Report - Beyond GERS: Scotland's fiscal position post-independence

Common Weal has published a major new report arguing an independent Scotland could achieve 'deficit parity' with the rest of the UK without cutting public services by rebudgeting.

The report, ‘Beyond GERS: Scotland’s fiscal position post-independence’, is authored by researcher Dr Craig Dalzell and can be read in full here.

Beyond GERS is part of the White Paper Project – a series of reports leading to the publication of a draft white paper for independence in early 2017.

The report looks at how taking a pro-active approach to establishing state infrastructure and negotiation with the rest of UK can ensure a sound budget for an independent Scotland at the point of set-up, prior to any policy changes that could be enacted through an election.

The issue of what budget deficit an independent Scotland could have since the collapse of revenue from north sea oil has been dominated by the GERS report, with the most recent 2015/16 publication in August stating that Scotland has a hypothetical deficit of £14.8bn (9.5% of GDP).

GERS calculates this through looking at the Scottish Government’s budget on devolved issues and adding on to that what the UK Government spends and raises on Scotland’s behalf on reserved issues, like Defence and Pensions.

In Beyond GERS, an entirely different approach is taken – an independent Scotland’s budget is constructed based on effective decision-making.

First, rather than simply adding on to Scotland’s hypothetical budget the reserve spend in rUK, key items of spending are taken on their own merit and judged against what an independent Scotland would want to spend on it. For instance, whereas GERS attributes over £3bn of spending to Scotland on Defence, the actual needs of a Scottish Defence force would likely be much different and significantly cheaper, with a spend of £1.95bn identified.

The same would also be true for the raising of revenue in a Scottish tax system rather than via HMRC – up to £3.5bn of increased revenue is a modest estimate of closing the tax gap (the amount of tax that should be paid but isn’t) by just one-third.

Second, GERS does not (and is not intended to) account for financial rearrangements that would occur on transition to an independent Scotland that would have a big effect on Scotland’s budget. The amount that would be saved from re-profiling Scotland’s share of the debt as well as the UK’s responsibility for pension liabilities is two areas that are accounted for in Beyond GERS that are not up for consideration in the official GERS report.

Finally, relocating items of government to Scotland would have significant multiplier effects which would be expected to boost revenue further. A beefed up civil service could expect to bring in an additional £719m, for instance. None of this is accounted for in GERS.

Where the gains come from:

  • Building a fit-for-purpose defence budget - £1bn saving
  • Recovering one-third of lost tax revenue through new tax system - £3.5bn saving
  • Negotiated settlement over UK Government pension liability - £3.5bn
  • Clever negotiation and re-profiling of Scotland's debt - £1.7bn saving
  • Accounting for tax income from influx of new civil service jobs - £720m

The combination of these approaches to building a hypothetical independent Scotland’s budget at the start of its life means that a “conservative estimate” of what Scotland’s deficit could be is £5.6bn (3.5% of GDP). This would be proportionately smaller than the UK’s current deficit at 4% of GDP. All of this is prior to any further policy changes that could be made after an independent Scotland’s first election, such as changes to tax policy or increased revenue from higher wages or reduced inequality, which could boost Scotland’s fiscal position further.

As part of the White Paper Project, Beyond GERS is supported by a series of other papers looking at specific issues in detail like debt & assets (already published), closing the tax gap, a Scottish Defence force and more.

“It is important that, collectively, this movement produces a robust and inspiring case for independence. We need to start building momentum now.” Robin McAlpine

Robin McAlpine, Common Weal Director, said of the report: “The independence movement has been too passive on Scotland’s finances and particularly GERS. There is no question Scotland could produce a budget to operate as an independent country with our current levels of public services and a perfectly manageable deficit. We’ve let anti-independence voices make all the running and we’ve been far too defensive. The health of public finances is crucial to winning an independence referendum and we don’t have forever to get on the front foot. With this report we think we’ve reached ‘deficit parity’ with the rest of the UK without cuts to anything other than defence. It is important that, collectively, this movement produces a robust and inspiring case for independence. We need to start building momentum now.”

