Saturday, January 27, 2007

Vote for Scottish independence and accountability

Scottish independence is in the air. It's the 300th anniversary of the Act of Union and people both sides of the border are restless with the settlement. In Scotland, partial devolution has intensified the hunger rather than quench the thirst for complete autonomy and the governing Liberal-Labour coalition is losing out to the opposition separatist Scottish National Party. Proud Scotland with its traditions and distinct identity would be more than at home as a distinct state in the European Union. Eight members of the current EU have smaller populations than Scotland's 5.1 million, which lies between Finland and Ireland - two of the EU's success stories.

So what are the costs and consequences of independence...?

In England, perhaps we are irritated by the West Lothian question - why do Scots MPs get to vote on English matters for those subjects that are devolved to the Scottish Parliament, such as health, education, environment and most social policy [see devolved and reserved matters]? We also suspect that English taxes are propping up a bloated unreformed Scottish public sector, which is quick to brag about the perks that it offers to Scots - like abolishing tuition fees for Scottish universities [see Scottish Labour spending brags] - without bothering to use its tax-raising powers to pay for them. Perhaps we English gripe that public spending in Scotland is £7,597 per head compared to £6,361 - 20% higher (See Table 3.1 in the accounts) through the Barnett Formula. And we are probably tiring of embittered Scots blaming us for their woes and refusing to support our football team at events like the World Cup, which they didn't qualify for [see The Scotsman theme on World Cup allegiance].

And opinion really is moving... polling for the Telegraph (here) now shows majority support for Scottish independence in both England and Scotland - and slightly more in England. I have to say, I'm for it. In fact, I'm so for it that I think England should declare its own independence from the United Kingdom, and force the issue, though I doubt that will ever happen. Scottish independence would give Scots an unambiguous identity and control over their own affairs. Most importantly, it would introduce accountability and a better democratic relationship between taxation and representation.

As FT columnist Martin Wolf puts it, "Scotland spends like Finland, but taxes like Canada" [view column]. And this is right: Scottish Executive accounts show that expenditure is about 51% of GDP whilst income is about 39% of GDP - making a huge 12% budget deficit. Ah, but what about North Sea Oil? Well revenue was 5.2 billion in 2004-5 (see chart & data) - so even if all the government revenue and all the contribution of N. Sea oil to GDP were added to Scotland's accounts, the deficit would still be a hefty 4.8% of GDP (see Scottish Executive discussion of oil revenues). Note that this would exceed the constraints of the EU's fiscal rules which limit member state budget deficits to 3% of GDP (the excessive deficit procedure - Art 104 of the Treaty) and independent Scotland may not be allowed to join without first being an 'accession state'. The fiscal position should improve, at least briefly, because N. Sea oil revenue is rising. But the point is this - the independent Scotland has extremely weak public finances. Independence would mean fixing that as well as incurring very large 'setup' costs as British institutions are separated into national components like a divorcing couple dividing up the home and possessions (who will get the Inland Revenue computer?).

The effect on Scotland of having to correct a long-term structural deficit would be profound - there would be an imperative to raise taxes and tackle public spending - the exact opposite of the comfortable Scottish political consensus. A cushion of some N. Sea money would help, but long term, it would have to take on greater austerity and reform - and live within its means within the European Union. I'd love to see Alex Salmond of the SNP taking that particular medicine to his people!

An interesting and mischievous alliance is developing between Scottish Nationalists and English Conservatives. The latter would like to see the Westminster Parliament constituted as an English parliament for devolved issues, with Scots and (sometimes) Welsh not voting - which would deprive Labour of its majority and possibly give them an English majority after a further election. It also keeps the heat on the very Scottish Gordon Brown. The Nationalists have been awakened to the cause of the under-represented Englishman. From opposite ends of the political spectrum, both are edging the centre of political gravity towards independence. I'll be looking forward to the Scottish elections on 3rd May 2007 - they could be very pleasingly disruptive.


Caspar Henderson said...

I am attracted to the idea that independence for both Scotland and England would force greater responsibility and honesty on the politicians of both countries as they confronted. I hope this is not a fantasy, and I hope it would not contribute to a narrowing of sense of indentity where people defined themselves by the deeply impoverishing label of nationality.

You estimate that "even if all the government revenue and all the contribution of N. Sea oil to GDP were added to Scotland's accounts, the deficit would still be a hefty 4.8% of GDP". My guess -- and I imagine yours -- is that the Scots would have to concede the English and Welsh (and other minorities within the rump state - e.g. approx 1m of Pakistani origin) a proportion of revenues -- say a 60:40 split in favour of Scotland (unless justice follows geography in which case more should go to the Norwegians?).

