GROWTH COMMISSION RESPONSE: 7. THE MISSING MODEL

The Chair’s introduction states that “Bridging the gap between potential and performance is the purpose of this report”.^{12.8 (p.6)} If this is the purpose of the report then unfortunately it fails.

Without costing the proposals and making assumptions about how much they could realistically improve Scotland’s growth rate by, it’s impossible to judge whether the proposed “Framework & Strategy for the Sustainable Public Finances of an Independent Scotland”^{2Part B. Note how independence is again presumed} adds up to a coherent plan. Whether the ideas the report has documented are capable of “bridging the gap” is a question left unanswered.

The “Strategy” in fact amounts to little more than a laundry-list of possible ideas and a long list of process recommendations. From a process perspective the Commission recommends:^{3Some of these are recommended in Part A of the report, some in Part B}

• Three further Commissions: Productivity Commission, Infrastructure Commission and Gender Pay Equality Commission
   
• Seven separate Reviews: Universities Growth Strategy Review, Government Led Innovation Review, Comprehensive Review of Scottish Taxation System, Comprehensive Review of Inherited UK Spending Programmes, Standing Council on Scottish Public Sector Financial Performance, National Balance Sheet Review and a Comprehensive Review of policy relating to long-term risk bearing projects
   
• Five new Agencies: Inward Investment Agency, Innovation Agency, Economic & Fiscal Forecasting Agency, Asset & Liability Management Office and an agency “tasked with creating a strategy for engagement and transitioning of the staff of international governments and multi-national organisations to Scotland”
   
• Two new Institutions: the Scottish Central Bank and a Scottish Financial Authority
   
• A National Brand Strategy

As far as actual strategy recommendations go, the report largely talks in unquantified generalities. Sometimes the scale of potential upside is asserted, but nowhere are all the costs associated with these upsides estimated or their likely total impact calculated.

• When talking about supporting greater R&D and innovation the report stops short of committing to any actual investment figures: “Many small advanced economies invest very heavily in R&D” [A3.14]; “it is likely that a net investment will be required”. [A6.142]
   
• Tax policy is only discussed in broad generalities. The possibility of competing on low corporate tax rates is dismissed, but the likely impact of other possible tax moves is left unquantified: “using taxation as a tool for economic development but not competing as a low tax location” [3.58]; “We are interested in the potential to tailor the Dutch R&D tax credit scheme, enhance incentives for longer term equity investment and improve capital allowances. While we do not consider that competitive use of profit taxation (corporation tax) is an optimal strategic tool, we do recommend that the headline rate of corporation tax should not rise above the level prevailing in the rest of the UK. As with all taxation the impact of the overall structure on both the tax base and revenue generation should be carefully assessed to ensure the more effective system is deployed.” [A6.212]
   
• Details of how Foreign Direct Investment will be attracted are vague: “an openness to foreign direct investment (like Ireland), but competing not on labour costs or tax incentives, but on access to markets and to the highly skilled workforce and university sector” [A3.82]
   
• The importance of ‘human capital’ is discussed but the actual investment required is not, despite the report observing: “small advanced economies are characterised by heavy investments in knowledge, innovation and human capital (skills, retraining).” [A3.13]; “An export-based growth strategy will therefore require that skills gaps in sales and languages are addressed” [A6.85]
   
• The potential upside from Enhanced Digitalisation [Table 6-4] is mentioned – but the report^{4The economic and social impacts of enhanced digitalisation in Scotland, Deloitte, July 2015} that table is drawn from  “does not seek to identify the infrastructure investment that is required” and neither does the Commission.
   
• Some figures are scaled simply by assertion: “Increasing overseas exports from 20% of GDP to 40% of GDP would be a reasonable target to set […] and would be expected to generate additional taxation revenues of some £5 billion each year.” [3.89]
   
• Some figures are scaled more robustly, but as with all the recommendations they are not then included in any total: “The Civil Engineering Contractors Association (CECA) recommends that investment in infrastructure should be maintained at least at 0.8% of GDP. For Scotland that would be £1.2 billion per annum and given the historic under-investment in infrastructure, there may be a case for substantially higher levels of investment over 5-10 years.” [A6.159]

Some of the building blocks may have been defined, but a strategy that would act as the bridge between potential and performance has not been constructed.

