Unanswered Questions

Here are some things we know:

1. The United Kingdom and Scottish Governments disagree over whether independence will make Scots richer or poorer. The Treasury says we’ll each be £1400 better off every year for 20 years if we stay in the Union. The Scottish Government says that after 15 years of independence we’d each be £1000 per year better off.

2. The Financial Times says the first figure is “specious”, because it’s inevitably based on assumptions and projections about future costs, which are notoriously difficult. But the FT also says that the Scottish Ministers’ figure is “more egregious” and “an insult to the intelligence of the land of Adam Smith and David Hume”. And the FT is not alone in pouring scorn on the magic beans fantasy economics offered by the Scottish Government. Check out the verdict of the independent IFS, for example, which highlights the serial ways in which Mr Salmond’s projections are unrealistic, over-optimistic, and not shared by independent experts.

3. The independence White Paper, as well as being legal junk, is now also economic junk, based as it is on projected oil revenues which John Swinney has now had to admit are completely over the top: his five-year outlook of £48bn has been downgraded to a maximum of £39bn. And even that is well above the OBR’s forecast of £16bn. It is worth noting in this context that, as the Herald reports, “the OBR have consistently over-estimated such revenues in the past”.

And now here is one (rather important) thing we do not know:

1. What would independence cost?

The Treasury yesterday tried to put a figure on what it considered would be some of the costs of independence. But even their figure appears not to take into account a range of factors that have been highlighted in previous contributions to the debate, such as the loss to Scotland of EU payments (under the structural fund and the common agricultural policy), which Scotland would not be entitled to in the period between becoming independent and acceding to the European Union — and it seems inevitable, on the SNP’s chosen timetable, that there would be such a period. So any figure given by the Treasury yesterday of the independence price-tag is highly likely to be an under-estimate.

The Treasury’s analysis of the costs of independence comprised a series of factors: (a) that an independent Scotland would start off in life in a worse financial position than the rest of the UK; (b) that an independent Scotland would face start-up costs for a range of public institutions and services; (c) that an independent Scotland would face higher borrowing costs; (d) that an independent Scotland’s oil and gas revenues would be lower than projected by the Scottish Government; (e) that the more rapidly ageing population of an independent Scotland would further squeeze Scotland’s public finances and (f) that the uncosted policy promises contained in the independence White Paper would in fact cost at least £1.6bn every year.

On BBC Radio Scotland yesterday John Swinney disputed the Treasury’s numbers but was unable to supply alternative figures of his own. In one interview he was asked 11 times — or was it 13? — what the start-up costs of independence would be. On each occasion he could not answer the question. Perhaps the maths are too difficult for him, so let’s break it down a bit, and work our way through the Treasury analysis step by step.

Starting off in a worse financial position

Onshore tax revenues per person are lower for Scotland than for the rest of the UK (i.e., we pay less in tax) whilst, at the same time, public spending in Scotland is higher per head than it is in the rest of the UK. This is known as the “Scottish fiscal deficit”. And it is about £1000 higher per person per year in Scotland than it is the rest of the UK. This is not a Treasury estimate: it’s based on three independent sources — the IFS, Citigroup, and the Centre for Public Policy and Regions. Unanswered question 1: how would an independent Scotland fund the Scottish fiscal deficit: by implementing spending cuts of £2.5bn, by increasing taxation by this amount, or by borrowing? in other words, how would an independent Scotland avoid an austerity programme far worse than anything contemplated by the UK Government? “Vote Yes for Austerity” — perhaps that was the theme of YesScotland’s new cinema ad that we’ll never now see.

Start-up costs

An independent Scotland would need a new (or a much enlarged) tax collection agency. It would also need new agencies to process and distribute welfare payments, as well as armed forces, security and secret intelligence services, new regulatory agencies, and a new diplomatic corps, etc. The creation of such agencies would inevitably require spending on staff and training, building, infrastructure and equipment, and IT. We know that none of this comes cheap (remember the scandal over the cost of the new Scottish Parliament building?). To put it into perspective, under the Scotland Act 2012 a new body, Revenue Scotland, is being created now in order to collect the new Scottish Landfill Tax and the new Scottish Stamp Duty, both of which are devolved to the Scottish Parliament under that Act. On the Scottish Government’s own figures, it is costing £20.2 million to establish Revenue Scotland and to run it for five years. £20.2 million just to collect two small taxes. (In 2006-07 Scottish receipts from Landfill Tax were £75 million; in the same year Scottish receipts from Income Tax were £10.5 billion — a sum 175 times greater.) The Treasury estimates the cost of extending the powers of Revenue Scotland so that it could collect all taxes in an independent Scotland to be £560 million. The Institute of Chartered Accountants in Scotland (ICAS) puts it even higher, at around £750 million. The Scottish Government’s own figures show that the annual running costs are estimated to be £575-625 million.

And that’s just tax collection. What about welfare payments? Again, the Treasury has estimated that the IT costs alone would set Scotland back by up to £400 million. And what about the armed forces, and international representation? Here, the Scottish Government appears to think that everything could be covered through Scotland inheriting her share of existing UK assets but, as I and others have shown over and again, it is nothing like so simple. As a matter of law, for example, the overseas property of the UK would not fall to be apportioned between an independent Scotland and the rest of the UK: rather, the UK’s international representation, including its network of embassies and consulates around the world, would become the international representation of the rest of the UK, in the event that Scotland voted to leave the UK to form its own state. Scotland would have to build its own from scratch.

