Differing assumptions on iScotland’s public finances

We have two weighty reports today on Scotland’s public finances post independence, one from the Scottish Government and the other from the Treasury. The numbers are some way apart and that’s due to their respective assumptions, not a dodgy calculator.

The BBC has done a good job of summarising the claims in both reports with some nice info graphics. So I will focus on two key areas – start up costs and public finance projections, both key concerns for UNISON members.

The Treasury has published a projection for the costs of creating government departments for an independent Scotland. Based on LSE estimates that it costs around £15m to set up an individual department, this means a £2.7bn bill to replicate the work of the 180 government departments and agencies in Scotland. They have previously estimated that a new benefit system could cost £400m, while setting up a new tax system could cost as much as £562m.

In my view this calculation is mince and I note that one of the LSE researchers has also said as much. Only four wholly-new departments are needed – defence, foreign, HMRC and a Scottish Department for Work and Pensions. Crude calculations like this do nothing for the UK government’s credibility in this debate and undermine much better papers in the Scotland analysis series. They can of course, with some justification, point to the absence of costings from the Scottish Government on this issue. John Swinney’s argument that we are saving on the putative Revenue Scotland, is a bit thin.

The Scottish Government is on much stronger ground when it brings Scotland’s share of the UK’s £1.3 trillion public sector assets into the debate. The Treasury’s Whole of Government Accounts for 2011/12, shows a total public sector estate in the UK worth £745bn and financial assets worth £288bn. Although much of Scotland’s share will already be domiciled here, less the bits we don’t want like Trident!

Let’s move onto the more substantial part of both papers, the assessment of public finances.

Here the Scottish Government outlines a much more optimistic medium term picture for Scotland than the IFS and others. The Scottish Government’s paper claims that total spending in Scotland in 2016-17 would exceed revenues by 2.8% of national income – more optimistic than the Treasury paper and the 5.2% deficit forecast for Scotland by the Institute for Fiscal Studies (IFS).

The main reason for the difference is varying forecasts for revenues from North Sea oil and gas. The Treasury and IFS used the Office for Budget Responsibility’s projections. The Scottish Government report uses their own, higher forecasts. Their figures assume that Scotland will receive £6.9bn (or 4.1% of Scottish GDP) in tax revenues from offshore oil and gas production in 2016–17, rather than the £2.9bn (1.7% of GDP) forecast by the OBR. David Bell from Stirling University puts this in perspective by explaining that the difference exceeds the annual revenue from council tax and non-domestic rates combined.

David Bell has explained these forecasts in some detail and is worth a read. However, the bottom line is that oil revenues are both volatile and notoriously difficult to forecast.

There is another problem with the Scottish Government’s position that IFS has previously highlighted. In the longer term, Scotland’s ageing population will place greater strains on public finances and revenues will decline as oil and gas reserves are depleted. The Scottish Government claims that this can be addressed in their scenarios for increasing productivity, employment and population growth through immigration. These may happen, but again they are optimistic scenarios, not for the cautious or faint hearted. In addition, public service spending per person usually increases in line with productivity growth, so unless relative public spending was to decline, it is difficult to see how these scenarios make that much difference.

As is often the case with the referendum debate, these points depend on assumptions and forecasts that don’t have a strong track record for accuracy. You certainly wouldn’t bet the Friday night pub kitty on them, let alone your mortgage. The UK public finances don’t look good, but it also requires a leap of faith to accept the Scottish Government’s alternatives.