(NOTE: This is an updated version of my original essay. Not much has changed but adding more sources and details into my argument.)

The most fascinating aspect for me around the debate of Scottish independence is, hands down, economics. No matter what side you’re on, it’s a debate which has many twists and turns, figures flying in all directions and sources which are dissected like a frog in an 80s science class. Whilst others may look at it as a total shambles or mess, I think it’s something glorious to piece together.

I wanted to throw my own hat into the mix of my own understanding of the economics behind independence. And whilst I am no qualified expert, I have based my view on numerous opinions from qualified economists and political bloggers such as Professor Joseph Stiglitz from Columbia University, Professor Andrew Hughes Hallett from Saint Andrews University, Professor David Branchflower at Dartmouth College, Hanover, New HampshireProfessor Richard Murphy of Practice in International Political Economy from University of London, Simon Wren-Lewis of Economic Policy at the Blavatnik School of Government and Oxford UniversityDoctor Craig Dalzell from Common Weal, Director Robin McAlpine from Common Weal and Private Investor James MacEachern. So ultimate credit goes towards these individuals for their involvement in the debate and helping me gain greater understanding.

To start off the economics debate, we need to understand that there is limited information to accurately calculate Scotland’s GDP and deficit. This, in turn, casts much doubt on the claims made by unionists that Scotland would have a deficit of £15 billion in the event of independence (a figure which comes from the Government Expenditure and Revenue Scotland report). Doctor Craig Dalzell makes the point in his report “Beyond GERS” that there is three main types of spending that used to come to such a conclusion: “That which is spent in Scotland by the Scottish Government, that which is spent in Scotland by the UK Government and that which is spent outside Scotland by the UK Government but which is deemed to be either “on behalf of ” Scotland or in the shared interest of all nations and regions of the UK.”

It is arguable that the first two forms of spending (also known as identified – Public Expenditure Outlay/iPEO) are fairly acceptable, but the third form of spending is highly questionable. There may be factors which are spent on Scotland’s behalf which have no benefit to the Scottish economy at all. A classic example of this is back in 2012, when the London Sewage systems cost Scots £353 million, but because it was not funded through normal methods, Scotland never saw £400m Barnett Consequentials. Scotland doesn’t get any direct benefit from London’s sewage system, so why should it make any economic contribution in the first place, especially if we don’t see any Barnett Consequentials for our contribution?

If we were to look at identified Public Expenditure Outlay compared to what Scots actually raised, you will find that total spending in Scotland is roughly £55.5 billion. In terms of revenue that was raised in Scotland, that figure is about £53.5 billion.

 

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This means that the identified deficit is £2 – £2.5 billion. But that is far from any real conclusion we can reach, because there are things that are spent on our behalf which should be accurately added to our spending, such as EU membership (membership that sees Scotland’s economy boosted by around £2.24 billion a year).

But even then, we must take into consideration how Scottish GDP, tax raised in Scotland and government spending may also be inaccurate. This view is strongly held by Professor Richard Murphy, who helps us understand that there is little dissection when looking at these figures.

First, when it comes to Scottish GDP there is zero figures when looking at sales that take place within the UK. Richard Murphy makes the point “VAT returns are an utterly unreliable source for this: a UK company does not submit data separately on sales in Scotland from elsewhere. The same is largely true on spending. So forget Scottish GDP data: we just don’t know what it is.” Richard Murphy extends this point by arguing that figures gathered surrounding revenues raised in Scotland do not actually take into account which people are actually resident “whilst on corporation tax”. This again, raises many questions as to what real Scottish revenue actually is and shows that the data was is abstract. (As of writing this, Doctor Craig Dalzell has responded to Richard Murphy’s article on this, worth a read.)

Murphy points out that there are 26 variables when it comes to the data, with 25 being estimates.

 

GERS GRAPH

 

GERS GRAPH 2

 

Many unionists will usually point out that GERS is made in Scotland. But there is a difference between who calculates the figures and who publishes them.

 

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The third point on spending is something we’ve already covered, but the issue surrounding Scottish exports and imports is also rather interesting. Murphy makes the point that the figures are “literally made up”. But there is a lot of confusion when collecting such data also. Whilst the Scottish Government has given a guidance note when businesses fill out forms for the Global Connections Survey, it doesn’t answer a lot of questions. Take this as an example:

“If you run a hotel in Edinburgh and lease a room to someone coming from Liverpool, does that count as a transfer of money from rUK into Scotland? If you run a haulage company in Manchester and buy fuel in Falkirk does that count? If you produce goods in Edinburgh then ship them to France via an English haulage company and through an English port then how does the profit break down? What happens if a company in Dundee create something but the final packaging and shipping to customers happens in England? Say you run a business in Glasgow but the registered office is still your old address in Bristol?”

