Bookies odd shorten on Yes vote

Last night’s debate has altered bookies’ expectations of the referendum. There was a slight shortening of the odds on a Yes vote (see the extreme right of Figure 1). These data are taken up to lunchtime on the 26th August.

Figure 1: Implied Probability of a No vote from Bookies’ Odds May-August 2014.



The probability of a No vote is still above 0.83. Future posts will examine whether the increased chance of a Yes vote gathers momentum in the last few weeks before the referendum.

Posted in Uncategorized

Fiscal Update

For those of you who may have dropped in from Mars and who have not had the opportunity to acquaint yourself with the intricacies of Scotland’s taxation and spending, here is a potted version for the uninitiated.

In 2012-13, the most recent year for which data is available, public spending in Scotland, or for Scotland, cost £65 billion. This was from total UK public spending of £702 billion. Scotland accounted for 9.3% of UK public spending, though its population only makes up 8.3% of the total UK population. Public spending per head was higher in Scotland than in the UK as a whole. Scotland has traditionally experienced higher public spending than the UK as a whole.

Not all of this spending can be associated with activities carried on in Scotland. Spending on overseas embassies, on the national debt, and on foreign aid cannot be “identified” with Scotland. Such “unidentified” spending is allocated to all citizens of the UK equally, since they are all deemed to equally benefit from this spending. Since there is no differentiation of “unidentified spending”, comparisons of public spending within the UK are usually carried out across the “identifiable” spending categories, such as health, transport and education, which can be located geographically.

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The Carbon Bubble & North Sea Oil

In March this year, the Left Foot Forward blog claimed that “The fall-out from the carbon bubble bursting could devastate Scotland”. The issue has also been mentioned by Partick Harvie MSP of the Scottish Greens, and raised in a SPICe Research Briefing. What is the “Carbon Bubble” and is Scotland particularly exposed?

In 2011, the Carbon Tracker Initiative issued the first of its reports[1] which warn that the valuation placed on financial assets throughout the global economy are overstated because of the problem of so-called “unburnable carbon”.  This overvaluation is labelled “the carbon bubble” which may “burst” if valuations are corrected. In 2009 at the United Nations Climate Change Conference in Copenhagen, a global temperature target of two degrees Celsius above pre-industrial levels was made international policy. A global mean temperature increase of 2 degrees is considered by some as a threshold separating minor climate change from extreme events such as significant reductions in water availability and food production, and major extinctions of species, biodiversity loss and the loss of important ecosystem services. The Potsdam Climate Institute has estimated that, if we want to reduce the probability of exceeding 2 degrees warming to 20%, only one-fifth of the Earth’s proven fossil fuel reserves can be burned (unless Carbon Capture and Storage technology is used). As a consequence, the global “carbon budget” may only be 20% of worldwide reserves, whilst the rest is “unburnable carbon”.

This then is the basis of the claim that the carbon bubble is of great concern to Scotland: basically it is the claim that any coherent global action on climate change will require Scotland to leave much North Sea oil unexploited – but Scotland needs that oil for its fiscal sustainability, and so Scotland is particularly exposed to the Carbon Bubble issue. There are three main problems however with this claim.

  • Climate scientist James Hansen has outlined[2] how he thinks the world should rationally meet its climate change targets: (high carbon per unit energy) coal use must be phased out by 2030; unconventional fossil fuels (such as coal bed methane, shale oil and gas from fracking, oil from tar sands, and enhanced oil recovery) should not be developed; and fossil fuel exploration should cease. The global carbon budget is covered by declining coal use until 2030 and the total current reserves of conventional oil and gas. The implication of this for North Sea oil and gas is that it is one of the world’s reservoirs of “allowed” fossil fuel resources. The future exploitation of this reservoir under plans consistent with Hansen (2009) may be much lower though than current industry plans which involve enhanced oil recovery and exploration west of Shetland.
  • The bursting of the carbon bubble is a problem for the whole global economy. If carbon intensive energy production is restricted on such a scale before adequate low or zero carbon infrastructure is constructed then economic activity everywhere, and fiscal sustainability everywhere, is imperilled. Indeed, a country with local access to some of the remaining allowed fossil fuel resources, and with relatively high levels of zero carbon infrastructures, is likely to be relatively well placed in such a dystopian world.
  • My own work[3] incorporates the effect that writing off fossil fuel based assets has upon economic activity and hence upon investment in replacement zero carbon infrastructure. This work shows that, if the aim of climate policy is to replace our current carbon emitting productive capacity with zero carbon productive capacity, then it may be that this cannot be done (in a capitalist economy) unless there is continuing investment in fossil fuels, and maybe unless the private sector is deceived as to the extent to which its high carbon assets are worthless. This is because an honest but naive global agreement to limit carbon emissions may trigger an economic collapse through the collapse of the chain of credit that supports the economy. An economic collapse prevents investment in the capital and technology required for the post carbon age. In the context of North Sea oil, this means that while all the reserves may not ultimately be used, at the moment we perhaps should be behaving as if they are going to all be used – so long as we are also investing heavily in zero carbon infrastructures at the same time. This is fairly consistent with current SNP policy.

