Tuesday, 26 November 2013

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.

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