As of writing this, Kevin Hague actually engaged with Richard Murphy over VAT figures, which came to a rather funny point.

 

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It should be pointed out, Professor Richard Murphy has an extensive background surrounding economics, I think it’s safe to say where my opinion would rest between him and Kevin Hague. There’s also this beauty of a tweet from a few years ago…

 

not my strong point

 

If you wish to look more into the figures produced by GERS, you can read the work of John Jappy, an ex-senior civil servant in the Inland Revenue who came out to explain how Scotland’s wealth has been hidden for years. And to further highlight how the data is abstract, here is what UK Statistics Authority had to say on the matter of GERS:

 

OFFICE OF NATIONAL STATISTICS

 

However, many critics will argue that despite the data being estimates, they are checked with the best methodologies. I’ve read two interesting articles on this, one from Kevin Hague who uses two academics to argue that GERS is sound, and one from Graeme Roy from the Fraser of Allander Institute. Professor Richard Murphy has already responded to both Kevin Hague (here) and and Graeme Roy (here), which leaves me with very little to say overall, but I’ll go over the issue anyway.

In response to Graeme Roy, he makes this argument near the end of his article:

“These arguments are entirely legitimate, and ‘fairness’ is something we each may have an opinion on, but to criticise the entire GERS exercise for the simple fact that they are based upon ‘estimation’ is clearly wrong.”

One of the academics Kevin Hague cites, Professor Ronald McDonald, makes a similar comment:

“As in practically any statistical exercise the GERS statistics depend on estimates and there is nothing unusual about that. In that regard it is noteworthy that the statistics produced and reported in GERS come with standard confidence intervals indicating the uncertainty with which the central estimates are held. An examination of these confidence bounds demonstrates that the generally accepted position on Scotland’s fiscal and trade positions are unchanged. This is why mainstream economists, statisticians and commentators will continue to use these statistics in their work.”

In respect for both men, they have ultimately missed the point being made here. What we are questioning here is not primarily the estimation, but what the estimations are based on. The data itself, as has been argued for a while now, is abstract. Doing great things with bad data will not magically change the data to be accurate, which complies with the GIGO theory (Garbage In, Garbage Out). Again, this is highlighted by the UK Statistics Authority when they had to say on such a matter:

 

OFFICE OF NATIONAL STATISTICS

 

Another worrying comment made by Graeme Roy is the following:

“It’s important to remember that GERS does this taking Scotland as a mini-UK, and the constraints and protections that the current constitutional arrangements bring.”

Why is Scotland being perceived as a “mini-UK? This in turn goes back to one of the original arguments made towards GERS, which is that it does not represent Scotland as an independent country, since independence changes the current setup which GERS works upon. If GERS represents Scotland as a mini-UK, it cannot be applied to thinking what an independent Scotland would look like, since the government of an independent Scotland would be taking different macroeconomic decisions.

Scotland being treated like a region but compared to national economies is weird logic from many unionists. As Robin McAlpine from Common Weal says, you’ll often hear them argue  “look – Scotland’s economy is struggling while across the UK the economy is booming. Nationalists should do something about it and stop moaning.” McAlpine points out a few errors in this argument.

For starters, the word choice of “across” is wrong. Scotland doesn’t have a national economy, since we don’t have a national monetary and little macroeconomic levers. If unionists want to make a fair judgement then it should be compared on a regional basis. McAlpine points out however:

“But that’s not what they do. Rather they merge and then average all the other parts of the UK. Or rather, they take a nation state with full monetary and macroeconomic powers and a powerful international capital city, subtract one region and then compare the region to the nation-minus-one-region.”

When you actually look at Scotland as an individual, and compare it to other individual regions within the UK, you’ll find a different picture from what unionists try to portray. Using McAlpine’s example, let’s look at numbers from the Office for National Statistics, which is analysed by the House of Commons.

 

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Only two regions in the whole of the UK are above the UK average, the South-East of England and, unsurprisingly, London. Scotland is in the top 6 of the 12 regions in the UK. And when looking at growth per head of the population, Scotland is has higher growth than the South-East of England, putting Scotland 3rd place overall in the UK. As McAlpine points out, this shows how population growth is a key factor for the SE of England and reveals the possibilities of what Scotland could do if it had such powers over immigration. If you want to look into more detail about these comparisons, click here to read more.