The Carbon Bubble issue is a serious issue for the global economy and for every country on earth. However, it is not more serious for Scotland than elsewhere. Environmentalists may be concerned about voting for an independent Scotland on the grounds that its finances depend on oil extraction and so independence increases the likelihood of this extraction. My work instead suggests that until our carbon budget is exhausted, the investment level in low or zero carbon infrastructures is the critical metric for welfare, given the problem of climate change. Therefore, these environmentalists should make their minds up about a Yes or a No vote on the basis of which they think enhances low or zero carbon investment levels.



[1] Carbon Tracker Initiative (2011) “Unburnable Carbon: Are the world’s financial markets carrying a carbon bubble?” and Carbon Tracker Initiative (2013) “Unburnable Carbon 2013: Wasted capital and stranded assets”
[2] Chapter 9 of Hansen (2009) Storms of my grandchildren
[3] Comerford & Spiganti (2014) “The carbon bubble: climate targets in a fire-sale model of deleveraging”
Posted in Uncategorized

The Referendum: Latest Odds

The bookies odds have been gradually moving in favour of a ‘No’ vote. I explained how these odds are calculated here. My latest estimates, which are described in this post, reflect the odds taken up to 12 noon on 6th August 2014 so they reflect the immediate reaction to the STV referendum debate on the evening of the 5th August 2014.

My response to the debate is described here. Mr Salmond and the Yes campaign did not do substantial damage to Mr Darling and the No campaign. Indeed, on some issues, notably currency, the view is that Mr Darling came off best.

The latest probability of a ‘No’ vote derived from the bookmakers’ odds is shown in Figure 1.

Figure 1: Implied Probability of a ‘No’ Vote Taken from Bookmakers Odds 28th May 2014 to 6th August 2014.


Having been broadly stable during early July, it appeared that the Yes campaign was making headway in the last week of the month and into early August. However the Figure indicates that the immediate response to the debate (the last observation on Figure 1) seems to have been an increase in the probability of a ‘No’ vote.  This means that the latest data show that the market expectation is for a more than four in five chance of a victory for the ‘No’ campaign. The probability of a ‘No’ vote, measured on the morning of August 6th, was 82 per cent.

Figure 2 shows the longer term evolution in the probability of the ‘No’ vote since the beginning of October 2013. The ‘Yes’ campaign had its strongest showing in mid-April 2014 which may have coincided with residual resentment arising from Mr Osborne’s refusal to share the pound sterling with an independent Scotland. Since then, the probability of a ‘No’ vote has returned to the same level as in late 2013.

Figure 2: Implied Probability of a ‘No’ Vote Taken from Bookmakers Odds 1st  October 2013 to 6th of August 2014.


If these odds are good predictors of the likely outcome, then the ‘Yes’ campaign needs some dramatic intervention between now and the referendum if it is to bring this probability down to 50% (0.5) which would give it an evens chance of a favourable outcome.



Posted in Debates, Referendum odds

Taxation of cross-border commuters

Taxation of cross-border commuters

Michael McGoldrick

University of Stirling

One of the reasons that Professor Andrew Hughes-Hallett uses to claim that the Scottish budget will be stronger with independence is that there are “repatriated taxes from cross-border commuters (£1 billion)”. In a later post he then goes on to explain his reasoning “My figures on taxes repatriated from cross-border commuters come from a 2008 report by Oxford Economics”. This seems to be a reference to a series of reports that were undertaken by the City of London to show London’s importance in the UK economy. These reports break down tax receipts on a residence and on a workplace basis for different parts of the UK. Commuting causes differences in tax receipts at place of work relative to place of residence.

Oxford Economics use income tax data on a residence basis derived from the HM Revenue and Customs (HMRC) Survey of Personal Incomes (SPI).  This is combined with the Annual Population Survey (APS), from which employment can be derived on both a workforce and residential basis. These data can therefore be used to compare workers who claim to be working and living in Scotland, with those living in Scotland and working elsewhere. If more workers say that they are resident of Scotland than work in Scotland, this suggests that there is a commuter effect – a discrepancy between the location of tax revenues and place of residence. The LSE methodology is less clear. In 2006-07 they get similar results for the commuting effects in respect of National Insurance and income tax.

