Some thoughts on Beyond GERS

I was going to write sooner in response to the Common Weal paper Beyond GERS [LINK], written by anti-union campaigner Dr Craig Dalzell, but I was beaten to it by some excellent pieces from:

  • Neil Lovatt – GERS: Beyond a Laser Engineer [LINK]
  • Neil Lovatt – Beyond GERS Goes Beyond Facts [LINK]
  • Kevin Hague – Beyond GERS, Beyond Belief [LINK]
  • Kevin Hague – Data Errors in Beyond GERS [LINK]

There is no point in me repeating what they have already written and I’d share their incredulity at the outlandish claims, so instead I thought I’d note a few additional observations I had.

Debt

Dr Dalzell argues for an “additive model” of debt allocation.  Essentially the argument goes that iScotland would start with a blank sheet of paper – no assets and no debt.  Negotiations would then commence and for every £1 of asset that Scotland gets, we take £1 of debt.  Beyond GERS then argues that we’d want (coarsely) £50bn of assets and so we’d take £50bn of debt.

This is not proportionate.  This is just buying assets and paying for it with debt.  Why would rUK accept this negotiation?  Consider the reverse – if UK sovereign debt was £100bn in total, would iScotland accept a negotiation in which they took 50% of the debt for less than 5% of the assets?

Rather than £ for £, a proportionate calculation would seem to be % for %.  For every 1% of assets that iScotland wishes to take, it would be fair and proportionate to assume 1% of the debt¹.

I’m also very sceptical about the £50bn value of assets that Dr Dalzell argues we’d want to take.  In 2013, Audit Scotland estimated that the public sector assets in devolved areas alone were worth £86bn [LINK] and further noted that councils were potentially undervaluing the local road network by up to £50bn.  This figure does not include fixed assets in Scotland for reserved matters such as defence, with the 2007 National Asset Register showing Scottish defence assets valued at over £1bn.  This is before you add the share of moveable and financial assets an independent Scotland may need or want – the government’s stake in Royal Bank of Scotland, for example – not to mention the value of Scottish North Sea oil and gas assets which iScotland would clearly want.  For reference, the 2014/15 WGA shows total UK public sector assets of £1455.3bn.

It seems impossible to state with any certainty the value of assets to be negotiated but the £50bn figure used by Beyond GERS simply  can’t be accurate if it doesn’t even cover the value of Scotland’s devolved fixed assets.  I don’t wish to be accused of over-egging the pudding so, for the sake of argument, let’s (very) conservatively  assume Scotland wants £100bn of assets.

Should this mean iScotland takes £100bn of debt?  Why would rUK accept such a negotiation?  Instead, surely they would look for iScotland to accept a proportion of the debt equal to the proportion of assets assumed.

£100bn is 6.9% of the UK’s assets (2014/15 WGA).  6.9% of the UK’s debt is £110bn.  So instead of Beyond GERS‘ £1.1bn annual interest repayments, we’d be paying at least £2.42bn.

This is still less than the £2.8bn currently assigned by GERS (a population share of UK repayments) but is a Year 0 figure before any additional iScottish deficit and increased cost of iScotland’s borrowing is factored in for future years.

It’s also worth noting that, certainly as far as I can tell, no-one except Dr Dalzell has ever suggested such a model for splitting assets.  The 2014 case, historical precedence and academic research like this from NIESR [LINK] are all very clear that population shares of debt are the likely starting point.

Pensions

There’s been some frankly reprehensible debate on the topic of pensions with various people on the anti-union side claiming that rUK would accept financial responsibility for paying a proportion of iScotland’s pensions.

Other than a desperate attempt to cobble together an economic argument for independence, I cannot fathom how anyone could believe this to be a reasonable expectation.

Somehow a discussion about retaining entitlement to service and whether the existing UK pensions scheme or an independent Scotland would conduct the actual administration of paying the pension has become conflated with the financial responsibility for funding those pension payments.

