Sunday, 26 February 2017

And another thing

I was meant to be working this weekend. I've just finished a big, year long case on Tuesday past and I'm meant to be doing the account. Trouble is, it will be an incredibly boring job. So for the moment, I've put it off. But it will need to be done sometime. For my staff won't wait to be paid or my landlords wait to demand their rent. Never mind that, my stomach will not wait to start rumbling. Accordingly the account will have to be done sometime. You can't spend money you don't have.

Anyway, what's all this got to do with me, I hear you, my loyal band of readers, ask?

That lies in the final sentence above. You can't spend money you don't have.

More specifically, the Scottish Government couldn't spend money it wasn't going to have.

According to the Scottish Government's own GERS figures, there is currently an annual £15 Billion shortfall in funding public spending undertaken in or on behalf of* Scotland. £6 Billion of that is our share of the interest on the UK's National debt but the remaining £9 Billion is spent on Welfare Benefits, Pensions, Health, Education and other public services.

Not all of this spending is of course currently undertaken by the Scottish Government. Particularly, the first two big ticket items remain administered directly from Westminster. At least for the moment. But most other public expenditure in Scotland is routed through Holyrood, albeit then being passed on to local government, health boards, NDPBs etc to bring about the actual delivery. And in the process we are receiving, as I say, £9 Billion more to actually spend than we are earning.

Now, £9 Billion is a big figure and people's eyes sometimes gloss over when faced by big figures so I'll try and give that big figure some context. Excluding our share of the interest on UK national debt, the total figure for public spending in Scotland is £62.6 Billion, so that £9 Billion "gap" is more than 14% of the total spent. Put the debt back in and the gap becomes £15 Billion and the overspend percentage jumps to 22%. The total spending managed by Holyrood is £37.1 Billion, so the £9 Billion gap is about one quarter of total Holyrood spending. Total spending on the NHS in Scotland (Holyrood's single largest area of expenditure) is £12.9 Billion, so the £9 Billion gap funding pays for just about three quarters of that total.

But the £9 Billion, although starting as a big figure doesn't remain that. It is not paid out in Billions, And it is not paid out for abstract "public services". It is overwhelmingly paid out in relatively modest amounts as wages, pensions and welfare benefits. And the vast majority of its beneficiaries, even if they are being paid to deliver essential public services, need that money to feed themselves and their families, to pay their rent or their mortgage and to provide heating and lighting for their homes.

After independence that money wouldn't be there. It wouldn't be the abstract Billions that wouldn't be there, it would be the money to pay the wages, pensions and benefits that wouldn't be there. Sure, some of it could be produced by increased borrowing but, even assuming a willingness of the markets to lend, borrowing on that scale, including borrowing to service our share of UK Debt, at 22% of revenue, would never be sustainable. Indeed, for a new State with no credit history, it probably wouldn't even be possible.

So taxes would need to rise (a lot) or spending would need to be cut (a lot). Indeed probably both.

The trick the Nats pulled in September in 2014 was threefold. Firstly they took as the starting point a wholly untypical historic point in Scotland's finances, Secondly, they proceeded on a ludicrously optimistic estimate for the future price of oil and the tax revenues that would consequently produce. But their third prong was the masterstroke. Nothing was to happen immediately. By their hope, by the time the electorate realised the trick that had been pulled on them it would be too late to turn back. The economic consequence of independence would only become clear once we were actually independent. Until then our funding would continue as before.

But why should the residual UK agree to go along with that this time? Why, until they actually left, should they agree to continue to subsidise people who had, by majority at least, decided they wanted nothing more to do with them? If you earn much more than your husband and he announces his intention to leave you for somebody else, you don't keep paying for his fancy car until he actually goes. Not unless you are an idiot.

So why should the taxpayers of England be idiots? They shouldn't.

If there is to be another vote, the immediately preceding UK budget should indicate what Holyrood would receive under the "pooling and sharing" status quo until the vote and indeed in the event of a unionist victory. Separately however it should state what Holyrood would receive on the basis of "you only get what you've earned" in the event of a separatist vote and until actual Independence. And they should state that the second formulation, in terms of actual payment, would start on the day after the vote.

Holyrood couldn't of course be expected to cope with an immediate 25% cut in its revenues, so the Scottish Finance Minister would be given the obligation to specify in advance, so far as competent, in the Scottish Budget and, as required, in the UK Budget what income and other tax rates he or she wished to apply in Scotland from the day after the referendum and what levels of pensions and benefits he or she wished paid. The UK Government would undertake to facilitate that in terms of collection and payment and, to be fair, on the revenue side, cash flow.

Finally, of course, Holyrood would need to be given the right to attempt to set up borrowing conditional on a separatist victory. Although good luck with that if they didn't set a budget even attempting to deal with the deficit.

Holyrood in turn would have to produce a budget setting out expenditure plans in the event of either outcome in the knowledge of what they would have to spend in each eventuality.

There wouldn't be any way of them dodging this because otherwise there literally wouldn't be the money to pay public sector wages in full from the first pay day after a separatist vote. For the Scottish Government couldn't spend money it didn't have. And people would know that when they voted.

So, on polling day, people would vote knowing what their tax rate would be under either outcome: what their pension would be and/or what other benefits they would still be receiving.  Not at some abstract point in the future. At the very next payday.

Who could possibly object to that?

*On behalf of refers to defence; overseas aid, central government administration, consular services and most importantly, interest onthe national debt.


8 comments:

  1. Interesting Ian. This very thought occurred to me in the watches of the night last week (old mans' syndrome). Why should the band continue to play for people who have decided to leave the venue? It's not fair to the contributors that they subsidise a surly gang who don't like you and don't want to contribute.

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  2. Problem being of course they lied with the false White Paper the first time around so what would their be to stop them providing nothing but yet another Fantasy plan that they would never intend to live up to but just blame WM or "changed circumstances" after the event, the SNP cares not for Scots only to get their objective at any cost whatsoever. Fallout will only ever be "other peoples" fault.

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  3. Was thinking the same the other day when confronted by a Nat who believed WM would continue to fund an iscot in perpetuity. In addition to the debt deficit overhang there is also the small question (ok elephant in the fcking room 'scuse French) of the currency. Given iscot intention to pursue EU membership that dictates we have to have our own currency with our own central bank. Estimates suggest we would need at least £40b in reserves to support our own currency and then there's question of whether its pegged or floating. If it floated it would almost certainly trade below UKpd meaning loss of asset values; increased prices and lower wages relative tom UK. Pefgged and it's a one way speculators bet. Guess what I'm saying is add currency to your list of pre determined things we need SNP to declare pre indy.

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  4. Excellent post. Never thought about this as a fiscal tactic before. Yet it is a blindingly obvious move which would make the threat of withdrawal of the fiscal transfer to people very real in terms of cost to them and their families.

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  5. Nice idea. However in order for this to be possible, the Scottish Government will need to have its own Central Banking facilities as part of the preparations before the Vote - realistically that would be an account at the Bank of England with a large overdraft facility.

    As an Englishman I certainly approve of the idea of making the fiscal transfer explicit and out in the open. There's two sides to a marriage and it's about time Westminster started considering the English point of view as well.

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