is no longer very closely related to the GERS created by Ian Lang to discredit Scotland in the early ’90’s). There are still differences in the results presented straight by HMRC and the data eventually “Scottishised” [To use the stats folk’s term] and presented in GERS.

Onshore corporation tax is a good example of this. Where an overall UK stat may simply count the location of the HQ of a company for the purposes of assigning corporation tax and this may make sense from a unitary state perspective (albeit this is becoming less true as globalisation increases the ability for multi-national companies to move resources across borders).

For many companies though, the profits one which corporation tax are paid are not generated at the HQ. This is obvious in the case of, for example, a large retail chain which has stores across the country. To correct for this, HMRC and GERS both use different methodologies to apportion the tax more evenly. Various measures (and the weighting applied to those measures) such as estimating volume of sales, number of employees, amount of capital spent in the region and overall population are all used in different ways to reach slightly different estimates. As a result, HMRC estimates that in 2015-16 Scotland produced 7.1% of the UK’s corporation tax compared to 7.3%% estimated by GERS – a gap of  about £100 million.

One can also see possible limits of these methodologies especially if taken individually. For example if one looks at employees then one could probably consider a company (and, it should be stressed that this is a completely hypothetical company) which employs a dozen people in Scotland to make, say, a high value, highly exportable product with a geographic link (call it a similarly hypothetical product like “Scotch blisky”) and then employs a couple of hundred people in London to market it. It may be very difficult to properly apportion the “value” of that product and its profits based on employees alone. It’s possible, after all, to find a market without marketing but a bit harder to drink an advertising campaign.

VAT is another issue where these figures can differ for similar reasons. The UK doesn’t demand point of sale ID to determine the location of VAT spend (If you nip down the road to Carlisle for your shopping, then that results in VAT paid in England but Tesco neither knows nor cares where you came from to get there). Again, various methodologies are used to try to estimate the proportions paid and the estimates are slowly aligning (HMRC claims Scotland paid 8.4% of the UK’s VAT compared to GERS’ 8.6% – a gap of £110 million). There is also a further complication wherein the results between HMRC and GERS are simply presented in a different manner (HMRC measures the cash receipts, GERS measures the accruals)

A third prominent example is Income Tax, and is going to become pertinent now as IT is largely devolved to Scotland and all Scottish residents are to be assigned a distinct Scottish tax code and especially now that the income tax bands in Scotland will soon start to diverge from the UK bands. However, HMRC has been recently criticised for a series of administration issues which is making it difficult to roll out this tax code. As with the difficulties in rolling out devolved welfare, this won’t be nearly so much of an issue once Scotland is independent but highlights the difficulty in trying to run a devolved situation from a centralised unitary setup. This said, both HMRC and GERS arrive at a proportion of about 7.2% of the UK’s income tax coming from Scotland although this may change as the new systems are launched (even if tax rates are kept the same).

It is not possible to say whether the HMRC or GERS estimate is “better” or “worse” than the other. The Institute of Fiscal Studies has commented saying, especially of corporation tax:

“Neither of these estimates is clearly superior to the other, and both may be some way off. Profits are not necessarily generated in proportion to the number of employees, or their wages. Some employees may be more instrumental in generating profits than others; and profits also arise from capital assets – both physical (such as buildings and equipment) and intangible (such as intellectual property and brand value) – the location and contribution of which may differ from the location and wages of employees. Calculating how much of a company’s profits are attributable to economic activity in different locations is conceptually and practically difficult and is the source of many problems in international corporate taxation”

Balance of Trade

This is the big one that has attracted a lot of shouting in the past few months. Once again, the UK’s status as a unitary state causes much of the furore over the published numbers to be based on false premises and over-massaged numbers. The UK’s balance of trade figures are published here and probably do do a decent job of estimating the UK’s position in the world. What it doesn’t do is show the internal movements of trade within the UK. As a unitary state it simply doesn’t matter to the external balance of trade whether or not Yorkshire is a net exporter to Sussex. The UK does produce figures which try to estimate the trade balance between the regions  with the rest of the world but it only covers goods, not services (hence excludes nearly half of the UK’s total trade) and it does not cover internal trade. For that internal trade, we turn to ESS – Export Statistics Scotland – which surveys exporting companies in Scotland and asks them where they send their goods and services (contrary to a semi-popular belief, these statistics don’t care how the goods reach their destination so it doesn’t matter if they physically leave the UK via an “English port“). There are some limits, again, to this methodology.

