The Bridge

“Politics is a life we choose because we think we can do some good” – Kezia Dugdale, 25th April 2017

Today the Scottish Parliament debated the cuts to Child Tax Credits being imposed by Westminster. This necessarily centered much of the debate around certain exceptions to those cuts, in particular the so-called Rape Clause. This article isn’t about that Clause in particular. That must be for others. If you want, you can watch the entire debate below

Instead I want to particularly highlight Labour leader Kezia Dugdale’s speech (from 26:20 above or here). Please watch it in the context of that debate before continuing.

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Now IS The Time

PM Theresa May has called for a UK General Election to be held on June 8th. Because the UK is completely united behind her vision of Brexit and now is not the time for divisive politics..or something.

This election does have to get over the stumbling block of the Fixed Term Parliaments Act which requires a 2/3rds majority in the Commons to overrule but Labour have already announced their support for that move. It must be hard for them. If they do it, they’ll get a drubbing. If they don’t, they’ll be crucified in the press.
Whilst I don’t think the Tories will find the prospect of kicking Labour whilst they are down to be an unwelcome one, I still don’t think that this is the primary motivation for this call. There’s little the Tories can’t do with a majority of a dozen or so that they could do with a majority of 50+.

I don’t think this is about Labour. This is a Brexit call. May will be wanting to legitimise the hardest-of-Brexits she’s angling for but which wasn’t in the last manifesto. She’ll also be wanting to harden the party behind that vision. I’d be watching the selection process very carefully to see how many of those back-bencher Remainer Tories get quietly (or not so quietly) purged from the ranks or at least get made to submit to the party will.

With regard to Scotland, this is a gamble which only makes sense if May isn’t considering Scotland at all. All it is going to take is the pro-independence parties (especially the one which holds all of the pro-indy seats at the moment) to put up their 2015 manifesto as read and state that this General Election is about the choice between the hardest of Tory Brexits and Independence. Once they return a majority (I wonder how David Mundell is feeling right now) then no-one can deny that mandate for a referendum without ridicule.

SNP support probably isn’t as strong as it was in the wake of the Surge inflated 2015 election but FPTP will still work in its favour. The chances of returning a majority of seats by themselves is still substantial.

And then there’s Northern Ireland which is still without an Assembly. Yes, in normal times the General Election dynamics are somewhat different but between the prospect of Brexit and Direct Rule these are far from normal times. I won’t even pretend to try to predict what will happen there.

So what’s the “best case” scenario for May? A quelled party, a silenced opposition and “the regions” don’t make too much of a racket as they follow the UK into the hardest of Tory Brexits and all the cuts, Austerity and pain that will bring. Tory rule will dominate for a decade or more.

Her “worst” case? She loses her majority and the mandate for Brexit. Government crumbles, resignations happen and all the while Article 50 – which was triggered by a “united” Britain less than a month ago keeps on ticking down towards May 2019…

Interesting times.

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The Drake Equation

When was the moment you became afraid, genuinely afraid, for the outcome of Brexit?

Maybe it happened a while ago. Maybe it hasn’t happened yet. I hit that point today.

Gib

We’re less than a week into the Brexit process and the UK has already told the EU that there may be security concerns…nudge nudge…if it doesn’t get what it wants (although that was just a misunderstanding, don’t you know?).

Then the Government was utterly blindsided by Spain gaining a veto over any deal which involves Gibraltar – despite those in the actual know talking about it for literally months prior to the vote.

In response, senior politicians in the UK – a NATO member – are threatening another NATO member with the prospect of actual war.

And the negotiations haven’t even started yet.

As part of my EU Referendum series, back right before the Brexit vote I stated that I didn’t believe the hype that a Leave vote would be the utter ruination of everything.

I even felt that J. J. Patrick’s three part series on the road to a Dystopian Brexit was, if plausible, at least well out on the edge of the probable. At best a warning rather than a prediction.

What I hadn’t, obviously, fully appreciated was the utter incompetence of the UK Government’s Brexit team. I’m not just talking about the bumbling excuse for a clown that is Boris Johnson – such a Titanic Success he’s been – but also David Davis, who nine months after the vote and just days before the triggering of Article 50 couldn’t answer even basic questions about the “plan”.

But even all that is just incompetence. Even that would just lead to the UK being out-negotiated on every major issue by the EU until it either accepts the deal offered or stomps off into the sunset without one.

And this latter option is what looks increasingly likely. It really does look like the “plan” is to walk out of talks and to find some way of blaming the EU for it happening.

But back to that headline. The sight of the UK threatening another European nation with war as a negotiating tactic – for that is what it is, make no mistake there – is deeply disturbing. At heart, I’m a pacifist. War should never be considered an “option” in the diplomatic process, not even the final option. It should be considered to be the consequence of the failure of the last option. Even the threat of a war is one which can rapidly spiral out of control, if one ever presumed for a moment that it could have been controlled.

What’s the strategy here anyway? By launching an attack on another NATO member, the UK would pull in other NATO members, most of them also European. Does the UK want to pull the USA into this to pick an ally? Or hang one side (or both) out to dry?

Is the UK relying on Donald Trump being a rational and impartial mediator in all of this?

As has been noted elsewhere, this shouldn’t even have been any kind of issue at all. Most of the deals of any competence within the EU divorce settlement, including the Gibraltar/Spain border issue, need to be ratified by the entire EU27, including Spain, anyway. At this point it looks as though the inclusion of the explicit Spanish veto was added to the EU’s strategy document for one (or both) of two purposes. a) As a sweetener to keep Spain “on-side” and acting within the whole of the EU27 “as one” and/or b) to test the UK’s plan to see what they’d do and to test the robustness of its strategy ahead of the negotiations.

The UK didn’t just blink in the face of this test. It has shut its eyes, screamed loudly and ran right off the cliff. The EU now knows that the UK has buttons which can be pressed. Westminster needs to ramp down the rhetoric immediately and get a serious grip of itself before it reaches the negotiation table proper if it wants to be taken seriously. From the lack of planning, through the deliberate exclusion of the devolved nations (and Gibraltar) from any kind of involvement in negotiations out to frankly stupid statements like this the UK has done a great deal of harm to its own reputation and the chances of making Brexit bearable, never mind making it a “success”.

And we’re less than a week into the Brexit process. Two years to go.

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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.

ItsOn.jpeg

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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