The other academic that Kevin Hague uses is Professor Angus Armstrong, who for one is questionably bias. For starters, he use to be Head of Macroeconomic Analysis at HM Treasury, so realistically he is defending much of his own work. If I were to present an essay to my university and quote myself to prove the argument I’m using is sound, I would lose a lot of marks and would most likely be failed. Not only that, he’s also wrote for Labour Hame and is a House of Lords special advisor when it comes to Scottish independence. So when we take his viewpoint, you’ll need more than a pinch of salt.

If we want to have a proper debate on Scotland’s deficit, we need to have proper identified figures and less so on what is assumed. For example, the US can go into incredible detail about what is spent on defence in terms of a regional basis, yet the Ministry of Defence in the UK fails to do so. Why? GERS assumes that roughly £3bn is spent in Scotland, yet the real armed forces budget is around half of that figure (whilst the Tories severely cut more of Scotland’s defences).

At my time at Stirling University, I’ve gone through a lot of learning about economics, but there has always been one thing that has struck out by everyone who I’ve spoken to: question everything.

We cannot simply accept that data is good enough because the government or statistical bodies say so, that’s why this debate is important to have. Whilst GERS is improving, ultimately Scotland should have data gathered specifically for ourselves as a country, not as a “mini-UK”. I can appreciate that Graeme did bring more clarity about the role of Scottish civil servants. He had the best intention when it came to this debate, however, he sadly misses the point.

Another factor we should also consider is how we think about the economics of Scottish independence. This point is shared by Doctor Craig Dalzell, Professor Richard Murphy and Professor Andrew Hughes Hallett. When Kevin Hague (and journalist David Torrance) responded to Beyond GERS, they made the point that if Scotland wanted to raise £3.5 billion then it would need to raise 30% increase in income tax. But Dalzell points out very clearly, that an independent Scotland doesn’t just have one tax power, and goes on to say “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.”

Professor Richard Murphy himself spoke to the Finance and Constitution Committee about his view on GERS:

 

 

If we are discussing the economics of an independent Scotland, we need to imagine all the powers in place for a Scottish government which they can wield, not just income tax which is the only major tax raising power Holyrood has control over just now. We must take into account that an independent Scotland will very much have a different structure than the UK in terms of government and how we calculate that.

Professor Andrew Hughes Hallett gives an analytical framework equation with macroeconomic accounting identity:

S – I = (G – T) + (X – M)

S = Savings   I = Investment  G = Government Spending  T = Government Revenues  X-M = Current Account Balance

And whilst the information we have is limited to carry out this equation, it is at least right to start off with using the correct methods when understanding the economics of Scottish independence.

Private investor James MacEachern has actually asked Derek Mackay to try and fix GERS in terms of the apportion Scotland’s share of public sector debt interest to reflect true yearly costs of the share of accumulated debt. In his case, he argues the share of Scotland’s debt interest covered £6.2 billion of Scotland’s £14.8 billion deficit as its of the UK population. The way this is calculated is understanding Scotland’s share of the UK population (being 8.24%) and the UK’s deficit/new debt being £75.32 billion in GERS, concluding it is £6.2 billion.

The issue, again, with GERS is that it apportions debt interest on the basis of population. If we want to study Scotland separately, then this logically does not add up.

MacEachern further argues that in making this adjustment for GERS, it would make the case much harder for unionists. Referring back to the years 2015-16, Scotland paid £2.8bn in debt interest (this is 4% of the total assigned expenditure budget of Scotland). Scotland would need an extra £0.18 billion which could cover the so-called of £8.6 billion (AKA, the fiscal transfer) that rUK serviced.

So where can we get £0.18 billion from? One proposal is to scrap Trident, meaning that an independent Scotland would no longer pay any contributions towards it. This saves Scots £0.46 billion a year, meaning that servicing the fiscal transfer is affordable.

If you wish to know where the £0.18 billion came from, it can be calculated. When using GERS, Scotland’s population share of debt interest for total UK debt (£1.6 trillion) is £2.8bn. Again in the years of 2015-16, it cost UK £33.4 billion to service £1.605 trillion of debt (or £1,605 billion).

 

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Doctor Craig Dalzell has also written a report surrounding this issue titled “Claiming Scotland’s Assets”, which estimates that Scotland could save up to £800 million and £2 billion a year. However, both figures would depend what sort of negotiation position the Scottish government would take with the UK government.

The next point to go towards is a new currency for an independent Scotland. The best detail we have here is from Doctor Craig Dalzell, but with the input from nobel-prize winning economist Professor Joseph Stiglitz.