First, not all companies know where their goods are going (see the example of Tesco again. If someone from Carlisle buys a crate of beer in Glasgow then goes home then that’s a Scottish export but Tesco wouldn’t be able to record it easily) so they won’t appear in the survey. Goods which are shipped to England then either re-packaged or used as a sub-component before being exported from England to somewhere else (or even back to Scotland) would be counted only as far as their export to England and there may be some cases where service “exports” are caused by, for example, someone in London buying insurance for their house in London from the London branch of a provider who just happens to have a brass plate in Edinburgh. The total proportion of these anomalies in the data is simply unknown at this point and unlikely to be knowable until after independence.

Beyond the Horizon

And this takes us to the most important point in this whole article.  Even if the methodologies above all align and all can capture the full economic picture of Scotland and everyone can agree on the figures produced and everyone agrees that they produce an accurate and complete picture of Scotland’s economy within the Union there is a fact which should be utterly indisputable (and certainly is within the team which put together these stats).

Independence. Changes. Everything.

None of these figures have any validity if you try to use them to project beyond the independence horizon. Corporation tax may change due to the redomiciling of businesses post-independence. Both those seeking to remain within the UK and those seeking to remain within the EU or EEA may shift operations. Trade exports may suddenly become a lot easier to assign (whether there’s a “hard border” or not) and that “extra-regio” oil which is often excluded from stats due to historical and supply chain accounting issues suddenly has to be accounted for. Those tax streams which are simply too embedded to discuss in any terms other than by a population share have to be audited. And all of this is before Scotland starts to make changes to the tax system to optimise it for the Scottish economy or to do things like close the tax gap.

As with everything in science and in economics, statistics are based on models, models are only ever as strong as their underlying assumptions and projections are only ever as strong as the person making the prediction’s understanding of the limits of those assumptions and the models.

IMF GDP Growth

(One day I’ll write an article about the “Porcupine Plots” which get created when inappropriate models are used year after year in spite of reality)

I don’t mind discussing the economy of Scotland within the Union. I don’t even mind speculating on the economy of an independent Scotland. But I sense that the next two years of campaigning will get very frustrating if pundits continue to stretch their own models past the point of credibility in a quest to push their political point. This, I should warn, goes for both sides. We need a more meaningful economic debate than we saw last time. Let’s get beyond the headlines to create one.

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Heart Under Blade

“If I ruled out a referendum, I would be deciding – completely unilaterally – that Scotland will follow the UK to a hard Brexit come what may, no matter how damaging to our economy and our society it turns out to be. 

 “That should not be the decision of just one politician – not even the first minister. It will be decided by the people of Scotland. It will be Scotland’s choice.” – Nicola Sturgeon, announcing the new independence campaign.

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We’re so officially on. Today Nicola Sturgeon announced that next week she shall seek Scottish parliamentary approval for a second independence bill and with the announcement that the Greens will unanimously support it, it has a pro-independence majority in Holyrood and so will pass with nothing more than the hollow wails and gnashing of teeth of the minority of Unionist MSPs to hold it back. Once the bill is passed, she shall request an order under Section 30 of the Scotland Act which, if approved by Westminster, will give Holyrood the power to hold the referendum (if Westminster declines such permission well…that should be an interesting bridge to cross).

Once the Section 30 order is approved, the First Minister has stated that the intention is to hold the referendum some time after the Brexit deal is clear but before (or, at the very latest, shortly after) Brexit day. The reasons for this are laid out in my article on the topic here. Essentially, we’ll need to know what the actual Brexit deal will look like but if we’re still in the UK once we’re out the EU and the UK starts making changes which affects our eligibility for EU membership then they could take a substantial amount of time to reverse if we want to rejoin the EU as a full member.

