Friday, 30 May 2014

I'm in the New Scientist!

But I'm not particularly happy about it! The article is entitled Scotland: What if independence goes horribly wrong? and I'm quoted as saying "Raising tax rates to provide pensions could be a self-defeating policy if it leads to an exodus of workers"...

The actual exchange with the journalist was:

I’m writing about how Scotland’s aging population could be a problem post-independence, and was hoping you could answer a few questions:

1.       Is the pension cost gap between Scotland and the UK that you describe a significant problem for Scotland, or just a minor difference?
The pensions cost gap between Scotland and the UK, based on the Office for National Statistics 2012 (ONS2012) projections, is a minor issue for an independent Scotland. This difference, projected to peak in the late 2030s, means that to pay equivalent pensions across both Scotland and the rest of the UK (rUK), would require workers in Scotland face a tax rate that was between 0.5% and 1% higher than that of rUK.

This should be compared with the absolute costs of an ageing population. This extra cost to Scotland is much less than the increase in pension costs that both Scotland and rUK can expect to face over the next half century due to an ageing population (maintaining current pension policy in the UK without diverting funds from elsewhere will require an increase in the tax rate that workers face of around 6%). Looking across the advanced countries of the OECD, there is a wide variation in the projections of demographic change. On this comparison, Scotland and rUK are almost indistinguishable, and are relatively well placed: the costs of an ageing population are even higher in Germany, France, Italy and Spain for example.

2.       How politically difficult would it be to implement the immigration fix you describe?

To eliminate the cost difference between Scotland and rUK through increased relative immigration would require that rUK follow the central projection from ONS2012, whilst Scotland follows the actual experience of 2000-10. The experience of 2000-10 is clearly politically feasible at least in terms of annual flows since it has been followed for the last decade without provoking any great public reaction in Scotland. It was however a period of above average (relative to a longer historical view) net migration into Scotland, especially due to net migration from rUK and from Eastern Europe.

3.       How does this problem relate to your other paper on constitutional change and inequality? If I’ve understand that correctly, Scotland would need large tax rises to tackle inequality, which is presumably at odds with paying the pension bill?

Reducing inequality through raising taxes clearly raises revenue. This revenue could meet the cost of paying pensions so there is no conflict in principle between reducing inequality and meeting the costs of an ageing population.

My paper with David Eiser on Constitutional Change and Inequality in Scotland made the point however that the exercise of fiscal policy to reduce inequality (say by raising taxes) could have adverse impacts due to labour force movements. This is an especially important point to consider when deciding on the tax rate to charge to fund pensions: providing pensions requires a working next generation, so raising tax rates to provide pensions, if it leads to an exodus of workers, could be a self-defeating policy. As discussed above though, this is an issue of relevance to the whole of the western world, not particularly an issue with Scotland or the UK per se.

And they linked to the wrong David Comerford!

1 comment:

  1. It's quite a coincidence that there are two economists called David Comerford at Stirling University. Apologies for mixing you up - that was my fault. We've corrected the link now. Valerie Jamieson, features editor, New Scientist