Readers of this site will be well aware of the many failings and limitations of GERS, aka Government Expenditure and Revenue Scotland – the document which serves as the informal accounts of a devolved Scotland but tells us next to nothing about the finances of an independent Scotland, as noted just a few weeks ago by the impartial multinational auditors Deloitte.
An article I produced this week for the Common Weal White Paper Project – Beyond GERS – has generated much critical response from Unionists, though some of it has at least been constructive.
Spurred on by the mention of the article by David Torrance in Monday’s Herald, in a column containing several serious inaccuracies, I’ve seen various misunderstandings and misconceptions about it which ought to be addressed.
Beyond GERS represents a large leap away from where the independence debate has stood – which is to say, more or less stationary – for the past two years, so some further explanation of some of the points is warranted. I’ll address the misconceptions in a number of sections.
1. “The Data Source Is Wrong”
This first clarification comes via a piece by a blogger and amateur economist popular with Unionists, which can be found here and which examines some of the figures used to back my arguments. His chief objection is that I used PESA 2016 (which covers up till financial year 2014/15) as the basis for my disaggregation of UK and Scottish geographic spends and that I should have used CRA 2015/16 instead (he makes the case that doing this actually strengthens our case from a financial perspective).
Whilst it’s a point to which I wouldn’t necessarily object, I can only point out that the latter source wasn’t actually published until after Beyond GERS, thus was unavailable at the time of writing, and that my conclusion makes it quite clear that this publication should be considered as a first step – to be updated as new data develops.
We must remember that the data for 2015/16 will continue to be updated and refined for several years from now – most of these documents will show refinements and adjustments running up to five years before they “drop off” the table. We must also remember that whilst this study assumes the case of Scotland becoming independent today, the simple fact is that we are not, we will not be and it will be several years at a reasonable minimum before we are.
Despite the efforts of economic analysts to divine the state of the economy several years hence, the only certain conclusion one can reliably reach on such things is that these predictions will be wrong to greater or lesser degrees, one way or the other.
Would using GERS 2014/15 have made for a neater comparison? Possibly so. The baseline deficit was relatively similar so the task at hand isn’t significantly different. But the more shrill objectors I’ve encountered would have immediately demanded to know from where I was conjuring up £1.8 billion of oil revenue.
On one particular point of attention, the piece suggests I’ve overestimated the effect of overseas spending to the tune of £2.4 billion. This number was reached via a share of the total UK’s total overseas spend, rather than the more modest figures assigned in CRA, which applies a “who benefits” formula to spending where possible and a population share where not.
The rationale for this choice being that, as outlined in the paper, one of the arguments used directly against Scottish independence was the breadth and reach of the UK’s diplomatic service. Whilst a credible case is made that the UK’s diplomatic service is, while broad, rather more inefficient than it need be, others who do not necessarily support independence would now surely recognise that if Scotland wanted to replicate that reach then it would be within our budget to do so.
2. “This Means Cuts To Scottish Defence”
In two of the cases mentioned, Spending according to the EU average or at NATO target levels, this represents an INCREASE in the amount of spending within Scotland, along with estimations of the economic impact caused by this increase. Only in one of the cases – a level of spend similar to Ireland and in accordance with their policy of neutrality and involvement in UN Peacekeeping missions – would this represent an actual cut to defence.
If one were to consider reducing actual in-Scotland spending on defence – and were to do it in such a way as to risk jobs – then it would be absolutely right to consider how those savings could be invested into other sectors of the economy which may carry with them far higher fiscal multipliers than defence spending does.
As the IMF have noted more than once, rational defence spending levels are rarely decided out of “concerns about the state of the economy“.
This said, defence is an issue which is very much bound up in policy and it is a subject that we really need to have a serious discussion about. Scotland’s defence requirements post-independence are likely to be very different from that of the UK as a whole or even Scotland within the UK.
If, for example, you believe that Scotland’s defence threats are primarily Russia and terrorism, then you’re likely to end up creating a defence force entirely inadequate for tackling the actual threats to our national security. None of these need aircraft carriers, outward force projection or nukes to effectively combat.
3. “Closing the Tax Gap Means Raising Income Tax”
One of the implications made – and picked up by Torrance – was that closing the tax gap to raise an additional £3.5 billion could be equated to a ~30% increase in income tax level. This is a particularly misleading way of representing this particular point, not least because the research quoted in the paper makes it clear that the inefficiencies, loopholes and avenues for avoidance and evasion lie far more within the realms of VAT, corporation tax, capital gains and inheritance tax.
The fact that these taxes are all currently reserved to Westminster aside, the implication that closing the tax gap automatically means an increase in tax rates for those who already pay their full share and obligation is simply wrong.
This mode of thinking, I believe, is symptomatic of the main problem that this paper is trying to tackle. Too many political commentators (on both sides of the debate) have gotten far too used to thinking about Scotland strictly in terms of being a region of the UK with limited powers.
When just about the only major tax power Scotland has control over is income tax, perhaps it’s tempting to think of solutions purely in terms of that one tax but if you want to think about Scotland as an independent country – even if you’re against the idea and want to attack it – you must think about Scotland in terms of BEING an independent country.
