Government economists and the Scottish Government

More on the Scotland on Sunday news story and my article, which is also included in my last post.

My paper criticises recent work by Scottish Government economists in the Office of the Chief Economic Adviser (OCEA), which purports to show that increased productivity, investment and exports will raise the growth of the Scottish economy and generate more tax revenues.

That is unexceptional.  

However, the March 3^rd paper, which accompanied the Government’s new Economic Strategy, has the implicit sub text that the new strategy will raise the rate of growth of productivity etc. The March 3^rd paper is careful to say that it is ‘illustrative’ but nowhere does the paper mention the difficulties of getting an effective growth policy, something that has eluded governments for years.

It is the March 9^th paper, which I find most troubling. This is essentially the March 3^rd paper with anther scenario added to the analysis contained in that paper which is branded the first scenario and called the Smith Commission Scenario. The second scenario is branded the Full Revenue Retention Scenario.

What I find particularly troubling with both scenarios is that they ignore the partial or complete loss of Barnett that would have to occur before either scenario could be implemented. The second scenario is simply full fiscal autonomy (FFA) in different words and so would only follow after the loss of Barnett.

In the Scotland on Sunday news story the Scottish Government responds with:

“Going forward, these figures illustrate once again the need for the Scottish Government to have full control of job-creating powers.”

I suspect what they mean with the phrase "Going forward" is that from an initial equilibrium state increased growth would generate more tax revenues for Scotland if Scotland had FFA.

But this is the wrong counterfactual.

The correct counterfactual must be taken into account, which is that in each period future public spending will be lower in Scotland because of the loss of Barnett. The counterfactual used in the OCEA model and in the quote above is that baseline public spending is unchanged. This would only be the correct counterfactual after FFA had been implemented and after the loss of Barnett.

However, given that we currently benefit from Barnett, to undertake an analysis which does not acknowledge this loss is partial at best and dishonest at worst.

I fear that this is a further example of the politicisation of the Scottish civil service. One would have expected in the past that the OCEA would have resisted pressure, had it occurred, to produce such a partial analysis.

This is an issue that clearly needs further discussion and debate.

 

Comments

[Ian Jenkins]

'increased productivity, investment and exports will raise the growth of the economy and generate more tax revenues'

Germany's formula for revitalising the competitiveness of its economy was recently summarised by a think tank there: Increasing exports was the aim; but substantial improvements in productivity [Scottish government's choice] were thought too difficult, so Germany decided it was best to focus on reducing cost instead. "The stagnation of wages dampened domestic demand and tax receipts, but allowed German exports to grow." http://www.theglobalist.com/germany-as-the-euros-real-loser/

It seems that Germany reasons that the world-wide system for economics is not about to change, despite reports that the White House wants to introduce political standards into global trade. Westminster doesn't disagree with Germany and is supporting Asia's new Infrastructure Bank; the US is not best pleased that apparently short-term profit comes before stability. Incidentally the US will be even less pleased if Australia follows the UK route, as is said to be likely later this week.

[Ian Jenkins]

The politicisation of the civil service needs further discussion and debate?

But it's the classic prisoner's dilemma. Who pays the piper tends to call the tune; even statutory checks and balances on finance to protect the public suffer from the conflict of interest. For example, the parliamentary inquiry into the international financial collapse in 2008 heard that auditors of £billions of public funds were dissuaded from performing their professional duties.

[Alan Weir]

The issue is not, it seems to me, Barnett and FFA but the transfers promised by Better Together, the 'Union Dividend' of around £7billion a year at 2014 oil prices- more now presumably- as a result of Barnett. You assume that with Full Fiscal Autonomy those transfers from rUK would no longer occur: "how can you be autonomous if you are getting a 'subsidy'?" is presumably the idea.

But no one thinks rUK is not fiscally autonomous because of the £3billion or so debt repayments from Scotland built into GERS. So the assumption here is that Scotland's share of UK national debt, which we clearly do have a moral obligation to pay, equates straightforwardly to a *net* liability of Scotland to the UK. Why on earth should the Scottish Government and the SNP accept that? They (and I) believe North Oil represents a giant mis-sold investment, dwarfing PPI scandals, in which the Scots were told by the Labour govt. in the 70s the complete opposite of what their expert was telling them in order to block a potentially unstoppable political drive for a Scottish oil fund (as recommended by McCrone it turned out) and for devo max. The result was Scotland sending, but not as a result of informed consent, a surplus of around 25% of its annual GDP to Thatcher during the oil boom.

In compensation cases in financial fraud and deception one runs counterfactuals: where would you be, granted average prudence, had Shyster Sam not defrauded you. Figures from e.g. the Cuthberts suggest Scotland would be £150 billion or so in the black, not the red, had an informed Scottish public voted for and got a FFA devolved government in 1979- given reasonable financial prudence (just sticking the 80-85 surplus money in gilts, for example).

So one model for FFA in 2015 is for Scotland to get full borrowing powers and £150 billion credit lodged in its opening FFA bank account by the UK govt. Since the UK borrowing that amount would be a bit tricky now, to say the least, another model is for the SNP, if holding the balance of power, to 'hold Westminster's feet to the fire' to the 'union dividend' over the next parliament, as part of the FFA settlement. That is to a transfer from rUK to Scotland equivalent to what we would have received under Calman; the rUK would be no worse off than it would have been, were the promises to be kept. This would not be a subsidy but a recognition of the net UK liability to Scotland even taking account of our liability to a share of UK debt. That would radically change the financial situation of a fiscally autonomous Scottish government.