The evidence provided by Steve Webb, then the coalition Pensions Minister, to the Scottish Affairs Committee has been widely used as “evidence” that this liability remains with the UK Government despite Mr Webb very clearly stating that this wouldn’t be the case.

http://parliamentlive.tv/event/index/07c1d4a3-7bdb-4247-8312-624255d7034b?in=14:48:08

Ian Davidson (chair): “… if you are saying, as I think you are which is something new, that if people have paid into the National Insurance system then they would, in a sense, inherit a payment from that National Insurance system.  That would actually presumably mean that the liabilities and assets would stay with the United Kingdom Government rather than be divided.”

Steve Webb: “No, that would clearly have to be a matter for negotiation.”

He’s even more clear in his written evidence [LINK]:

While there are to be no pre-negotiations, I would think the Scottish people would expect their Government to take on full responsibility for paying pensions to people in Scotland including where liabilities had arisen before independence. Similarly people in the rest of the UK would not be expecting to guarantee or underwrite the pensions of those living in what would then have become a separate country. The security and sustainability of pensions being paid to people in Scotland would, therefore, depend on the ability of Scottish tax payers to fund them

I don’t think anyone sensible would expect anything other than a matter as complicated and as financially imposing as state pensions to be ferociously negotiated on separation.  Throughout his evidence, Mr Webb makes it painstakingly clear how complex a matter it would be to disentangle iScottish pensions from the UK system.  Who pays for someone who has worked 20 years in England, 10 years in Scotland, 10 years in Wales and then retires to Oban?  How do you even find out how many years of contributions a worker has made on each side of the border given there is no requirement to report intra-UK locus when paying NI?

The negotiations are not about how much financial liability rUK should retain for Scottish pensions; they’re about quantifying exactly how much Scottish pensions are.

So how does Beyond GERS reach the £3500m per year rUK contribution to Scottish pensions for the “middle case”?  Why that figure?  Who knows?!  There’s no explanation given other than ‘negotiation’.  And then there’s an “upper case” where rUK pays ALL Scottish pensions except those which start after independence.  Why would rUK ever accept that?  Why would they ever take on that responsibility?

Look at it from a different perspective.  If iScotland wished to be treated as the ‘continuator state’ so that it could assume the UK’s EU membership, would iScotland be financially responsible for funding all rUK pensions?  Of course not.

Pensions are paid from general taxation.  There is not a “pot” which is paid into and then drawn from when pensions are due.  Our tax today in the UK pays for pensions all over the UK, including Scotland.

If you think rUK should pay a Scottish pension after separation because we’ve paid tax to the UK Treasury of which we are part then why not unemployment benefit in iScotland?  After all I’ve paid my UK taxes all my life, shouldn’t I be entitled to get some back when I need it?

This is a stupendously moronic argument.

The usual riposte at this stage is “oh well, if iScotland is taking the liability then we’ll take the assets too”.  Except state pensions are not recorded as a current liability in public sector accounts.

pension-liability-wga
Whole Government Account 2014-15

So there is no negotiating position in which assets are traded off for this liability.  It would be, quite simply, iScotland’s responsibility to supply the funding for iScotland’s pensioners.

This is not a controversial argument.  Not one pro-independence politician has ever claimed rUK would pay for iScotland’s pensions.  Not one.  Why would they?

Logically, politically and morally this is very straightforward and I cannot tell you how much contempt I have for people who are willing to pretend otherwise, using Scottish pensioners as a desperate bargaining chip to fabricate an economic argument for their own nationalism.

Non-identifiable spending

A minor point but indicative of a general carelessness with facts and accuracy in Beyond GERS.  The report contains the following on non-identifiable spending:

non-ident-nonsense

This exhibits a basic failure to understand non-identifiable expenditure and builds on the Wings Over Scotland generated myth on projects of “national importance” – which I have already comprehensively dealt with here [LINK].

Dr Dalzell goes on to give some specific examples of what he thinks are non-identifiable spending we’re assigned, all of which are wrong:

  • Trident replacement – dealt with in defence spending which, although assigned on a non-identifiable basis, he has already covered defence elsewhere and so is a double-dip here
  • HS2 – in GERS we contribute 2% of HS2 spend according to the economic benefit to Scotland assigned by ScotGov.  This is attributed to identifiable spending in GERS, not non-identifiable, and amounted to £5.43m (million) in 2014/15
  • London Crossrail – I don’t know how many times I need to explain this but GERS does not include any Scottish contribution to Crossrail.  It’s simply wrong, a myth, made up.
  • Upcoming House of Parliament renovation – the operative word here being “upcoming”.  There hasn’t been any spend yet so obviously there is nothing in 2014/15, 2015/16 or any other GERS which assigns any contribution to the renovation of our Parliament.  I’ve also yet to hear a good argument as to why we shouldn’t contribute to this.