That aside, how much of an asset would oil and gas revenues really be if we are serious about a carbon constrained world -- aiming for, say, maximum atmospheric concentrations of 450ppm CO2e or less followed soon by rapid reduction. Scotland might do better to sell wind and tidal power rather than gas and oil to England. In this form, Alex Salmond could still be a petit Putin vert with nice offices in Washngton, Paris and Beijing.

I worry the costs of divorce could be very large. What about a new constitutional arrangement that is neither full independence within Europe (whatever that may mean as Europe likely moves towards a new constitution) nor the old United Kingdom: two (confederated?) states (länder?) that require greater fiscal responsibility and accountability but without the price of two entirely separate eternal homelands? Hard to think of models that work. Catalonia's struggle with [the rest of] Spain is hardly one. Maybe the Germans got there first?

Anonymous said...

Disclaimer: I'm writing this 3 months after it was first posted it and have the benefit of being able to call on more recent events and articles in support of my argument. Sorry this is all a bit disorganised, I'm pushed for time, and was so pleased to see someone correctly cite the 51% government expenditure as a proportion of GDP figure correctly that I had to respond! (I've seen so many newspaper articles and political statements saying government accounts for 51% of Scottish GDP that I'm ready to gnaw my own arm off -- this form is incorrect for the same reason conflating profits and turnover is incorrect; the reason expenditure is stated in proportion to GDP is to enable cross-country comparisons, and it's only through comparison that it becomes particularly meaningful).

Well, the failure to solve the West Lothian question ahead of devolution was a major fault (although given that it was first raised in the 70s by Tam Dalyell, it's not exactly new). So how can it be resolved?

I don't think Scottish independence is a good answer; that still leaves Wales and NI. Strange how we hear so little of them in relation to these questions... I'm sure the fact that losing them wouldn't help the Conservative party so much has nothing whatsoever to do with that. And even if Scottish MPs do tip the balance of power against the Tories nationally, after the Thacher years, I think Scots are entitled to savour the irony of tables turned for a short while at least.

But I digress. Those spending figures look a bit grim. But a little thought should show they aren't actually that surprising. Those public spending figures come from the Government Expenditure and Revenue in Scotland or GERS (pronounced like the nickname given to Rangers Football Club, which is approproiate since it's one of the biggest and most bitterly contested political footballs the Scottish Executive produces). The spending per head figures for 2004-05 are:

England: 6,361
Scotland: 7,597
Wales: 7,248
NI: 8,216
UK average: 6,563

We don't have expenditure estimates for the English regions. We don't have revenue estimates for anywhere other than Scotland or the UK as a whole. GERS is unique in that regard. If revenue estimates were calculated for Scotland and NI, I'd jump at a chance to bet that after apportionment of oil and gas revenues (by whose territorial waters they lie in) Scotland comes off much better than either of them in terms of deficits. But this is to look at Scotland as a separate sovereign nation, and that's inappropriate (the SNP have exploited this category error masterfully, and commentators used to dealing with macoeconomic stats think they can switch to interpreting regional stats without breaking step) -- English regional estimates would show similar deficits; London and the South East would be funding these; perhaps they should split off? The fact is you'd see these patterns of flows of resources between regions whichever country you chose to look at; it's only because 300 years ago Scotland was independent, and the SNP are riding high on Labour protest votes (you'd see plenty of those elsewhere were a general election called in May...) that it's become an issue. Funding in the UK at all levels is determined by *need*. Yes, it's very difficult to do this objectively, but there are approaches. Wales and Scotland get more because they're more remote, have much lower population densities (so cost more to provide the same standards of services to), and are starting from a lower baseline, in large part due to some pretty shoddy governance before devolution. I know some Scots can go on about decades of Tory misrule, it annoys me as well, but I have to concede that at the very least for the Thatcher/Major years they've got a point. And lets not forget that it was the astonishingly rapid draining of North Sea oil and gas which funded the Thatcher years, the majority of which was from Scottish waters -- that's the only way she could have taken on the unions and funded unemployment benefits during the massive restructuring of the British economy -- if England were to unilaterally declare independence now that North Sea oil volumes are tailing off, I'd call that one hell of an asset-stripping job.

The independence poll figures have turned out to be rather soft (that or something funny was going on with the sampling) -- it also turns out that when if you ask whether people want an independent Scotland outside of the UK the majority disappears (apologies for not being able to find the citation for this, but check more recent polling data; it appears there is no Scottish majority in favour of independence after all).

