How different has Scotland’s recession and recovery been from the UK’s?

Compared to the recessions of the 1970s, 80s and 90s, the recent crisis in the UK has been characterised by several distinguishing features:

  • The fall in output has been more prolonged; the level of GDP did not recover its pre-recession level until the second half of 2013, some five years after the start of the recession.
  • However, employment (and total hours worked) have fallen less than the fall in output, and the labour market recovered much more quickly than output has done; employment had returned to its pre-recession level by early 2012.
  • Wages on the other hand have fallen by as much as 10% in real terms, and are yet to show any significant sign of increase.

The fact that output has fallen by more than employment (and hours worked) means that productivity has fallen, measured either as output per worker or output per hour worked. Continue reading

Posted in Uncategorized

Scotland’s 1%

There has been a lot of recent media attention on the top 1% of income earners. But what are the characteristics of Scotland’s top 1%?

The latest good data we have on incomes is for 2009/10 (the data is from HMRC and based on taxpayer returns; it includes income from a variety of sources, including bonuses). In that year there were around 4.32m adults in Scotland, so by definition when we talk about the top 1% we are talking about 43,000 people.

To be in this group in 2009/10 you had to have gross income (from all sources) of £93,500 or over. Continue reading

Posted in Uncategorized

The LBTT Revision

On 18th January 2015, the Cabinet Secretary for Finance, John Swinney, announced that he is revising the residential tax element of the land and building transaction tax (LBTT). Mr Swinney had  announced the rates for LBBT in his draft budget in October 2014. These are shown below:

Residential transactions Non-residential transactions Non-residential leases
Rate Rate Rate
Up to £135,000 nil Up to £150,000 Nil Up to £150,000 nil
£135,001 to £250,000 2.0% £150,001 to £350,000 3.0% Over £150,000 1.0%
£250,001 to £1,000,000 10.0% Over £350,000 4.5%
Over £1,000,000 12.0%

Source: Scottish Government

In December 2014, the Chancellor of the Exchequer announced new rates and a new structure for Stamp Duty Land Tax (SDLT) in the rest of the UK. This new structure was introduced from December 4, 2014. Its rates are shown below:

Continue reading

Posted in Uncategorized

The Scottish Budget under the Smith Proposals

David Bell and David Eiser

The Smith Commission proposals seek to increase the powers of the Scottish Parliament and to secure a corresponding increase in the Parliament’s accountability and responsibility for the effects of its decisions and their resulting benefits or costs.

How has this ambition been translated into concrete proposals for fiscal responsibility? On the spending side, the Scottish Parliament will control benefits associated with long-term disability and sickness, along with some relatively small benefits for older people, and the Work Programme – the UK Government’s key programme for supporting people into work. In total, this will transfer benefits worth around £2.5bn to the Scottish Parliament (in addition the Scottish Parliament would gain some limited ability to vary the housing cost elements of Universal Credit, and top-up other benefits).

On the revenue side, the Scottish Parliament will gain the ability to vary income tax rates and thresholds (but not the personal allowance). Half of VAT revenues raised in Scotland will be assigned to the Scottish Parliament (the VAT rate and exemptions cannot be varied). And Air Passenger Duty (APD) and the Aggregates Levy will be fully devolved. Continue reading

Posted in Uncategorized

How should the Barnett Formula be adjusted to reflect devolved taxes? A question of allocating risk (wonkish)

David Bell and David Eiser

The UK parties have committed to retaining the Barnett Formula to allocate grant to Scotland. The way in which the Barnett Formula is adjusted to reflect devolved taxes will have important implications for the budgetary risks facing the Scottish and UK Parliaments. This blog discusses two possible approaches to adjusting the Barnett Formula. It shows that the adjustment approach proposed in relation to the Scotland Act powers exposes Scotland to a different set of risks on the spending side relative to the revenue side which seems inconsistent. This approach also exposes Scotland to UK policy decisions, and these could affect Scotland positively or negatively. An alternative approach is discussed which overcomes these problems, but exposes Scotland to a higher rate of convergence in per capita spending with rUK. Continue reading

Posted in Uncategorized

Submission to Smith Commission, 2

Many people have interpreted Gordon Brown’s comments prior to the referendum, as well as the so called “Vow” made in the Daily Record, as some commitment so “Devo Max”. My submission to The Smith Commission on further devolution for Scotland assumes that we are indeed aiming for the maximum level of devolution possible, and asks where this must fall short of the common understanding of Devo Max.

Devo Max is usually interpreted to mean full Home Rule for Scotland within the UK, so that the only governmental functions for Scotland that remain at the UK level are defence, foreign affairs, as well as a single currency and free trade area. Scotland would raise all its own taxes and pay the UK government for the services it provides, such as defence.

However, this framework runs into many of the same criticisms that afflicted the proposals for an independent Scotland sharing the pound Sterling with the rest of the UK. The question now is different, since it is unambiguously the case that enhanced devolution for Scotland will mean retaining a common currency area with the rest of the UK: so Scotland WILL be sharing the pound. However, to make a success of divergent polities within a common currency area, it is a requirement that we learn the lessons of the Eurozone crisis and seriously consider the constraints imposed on these divergent polities by the need to maintain macroeconomic stability.

