The White Paper vs the IFS

Many of the questions, both actually asked in the press conference, and hypothetically asked in the Q&A in Part 5 of the White Paper, drew a comparison between the optimistic assessment of Scotland’s economy from the Scottish Government against last week’s negative assessment from the Institute for Fiscal Studies.

Firstly it is important to note what the IFS actually did: they compared projected UK finances with projected Scottish finances, both under what can be labelled as “best estimate, given current policy”. What these projections show is that, under union, Scotland would either start to see large subsidies from rUK, or it would see its budget cut. Prof Brian Ashcroft has shown that Scottish funding has actually tracked Scotland’s net fiscal position reasonably closely (Has Scotland already spent its oil fund?) – there is no reason to expect this relationship to change going forward (especially when England and Wales are agitating about the Barnett Formula). The IFS report really said nothing about the finances of Yes vs No: it described the finances of Yes under the policies of No, and said nothing about either the finances of No under the policies of No or the finances of Yes under the policies of Yes.

What the Scottish Government’s White Paper seeks to do is outline some of the policies of Yes and to speculate on the finances. In the short run, p75 of the White Paper presents a budget for a newly independent Scotland that is more optimistic than the IFS. This is explained almost entirely by a more optimistic short run assessment of oil revenues:

In the long run, to avoid the tax rises or spending cuts needed under the IFS projection, the Scottish Government has to counter the demographic decline that is ‘baked-in’ given the current age profile of the Scottish population. There are two ways to do this and the White Paper describes policies in both areas.

The first way is to increase the labour market participation rates of, and hence tax take from, the current population. The policy of enhanced childcare provision is explicitly justified in these terms: enhanced childcare would allow greater labour market participation by parents who would otherwise have childcare responsibilities. Whilst the policy would have a spending cost it would also have revenue benefits from the expanded tax base. To the extent that such a policy also reduces the cost to parents of having children, it may improve Scotland’s long term demographic outlook if people respond to this incentive.

This enhanced childcare policy can be criticised as something that can be implemented under the current devolved settlement. But the current settlement essentially provides the Scottish Government with funds to implement its equivalent of policy implemented in England (the Barnett Consequentials). If England is not implementing this policy, then the funds are not necessarily there for its implementation in Scotland. Further, to the extent that the costs are borne now and the benefits seen in the future, the balanced budget constraint embedded in the block grant is not a good funding mechanism. Finally, the costs will be borne by the Scottish budget, so if this policy is to be self-funding, the increased tax revenues must also go into the Scottish revenue. This is not true under the current settlement (and it will not hold even under the enhanced devolution of the Scotland Act 2012).

The other way, and this is a policy lever not available under the current settlement, is to implement policy to attract more immigration. The White Paper expresses the desire for a more liberal immigration policy than that pertaining to the rest of the UK. Specifically this would involve a points based immigration system, and a reintroduction of the student visas removed by Westminster.

The Scottish Government’s task in outlining how the future will be more favourable under independence is difficult: if these policies are so good then why doesn’t the UK Government implement them? But on immigration especially there is a clear dividing line: The IFS report assumed that the ONS low migration scenario was most consistent with current UK Government policy. In this White Paper, the Scottish Government are clearly expressing their desire that immigration be higher than this.

End October Links

# What does the long term price guarantee for electricity given by the UK Government (UK nuclear power plant gets go-ahead) say about Prof Gordon Hughes's contention (at last month's International Conference on Economics of Constitutional Change [slides and paper here]) that given current high prices, we should expect energy prices to fall, and that English consumers are unlikely to want to buy low carbon electricity from a renewables-powered Scotland?

# Of academic interest:
   - The Fractal Market Hypothesis and its implications for the stability of financial markets (related to Mandelbrot's 'The Variation of Certain Speculative Prices')

# Wayhey!? Nuclear fusion milestone passed at US lab: "during an experiment in late September, the amount of energy released through the fusion reaction exceeded the amount of energy being absorbed by the fuel - the first time this had been achieved at any fusion facility in the world"

# Borrowing from the Future — Except that We Aren't: "At an individual level, borrowing is truly borrowing from the future.  At a population level, borrowing is the creation of assets and liabilities across different people.  People like King are committing a fallacy of composition. Incidentally, we are borrowing from the future.  We are shirking the investments we need to make so that our children and grandchildren can live in a habitable world with a well-educated population that enjoys a productive infrastructure.  No fallacy of composition there."

# Interfluidity say that Mobility is no answer to dispersion: "If we augment standard utility functions with plausible notions of habit formation and social reference group comparison, the case against mobility grows even stronger. The cost and shame of downward mobility dramatically outmatches the potential benefit of upward mobility...A functional polity values rising fortunes across the wealth spectrum, but it fears and resists falling fortunes much more strenuously. I would go so far as to claim this is a universal social fact, a characteristic of all polities that endure. Capitalism is always crony capitalism — and socialism tends towards crony socialism! — not because of corrupt bad actors but because human lifestyles are sticky-downward. Large social divergences can in practice be remedied smoothly only by convergence upward from the bottom. The wise course is to prevent extreme divergence from emerging in the first place. Once it has, the only way out is to hope for growth, and to direct the fruits of growth towards the bottom of the distribution."

# Great idea from Chris Dillow: Shares in people

# From the ESRC's Future of the UK and Scotland project blog: How the SNP can still win the vote for an independent Scotland "Poor rates of economic growth, high levels of emigration and appalling social and health conditions of Scotland should be difficult to defend. If independence is to be judged over the long haul, so too should the union. Yet supporters of the union have been under little pressure to defend Scotland's miserable record within it. Historians will look back on this campaign and ask why unionists were not on the defensive given this poor track record."

# George Rosie Losing the Heid - this has to describe the losses that come from being a peripheral region of a large country (as well as a peculiarly British attitude to corporate ownership). Such losses might well be simply reallocative (and may even represent aggregate efficiency gains) but they are certainly losses to those of us who live in Scotland (and north England, Northern Ireland, and Wales). I suspect once imperfect information and agency problems are included in the analysis that they likely also do not represent aggregate efficiency gains.