An independent Scotland would, of course, have full control over all of the taxes currently employed. Most importantly, it would be fully in control of the power and opportunity to completely dispense with the UK tax code and start again with a better, more efficient, more effective one designed explicitly for the Scottish economy.
If a pro-Union commentator wishes to fight on this point then they have to be prepared to defend the current UK system, explain away its flaws and why we’re not getting any of the solutions that folk like Tax Research UK can identify, as well as attacking any proposals that we push forward.
4. “We’d Be Defaulting On The UK’s Debt”
The stated objective of the Westminster government in the 2014 campaign was to have the rUK recognised as the “continuing”, or at least the “successor”, state to the United Kingdom and for Scotland to be recognised as a “new” state
(The link above went so far as to claim that the 1707 Treaty of Union “extinguished” the country of Scotland as a legal entity despite the UK describing itself to the UN 2007 as being composed of “two countries [Scotland and England], one principality [Wales] and a province [Northern Ireland]“).
This state of affairs would carry with it significant advantages for rUK – notably, it would lessen any serious challenge towards their holding the UK’s permanent seat on the UN Security Council, which was the case when Russia became the successor to the USSR – but carries with it many obligations also.
(The historical precedents are clearly laid out and extensively referenced in my paper Claiming Scotland’s Assets but readers should also consider G.F. Treverton’s book on the subject Dividing Divided States.)
Essentially, where one country successfully claims “continuing” or “successor” status then it accepts that all of the mobile debts and assets of the former state belong solely to it (non-mobile assets like mineral rights, military bases and public buildings – including public companies and any mobile assets deemed essential to their running – are almost always split geographically).
This means that a “continuing” rUK owns all of the UK’s debts alone. Scotland can no more default on them than can a former lodger default on your mortgage.
Now, if the side negotiating on behalf of the UK wishes to make the case that Scotland should take on a share of debts, perhaps by offering a share of assets to their value, then this is something that Scotland could consider, accept or refuse. But there’s a very good case to be made that Scotland doesn’t actually need or want a population share of the UK’s mobile assets.
We may need a few £billion worth of military equipment – assuming we can’t buy newer or more appropriate equipment elsewhere. We may need a couple of billion (those stalwart supporters of independence Scotland in Union estimated not more than £1bn) to set up essential government departments currently lacking – assuming we can’t borrow the money at better rates on the open market.
We may need a couple tens of billions to support our new currency and set up the investment banks we’ll need to start rebuilding our economy. After that, it really does start to become a stretch to consider what other assets we would actually need which would justify accepting over £130bn worth of debt.
5. “rUK Won’t Pay Pensions To People In Scotland”
The current rules regarding the UK state pension are quite clear. If you meet the requirements for one, including paying up to 30 years worth of National Insurance, then you are non-negotiably entitled to a UK state pension when you retire.
Should you retire outside of the UK then, depending on which country you retire to, you may or may not receive an annual increment to that pension and changes to things like exchange rate and purchasing power may erode or enhance the value of that pension but the basic premise is laid out.
In the absence of an agreement to the contrary, if someone has reached their 30 years contribution before the date of Scottish independence, or has already retired, then they can expect their full UK pension. By this logic, at the point of independence, the full component of pension liabilities would fall on rUK as, at that point, no Scottish NI would have been paid.
This isn’t a controversial point, as it was precisely the stance that the UK government itself took during indyref 1 (and is entirely consistent with the stance laid out above that rUK would act as the continuing state to the UK).
At least one commentator has suggested that the UK could “change the law at the stroke of a pen” to block payment of extra-rUK pensions. They could certainly try. But even leaving the legal nightmare that would result aside, it’d be what Yes Minister used to describe as a “brave” move.
They’d have to pass that bill over the howls of horror from all the other British emigrants currently drawing that pension, and the idea that rUK citizens who chose to move to Scotland at some point after independence would face suddenly losing their pension is, to be generous, a challenging one.
It’d also present an interesting scenario in relation to those British nationalists who would seek to retain their UK citizenship post independence and might well reject the offer of taking Scottish citizenship to which they would be entitled.
(It’s perhaps pertinent to note at this point that millions of expats still retain the right to vote in UK elections.)
An alternative agreement over pensions liability sharing MIGHT be reached, given that independence would be a process of political negotiation, but the current situation is clear – the UK government owes current pensioners their pension whether Scotland is independent or not.
6. “But The SNP Said [X] In Their White Paper!”
It’s true that the White Paper said that an independent Scotland would take over pension liabilities. However, this was as part of their stance that Scotland would share UK successor status with rUK and would share assets and debts – something the No campaign originally claimed wouldn’t be possible.
If the pro-Union campaign wants now to seriously suggest asset and liability sharing, then everything is on the table. But it seems they’ve now flipped from saying that the White Paper was utterly without merit and should be rejected out of hand to now demanding that its proposals should be accepted in full.
In doing so they’ve revealed that their own case for the Union has yet to adapt to the new circumstances posed by (chiefly) Brexit, and they haven’t even considered the possibility that when they demanded that the Yes movement drop a previous position and adopt a new one, that it might actually do it.
They’re still stuck in a cave, blinking at the light and yearning for the shadows they sneered at two years ago. If and when they ever come out, it might be possible to discuss things with them like grown-ups.