In Dalzell’s report “Scottish currency options post-Brexit”, it concludes that an independent Scotland should have a new Scottish pound which is pegged to the pound sterling. This gives Scotland the advantage of having a fixed exchange rate whilst also maintaining full control of its monetary policy.

However, when Common Weall released such a report, it didn’t take long for many unionists to try spin their work.

 

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Which is a rather funny headline, since the real cost for a foreign reserve fund is actually £7.7 billion, Dalzell just rounded the number, which actually gives unionists the advantage in the debate. But this can be paid off in multiple ways, such as shared assets (Scotland’s share of the UK’s foreign reserves is £14 billion out of a total of £164 billion).

Whilst it is most likely that an independent Scotland will create a new currency pegged to the pound sterling, Joseph Stiglitz believes that an independent Scotland should not in fact peg it, but actually allow it to float (so effectively allowing the market to set the price of the currency). He is on record saying “a Scottish pound floating, it could help stimulate the Scottish economy, so the deficit would come down. That would make it acceptable to join the EU.” To further extend his point, Professor Joseph Stiglitz also points out “Small countries can have their currency. Iceland had one of the deepest downturns in 2008 but had one of the strongest recoveries, because it had its own currency.”

This option is strong, but would best be done after a smooth transition period after independence. In the event of a market shock with independence, it could be damaging. An example of this is the day after the EU referendum when the pound fell 8% against the US dollar, and is still predicted to fall another 16%. Whilst the risks are shared with a normal pegged currency, the essence of these risks are different. So for a later term a commission could look into these details and see which option is better for the long run.

Savings can also be found in defence in multiple ways. The average level of military spending in the EU equates to just 1.24% of GDP, so Scotland could save from £1.1 billion from the  £1.8 billion directly spent in Scotland (GERS equates that Scottish defence is £3 billion, but again much of that is spent on “our behalf” with little direct benefit). There could be further savings following Ireland’s route, of 0.45% of GDP on defence, that’s savings of £2.3 billion a year.

Whilst these specific options are appealing, what about general principles when it comes to managing an economy? It’s important to look at two different approaches which have been heavily debated in recent years: growing your way out of a deficit and cutting your way out of a deficit.

One of the main reasons that people have supported Scottish independence is due to Tory austerity. Austerity as a whole is totally laughable. It makes zero sense to grow the economy when you’re slashing spending in areas which heavily rely on people to work, and we should also note that a majority of economists believe that spending cuts have actually done more harm to the economy than good. The government have been heartless in their welfare cuts, believing that the system is too generous and that by taking away people’s benefits they’ll just decide to go find a job. But the reality couldn’t be anymore different, with a recent study finding that the making those poorer to force them to find jobs doesn’t work. And what about those who simply cannot work? People who are disabled or mentally ill having their benefits cut doesn’t make them more motivated, it only makes their situation much worse. This is actually linked to a shocking amount of suicide cases across the UK. The UN has also concluded that the government’s austerity policies are a breach on international human rights obligations. Jobseeker’s Allowance sanctions have been also ruled unlawful for thousands of people, whilst the hated “Bedroom tax” has been branded as “shocking” and should be “axed” by a UN investigator.

What other countries can Scotland look to for inspiration for better? One great example could be New Zealand, which back in 2011 had a deficit of 9% of GDP, but by 2016 saw a surplus of 0.7% as they increased their spending.

 

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New Zealand achieved this after a massive earthquake in 2011 and the financial crash of 2008. In comparison to the UK, which has continued its austerity programme, we have only managed to reduce to 4% of GDP from 2010, when the UK’s deficit share of GDP was 11.2%. Ireland had followed the UK’s route of severe austerity, which caused a huge deficit of 32% of GDP back on 2010.

 

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And with all this austerity, it’s extremely clear that most of the wealth in the UK goes to those at the top. creating growing inequality in terms of wealth and income. Despite these numbers, the reality is no single number can tell the story as to how bad inequality actually is.

 

Graph 1

 

This is justified by those on the right with the economic theory of “Trickle-Down Economics”, the idea that those on the top end allow the benefits of their wealth and income to trickle down to those on the bottom, so everyone prospers. But if such a theory were true then everyone else in our society would be doing very well.  Is this true?

 

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No, it seems not. When it comes to the top 10%, they own almost half of the private wealth in the entire country.

 

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The UK is also one the most unequal countries on the Earth when it comes to opportunities.

 

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Chile can be ignored due to it becoming an emerging market and not actually a developed one. Within almost all the countries within the OECD, all of them have had increased inequality within the last 30 years, and countries around the world are trying to copy them. However overall, countries around the world remain mixed.

 

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Let’s not forget income inequality.