My submission argues that whilst devolution can be extended greatly from its current form, an automatic, formulaic system needs to be built that responds to business cycle fluctuations and asymmetric shocks. Such a system is necessarily “less devolved” than Devo Max.

Posted in Uncategorized

Submission to Smith Commission

Our submission to the Smith Commission is available here: Smith submission Final

Desire to increase the tax and spending powers of the Scottish Parliament is often driven by an aim to improve the accountability of the parliament to the electorate. The submission discusses what might be meant by accountability in this context, and the extent to which different powers – and the way they are exercised – can be said to improve the accountability of the parliament. It also discusses the inevitable trade-offs between accountability and budgetary risks and uncertainty.

The submission argues that in a first best world, the Scottish Parliament’s revenue control would match its spending responsibilities, but that this is unlikely to be achievable because many taxes are not appropriate for devolution for practical, legal or institutional reasons. Therefore the advantages of tax devolution for Scotland (greater accountability) have to be weighed against the disadvantage for Scotland (the risk of a potentially less generous or more volatile budget in the longer-term) and the risk to the UK and Scotland that tax devolution might lead to tax competition that is in the interests of neither.

There may also be a case for devolving aspects of welfare spending to the Scottish Parliament, but this should be underpinned by a set of clear principles, consistently applied.

The submission also argues that control over minimum wages would also increase the accountability of the Scottish Parliament.

Posted in Uncategorized

Scotland’s Fiscal Future

The referendum on Scottish independence indicated that a majority of the Scottish people wish to remain within the UK. They have been given commitments that additional fiscal powers will be granted to the Scottish Parliament in the near future. In the paper Scotland’s Fiscal Future David Bell and David Eiser explore some of the issues that follow from this commitment and from the proposals that have already been tabled.

Continue reading

Posted in Uncategorized

Bookies 1 Opinion Polls 0

The referendum campaign lasted more than 2 years. Over that time, more than 100 opinion polls addressed the question “should Scotland be an independent country”. Many thousands of pounds have been spent on collecting the data and analysing the results. Yet in the month of September, at the business end of the campaign, the average poll gave Yes  48 per cent support and No 52 per cent support, if don’t knows are excluded. The narrowness of the margin panicked politicians into making promises about further devolution that may be very difficult to keep. Yet the outcome was Yes 45 per cent, No 55 per cent.

Continue reading

Posted in Uncategorized

Final polling and betting data

The implied probability of a No vote based on bookmakers odds up to 7pm on the 17th of September and the opinion poll probabilities of a No outcome (eliminating the don’t knows) are shown in Figure 1 below. The odds on a No outcome shortened throughout the 17th. The final observation was taken at 7pm.

A number of opinion polls were  also published on the 17th. They tended to show the No campaign having a tiny lead over the Yes campaign. Once the standard errors and the possible impact of the undecided voters are taken into account, there would seem to be little to choose between the likelihood of a Yes or No outcome. Yet this contradicts the bookmakers assessment of the odds, with the implied probability of a No vote now creeping up to 80 per cent.

Figure 1: Opinion Poll and Betting Market Implied Probability of a No vote

both_combined_17-09-14

Sources: What Scotland Thinks, Oddschecker.com, own calculations

A betting market on the share of Yes votes in the referendum is also open. The distribution of these is shown in Figure 2. The most likely range of Yes votes is 45-49 per cent. The chance of an outcome above 50 per cent (a Yes win) is 0.15, which is consistent with the overall odds of a Yes outcome, which can be deduced from Figure 1. However, the implied probability of Yes outcomes in the 35 to 44 per cent range is over 0.4, higher than the probability of a Yes win.

Figure 2: Likely Yes Vote Percentage

Majority

Sources: Oddschecker.com, own calculations (omitting overlapping intervals)

Nevertheless, taken together, the evidence from the betting odds is suggestive is of a No victory with a majority of between between 2 per cent and 10 per cent.

Finally, a market has developed in the local authorities most likely to vote No. These are mainly dominated by the more affluent areas, those close to the Scottish-English border and interestingly, Orkney and Shetland, which are located close to Scotland’s main oil fields.   These are closely followed by Edinburgh, Scotland’s capital city. Clearly a Yes outcome where Edinburgh votes No would also pose significant political challenges.

Those areas least likely to vote No include Scotland’s more depressed former industrial cities – Dundee and Glasgow. These are joined by a group of authorities in central Scotland and the Western Isles (Na h-Eileanan Siar), which has always had close ties with Scottish nationalism.

Figure 3: Area Most Likely to Vote No

Area Most Likely NoSources: Oddschecker.com, own calculations

The probabilities implicit in the betting odds provide an interesting set of predictions for the outcomes of the referendum. But they are just predictions: nothing more, nothing less. What will be fascinating in the post-referendum analysis is how they perform compared with the opinion polls. This referendum has produced a wealth of data and a unique challenge to both methods of foretelling the outcome.

Posted in Referendum odds, Risk