The Treasury has estimated that the start-up costs of a Scottish state’s new institutions is likely to be at least £1.5bn. Scottish Ministers dispute this figure, but refuse to supply an alternative. Unanswered question 2: if the Scottish Ministers do not accept that it would cost an independent Scotland £1.5bn to establish the institutions and public services it would need, what is their alternative figure and how has it been calculated?

Higher borrowing costs

Peter Jones in the Times today writes as follows: “If it wants to invest in infrastructure at the rate it thinks is needed, pay for new buildings to house the staff replicating services now provided by the UK, and deal with financing shortfalls caused by uneven tax revenue flows, an independent Scotland will need to borrow and pay interest, every non-aligned analyst has concluded, at higher rates than does the UK”. Unanswered question 3: how much will that cost? (And who are these “non-aligned analysts”? They include the National Institute of Economic and Social Research, Prof Charles Goodhart, Prof Ronald Macdonald, Jeffries International, Citigroup, Deutsche Bank and Blackrock.)

Oil and gas revenues

See above, “things we know”, point 3. The question about oil and gas revenues has been answered, but only in a manner that undermines the forecasts underpinning last year’s independence White Paper. I wonder if there will be a second, revised, edition later this year…?

Demographic challenges

The elderly pay less tax and rely more heavily than most on health and social care. The proportion of working-age taxpayers to the elderly (and to children, who pay no tax and consume state-funded education services) is of critical importance to effective management of public services. All the evidence shows that Scotland faces particular pressures in this regard: projected population growth is less than for the rest of the UK yet, at the same time, Scotland’s population is ageing more rapidly than that of the rest of the UK. Sources for this evidence include National Records of Scotland (in evidence to the Scottish Parliament) and the UK Statistics Authority, as well as the IFS. To my knowledge, Scottish Ministers do not dispute this evidence. They propose that an independent Scotland would meet this demographic challenge through attracting immigration into Scotland. Yesterday, the First Minister said that an independent Scotland would need to attract 24,000 people into Scotland annually. But this poses several problems for him. First, within six years of independence Scotland would need a new city the size of Dundee to accommodate its 150,000 new immigrants. Secondly, there is no guarantee that Scotland would attract that many people to migrate annually (the UK Government has said that 15,000 annually would be more realistic; the IFS have said that 7,000 is nearer the mark). Thirdly, there is a direct clash between Scotland having an immigration policy such as this and Scotland becoming a member of the Common Travel Area with the rest of the UK and with Ireland. The CTA requires its members to follow a broadly similar immigration policy. Mr Salmond cannot guarantee that the border with England would remain open at the same time as seeking to bring 150,000 new immigrants into Scotland in the first six years of independence. Yet, on his own figures, without the new immigration Scotland fails to meet its demographic challenge. So unanswered question 4 is: how is Mr Salmond’s new immigration policy consistent with the commitment given by his Government in the independence White Paper that “there will be free movement across the border between Scotland and England”?

The SNP’s policy promises

That independence White Paper was famously uncosted. So the Treasury have run the policies through their models and have costed them as follows: increased childcare provision will cost £570 million in the first year; reducing Air Passenger Duty by 50% will cost £130 million in the first year; and reducing Corporation Tax by 3 points below the UK rate will cost £300 million in the first year. That’s £1bn of additional public spending in the first year. And that’s looking only at the SNP’s first term spending commitments, saying nothing of their further commitments thereafter (such as the further increases they have promised in childcare provision). Our fifth unanswered question is: how is all this to be paid for?

I shall resist the temptation to ask, finally, what the currency is in which an independent Scotland would meet these costs. I’ve asked that question before. It’s still unanswered.

Yesterday was an unusually noisy day in the ongoing indyref campaign. Amid the noise and haste a lot of big numbers were thrown by each side at the other: £1400 here and £1000 there. To my mind, the numbers themselves are of little consequence. But what does matter, it seems to me, are questions I’ve tried to set out here: just the latest in a long and growing line of unanswered questions about independence which the Scottish Ministers are either unwilling or unable to answer. Their refusal just piles on more and more reasons to Vote No. There is a better future for Scotland than this.

 

9 thoughts on “Unanswered Questions

  1. Thanks Adam for another illuminating piece which I hope the Salmondistas will also read.

    One question I have (which I may have missed) is what is the cost of the independence to the rest of the UK? If there is a significant cost to the RUK tax payers, then they at least deserve to be told and possibly be allowed to vote! Unless independent Scotland was to carry that additional cost burden.

    What is you make on that?

    Keep up the good work!!

    Brgds – Colin Clarke

  2. Unless someone is offering to write me a cheque any “you will be x better” off claim is instantly bogus, as it presumes political a decisions that are even less predictable than other factors.

    But the setup costs are a big thing. How much was East Timor and South Sudan looking at to setup? Yes I know their economies and situations are by no means comparable, but setting up a new state isn’t a common thing.

  3. This would worry me if I lived in Scotland and was intending to be a YES voter. However as a native born, retired Scot, living a reasonably comfortable life in London I am thinking the a YES vote might be interesting if only to see what happens. From where I am it might be the best entertainment ever when England becomes the neighbour from hell.

  4. Thank you Adam for such a well written piece; somehow amongst the ‘noise’ you refer to, you have eloquently sorted the wheat from the chaff and presented a brilliant and understandable analysis of an important issue which so many of us would like to know the answers to. Not that I’m holding my breath we are ever likely to receive an equally eloquent and understandable answer to your questions……………………….or even an answer at all 🙂

  5. A great piece. Independence sounds great but it just does not stand up to the tiniest bit of scrutiny. The bluster and unanswered questions from the SNP camp means the people of Scotland are being denied a truly informed decision. It’s for that reason I’m out.

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