Financial reflections: Independence bonus or a UK dividend?

Angus Armstrong reflects on the implications of projections made by HM Treasury and the Scottish Government for the 'dismal science' of economics.

The publication of two official reports last week making apparently contradictory claims might appear to reflect badly on the 'dismal science' (economics). On the one hand, the Treasury report claims that Scots would be £1,400 better off each year by staying in the union. On the other hand, the Scottish Government claims that Scots would receive a £1,000 bonus per year if Scotland becomes independent. If the officials cannot decide, then is there any hope that the rest of us can make sense of their claims?

The short answer to the question - "who is right?" - is that the question just doesn't make sense. While this may seem like an annoyingly evasive answer, once the point is understood then the claims are actually quite revealing. In fact, they have more in common than they appear.

Put simply, the two reports answer two different questions. Let's take the Treasury report first. The question it seeks to answer is: if Scots choose to leave the UK how much will they be better or worse off per year than if they remain in the UK? Answering this question requires projecting the public finances of an independent Scotland into the future based on a starting point, the impact of policies which have been announced, economic trends over the medium term and the costs of operating as an independent country. The most important part of the calculation is the initial starting point.

Now let's turn to the Scottish Government report. The question it seeks to answer is: if Scotland becomes an independent country, and introduces better policies which have positive consequences for economic growth, then how much better off would Scots be per year compared to the remaining in the Union? The critical additional information for this figure is the extent to which the better policy making leads to an improvement in economic performance. The idea is that its better policy making as an independent country leads to faster economic growth and higher tax revenues.

How much faster economic growth is the Scottish Government assuming? The report suggests three assumptions: a 0.3% improvement in productivity per year, additional migration of 8,500 per year and a permanent 3.3 per percentage point improvement in the employment rate. Based on some fairly simple assumptions, the three assumptions together imply an improvement in trend GDP growth for an independent Scotland of 0.7 percentage points.[1] To add some context, this would be on top of the 2.2% trend growth for the UK predicted by the Office of Budget Responsibility. Considering that offshore GDP is likely to decline (the rate of decline is contested) this implies an even faster rate of onshore Scottish GDP growth.   

Now if we leave the assumed improvement in economic performance aside, the increase in the debt burden should be broadly similar in both reports. They will not be the same because of differences in starting points, costings, oil price scenarios and borrowing costs. But they should at least be in the same direction. Indeed both reports show that officials in both camps seem to agree that without an improvement in economic performance the debt burden for an independent Scotland will be on a steady upward path.[2] Perhaps, then, despite the seemingly contradictory headlines, it was not such a bad week for the 'dismal science' after all.




[1] We assume the increase in employment is spread over the eighteen year forecast horizon and that the employment rate for the additional migrants is the same as for the current population. 

[2] See Chart 4.12 in the Scottish Government's Report and A.2 in the Treasury's Report.  

 

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Angus Armstrong's picture
post by Angus Armstrong
National Institute of Economic and Social Research
5th June 2014

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