The report’s Chair has stated clearly “we don’t put assumptions for growth into the numbers”^{5BBC Sunday Politics Scotland, 27th May 2018} and the report itself explains “The recommendations set out in this part of the report [Part B, the ‘Strategy for the Sustainable Public Finances’] do not rely on increasing the growth rate.”^63.108
 
The report does talk about “economic aspiration”^{7“Over a medium-term horizon, the economic aspiration for Scotland can be framed around sustaining GDP growth at above-average rates to converge towards the income frontier for small advanced economies.” [A1.90]} and “ambitious growth goals”^8A3.99, but those who have interpreted these future growth figures in the report as ‘assumptions’ are apparently mistaken (presumably because they are never used as assumptions for modelling purposes).^{9These “goals” being distinct from the assumptions that were used by the Commission in their attempt to demonstrate how their spending-restraint driven deficit reduction strategy could lead to real spending growth (see B12.18)}

“Growth goals: The Strategy should include globally ambitious growth goals, to i) First 10 years: catching up with the small advanced economies average growth rate (currently 2.5%^{10This is the average real GDP growth rate for the GC’s SAE cohort from 2000 –to 2016, so we presume these figures are in real terms and that is how they have been arrived at – the IMF forecast 2016 – 2023 growth of 2.4% for this cohort and 1.9% for the LAEs}) (ii) Years 10 to 25: closing the GDP per capita gap with the small advanced economies (with period of 3.5% growth) (iii) maintaining a GDP per capita position in line with the top half of the small advanced economies group.” [3.98 and repeated A3.99 & A7.1]

These ‘goals’ are unjustifiably ambitious. Not only do they assume that an independent Scotland would grow at rates that can only be justified by including low tax, high income-inequality models in the SAE cohort, but these goals suggest an independent Scotland would outperform that SAE average by fully 1% of GDP growth pa for 15 years.

The idea that an independent Scotland would outperform the optimistic 2.5% pa figure by a further 1% pa for 15 years is an assumption that appears to come from nowhere. We presume it has been arrived at because if you compound a 1% difference over 15 years then you get 16% superior growth. The Commission rather arbitrarily chose the Netherlands as the aspirational GDP/capita target in Part A of the report and this was 14% greater than Scotland’s. If we ignore the fact that, by implication, the growth gap would be growing during the first 10 years (while Scotland is playing catch-up on growth), then this assumption would roughly close today’s gap in GDP per capita between Scotland and the Netherlands - but only if there is no differential in rate of population growth.

Over the last decade Scotland’s population growth has averaged 0.5% pa, but the Commission offer no estimate as to the incremental increase in rate of population growth they either aspire to or expect. What we can be sure of is that if incremental improvement in GDP is driven by an incremental increase in population, then the rate of improvement in GDP per Capita will be less than the rate of improvement in GDP.

The failure of the Growth Commission to make any assumptions about GDP/Capita is startling when we consider how strongly they recommend accelerating population growth: “The attraction of economic migrants (from identified target groups) should be one of the top priorities of Scottish Government economic policy.”^113.68

This is vitally important because, as the report observes: “The overall level of GDP in a country is less important to individuals than the level of GDP per capita.”^12A1.41 By providing an incremental GDP growth goal without any assumption about incremental population growth, we are left unable to judge what even the Commission’s aspirational goals would deliver in GDP/Capita terms.

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Executive Summary

Context & Response

1. Smaller isn’t Necessarily Better

2. Stretching the Empirical Data

3. Failing to Make a Case

4. A Reality Check

5. The Truth about Austerity

6. Aiming Too Low

7. The Missing Model

8. Currency – an Unsolved Conundrum

9. Making the Case for Union

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