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12 March 2014

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Alan Weir

As you indicate, the GERS figures cannot be used directly to predict differences between a 'future UK union and a future independent Scotland' .. 'because economic conditions and policies will be likely to be different'. At best they can be used to estimate fiscal transfers within the current set-up. Your thought experiment certainly can't be used to measure that, it seems to me.

Thus if I was a partner in an enterprise which was losing money and having to borrow, and if each partner's rewards and the income each generated for the business could be fairly accurately separated out and, finally, if I was both receiving more and generating more than average, how could I tell if I was being subsidised, or subsidising? I suppose an economist would say it would depend on whether my income per unit time was equal to my marginal productivity. But that’s not really applicable here, the different parts of the UK aren’t factors contributing to a single product. But assuming relative independence of the income streams in the firm example, I can look at the difference between the money I bring in, as a percentage of total revenue, and my income, as a percentage of total income. If it is positive, then I am a subsidiser to the tune of the amount it would cost to bring these into line, by bumping up my rewards, or by my bringing in that amount less money. (True the total income or revenue pies wouldn’t stay the same given changes in the pattern of input or reward among the partners but if I am only a fairly small cog, that should give a fairly accurate measure should it not?)

Furthermore, if my income from client X was very significant, I would not think that my additional input, if I was a net contributor, could be measured by the difference between this income and the result of sharing out my income from X among all the partners, which seems to be roughly what is going on when you compare (Scottish non-oil revenues + Scottish oil) to (Scottish non-oil revenues + oil revenues times our population share.) The contribution of tax revenue T from the City of London to the UK is not the same as (T times (1 minus population of London/UK population)).

So with ‘a’ non-oil Scottish revenue, ‘b’ UK oil revenue, ‘T’ total UK tax, ‘e’ Scottish TME, ‘E’ UK TME, ‘p’ our population share, ‘g’ our geographic oil share I am suggesting the Scottish subsidy to UK (or vice versa) is [(a+gb)/T - e/E]*GDP. Your formula is [(a+gb) - (a+ pb)] - [e - pE] = (g-p)b - [e - pE]. But that then completely neglects the non-oil component, changes in it make no difference to the figure unless they change oil revenues or public spending decisions. And of course oil/non-oil is arbitrary. It could have been a = non-whisky revenues and b = whisky duty. And it neglects T and GDP. If expenditure rises faster (but remains proportionately higher and to the same degree in Scotland) than tax revenues, including oil (because rising faster than GDP perhaps, say in a recession) then on your account the Scottish subsidy to UK goes down, or the rUK subsidy to Scotland goes up, even if Scotland continues to contribute the same proportion more in tax than it spends.

If we look at the percentage gap between Scottish/UK revenue on the one hand (including all of Scottish tax revenues, not excluding arbitrarily e.g. the whisky, or else the oil) and Scottish/UK TME on the other, the figures for the last five years are:

0.90%, 0.00%, 0.10%, 0.50%, -0.20%.

When you calculate the percentages of Scottish GDP in each case and sum, the answer is a £1,926 million transfer from Scotland to rUK, not £193 million. Of course your estimate is not for internal fiscal transfers but a counterfactual 'dividend' or 'loss' from union. But since the alleged subsidy has featured very heavily in the debate, and the difference is a factor of ten, isn’t it important to be clear about exactly is being measured here?

Moreover I am having trouble seeing how your calculation does give an estimate of how we would likely have fared had we been independent. For example, I don't see why one should assume our public spending would be down at the UK level (even if total tax revenues were the same as estimated by GERS). But I'll pause for breath there and try to put together a comment on that.

lwarence

Fascinating read .Was just wondering if the gap in 2012/13 would have been so large if the threat of independence was not there or would the trend from the previous year not have continued because of Westminster`s austerity cuts, therefore creating excess revenues.

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