What is the best way to forecast the outcome of the independence referendum ? This is an important issue for individuals, organisations and businesses planning the future. In this paper I calculate a new way of forecasting the referendum outcome. It uses “prediction markets” rather than opinion polls to forecast the outcome. It builds on an important theorem in financial economics – the “efficient markets hypothesis” (EMH). It is an important aid to the understanding of financial and economic markets. The basic idea is that the market price of an asset or good reflects all the information relevant to setting that price. If the EMH is true, there is no point in trying to beat the market because any information that might have a bearing on the price is instantly reflected in the price. One of the best examples of this effect was documented by Roll (1984). He showed that the production of concentrated orange juice was concentrated in a relatively small area around Miami, Florida. The yield, and therefore the price, of the orange juice were highly dependent on weather conditions in this area. He showed that the futures price of orange juice was closely linked with local weather forecasts and indeed outperformed these forecasts in day-ahead temperature predictions. Continue reading
David Bell & Michael McGoldrick
University of Stirling
Two of the most important sectors in the Scottish economy are finance and oil & gas. These are highly productive and dynamic elements of the Scottish economy. They are also quite large: the financial sector employs 91,000 people while the oil and gas industry has 31,000 employees. Their views on the independence debate should therefore carry some weight. Continue reading
People’s perceptions and attitudes determine electoral outcomes. In this report we examined attitudes and beliefs about the Referendum options. Yougov administered a survey designed by the authors to a representative sample of 2037 people in December 2013. Our findings confirm many of the key predictors of voting intention with party political affiliation, national identity and trust in Institutions all having large predictive effects. Furthermore our report reveals interesting demographic patterns with women being substantially less likely to support Independence and older, higher income people also being more likely to support no. Those with Roman Catholic or no religious affiliation are substantially more likely to support a Yes outcome than Church of England and Church of Scotland voters. Policy preferences also play a role with No supporters being less supportive of universal benefits and immigration. Our report is unique in examining core attitudes to risk and the future in determining voting intentions. Both the Yes and No options involve uncertain costs and benefit is that will unfold over many decades. We asked simple validated measures of risk tolerance and future orientation of our sample. We find no role for future orientation with Yes and No voters scoring equally on these measures.
My blog on The border effect and Scottish independence(*) was published last week at the LSE Politics site. The exercise that this post was based on, is the comparison of the apparent border frictions between Scotland and the rest of the UK, with the apparent border frictions between Ireland and the UK. These differences do not arise because of language or because of any explicit tariffs or border controls (the UK and Ireland share the Common Travel Area). Rather, the differences in apparent border frictions are likely to arise because firms in UK and Ireland do not share all of the same social and business networks(**).
David Eiser, David Bell and David Comerford
Nicola Sturgeon and James Naughtie had an interesting debate on funding pensions in an independent Scotland on GMS this morning (available here). The debate was a response to the latest UK Government paper on the economics of Scottish independence, this one from the DWP focussing on welfare spending and pensions.
Sturgeon claimed that pensions cost less to fund in Scotland in both absolute terms and as a percentage of tax revenues. Naughtie pointed out that the DWP paper argues that an independent Scotland would face an additional £1.4 billion in pension costs by 2032, amounting to around £400 per working age person in Scotland. So who is right? As ever, there is something to take from both sides. Continue reading
David Bell and David Eiser
The Scottish Labour Party has proposed further powers for the Scottish Parliament. They are perhaps not as radical as might have been expected, but the argument is that rights that are enshrined at UK level – such as free health and education – should be paid for from UK tax resources. This leaves around 40 per cent of spending that could be directly paid by Scottish taxes.
In terms of cash raised, the most important proposal is to extend the Scottish share of income tax from 10p to 15p of each rate band. The 10p rate is included in the Scotland Act 2012, and will become a reality for Scottish taxpayers in 2016. The Office of Budget Responsibility is charged with forecasting the revenue from the 10p share. It does so at each budget. Its forecast in March 2013 was that the value of the 10p share to the Scottish Government would be around £4.5bn in 2014-15. Another OBR forecast for Scotland will be published alongside this week’s UK budget, but is unlikely to be substantially different, given the recent sluggishness of tax revenues. Increasing the share to 15p is likely therefore to generate around a further £2.2bn in revenues, broken down across bands as per the table below. Continue reading
Speaking before Budget 2014, John Swinney declared the Budget was the Westminster Government’s ‘last chance to seriously tackle inequality’. Early in his Budget speech, George Osborne argued that ‘income inequality is at its lowest level for 28 years’, so he clearly agrees that it is an important issue[i]. But did the Budget measures do anything to improve this statistic further? Continue reading
Alex Salmond has twice this week refused to commit to re-introducing the 50p rate of income tax on incomes over £150,000 – first following his New Statesman lecture in London, and then at First Minister’s Questions on Thursday.
In making the case for independence, the Scottish Government has frequently argued that having access to tax and benefit levers would enable it tackle inequality more effectively than successive Westminster governments have tended to do. Against this backdrop, the First Minister’s refusal to support the re-introduction of the 50p rate seems contradictory – but is it?[i] Continue reading
After the release of our paper, Funding Pensions in Scotland: Would Independence Matter?, I was called to the Scottish Affairs Committee at Westminster to give evidence. The most interesting issue that we discussed was the level of net migration into Scotland that we would need to see in order to eliminate the cost differences that are projected between Scotland and the UK, and eliminating the costs of an ageing population. Continue reading
The recent decision by all of the major unionist parties to rule out an independent Scotland participating in a sterling monetary union has created much political heat. So much so, that there is a danger that the light of the underlying economics will be extinguished in the maelstrom. As an economist, and a specialist in currency regimes, I think it is wise to return to the basic economics of this issue lest some costly mistakes are made for both Scotland and the rest of the UK.
When questioned about the suitability of a sterling monetary union, the Scottish Government’s stock response is to say that its Fiscal Commission (FC)1, comprising a number of eminent and distinguished economists, considered all of the potential currency options open to an independent Scotland and settled on the sterling monetary union as its preferred option. However, in coming to that decision it is striking to note that the FC considered how the Scottish economy compares to the UK today rather than what the economy is likely to look like post independence, which is surely the relevant comparison. Continue reading