But in England..? Well for starters let's deal with the football issue. Now, I'm very glad I stumbled across this blog, I like your writing, but this is probably going to sound a little sharp. I've been astonished at the sheer prissiness of the English media over the world cup issue. I have to wonder whether the people who come out with this stuff actually watch much football. Scotland and England have a great sporting rivalry, that's a fantastic thing. Expecting all Scotland supporters to fall in behind England would be like expecting Manchester City fans to fall in behind Manchester United. Ain't gonna happen (although a sizeable proportion will, and many Scots did support England in the world cup), but then... why would that matter?

This is not to say there's no anti-England bigotry in Scotland, there is. The reverse is the case too, although lesser due to the power and size disparities involved, but I've heard some pretty nasty stuff directed against Scots in England, and I've taken a beating there myself for being Irish, but I'm not so much of a fool to generalise that to England as a whole. Even on lesser issues, the sort where there is a reasonable case for talking about whingeing Scots, these aren't majorities you're hearing from, it's a much smaller number of noisy people (noisiness disproportionate to size seems to be a common trait among nationalists of every stripe...). The nature of the news agenda inevitably creates a distorted impression of the national mood, and I think the impression it has given is partly a contributor to English dissatisfaction.

But still, there's the West Lothian question.

There are still issues that can only be resolved at Westminster, so Scottish representation is still necessary in these cases. The fact that the UK parliament also performs the functions of the Scottsih Executive for England isn't actually favourable to Scotland, either. UK legislative time is still needed where reserved matters are involved, but actually getting that time is often nigh impossible. There are still plenty of government departments, NDPBs, etc whose work impacts on Scotland and the Executive's remit, and consultation on these has been frankly pisspoor in many places. With Westminster playing a dual role of English Parliament and UK parliament, there's always going to be problems; not just Scottish MPs voting on issues that don't affect them, but other nations in the UK are going to find it difficult to believe that Westminster represents them effectively. To my view, this would be the ideal time to introduce the F-word. Federalism is the obvious solution. Devolved English regions with a reduced UK chamber. Unfortunately not very realistic. However, there is a lesser compromise. A separate English parliament. A Newsnight poll found 65% of people in England supported the idea, but it was quickly dismissed by Tony Blair. A Brown government, on the other hand, might have more of an incentive to consider this solution, particularly if opportunistic attacks on his Scottishness from the Tories continue to bite. I'd consider regional assemblies (with some aggregation of broadly similar regions to keep the number down) a better solution for England, but that's
difficult to pull off after the first attempt Labour made at it was rejected by the voters (although it may not be dead yet. Had they waited till now to hold the referendum, Labour might well have won it...).

I should concede, though, that there is a problem with the Barnett formula. I'm all for allocating resource on the basis of need, it's long been the policy of many governments, and politically, morally and practically I think it's the Right Thing To Do. But even holding this belief, Barnett is open to attack, because the Barnett squeeze has failed to happen. The Barnett squeeze refers to a property of the allocation formula (essentially based on govt expenditure on each of the devolved functions outside of Scotland, but not hypothecated) which should see funding levels between Scotland and England approach parity over time. The reason the squeeze hasn't happened is that the Scottish population didn't grow as fast as it was forecast to (didn't grow at all in some years), so the squeeze was very light indeed. I expect this to be less of an issue now that population is rising again, but the Comprhensive Spending Review could correct for this, and there's actually a strong appetite for a change to the devolution settlement to provide more fiscal autonomy to the Scottish Executive, especially from the Lib Dems (I should say I favour their idea of a new constitutional convention to look at extending the Executive's powers).

I don't expect Scottish independence to happen any time soon, though. The SNP have pushed back their promised date of a referendum by 4 years to try and win over voters understandably rather nervous about the idea of a party with no organisational experience in government (let alone any people with experience) leading Scotland through the process of becoming independent. I don't expect the SNP, even if they get in, to cover themselves with glory; I don't think they're up to the job of government yet, and 4 years in that will be more obvious, and thirst for independence will die back. The reason the SNP are doing well is not apetite for independence, but disenchantment with the UK Labour government and a lack of appetite for a 3rd Lib-Lab term. The SNP and Lib Dems may come to a deal over the referendum (Lib Dems have been publicly saying they will refuse to enter a coalition with the SNP if an independence referendum is part of the deal, but with the recent softening of the SNP position (from referendum within 100 days to referendum after 4 years) it's not beyond the realms of possibility that Nicol Stephen could end up with the keys to Bute House. I imagine that would rather please Lib Dem supporters at least across all the UK...