Table 1: Results from City of London reports, difference between Scotland residence based and work based. 2005-06 to 2010-11

£Billion 05-06 06-07 06-07 07-08 08-09 09-10 10-11
Total of all taxes 0.7 0.9 0 0 None


1.5 2.2
NI and income tax -0.1 -0.1 -0.1 0 0.7 1.5

The commuting effect increased between 2005 and 2011. The reason seems to be that work based tax revenues have decreased more than residence based revenues since 2007-2008. The City of London reports have stopped and the publicly-available SPI has not been updated since 2009, meaning that it is not possibly to update this research. However, estimates of the commuting effect can be inferred from ASHE (Annual Survey of Households Earning) data. One caveat on the ASHE data is that it does not include the self-employed. The Labour Force Survey (LFS), was also used to construct commuting effect estimates and the results are compared in table 2. It seems quite clear that it would take much more commuting to get a £1bn increase in income tax.

Table 2: Comparing ASHE results to LFS to necessary number to receive £1bn of income tax

Data Source LFS  Quarter 4 2013[2] ASHE 2013 To get £1bn of income tax[3]
Net income (£Million) of those people who commute 780 (extrapolated) 530 5,200
Net number of people who commute and work outside Scotland 10,500 13,000 104,000
Average wage 78,000 41,000 50,000

Scottish ashe

Scottish ashe2

The ASHE data suggest that the net effect of the income of commuters and residents is larger than for just residents in most years; however that has varied across the past 10 years. 2002 and 2007 stand out as years where rUK-resident workers in Scotland paid more in tax than Scottish resident workers in rUK. This implies that the income of rUK commuters into Scotland was greater than the net income of Scottish residents working in rUK.

Would this level of commuting be able to justify an extra £1 billion of revenues? According to Government Expenditure and Revenue in Scotland (GERS) total income tax raised in Scotland is £10.8bn while national insurance receipts are £8.5bn. An extra 9% of income tax would have to be raised by the 1% of workers who work outside Scotland but live in Scotland. The wages of those workers, according to ASHE is only £530 million, while according to my own calculations £5,200 million would be needed or approximately 10 times the current level. Additionally, it is unclear how such taxes might be repatriated, it is unlikely that the tax regimes of the countries that the workers commute to, would view this as a favourable relationship. In fact, regular workers in London, on just one of the tests, would automatically taxed by the rUK, if the same rules applied. It also seems that the Scottish white paper on independence, would agree with this definition and that only the proportion of workers from Scotland, who spend less than a qualifying period of time in UK, would be liable for Scottish taxes, on income and insurance contributions.

Who would be liable to pay Scottish taxes?

According to the Scottish Government white paper on independence, an independent Scotland would build on the existing definition set out in the Scotland Act 2012 and general international protocols to establish a definition of a Scottish taxpayer based on residence. In general, this means that people who live in Scotland for most of the year will pay their taxes here.

The Scotland Act 2012 – Section 80F says that to be considered Scottish for tax purposes:

“The number of days in the year on which an individual is in Scotland ……equals or exceeds the number of days in the year on which an individual is in any other part of the UK .. “

Additionally if Scotland was to become a member state of the EU there are some general conventions that might apply:

Each country has its own definition of tax residence; yet: you will usually be considered tax-resident in the country where you spend more than 6 months a year and if you spend less than 6 months a year in another EU country, you will normally remain tax-resident in your home country.

Overall, it seems that there is no clear trend in the number of Scottish resident workers who commute. It is also unclear which of these workers would be taxable in Scotland and how large would be the resultant revenues. The number of workers seems to balance over recent years, to a fairly low number. Will this relationship continue to hold?  If there are higher levels of unemployment or low wages in Scotland this might lead workers to commute more from Scotland. Alternatively if Scotland becomes more desirable due to higher incomes, then more workers will commute in. Under these circumstances, it is difficult to see that the net revenue to the Scottish Treasury from cross-border commuters would amount to £1bn.

Scottish ashe3


[1] Not a City of London report

[2] Wages in the last quarter of the LFS might be skewed

[3] Author’s calculations

Posted in Labour, Migration, Population

The Odds On the Referendum Outcome

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

Posted in Debates, Risk, Things no-one thought about before

Scottish Independence: Analysing Views From the Oil & Gas and Finance Sectors.

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

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Attitudes and Voting Intentions

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.

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Posted in Population, Risk, Things no-one thought about before, Uncategorized

Creating a border effect

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(**).
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Posted in Business, Trade

The future costs of the State Pension

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

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