The level of debt and how an independent Scottish Government would deal with it is a hugely important issue. Given that it is currently running a deficit – its spending exceeds its tax revenue – Scotland will be dependent on the commercial money markets to supply funds to pay for that part of the costs of public services which cannot be paid from current revenues.
Market sentiment will play a key role in determining the price that the Scottish Government pays for this borrowing facility. If the markets think Scottish bonds will be low-risk and highly tradable, they will charge a low price. If they take the opposite view, then the Scottish taxpayer will have to pay high interest charges on its debt. The White Paper estimates that these charges will lie in the range £2.7bn to £5.5bn. Even the lower end of this range is greater than the Scottish government’s current capital budget.
Did the White Paper on Scottish independence need to be so long? It arrived on my desk with a resounding thud and I wondered whether we were supposed to judge it on its physical or intellectual weight. Yet even with the concerted efforts of the Scottish Government to produce a comprehensive prospectus, there are still issues that need further detail.
One of these is Scotland’s debt after independence. The White Paper gives two methods by which it might be calculated. First, Scotland could take its population share of the UK debt. This is based on the argument that all UK citizens have an equal stake in the debt and that it therefore Scotland should be allocated the share of debt equivalent to its share of the population. Second, Scotland’s liability could be based on the past record of fiscal deficits and surpluses. This amounts to arguing that Scotland should only be responsible for that part of the UK debt that relates to revenues and spending in Scotland. If you start the clock in 1980, when oil was about to come on stream, Scotland’s debt is much lower than with the population method. Both arguments have merit, though one might question the choice of starting date in the second option: perhaps by divine intervention it just happens to coincide with the beginning of the oil boom. However, having opened the argument, the White Paper does not come down either on one side or the other, arguing that the “Scottish Government will service the share of the debt allocated to Scotland”. This is as close as it gets to acknowledging that the outcome will be a matter of negotiation and so cannot be definitively assigned before the independence vote. Continue reading
Many of the questions, both actually asked in the press conference, and hypothetically asked in the Q&A in Part 5 of the White Paper, drew a comparison between the optimistic assessment of Scotland’s economy from the Scottish Government against last week’s negative assessment from the Institute for Fiscal Studies.
Firstly it is important to note what the IFS actually did: they compared projected UK finances with projected Scottish finances, both under what can be labelled as “best estimate, given current policy”. What these projections show is that, under union, Scotland would either start to see large subsidies from rUK, or it would see its budget cut. Prof Brian Ashcroft has shown that Scottish funding has actually tracked Scotland’s net fiscal position reasonably closely (Has Scotland already spent its oil fund?) – there is no reason to expect this relationship to change going forward (especially when England and Wales are agitating about the Barnett Formula). The IFS report really said nothing about the finances of Yes vs No: it described the finances of Yes under the policies of No, and said nothing about either the finances of No under the policies of No or the finances of Yes under the policies of Yes. Continue reading
The Institute for Fiscal Studies often upsets governments by not agreeing with their policy prescriptions or with their view of the future. So the recent analysis of Scotland’s fiscal prospects by the IFS may have been unwelcome to the Scottish Government, but it is not the first government to be upset by the Institute’s analysis, nor will it be the last. The crucial difference between this analysis and those that have gone before is that the issue at stake for Scotland is constitutional change rather than electoral advantage. Hence the need to ensure that the analysis of Scotland’s fiscal prospects post-independence uses the best available data in the most authoritative fashion.
The IFS analysis rests on two principal datasets: Government Expenditure and Revenue in Scotland, prepared by the Scottish Government and the Public Expenditure Statistical Analyses prepared by HM Treasury. Neither of these is perfect: there are areas where approximations have to be made. But over the years, both datasets have been improved and are broadly consistent with each other and with other reputable data sources. Continue reading
The full version of our paper looking at trends in inequality can be found here:
Inequality in Scotland
This blog describes recent research which estimates Scotland’s relative spending need for devolved public services to be about 6% higher than for the UK as a whole.
It has long been recognised that Scotland spends more per capita on devolved public services than is spent in the UK as a whole on equivalent services. The latest IFS report indicates that spending per person in Scotland was around 17% higher on these services than in the UK as a whole. But these figures give no sense of what Scotland needs to spend relative to rUK in order to attain a similar level and quality of public services. Instead, Scotland’s spending is a function of its Barnett-formula determined grant allocation, which bears no relation to spending need. Continue reading
The International Conference on the Economics of Constitutional Change, held in Edinburgh on the 19th and 20th of September 2013, brought together leading academics and policy makers to review the Scottish independence debate within the context of wider international experiences. Speakers from Ireland, Belgium, Lithuania, Catalonia and Spain, Quebec and Canada, explored the constitutional change experiences and debates in their respective countries, focussing particularly on the actual and anticipated economic costs and benefits of constitutional change. UK-based speakers presented papers considering how a range of issues – including currency and debt, spending and taxation, migration, the energy sector, and ambitions for social justice – might influence the costs and benefits of various constitutional change options and scenarios. This blog summarises the key messages of each paper; the slides for each presentation can be viewed here.
Inequality and social justice are playing a central role in the debate around Scottish independence. In “Scotland’s Economy: the Case for Independence”, the Scottish Government asserts that the UK Government has done too little to address rising inequality in the UK, and argues that high levels of inequality are likely to be having adverse consequences on Scottish economic performance and individual well-being. But, as argued previously by the Scottish Government’s Fiscal Commission Working Group, the report stresses the limitations faced by the Scottish Government in addressing inequality within the context of the existing constitutional settlement. Independence, it is argued, would give the Scottish Government access to the levers (notably welfare spending and personal taxation) necessary to achieve lower inequality. Continue reading
(This blog comprises part of the presentation that we will be giving at the International Conference on the Economics of Constitutional Change at Dalmahoy on the 19th and 20th of September – Twitter #icecc)
Migration has a pervasive effect on economic performance, on the demand for public services and on the diversity of culture and identity. It is rightly central to the constitutional change debate in Scotland. Emigration was a common feature of Scotland’s history. However, in recent decades, the net flow of people has been into, rather than out of, Scotland.
In relation to constitutional change, one key question about is how migration flows between Scotland and the rest of the UK (rUK) might be affected. We know that such flows have become less important relative to international flows in recent years. For example, in 2010-11, the net inflow to Scotland from overseas was 25,400 while the net flow from rUK was only 2,900. A decade earlier, in 2000-10, the net flow from rUK was 4,700 while there was a net outflow of 6000 to overseas destinations.