What happens after that? How do we organise the campaign? How prominent will the parties be?

Well these are questions that will be determined as we shape the independence campaign but on that last question it is quite instructive that the First Minister made this announcement today and not at the SNP party conference at the weekend. This is an encouraging signal that the campaign will emphatically not be a solo project by the party.

I have to say that the adrenaline has been rising in me since the press conference and it has reminded me of an old legend from the ninja of medieval Japan. Within their own name for themselves, 忍者 – shinobi-no-mono, there’s a story about the first symbol 忍. It is said that it can be broken into two. 心, meaning heart or spirit, sitting underneath 刃, a blade. Amongst many lessons, one that it teaches is that one must be steeled with the determination to act as though our actions have real meaning which will echo far beyond our own life and ego. History is being made now and we have a chance to play our own small but lasting part in that.
It’s going to be  a busy road ahead of us for the next 18 months but I, for one, am willing to put my heart under the blade and to work as absolutely best I can to build the strongest of foundations for the new campaign and to get out there and win it. I’ve already started with my work on the Common Weal White Paper Project (which we all hope you’d be willing to support to get it finished). I’ll be at the heart of my local Yes group and, of course, my local Green branch when we start getting back out chapping doors. Most importantly I’ll be acting as though I’m living in the early days of a better nation.

Come with me.

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Air Departure Tax Post-Brexit

“We haven’t commissioned to the best of my knowledge any independent research of our own. If committee wishes me to look at that, I will certainly consider that absolutely.” – Derek Mackay on the Government’s (lack of) analysis into the proposed ADT cut.

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The Scottish Government put out a call for evidence for their proposal to cut and eventually eliminate air passenger duty (or, as it’s now going to be known, Air Departure Tax).

Common Weal duly obliged and updated our previous work on the topic to account for the impact of Brexit. You can read the new report here or by clicking the image above.

It’s just as well that we’ve done this as it has since been reported that the Government itself has done precisely zero economic analysis of the impact of the tax cut and, as it turns out, our report is the only economically based submission which is against the tax cut (The RSPB have submitted an objection on the grounds of a very well founded environmental impact analysis). More than half of the other submissions and the bulk of those in favour of the cut are from companies and groups within the airport and airline industry. There is a great deal of concern that unless the government does pull its weight and do the maths itself then this policy could pass through simply on the say so of those who stand to benefit directly from the tax cut and at the expense of those who will lose out due to the impact on tourism and the lost revenue to public services.

Preface and Key Points below the fold.

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Scotland’s New Deal

“Remember, the EU isn’t as keen on “Special Deals” as it once was”, The Common Green, 11th February, 2017.

I’m always more than happy to be proven wrong especially when it’s in a pleasantly surprising manner.

This week saw the news story in The National that, contrary to my impressions up till now, that a report had been written by the European Parliament’s Committee on Constitutional Affairs recommending that the EU should  indeed be considering some kind of “Special Deal” for Scotland which would allow it stay within the Single Market even if we remain within the UK after Brexit.

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QuEUing up for Membership

Don’t want to read 2600 words? Twitter version: None of the things people say will be hard are. Few are talking about things which will be.

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Only in the madhouse world of UK politics that a government which is actually embarking on the process of taking Scotland out of the EU against its will while claiming that this would be a wonderful thing could somehow contrive to simultaneously try to sell us that line that an independent Scotland would be out of the EU against its will and that would be terrible.

Whilst this is going on, the same several year old phony war surrounding Scotland’s membership of the EU continues with a great many people still claiming that we would a) be forced to join the euro and b) Scotland would be punted to the back of the accession “queue” doomed to wait till all other potential members (including, possibly, Turkey) have joined before we’ll get a look in.

This week has seen the publication of a couple of commentators on Scotland’s precise position regarding our EU membership, independence and the interaction with Brexit which has sent every man and their dug howling at the moon and trying to spin themselves into position to get another shot in.

So lets take the opportunity here to take a slightly more sober, honest and open look at how things work in the EU and plot out a couple of likely (that is, actually possible) pathways from which Scotland goes from here, through Brexit and independence and to an independent Scotland within the EU.

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