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Monday, 13 March 2017

First and Worst. A Layman's Analysis...

Back in the mists of time, when I used to blog, I wrote a little about the supposed (at that time) £6 billion deficit in Scotland. Looking at the press today, that might seem like the good old days. We now, apparently, in Scotland are weighted down by a £15 billion difference in what we generate and in what is spent by Scotland and on our behalf.

This terrible news is enough to make any clear-thinking supporter of Scottish independence have second thoughts. After all, many of us were voting Yes to create a better future for our children and grandchildren and saddling them with insurmountable debt was not a part of that better future. Bequeathing them the keys to the northern-European version of Greece was not a part of that better future. Leaving our young people an economy where structural deficits account for almost 10% of GDP was not a part of that better future.

So, in the interests of my children and, hopefully, future grandchildren - thought not for a wee while yet, lads - I thought I'd take a new look at the figures. I should stress from the outset that although I do have an economics qualification, I am no economist but, hey, that hasn't stopped one particular dog-food seller from becoming the nation's go-to-guy for bad news stories on the Scottish economy. I'm happy to be corrected on these findings. After all, it's better we all start from a point of accurate information. This is just one (educated) man's attempt to apply common sense to the situation.

Point 1: The current £14.8 billion deficit represents the revenue raised in Scotland contrasted with what is spent in Scotland by the Scottish Government PLUS what is spent on Scotland's behalf by the UK Government - a considerable portion of which relates to servicing current UK debt.

Counterpoint 1The current UK national debt is £1.56 trillion which is serviced (ie. paid for) at a cost of £43 billion per year. Scotland's 8.3% per capita share of those payments and paid on our behalf by the UK Government amounts to £3.6 billion.

There are three separate reasons why we can deduct that £3.6 billion annual payment from Scotland's deficit.

(1) The UK Government confirmed prior to the 2014 Independence Referendum that it guaranteed to meet the UK's historic debt repayments in order to calm any fears in the financial markets. This is a handy position for the UK Govt to take because...

(2) law is very clear on these matters. The emerging state (ie. an independent Scotland) cannot be bound by the treaty commitments - including debt obligations - of the successor state (ie. rUK). However, should a newly-independent Scotland feel obliged to take a share of UK debt...

(3) ...this could be effectively nullified by giving up a claim to a pro-rata share of UK assets which are currently valued at £1.45 trillion. The two common sense positions are that (a) rUK takes on all the debt and retains all the assets; or (b) indy Scotland negotiates a share of both debt and assets and uses one to offset the other.

Conclusion 1: Scotland's £14.8 deficit can immediately be reduced by £3.6 billion in debt repayments. Updated deficit - £11.2 billion (or, put another way, 7.4% of GDP)

Point 2: United Kingdom defence spending is based on a mix of conventional and nuclear forces which represents its commitment to partners in NATO and includes the capability to project power internationally when appropriate.

Counterpoint 2: Defence spending priorities in Scotland would vary considerably from current UK defence spending of £45.6 billion - Scotland's contribution to that total being £3.8 billion. Although the Scottish National Party does not represent the totality of the independence movement, it is clearly the major part and that part most likely to enact its policies in the early years of an independent nation. The SNP's defence policies call for spending of approximately £2.5 billion per year - a saving to a Scottish exchequer of £1.3 billion - whilst still, incidentally, spending substantially more on the UK defence establishment in Scotland than is done currently (£1.9 billion).

Conclusion 2: Scotland can spend £1.3 billion less than we currently contribute to UK defence budgets whilst spending more money in the Scottish economy and more effectively defending Scotland and its interests - such as maritime air patrols, coastal protection, fishery protection and oil and gas installation security. Updated deficit - £9.9 billion (or, put another way, 6.5% of GDP). 

Point 3: Oil prices have collapsed. Whilst the situation may have looked better prior to the 2014 Referendum, the new situaton has created a massive hole in a potential Scottish budget that makes independence a pipedream.

Counterpoint 3: A recent report in The Guardian made this point very clearly showing Scotland's share of oil tax revenues falling from £1.8 billion in 2014/15 to just £60 million in 2015/16. These figures, incidentally, seem to represent about 80% of total UK oil tax revenue, so we can confidently assume (presumably) that is the share of North Sea oil that will become 'Scottish' at the point of independence. That drop in revenues should worry anyone.

However, last years oil price went down to historic lows and has almost doubled since then. Despite that doubling, analysts are now reporting that prices should now spike considerably. Let's assume that 2014/15 levels of revenue become the norm. Hardly a huge assumption as they were the worst figures since 1994/95. That would mean that instead of the £60 million figure used to project the current £15 billion deficit, we should use the more realistic £1.8 billion figure from the previous year.

Conclusion 3: Scottish oil revenues may never again hit the heights of the mid-1980s and mid-2000s but, going forward £1.8 billion seems more likely than £60 million. Updated deficit - £8.1 billion (or, put another way, 5.3% of GDP).

Point 4: Money spent by the UK Government on 'national projects' benefit us all and lead to the sharing of wealth and prosperity around these islands.

Counterpoint 4: In fact, many of the national projects now underway are likely to actively draw investment away from Scotland. One example is HS2. Originally budgeted at £32.7 billion, it has since (officially) increased to £55.7 billion and unofficial estimates now put the cost at £63 billion. That last figure involves a Scottish contribution to HS2 of £362 million per year until 2033 - the current estimated completion date. Of course, that figure could rise further and the completion date could be missed meaning our contribution goes on longer. In the case of HS2, this 'investment' from Scotland is likely to see jobs and investment leach away to the Manchester-Leeds corridor where any benefits of HS2 will accrue.

Conclusion 4: A conservative estimate of the cost savings of current national projects to which Scotland contributes and is unlikely to see any benefit is £500 million per year. Updated deficit - £7.6 billion (or, put another way, 5% of GDP).

That gets us to the point where another £1 billion of savings takes our deficit to GDP ratio below that of the United Kingdom's currently sitting at 4.1%. Incidentally, it would also take us below that of Spain and the United States. So, how are we going to do that?

Clearly there are a number of areas of UKG spending that would not be replicated (even proportionally) by an independent Scotland - we would not, for example, need to maintain the vast network of embassies, consulates and diplomatic missions that the UK does currently. An independent Scotland is likely to maintain a much smaller footprint in key nations whilst utilising the facilities of EU partners and, possibly, rUK embassies where appropriate. However, rather than savings, perhaps we should be looking at how the economy and tax base can be grown.

Imagine this scenario. The UK 'Brexits'. Scotland votes in Autumn 2018 or Spring 2019 to return to independence and remains within the EU single market. Financial companies, desperate to retain their 'passporting' credentials into the EU relocate not to Frankfurt, Paris or Dublin but to Glasgow or Edinburgh. The same arguments that were used against Scottish independence in 2014 - brass-plaquing, capital flight, lack of investment and loss of high-paid HQ jobs - work in the opposite direction this time around. In the words of one Global Risk Manager at one of our leading banks, "There wouldn't be enough office space in Glasgow and Edinburgh to satisfy demand."

None of this, to this point, requires any creative imagining of what difference could be made by all the economic levers of an independent nation being applied to particular Scottish requirements rather than slightly different UK needs, and yet this still places an independent Scotland in a financial position which is at least as strong as the UK currently finds itself. There is little serious doubt that Brexit - at least for a number of years - is going to diminish the UK's prospects.

The decision in 2018/19 will be, therefore, between an independent Scotland roughly comparable to where the UK currently sits or remaining within a worsening UK position. And when the jobs in that worsening UK start to haemorrhage, where do you think will be hit first? And worst?

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