If ever you were after an example of everything that’s wrong with political economics today, you need look no further than the debate over Scottish independence.
This is an issue of immense importance – one that may come to define the history of this country (or these two countries) for centuries, and which should be treated more gently and seriously than pretty much any other public policy issue. And yet it has descended into a statistical farce. It is hard to see how anyone watching Danny Alexander and Alex Salmond accusing each other of manufacturing bogus figures to suit their respective sides would not conclude that both sides are trying to bamboozle the general public.
And, to an extent, that is quite right. Neither they nor I or you have any idea, or any reasonable way of quantifying the economic impact of Scottish independence. This is an unprecedented event. There have been secessions around the world before, but nothing quite like this: as Oliver Harvey and George Saravelos have pointed out, the sterling union involves not just a unitary state but a “highly integrated and complex financial sector, an indivisible payments system, and an overlapping legal system.”
But that hasn’t stopped both the yes and no campaigns coming out and publishing “definitive” assessments of the costs or benefits of independence. According to the yes camp independent Scots would be £1,000 better off; Danny Alexander and the Treasury think they’ll be £1,400 worse off.
Before we determine how bogus or otherwise these numbers are, it is worth assessing what they actually mean. Because, helpfully (and this is something you’ll encounter repeatedly when comparing economic projections from political parties), they are not directly comparable. The Treasury’s £1,400 a person figure represents the total difference between Scottish and rest-of-the-UK government deficits by 2035 (but expressed in terms of 2016/17 money).
This £1,400 is therefore comprised of a whole load of comparative differences: the extra borrowing costs an independent Scotland would face (smaller, more volatile economies tend to have to pay higher interest on their debt), the cost of long-term North Sea decline, the cost of an ageing population and higher public spending per capita. All that set against the higher oil revenues Scotland would enjoy if it didn’t have to distribute them to London.
Scotland’s £1,000 a head number, on the other hand, is based on something else entirely: the extra tax revenue the country will derive from having higher employment and greater productivity growth (2.5% as opposed to the 2.2% projected by the Office for Budget Responsibility). All of that adds up to £5bn a year by 2029 which, according to Alex Salmond, works out as £1,000 a person. Quite why this “dividend” is dependent on independence (if you see what I mean) is beyond me: there is surely no reason why Scotland could not achieve higher productivity were it still part of the UK.
Anyway, having established that these numbers aren’t strictly comparable, let’s examine the two sides’ estimates of something we can compare – an independent Scotland’s deficit in 2016/17, the year of possible independence. And here there are sizeable differences. Both agree that the rest of the UK’s deficit will, by then, be 2.4% of GDP (though the SNP’s paper also points out that under a Labour government the deficit would be 3.4%). But they differ on what Scotland’s will be. The SNP says 2.8% of GDP.
The Treasury seems to be basing its sums on a figure of 5.5% of GDP, which it takes from the Glasgow-based Centre for Public Policy for Regions (though it also cites a 5.2% number from the Institute for Fiscal Studies).
These numbers differ in large part because of their assessment of revenues from North Sea oil. The OBR thinks these revenues are heading downwards, or at best plateauing. The SNP, using numbers from the industry group Oil and Gas UK, disagrees, and thinks they will increase. The upshot is that while the HMT numbers forecast the oil and gas tax take at £2.9bn in 2016/17, the SNP’s comparable figure is £6.9bn.
It is not merely that these figures are different; the differences are so large they can single-handedly change the entire outlook for the country’s finances. Who is right? Betting on that is a mug’s game, given how volatile oil output (and for that matter prices) are, but it’s worth remembering the OBR’s forecasts have actually overstated likely revenue in recent months, so it hardly has a history of extreme caution here.
In the long-run, the two sides also have vastly different assessments of core growth levels (that productivity difference mentioned above) which hinges on how likely one thinks Scotland is to turn into Hong Kong.
So who should one believe? Or, to put it more appropriately, whose sums are the least egregious? Well, both the Treasury and the SNP have been exposed for some rather, ahem, interesting assumptions. In the case of the Treasury, the supposed source for their initial estimate of how much it would cost to set up a Government north of the border, Patrick Dunleavy, described their figures as “bizarrely inaccurate”. Elsewhere, it has been more cautious: for instance, its estimate of the extra cost of higher interest payments for an independent Scotland actually seems generously low. The SNP’s £1,000 a head dividend, meanwhile, is predicated on a best-case scenario rather than a cautious forecast for growth. And those oil revenue numbers, upon which almost everything hinges, are a lot more optimistic than those followed by almost everyone else.
In the end, though, one’s conclusion of these respective documents’ credibility must come down to the credibility of their sources. The SNP’s case involves its own internal numbers (based, it should be added, on external forecasters). The Treasury’s is based on independent numbers. I tend to prefer using independent forecasts, provided they’re from reputable organisations, as these are, which points the needle more towards the Treasury than the SNP forecasts.
But then this is the greyest of grey areas. Ultimately, both sides will be wrong – and neither has covered themselves with glory today. It’s a useful reminder of the fact that economics doesn’t have answers to everything. Trying to pretend it does only devalues your case – and your credibility.