A front page lead story by The Herald last week has provided yet another reinforcement of the old adage not to believe everything you read or hear in the media.

The article claimed that a “report” by university experts at the Centre for Public Policy for Regions (CPPR), a collaboration between Glasgow and Strathclyde Universities, posed a dilemma for Alex Salmond and other advocates of Scotland’s independence. According to The Herald the academic authors of the report claimed that the latest issue of the Government Expenditure and Revenue Scotland covering the year 2006-7 highlighted the need for the Scottish Government to choose whether it intended to use the oil revenue which would accrue to an independent Scotland to meet the gap between current Scottish expenditure and income or to build the promised Scottish Oil Fund.  According to the report the GERS figures confirmed that oil revenue would not be large enough to do both and it was time for Nationalists to get real.

Tracked down on the Centre’s website the “report” proves to be a more modest Comment on the GERS figures, just a few hundred words’ long, by a team of four academics..  As one would expect from academics their assessment of the implications of the latest GERS figures for the debate on Scotland’s constitutional future were a good deal more qualified than The Herald’s front page suggested.  Nevertheless their main message was that the figures increased pressure on the Scottish Government to clarify its fiscal priorities – maintaining current public expenditure levels or investing in the Oil Fund.

GERS has been a focus of controversy since it was started in 1992 when Nationalists accused it of being a tool of unionist propaganda.  A more technical line of criticism focused on the reliability of its estimates of Scotland’s  income and corporation tax contributions to the Treasury and of  Scotland’s allocated share of UK public  expenditure –  for example on defence and foreign affairs – which could not be disaggregated regionally within the UK.  Indeed the latest issue of GERS incorporates a £800m reduction in public expenditure allocated to Scotland as a result of a continuing review of GERS methodology.

But GERS’ technical problems aside, the CPPR academics’ headline conclusion about the dilemma facing Alex Salmond on the use of oil revenues is itself open to challenge or at least qualification.

First, they treat the GERS results as if they represented the budget of an independent Scotland.  They do nothing of the sort.   All that they represent is the estimated balance between tax income raised in Scotland as part of the UK and Scotland’s estimated share of total UK public expenditure in the financial year 2006-7.  That Scottish share includes large figures for regionally non-identifiable expenditure such as International Services at £499m, Defence at £2.722bn, Recreation, Culture and Religion (sic) at £328m., and Public Order and Safety – essentially the security services – at £147m.   It would be for an independent Scottish Parliament to decide what level of expenditure to commit to such UK priorities.  With a SNP majority it might want to commit to higher expenditure on international development aid to meet its 1% of GDP target while eliminating any contribution to the UK’s nuclear ambitions (and future Iraq style adventures).    How closely the budget of an independent Scotland would approximate the GERS allocations out must be a matter of judgement.  The CPPR academics have no grounds for using the GERS results as a basis for positing fiscal “dilemmas” for advocates of independence, particularly without any acknowledgement of the potential difference between GERS and the budgets of an independent Scotland.

Second, their case is built on a static view of economics.  They make no provision at all for the dynamic effects of independence.  As economists they may point out that such effects cannot be assumed.    But they must know that many of their fellow economists do accept that the political and institutional environment in which economies operate and  are managed can make a difference to performance -  most development economists for example and most economic historians,  as well as those economists who follow a tradition of ‘political economy’ including their  Glasgow colleague  Professor Ronald Macdonald of Glasgow University who does not hesitate to includes gains in the efficiency of resource allocation in his case for full fiscal devolution for Scotland.   And the efficiency gain like other gains from improved governance is both recurring and compounded year on year.

In the same static perspective the CPPR authors offer no time frame for the their ‘Nationalists dilemma’.  Given that there is almost as much oil to be extracted from Scotland’s oil province as has already been piped out, the building of an oil fund need not be a quick Big Bang affair.    As happened in Norway a Scottish Exchequer will allocate revenues to the Oil Fund as and when Scotland’s independent fiscal balance offers the opportunity.   Annual allocations are more likely to be counted in £100ms than in £1billions.  It has taken Norway nearly thirty years to grow its Fund to £190 billion or so.

Perhaps the CPPR Comment illustrates that the debate about Scottish independence will need the contributions of many different schools of economists, and of historians and political experts too, if it is to offer a realistic picture of Scotland’s choice.

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