25 Aug 2014
Throughout the campaign there has been an assertion based on polling evidence that the Scottish people are likely to be heavily influenced by the likely impact on their incomes.
The figure regularly quoted by ScotCen Social Research is £500. So it's no great surprise to find that the Yes Scotland campaign claims we will on average be £1,000 better off with independence whilst the Better Together campaign argues we will be £1,400 better offstaying with the Union.
Who is right? In both cases there are some significant assumptions affecting the figures.
The Institute of Fiscal Studies (IFS) is one source of help in explaining the difference between the two campaigns and so too is an excellent book The Economic Consequences of Scottish Independence published very recently by the Scottish Economic Society. The first chapter on Scotland's fiscal position by David Eiser and Mike McGoldrick is especially clear and a good read.
There are essentially five main assumptions being made.
Together these make the difference between the two campaigns' position.
North Sea Oil
It's worth briefly acknowledging from where the Scottish economy starts. Both the IFS and Eiser & McGoldrick make it clear that Scotland begins with a net fiscal deficit in 2012/13. Scottish public spending was around £65.2bn and onshore government tax revenues were about £47.6bn. Oil revenues amounted to £5.5bn so the remaining gap was £12.1bn, measured to be about 8.3% of Scottish GDP. That was slightly worse than the UK's deficit of 7.3% but in previous years when oil revenues were higher (in 2011/12 the figure for Scottish oil was nearer £8.4bn) Scotland's deficit was smaller than the UK's.
That emphasises the key point that Scotland's fiscal position for the future depends on the oil revenue. The Yes Scotland campaign's £1,000 and the Better Together campaign's £1,400 are estimates of the position in 2016/17, the planned first year of independence. They have very different assessments of oil revenues. The Scottish Government says £7bn and the Office of Budget Responsibility says £2.7bn. As it happens the figure for last year 2013/14 was very recently revealed to be about £4bn which was another drop on the previous year. Whatever the right figure for 2016/17 might be, it can only be an estimate of course not least since oil prices are so difficult to predict. But there is no doubt that oil is an important part of closing the deficit gap in Scotland's public finances.
The level of debt that Scotland will take on should independence occur is also in doubt. Whilst not delving into figures around the debt level itself , suffice to say that there is absolutely no clarity on the agreed figure. One position is that the assumed Scottish debt should be calculated as a share of population. Another proposed by the Scottish Government is based on a historic assessment of Scotland's share of debt since 1980 - although why 1980 is the staring year is not especially clear.
Equally there is disagreement about whether Scotland will have to pay a higher rate of interest on the Scottish Government bonds that would have to be issued to cover the assumed debt. Angus Armstrong and Monique Ebell at the National Institute of Economic and Social Research think that Scotland could be paying an interest premium of between 0.72% and 1.65% due to the lack of a Scottish credit history and the lower liquidity that Scottish bonds would have compared to UK bonds simply because there will be less of them. The Scottish Government rejects that premise and assumes no additional interest costs. Again we are left unsure what the position would really be in 2016/17.
Set up costs
Similar disagreements arise over start up costs for setting up a new Scottish state with estimates ranging from a UK position of £2.7bn for tax and benefit systems, debt management offices, security agencies and foreign affairs offices for example versus a Scottish Government one of zero on the assumption that existing agencies can suffice.
Ageing population and flagship policy proposals
Finally there are various disagreements over the implications from the policies laid out in the Scottish Government's White Paper. The Better Together campaign highlights the challenge Scotland faces in having a population that is ageing quicker than the UK's arguing that the additional costs for pensions in particular can be borne across the whole UK. Yes Scotland believes we can offset these costs by increasing immigration. Equally the White Paper identifies various policy choices a new Scottish Government could make to reduce defence spending, cut corporation taxes and Air Passenger Duty, increase child care costs and improve pension provision. Clearly all of these policy choices depend on who the new Scottish Government would be in 2016/17.
Overall though we are left with judgements to make about the credibility of various different assumptions and forecasts. Of course it has always been that way whether it's a business plan you are reviewing or the manifesto for a political party. However you are never likely to be asked again to make as important a judgement as the one you are being asked to make on Scotland's economic prospects in 2016/17.