Dr Dalzell then goes on to state that “It can be estimated from publicly available estimates that the Scottish share of these and other national capital projects could come to around £30 billion”, for which he offers no sources.  It appears that this figure comes solely from the ever-reliable and trustworthy mouth of Alex Salmond and has already been thoroughly debunked here [LINK].

To give Dr Dalzell some credit, however, he does note (as others don’t) that this mythical sum would necessarily be over an extended period and, further, he does not attempt to assign any savings to iScotland from this.  I include this note here simply to point out the factual inaccuracies.

Fiscal multipliers

Included in the discussion on non-identifiable spending is an argument that the Scottish exchequer would benefit from a fiscal multiplication effect as civil service employment that is currently based across the rest of the UK would be generated in Scotland.

There are two missing strands to this which I think should also be taken into account:

  1. Being in the UK offers economies of scale for shared civil service functions, meaning the same service in iScotland would almost certainly cost more, proportionally, to run.  A good example of this can be found in John Swinney’s leaked memo before the last “once-in-a-generation” referendum.

swinney-hmrc-costs

That’s £575m to £625m per year for the administration of a Scottish HMRC alone.

Scotland’s share of non-identifiable spending on the UK HMRC in 2014/15 was £290m.  Or less than half what the Deputy First Minister says we would need to pay if independent.  And that’s just one department.

Of course this may then lead to suggestions that the fiscal multiplier would be even more beneficial to iScotland but…

2. Beyond GERS ignores the lost spending in Scotland from UK institutions and civil service that provide services to the whole of the country.

According to the latest statistics, 10.3% of civil service employment is in Scotland (both headcount and Whole Time Equivalent), whilst we have 8.2% of the population.  This potential over-representation is particularly marked in the Department of Work and Pensions (11.4% of UK employment) and HMRC (13.7%).

It’s simply illogical to count the benefits of fiscal multipliers from additional spending and employment but ignore the detriment of spending and employment that would be relocated in the other direction.

Besides, are we actually gaining any employment at all or simply becoming responsible for a higher spend whilst losing jobs to rUK?

It’s also been contended that defence spending in fact has a negative fiscal multiplier but this seems like an unnecessary point here for just £72m of additional tax.  It’s also not clear to me how “we’ll not spend a penny on defence outside Scotland” squares with the self-congratulatory “internationalist” outlook bestowed upon Scottish nationalists by… erm… Scottish nationalists.

Conclusion

It’s been a pleasant change from the norm to address actual proposals of ‘what would change’ rather than the usual raft of mis-informed or downright dishonest attempts to undermine the GERS figures, so for that we should give Dr Dalzell some deserved credit.

However, as I’ve tried to show here and others have done elsewhere, Beyond GERS seems to be little more than a collection of ludicrously optimistic, sometimes simply implausible, assumptions about the negotiated settlement an independent Scotland could achieve.

This is not “talking Scotland down”, it’s simply looking at what can be considered reasonable.

Even just covering the topics I’ve noted above, the Beyond GERS assumptions gain an additional £4.6bn in spending (not including additional civil service spending from lost economies of scale).  Adding in the rest of the data errors we’re talking about a deficit over 8%GDP rather than the 3.5% suggested by Dr Dalzell².

And this further assumes that you believe iScotland would spend a third less on defence (certainly the most plausible of the suggestions offered), baseline tax revenue would be completely unaffected, there would be no relocation costs for the civil service, no set-up costs for the new state, no drag factor from separating ourselves from our biggest market, no currency impact…  in other words, it’s a series of wildly over-optimistic positive assumptions without a single negative assumption.

What stands out for me, however, is this.  Even with this one-sided raft of simply implausible assumptions, the best Beyond GERS can do is achieve *parity* with our position within the union.  Not improve it, just stay the same.