Commenting on the report, author Dr Dalzell stated: “Whilst GERS may offer a reasonable, though still limited, snapshot of the financial health of Scotland within the United Kingdom, even major analysts like Deloitte now recognise that it says nothing about the finances of an independent Scotland and the debate surrounding Scotland's constitutional arrangements is ill served by continuing to assume otherwise.

“By attempting to account for the economic and financial impact of the necessary changes which will come as a consequence of independence, such as the relocation of currently reserved government functions to Scotland, this ground up construction of a "first year" independence budget - which neither relies on significant oil income nor on the complex accounting of 'Barnett Consequentials' - demonstrates that the very act of independence will result in several billions of pounds worth of savings and additional revenue paving the way for Scotland to reach "deficit parity" with the current UK budget or to improve even further.

“It is important for the independence debate that those involved expand their thinking about Scotland beyond the picture of the situation within the UK. It is time to start thinking beyond GERS.”

Comments

Bill Melvin

Fri, 11/18/2016 - 12:16

Excellent this gives us not only a source to point purveyors of GERS to get a different view but also allows us to develop new informed arguments about the deficit which is claimed in GERS.

geacher

Fri, 11/18/2016 - 14:20

Again, the methodology of GERS is being attacked, and not the root cause of the deficit. I'm no economist-but neither is the good Doctor, but the report is riddled with presumptions and assumptions, but I will start with the easiest ones. £1 billion saved on defence? Yep that is doable, but what about the effect on the local economy of the closures of bases and camps? It took Campbeltown and Dunoon years to recover from the closure of RAF Macrahanish and the US Holy Loch base. No mention of that. Also the new defence spending levels would take us below the 2% minimum spend required to join NATO. No mention of that either. Dalzell also states that "This figure (the debt) will almost certainly be reduced upon independence due to the nature of the division of assets and debts between separating states." I would love to see some proof of this assumption, because the debt is likely to increase. Then pensions...again I'd like to see where his £3.5billion savings will come from after *ahem* "negotiations" with WM...is rUK going to pay some of the pensions to the citizens of the newly independent Scotland? I would love to see his doings on that one. Then there is this: "Finally, relocating items of government to Scotland would have significant multiplier effects....",but there is no mention of the loss of jobs when HM Government establishments close...remember the squealing when HMRC closed some Scottish offices? There's more, but I will leave with a doozer. The report lists the alleged fiscal savings that an independent Scotland would make:
"independent Scotland’s budget at the start of its life means that a “conservative estimate” of what Scotland’s deficit could be is £5.6bn (3.5% of GDP). This would be proportionately smaller than the UK’s current deficit at 4% of GDP." There are two huge errors in that statement. The UK's deficit WITHOUT Scotland's contribution-remember we would be independent- would fall from 4% to just above 3%, so Scotland's deficit would still be higher, but listen up...nowhere, NOWHERE is the loss of the £9billion block grant accounted for....if (and that is a bloody big IF) we were to make these savings, we would still be facing the biggest pc GDP deficit in Europe. I'm not sure whether the good doctor is being daft or disingenuous.

DrDalzell

Fri, 11/18/2016 - 15:51

Hi Geacher. To comment on a few of your points.

Defence - Scotland pays £3bn towards UK defence of which ~£1.8bn is spent IN Scotland. We could increase spending to the NATO target (as I do indeed mention in the paper so I'd ask you to retract the claim to the contrary) or we could increase spending in Scotland up to the £1.95bn which would be commensurate with the EU average. Both of these plans represent MORE spending in Scotland, not less. Only in the case of modeling a defence force similar to Ireland would it result in a spending cut on the status quo. Whilst this would need to be managed, regard that the fiscal multipliers for defence spending are significantly lower than the multipliers for public spending on just about anything else. The purpose of defence spending is defence, not economic investment and growth.