There are risks. Firstly, the SNP could play the role of wreckers (for that matter, so could Labour south of the border). Cooperation on common issues with Whitehall is difficult enough at present with two Labour administrations... I shudder to think what it'd be like if the SNP get in. If the SNP can successfully argue to the ensuing problems as a case for independence, that would worry me. The first test of devolution with a government of a markedly different complexion (leaving aside NI) and it's going to have the independence issue to deal with at the same time. Smashing. Longer term, the decline of North Sea oil volumes and the realisation of just how badly Scotland lost out (there are subtle economic arguments to be had here, about the "resource curse" and management of oil revenues, but on balance I think the point more than stands) could fuel enough bitterness to garner enough support for independence.

I'd be disappointed to see Scotland become independent; I think it's contribution to the UK as a whole is often undervalued (although that's hard to avoid with a political battle over independence being waged), and both countries would be diminished as a result. I'd be especially sickened if the motivation turned out to be based on a por understanding of regional and spatial statistics. I can't say I'm completely detached, I've thoroughly enjoyed my few years living in Scotland and sure I'll enjoy the rest of my time here before I move back to England, but I believe there are certainly objective grounds to worry about whether the way debate over independence has been conducted on both sides of the border has given an accurate or considered picture of the state of the union.

(As to why I turned up to respond to this 3 months after it was posted, Google listed this as posted yesterday at this rather odd looking site, so I googled to see if the same post turned up elsewhere. I was very happy to see those expenditure figures quoted correctly for once!)

Anonymous said...

Addendum to above:

Okay, it seems we do have GERS-like estimates for other regions of the UK after all, if a reference in the FT here to a study by Oxford Economics is anything to go by:

Scotland does, indeed, have continental European public expenditure levels with UK tax rates, the paper estimates, but Wales, Northern Ireland and north-east England receive bigger subsidies. If they were independent, each would have a budget deficit greater than 19 per cent of the regional economy. Big fiscal transfers within the UK are certainly not unique to Scotland.

Clive Bates said...

Dear anon - thanks for your stunningly good comment! So much to say...

Let's start with the major issue: I don't think the Man United / Man City analogy works... I'm a Man United fan myself, and I don't see Scotland like Man City - more like Everton. I do think that Scots see Man United as Man City supporters would - but it's that the asymmetry that looks so feeble from down here. (But your point is a good one).

Glad you are on the case about public spending - the misunderstandings of public spending are absurd... government spending does two main things: it produces outputs (health services, education, law enforcement) that are just as important as any other part of GDP (often more) - they are just purchased collectively through the tax system. It also organises welfare transfers such as social security, housing benefit... the two should never really be conflated or misunderstood...

There are regional public spending stats - see HM Treasury pages - and they do support the general idea of flows to the English Northern regions being in an almost similar ball park - see this one for example (XLS) UK regional public spending. But then these regions they aren't considering independence. You can find this income disparity at virtually any scale - even within the richest borough in the country, Kensington and Chelsea, there are some very poor areas. It isn't surprising that we spend more in these poor areas because much of our public spending system has redistribution hard-wired in... for example the local government spending grant, NHS budget, policing - all have formulae that spend more on the poor areas. The problem is that these formulae are not applied consistently across Britain, so larger flows go to Scotland than would go to a English region with the same level of poverty or overall need.

On the W. Lothian question... it does need to be solved simply by constituting the Westminster parliament as an English parliament when it considers issues devolved to Scotland (and/or Wales) - the Scottish MPs just need to stand aside on these issues. The problem can only get worse and be brought into sharper relief by what will inevitably be a pasting for Labour on 3 May. Of course, Blair and Brown hate it because their guilty little secret is that they don't actually have popular majority in England.

I think the SNP are playing their hand well - and not frightening Scots with a swivel-eyed bagpipe-led march to independence. But the clamour for it will grow. I never understand those that imagine the value created by the UK will somehow be lost... the other day I heard someone from Scottish Labour saying why would we want to turn our biggest partner into our biggest competitor - that just completely fails to understand the mutually advantageous trading relationship that binds the two countries... and that would not change... (why should it?)
Scotland will continue to contribute to England and vice versa, even if they are independent states within the EU. What exactly does the UK do that the EU can't?

Oil upsets everyone... On the timescales of the great sweep of history over which things like devolution or independence will be judged, the oil is basically irrelevant... it might be useful as a transitional lubricant, rather than fuel for a future resource dependent economy.