It doesn’t provide any additional public spending.  Not one extra pound for the NHS.  Not one extra pound on education.  Not one extra pound on welfare.

So what’s the point?  Just so we can do things in a “more Scottish way”?  Do me a favour.  The Scottish Government and local authorities are already responsible for spending 67% of that identifiable spending in a “Scottish way” and bear in mind that Beyond GERS implicitly argues that pensions, another 12.7%, should retain the status quo.

 

It also shows just how difficult it would be to eliminate the deficit gap, indeed that it is impossible to do so without spending cuts or tax increases.  Beyond GERS has been very careful to present a base case which avoids both of those possibilities but can only do so by offering a suite of assumptions that are implausible in isolation and, to be frank, sheer fantasy in combination.

 


NOTES

¹ It’s worth bearing in mind that there are more liabilities on governments than just sovereign debt – public sector pensions, for example.  However it is argued that the liabilities to be negotiated from separation relate to the overall liability either according to the measure of Public Sector Net Debt (PSND), the Whole Government Accounts net liability or Gross Debt / the Maastricht definition.  For the purposes of this discussion I’ll assume that the non-sovereign debt liabilities (by whatever measure) are proportionally assigned and I’ll use the same £1600bn debt figure as Beyond GERS.

²Beyond GERS uses a multitude of data errors, not least using 14/15 expenditure and 15/16 revenue, appears to use £159bn as the figure for Scottish GDP, this is factually wrong – 2014/15 GDP was £157.5bn, 2015/16 £156.8bn, both including geographical oil and gas share.  Correcting the data errors, I estimate the following:

beyond-gers

*I’ve amalgamated “overseas spending” and “other non-identifiable spending” simply to ensure I don’t double count anything

**I’ve left this as £0 impact for the reasons outlined above.  We’d lose some civil service spending and employment from rUK, how much of this would be replaced by new employment required to cover services currently administered elsewhere in the UK… who knows?  To simplify, I’ve just left this impact as neutral and, to be fair, haven’t added any cost to the expenditure side for lost economies of scale either.

***I’ve also left the “closing the tax gap” field blank.  The “middle case” presented by Beyond GERS assumes iScotland would produce a tax system that eliminates every single penny of tax evasion and avoidance estimated by HMRC, or 1/3 of the higher sum estimated by PCS.  Two of the methods PCS suggest for tackling the gap are: country by country reporting for multi-national corporations which doesn’t seem to be in an iScotland’s gift; and, “most importantly”, significantly increasing resources and personnel at tax offices.  Given that Beyond GERS hasn’t accounted for any increased costs, I’ve simply left this blank and will allow you to decide what level of “closing the tax gap” you think is plausible.  For info, if you agree that iScotland would eliminate all HMRC estimated tax evasion and avoidance, the deficit would fall to 5.9%GDP.

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3 thoughts on “Some thoughts on Beyond GERS

  1. Interesting as always. Frankly, I think the whole debt/assets situation is impossible to predict in monetary terms, largely because of the very different solutions previously negotiated under the overall framework of the Vienna Convention (yes I know UK hasn’t ratified it, but both sides can agree to abide by its principles). Negotiations will be as much political as financial – how valuable is the status of Successor State – how valuable would a lease on Faslane be – what is to be done about the tax concessions guaranteed by UK govt on North Sea decommissioning…and so on and so forth.
    A further political consideration is the impact of the ‘zero debt’ model on capacity to borrow – Ukraine, notably, accepted a share of Soviet debt to ease its passge into the market.
    I consider both ‘Beyond Gers’ and the responses (including, I have to say, your own) as being an academic economist’s approach to a problem which is, at heart, political.

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    1. Thanks for the comment. I agree – political concerns will no doubt heavily feature although I’ll note that decommissioning provisions, for nuclear infrastructure as well as North Sea rebates, are recorded as some of the other “liabilities” I mentioned which are beyond the sovereign debt question

      Regardless the point is well taken, I am merely trying to respond in kind to the wildly implausible assumptions of the original report

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  2. Pingback: The Whyte Paper

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