Debt - See the more detailed paper on debt, Claiming Scotland's Assets. The rUK's claim of ownership of the former UK's debt leaves Scotland with the opportunity to reduce debt levels on independence. Even if we pay a premium on our own bonds compared to the UK, total debt interest payments would be significantly reduced.

Pensions - If have paid your National Insurance as a UK citizen and are therefore entitled to UK state pension then it is yours regardless of whether you choose to live in (r)UK or not. This was the basic premise accepted and promoted by the UK Government during the previous independence referendum campaign with the only proviso being that it was /possible/ that a negotiated trade of liabilities may take place. However, the UK's position was also that it claimed full ownership of all UK assets AND liabilities and that Scotland held no claim on them. This includes pensions.

Deficit as %GDP- The point was to bring Scotland to deficit parity with the UK as it is now, not to project the finances of rUK after we leave. That's their business.

Block Grant - The Block Grant is irrelevant to the discussion of an independent Scotland. The block grant is only relevant if you wish to discuss the finances of a devolved Scotland and as such has not been included in the calculations of projected revenue. This revenue is comprised solely of the actual taxation estimated to be raised from within Scotland.

I hope this helps clear your understanding of things.
Craig

geacher

Fri, 11/18/2016 - 19:19

Dr Dalzell, thank you for replying personally.
Defence: I would argue that the total spent on defence is nearer £2.5 billion, but accurate figures are hard to come by due to the fluid nature of our armed forces, but you must remember that the cost that Scotland pays covers a myriad of support logistical services that modern forces needs to function, For example, the Officers College at Sandhurst, the Air Surveillance unit at RAF Boulmer which covers the entire frontier of the UK, the vast training units set up on the Brecon Beacons and at Dartmoor, the National Security unit (NacTSO) in London, the Joint Rapid Response Group based who knows where, and many many more...... all these things are vital to having an efficient armed forces, it is not only about recruiting soldiers and handing them a gun. £1.95 billion? I don't think so.
Debt: Like I say above, I would like to see how you arrive at your assumption. It is certainly not the opinion of economists on both sides of the indy fence.
Pensions: You said it yourself....*negotiations*. It is disingenuous to assume that the UK would agree to the figure that you state, we really have no way of knowing. This is from Steve Webb the former Pensions Minister: "In this Steve Webb made it very clear “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.” So you may be right, you may be wrong, but to state that we would save £3.5b as a fait accompli is wrong.
Deficit as %GDP: A neat sidestep there.
Block Grant: What you have done is take the deficit then deducted the alleged "savings" to give you the *new* deficit figure. How can you just ignore the loss of the block grant? That is too silly.
Let's just say that all your projections are spot on to the penny.... how about the black hole of almost £9b that would be there? You CANNOT ignore it and pretend it won't be there!

gfyans

Fri, 11/18/2016 - 20:23

Clearly I'm missing something obvious, because the way I read it the loss of the block grant has been offset by the re-budgeting outlined in Dr Dalzell's report. Isn't that the whole point of it?

Geejay

Fri, 11/18/2016 - 20:49

I'm glad to see you tackle the issue of taxation head on. Inequality (and its malign effects) and taxation are closely linked. We also need to throw obscene levels of remuneration into the discussion.

One aspect of the neoliberal agenda has been the transfer of the burden of taxation from companies to individuals and although income tax may be the one most people notice there are a plethora of other taxes which we citizens have to pay in the form of indirect and "stealth" taxes, such as VAT which are all highly regressive while many hugely profitable companies pay very little.

Two things (at least) need to change. One is higher taxes on wealthy individuals - and as a university researcher said the other day, that includes people like her (and my wife and I) - and really high taxes on the 0.1% to discourage stratospheric levels of pay. (It wasn't that long ago that tax rates reached into the 90's) And the other is getting corporates to pay a fair share of taxation for all the benefits they receive like infrastructure, a skilled workforce, an NHS and so on, all of which are paid for by the State.