 

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This is inequality income AFTER taxes and transfers, for market income inequality is actually worse, even worse than the US. (Market Inequality: Includes incomes from capital, savings and private transfers).

It’s also interesting to see inequality from across the globe. We can see two groups that have prospered, the extremely rich across the world (richest in rich countries, the 1%), who have seen a 70% increase their income and have taken around 50% of the increase in global income. In terms of percentage, the middle class in China coming from emerging markets have also done well . At the near bottom, we have the middle-lower classes in the US and Europe.

 

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So we know trickle-down economics is a false theory, as the evidence clearly does not support it. Fun fact, during the time of the global recession in 2008, the theory of saving the banks and the benefits trickling down to those at the bottom was heavily believed by the government in the US. However, within the first three years of the recession, 91% of total increase in income went to the top 1%.

So why, after the “Golden Age of Capitalism”, has there been such a mass increase in inequality?

One theory that could be reached is that it’s down to market forces. In today’s market, demand in supply is played in strange ways, due to technical change such as increasing in productivity in highly skilled people rather than less skilled people. This is massively down to globalisation, which has integrated two billion people from emerging markets into the global labour force. Therefore this has increased the supply of unskilled labour relative to skilled labour, depressing the unskilled labour force. This seems like a logical theory, but there are arguments against this.

The laws of economics are universal. Demand and supply work on both sides of the Atlantic plus North and South of Europe. However the outcomes, in terms of the levels of changes and the level of inequality, have been very different, as there some countries with greater market inequalities than others. An example of this could be the Scandinavian nations and Canada, who have far less market income inequality, let alone after tax and transfers, than the UK and Germany.

This leads to my main point. Ultimately, this is mostly down to policy decision (which is what independence offers more to Scotland) and how nations structure the market economy. Markets don’t just exist from nothing; they must follow laws and regulations passed by parliament. So the way markets are structured also affects inequality. It was under the Thatcher era that the Conservative government actually re-wrote the rules on the market economy, with them arguing that lowering tax rates, particularly at the top, would only make people work harder and to invest more. This, according to Thatcher, would allow incredible new growth with inequality, but the inequality would be shared. Growth would be so high that those on the bottom end and in the middle would be better off anyway.

After a third of a century, not just a few years, we know for fact this has failed. But despite this, the Tories are incredibly far ahead in the polls, so future austerity doesn’t seem to be ending anytime soon. And all the figures I have used in reference to their trickle down economics approach to the economy doesn’t even take into consideration Brexit.

Due to the events of Brexit, Professor Simon Wren-Lewis of Economic Policy at the Blavatnik School of Government and Oxford University has gone out his way to say “Brexit changes everything”. He goes on to discuss the long term economic effects if Scotland were to be independent within the EU or even just in the Single Market: “The economic cost to the UK of leaving the EU could be as high as a reduction of 10% in average incomes by 2030. If Scotland, by becoming independent, can avoid that fate then you have a clear long term economic gain right there. But it is more than that. If, Scotland can remain in the Single Market it could be the destination of the foreign investment that once came to the UK as a gateway into the EU. By accepting free movement, it could benefit from the immigration that has so benefited the UK public finances over the last decade. No, that is not what you read in the papers or see on the TV, but I’m talking about the real world, not the political fantasy that seems so dominant today.”

And whilst many unionists outlets argue that the case for Scottish independence has gotten weaker due to the oil price (which is set to rise back to £4.7bn, although it was originally pitched to reach £6.5 by the OBR), Lewis disagrees: “But the bottom line is that the case for Scottish independence is now much stronger than it was in 2014. Then a brighter future outside the UK was patriotic wishful thinking. Now, if they can stay in the Single Market, it is almost a certainty.”

Another economics expert also argues that young, skilled workers and top businesses would move to Scotland if it were an independent country. Professor David Branchflower, who is an ex-Labour advisor and economist, argues that “Scotland should offer itself as a place of refuge for people and firms from the Brexidiots” and “Chances are a Scottish passport will be much more valuable than an English one post Brexit so a move north seems sensible for Remain voters”.

If you wish to learn more about how Scotland can be in the Single Market, there’s a brilliant read by Professor Steve Peers from the University of Essex. Definitely worth your time. It’s also a funny turn of events now that unionists will attack oil whilst nationalists will talk about the EU, swapped the otherway around from 2014. But that just goes to show how much can change in such a short amount of time.

This has been an extensive write up, and I’ve gathered tons of information over the time I’ve written for YTI. But hopefully for those who wish to have a greater understanding about the independence debate will do so now after this article. Whilst it may not cover absolutely everything, it’s a start, even for myself.

 

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