Growth Commission - Embracing Austerity
From the archive — published in 2018 on the original Chokkablog, kept as it was written.
Recap on Growth Commission GDP/Capita Growth Rate AssumptionIn previous blogs we've seen that the Growth Commission assumes an independent Scotland would achieve a GDP/Capita growth rate +0.7% pa greater than it would if remaining in the UK.
The justification for this figure is extremely tenuous, relying on including Hong Kong and Singapore in their comparison set despite explicitly rejecting those countries' low tax, high income-inequality economic models.
Remove Hong Kong and Singapore from the comparable countries' growth rate analysis and +0.7% becomes 0.26%. If this were the case, instead of the 25 years the Growth Commission assumes it would take to generate an additional £9bn pa of revenue, it would take 67 years. £9bn is of course less than the £10.3bn effective fiscal transfer Scotland received from the rest of the UK in 2016-17, something we would of course lose on day one of independence.
To test that assumption further: if we look back at the Independence White Paper, the equivalent figure used then was in fact only +0.12% pa - on that basis it would take over 140 years to achieve the aspired-for increase in GDP/capita.
Finally, if we look at the performance of the three countries the Growth Commission explicitly cites as being those they seek to "learn in particular from" (Denmark, Finland and New Zealand) then the superior growth rate (using the Growth Commission's chosen data source and time period) becomes an immaterial +0.06%. It's a daft calculation of course, but on that basis it would take nearly 300 years to achieve the Growth Commission's target for superior GDP/Capita.
Implications for Austerity in an Independent Scotland.
The Growth Commission doesn't do us any favours when it comes to "showing their workings", but the projected deficit figures in section B are relatively easy to recreate because the analysis they use is not much more than "back of a fag packet" stuff anyway.
I've recreated all of the deficit/GDP figures used in the Growth Commission report (by going back to the source data and applying their stated assumptions) and - because I'm nice like that - I've put them in an easy to understand graphical format.
What we're looking at here is historic data per GERS, forecast to 2021/22 per IFS and then the Growth Commission's forecast to their Year 10 (per Figure 12-2). The black line is revenue/GDP, red is spend/GDP and therefore the gap between the two lines is deficit/GDP.
The step-change between IFS and Growth Commission figures is a function of the Growth Commission factoring in some additional Brexit downside (per the Nov 2017 OBR report), removing the relatively small amount of Oil revenue that was in the IFS figures (£0.7bn) and then making the very optimistic assumption that Scotland would save c.£2.8bn1 compared to spending allocated in GERS.
This £2.8bn assumed saving is more than 4x the £0.6bn that was assumed in the (notoriously optimistic) Independence White Paper and relies on some heroic assumptions1 which we may come back to in another blog.
More importantly: no allowance at all is made for any "economic-shock" effects of Scotland separating from the UK. If the UK leaving the EU has negative economic consequences (as the Growth Commission assumes), it's frankly ridiculous for them to create financial projections that don't allow for any economic shock from Scotland leaving the UK (a market we trade 4x more with than we do with the EU).
Now look at what the graph shows: the closing of the deficit comes pretty much entirely from reducing spend/GDP. Of course there's a numerator and a denominator effect here: the Growth Commission asserts that this can be achieved without real-terms spending cuts because GDP (the denominator) will be growing faster in real terms than spending (the numerator).
The assumptions made are in fact extremely crude . They don't even refer to the +0.7% superior GDP/Cap growth rate analysis from earlier in the report, which makes me wonder if that analysis was added later as they scrambled to find some tabloid-friendly headline figures?
The Growth Commission's assumption is simply that real GDP growth will be 1.5% pa and real Public Spending growth just 0.5% pa. Of course this means the numerator (spend) is growing more slowly than the denominator (GDP) and so spend/GDP reduces, as we see on the graph.
This is really important: if GDP growth drops to 1.0% pa or less, the Growth Commission is implicitly assuming that spending would be cut in real terms (to maintain the rate of reduction in Spend/GDP they project). This is why so many commentators have referred to the Growth Commission "embracing austerity";
- They assume we inherit another 5 years of austerity spending measures and yet don't seek to reverse those cuts on day one - implicitly accepting that today's cuts are necessary to get our economy on a path to being fiscally sustainable
- They assume that we will continue to drive towards achieving a deficit of under 3% of GDP through reducing spend/GDP, rather than by increasing the tax take (revenue/GDP)
- A corollary of this is that they don't assume we can increase spend/GDP to grow the economy. This is a realistic assumption give their "sterlingisation" recommendation, but one that will cause a lot of head-scratching among SNP supporters who bought into their "anti-austerity" rhetoric
But the point here is not just about whether or not we will be able to achieve real spending increases while pursing the Growth Commission's economic model (i.e. whether or not we can achieve the GDP growth rates they assume). It's also about what their hoped for 0.5% pa real-terms spending increase would actually feel like for the people of Scotland. To provide some context: over the 11 years between 1999/00 and 2010/11, average annual real spending growth in Scotland was 4.0% pa; in the 6 years of austerity between 2010/11 and 2016/17 average annual real spending growth has been 0.0%2 pa. Basically, 0.5% really isn't very much at all.
It gets worse though, because the figures the Growth Commission projects are absolute GDP based3 not GDP/Capita. Given the recommended push for greater net inwards migration, the impact on a per person basis of this hoped for growth would be significantly diluted.
I'm really just playing with numbers here now, but 400,000 has been quoted as a net migration target: to achieve that over a decade would imply 0.7% annual population growth in Scotland, enough to turn a 0.5% real spending increase into a real decrease in spend per person.
However you cut it, even if we were to achieve the optimistic growth rates and spending cuts the Growth Commission assumes, their commitment to fiscal prudence means the people of Scotland wouldn't see the benefits in terms of meaningful public spending increases.
I'm really just playing with numbers here now, but 400,000 has been quoted as a net migration target: to achieve that over a decade would imply 0.7% annual population growth in Scotland, enough to turn a 0.5% real spending increase into a real decrease in spend per person.
However you cut it, even if we were to achieve the optimistic growth rates and spending cuts the Growth Commission assumes, their commitment to fiscal prudence means the people of Scotland wouldn't see the benefits in terms of meaningful public spending increases.
To illustrate the aggressive nature of the Growth Commission's Spend/GDP assumption, we can plot the graph above on an "onshore economy" basis only (to exclude N Sea oil volatility from the historical spend/GDP data)
George Osborne would have been proud.
***
Notes
1. These are not clearly laid out, but the assumption is £0.7bn of effective debt interest saving, £0.7bn from defence, and £1.4bn from allocated UK Government spending (Whitehall costs etc) - so a total saving of c.£2.8bn. It's worth noting that the equiavlent number in the Independence White Paper was £0.6bn
3. see page 96, B12.18