A fair tax system will enable us to build a fairer society, rather than what we have at present where the rich live longer, healthier lives and the poor suffer more illness and die younger. We need to reject the Tory/Labour con of pandering to the wealthy.

geacher

Fri, 11/18/2016 - 20:51

It has (or has it?), but the savings somehow manage to negate the block grant AND reduce the deficit down to a manageable level... a buy one get one free sort of deal.

Watty

Fri, 11/18/2016 - 21:03

Geejay
The SNP have already rejected the opportunity to raise taxes for the wealthiest claiming it would reduce tax income so I wouldn't expect them to be putting up taxes anytime soon

geacher

Fri, 11/18/2016 - 23:05

From Neil Lovatt: https://t.co/acOcMShk4x
Read this... as always facts trump rhetoric.

Geejay

Sat, 11/19/2016 - 08:48

@Watty. At present the SG don't have full control of the fiscal levers or legislation. In an independent Scotland I would hope things would be different - perhaps different parties, perhaps even working together and as Craig Dalzell suggests a root and branch overhaul of the tax (and entitlements) system. It's up to us to make sure that it happens. Our responsibility has to extend beyond just putting a cross in a box every 5 years, otherwise we get what we deserve - or deserve what we get (like Tory governments).

Mike Fenwick

Sun, 11/20/2016 - 22:52

Scotland becomes independent - it is a foreign country to rUK - you fill in DWP Form IPC-BR1 and send it to the International Pensions Centre of the DWP, and based on your NI records the relevant pension will be paid.

If you wish it can be paid to an rUK Bank or a Bank in the country you then reside in - with the DWP making the necessary forex adjustments.

Link: https://www.gov.uk/state-pension-if-you-retire-abroad/how-to-claim

@geacher ... I am waiting Neil Lovatt's approval of my post on his blog, the post and detail follows the above comment. I am hoping he will act as I did recently - we need accurate data in some areas, and we need unbiased facts in other areas, and we are all the poorer when they fail to materialise.

Mike Fenwick

Mon, 11/21/2016 - 10:03

For the record, Neil Lovatt allowed me to post, and then responded, and in turn I replied (that reply is awaiting his approval before it is published).

Whilst it is one half of the conversation (mine) what I said is below - I hope it may clarify some of the aspects involved - or produce "facts" that disprove what I believe to be the position.

Starts.

"You appear to be referring to entitlement. I am not, I kept my criteria narrow to avoid what has happened, as we do indeed have "two distinct points being made here that often get confused to come to the wrong conclusion." Entitlement -v- Payment.

If we discuss entitlement on its own, I suspect you know many past UK residents now in Australia are not in the least happy, that whilst they receive their state pension, their entitlement having been established, they have been told they are not entitled to any uprating, as in for example the triple lock, whereas other past residents of the UK, dependent on their current place of residence, are so entitled.

However, I am questioning payment, not entitlement.

There are two main distinctions: 1) when entitlement has already been established and/or 2) when no dispute arises over entitlement.

1) I am a pensioner, I receive the state pension (as my entitlement has been established), I live in the UK, currently resident in Scotland.

I have family in Singapore, say I chose to take up residence there, would you accept - or - would you deny that if I completed DWP Form IPC-BR1, that I would continue to receive my state pension?

2) As one reaches the age at which one approaches entitlement to a state pension, one can apply for a statement of what that entitlement will yield, the DWP will issue the relevant statement. Yes, I agree, there will be those who then discover that they lack entitlement, but I remind you I am raising the issue of payment for those who are agreed to be entitled. The statement will be further qualified, not as to the entitlement, but as to the quantum, things can and do change. Would you accept - or - deny that once such entitlement has been agreed by the DWP and acknowledged by virtue of that statememt, that payment will then follow, no matter its destination?

