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Blogs Coffee House

Scottish Independence: The Cost of Living Like This

28 May 2014

1:40 PM

28 May 2014

1:40 PM

Yippee! The number-crunching boffins are at war again. The UK and Scottish governments have today released rival forecasts for life in an independent Scotland.

It will not surprise you that the UK government’s projections run towards the pessimistic side of the ledger while their opponents in Edinburgh take a sunnier view of Scotland’s future economic circumstances and performance. Fancy that!

The Scottish government suggests there might be £5bn windfall from independence; the UK government reckons each Scot receives a ‘Union dividend’ worth something like £1,400 a year. 

They can’t both be right. In fact the probability is they are both wrong. That is, Scotland’s fiscal and economic position would be neither as bleak as London suggests nor as rosy as Edinburgh claims.

The truth is that no-one actually knows. Like all such forecasts, these rely on so many assumptions that they should only be treated as some of the many possible outcomes that might be possible. Educated guess-work remains a matter of guess-work.

It is, I think, probable – and unnecessarily stupid – that some of the UK government’s assumptions about the one-off start-up costs of establishing a new state are exaggerated. True too that even on London’s pessimistic forecasts an independent Scotland remains a perfectly viable proposition. Poorer than she might be if Caledonia remained part of the Union but still far from destitute.

On balance, however, the UK government’s forecasts are closer to those made by more independent bodies such as the IFS and the NIESR than are the Scottish government’s. That doesn’t mean Edinburgh is necessarily mistaken, merely that it is worth recalling that the Scottish government’s estimates are the outlier in these competing projections.

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Take oil, for instance. It’s still largely all about the oil. If the OBR’s forecasts for future oil receipts may have often proved too pessimistic it may equally be said that the Scottish government’s projections are as optimistic as others are gloomy.

In today’s analysis for instance, the Scottish government lays out six potential scenarios for future oil revenue. The most optimistic projects £38.7bn of revenue from the North Sea over the next five years; the most pessimistic suggests oil and gas receipts might only total £15.8bn. The scenario upon which the Scottish government bases all its other calculations estimates revenues of £34.3bn over five years. That is, it is very much closer to the highest plausible forecast than to the lowest. Which is fine. Except if it is wrong.

Oil is a useful problem to have, for sure. Nevertheless both governments actually agree that, generally speaking and over the medium-term, oil revenues and higher public spending per capita in Scotland than in other parts of the United Kingdom effectively cancel each other out. Which means there’s no magic oil money to fund additional public expenditure above the levels which Scotland currently enjoys.

The British government’s paper naturally focuses on current trends and many of those are gloomy. It is based upon current trends remaining reasonably constant. The Scottish government’s paper, by contrast, focuses on what an independent might be able to do differently.

That’s all well and good and entirely in keeping with the Yes campaigns’ preference for dwelling in an imagined future. But it does rather mean that even by the standards of these matters the Scottish government’s projections are heavily dependent upon everything improving for the better. Perhaps it would! But how probable is it that everything would be better after independence?

For instance, the Scottish government’s document is stuffed full of If. If and independent Scotland increased participation in the labour force by 3.4 per cent, if an independent Scotland increased productivity by 0.3 per cent each year, if an independent Scotland attracted significant numbers of new immigrants to offset the deleterious impact of an ageing population… If, if, if all these things were achieved an independent Scotland’s net fiscal balance could improve as a share of GDP by 1.2% relative to baseline forecasts.

As the Scottish government puts it: ‘If Scotland was able to increase its population and close some of the gap in its employment and productivity rates with the top performing countries in the OECD, it would boost tax revenues year on year. After thirteen years this could provide an additional boost to tax receipts of over £5 billion a year.’

So here we have it: not only should Scotland be independent, an independent Scotland would have to be extremely well governed. Again, I don’t mean to suggest this would be impossible, merely that the Scottish government’s own forecasts might be best understood as a kind of accumulator bet. Sure, singles and doubles may pay-out but the full impact is only felt if every horse comes in first. Which it might! Though, you know, there’s a reason bookmakers promote these bets…

In the end, I fancy the impact of today’s rival forecasts will be neutral. They will not change many minds. Rather they will confirm existing prejudices. Those minded to vote Yes will have their preferences indulged; those Scots voting No will have their own instincts confirmed. And those in neither camp may be forgiven for thinking that no-one actually knows anything.

So: yes, it can be done. No, that does not mean it would be done well. The early years of a new nation would be difficult but that scarcely means those difficulties are insurmountable. But so much needs to go right for the Scottish government’s assumptions to become reality that it seems mildly improbable that an independent Scotland really could, as Alex Salmond has claimed, spend more, borrow less and tax just the same. There comes a time when heroic optimism descends into foolishness.

 

 

 

 

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