Your comments were referenced by link on Common Space, and I chose to comment as follows " I am waiting Neil Lovatt's approval of my post on his blog, the post and detail follows the above comment. I am hoping he will act as I did recently - we need accurate data in some areas, and we need unbiased facts in other areas, and we are all the poorer when they fail to materialise."

I am totally confident you and I could discuss further and in detail, but I do genuinely seek no more than your response to whether you agree - or - not with what I have stated. I would like to avoid, if at all possible, the "Ah, but ...".

The "ah, but ..." leads us both into a wide ranging third area 3) Will any of this remain intact if/when Scotland became independent? I hope I do not lack at least some of the knowledge to debate that question, but I wholly lack the wisdom and foresight to answer it, and I am not here (thank you for allowing that) to speculate, at least not today."

Ends.

Mike Fenwick

Mon, 11/21/2016 - 11:44

For anyone brave enough to really go into the nuts and bolts of this, the link below takes you to a House of Commons Briefing paper from May this year.

researchbriefings.files.parliament.uk/documents/SN01457/SN01457.pdf

I say brave enough because you will have to contend with legislation which involves "exceptions" and then "exceptions" to the very same "exceptions".

Isembard

Tue, 11/22/2016 - 11:58

It's a good anti-GERS article, but I'm disappointed (as usual) to see it makes the same assumptions about a 'sound budget' as the last few governments of the UK make.

Striving for a 'sound' budget is called 'Austerity' if you don't export more than you import, like the UK does.

If you Google 'functional finance' instead of 'sound finance' you will discover the difference between the two.

If you Google 'Modern Monetary Theory' you will learn the following facts for a country that uses its own sovereign currency with a floating exchange rate, such as the United Kingdom (or an independent Scotland with its own currency) :
(1) Taxes don't pay for anything. There is no 'taxpayers money' bank account anywhere. All government payments are made by money created out of thin air. The government doesn't check out the 'Tax bank account' before paying for anything, it just decides to pay (or not pay) for (e.g.) the NHS.
(2) Governments don't need to borrow money denominated in the national currency. The process is based on Gold Standard thinking, but continues as a political choice to limit government spending.
(3) Subject to not being at full employment and not seeing inflation, Government can afford to pay for anything it can buy with its currency. The need for a government sector 'balanced budget' or a 'budget surplus' is quite simply a lie. In fact government budget 'defecits' are a necessity if we import more than we export (as the UK does). Try Googling 'sectoral balances'.

Postscript - Money - what is it and where can you get it from?
Apple and Amazon and similar manufacturing industries don't make any money, they just shift existing money or newly loaned money about. If they actually made money they would be arrested.

Note that apart from paper notes and metal coins, which is only about 3% of the money in circulation, 'Money' is only magnetic patterns on hard disks in banks' computers, or if you prefer, numbers in spreadsheet computer files. It cots nothing to actually make money.

All money is created out of thin air, by banks. Always. Commercial banks create it when they give out loans. The government central bank creates it when they pay for the NHS or trident or pay civil servants wages or do the deliberately-obscurely-named 'Quantitive Easing'.

The commercial bank money that was created is then destroyed (cancelled) as the loan is repaid (excluding interest) and the government money is cancelled as it is spent in the economy via various taxes. The financial economy is a complex on-going process of simultaneous money creation and destruction.

There is much attention paid to and attempted control of (so-called) 'Government Debt' but no attention paid to or control of Private Debt, which is much bigger. This is due to the rich controlling the political narrative.

In short, Thatcher was a (deliberate) liar when she said that "There is no such thing as public money. There is only taxpayers' money". Osborne (and anybody else) are either ignorant or lying when they demand a balanced budget (or even worse, a budget surplus) while we import more than we export, as it can only be sustained by increasing private debt.

Watty

Wed, 11/23/2016 - 21:20

Geejay, they do have the powers to raise tax. Sturgeon herself has said they won't do it as they believe raising the highest tax rate will decrease income (i.e. she's basically trying to claim they will move elsewhere or somehow avoid paying it). The powers are definitely there though.

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