Treasury’s “union dividend” calculation deeply flawed

Treasury calculations of the financial 'advantage' to Scotland of staying in the UK are so flawed as to reveal a deep rot in a once proud British institution.

Jim and Margaret Cuthbert
26 August 2014

The Treasury. JamesF/Wikimedia. Some rights reserved.On May 28th, the Treasury produced its report “Scotland analysis: Fiscal policy and sustainability” on the size of the union dividend which every Scot, it was claimed, received as part of the UK. According to the Treasury, over the next twenty years, every man, woman, and child would be £1,400 better off each year for staying in the union.

In a paper published by “Options for Scotland” on 14th August, (available on our website, we examined a number of aspects of the Treasury’s calculation of its “union dividend”.

One thing we found is that there are large technical flaws in the Treasury analysis and calculations: in particular, the model the Treasury used fails to account for various known features which will inevitably affect the future they are trying to predict. The identified flaws include, among others:

  • - the Treasury’s failure to allow for the Barnett squeeze which, on the Treasury’s own growth assumptions will automatically begin and adversely affect the Scottish government’s funding under a continued union.

  • - Failure to recognise that the funding model for the devolved Scottish government has no mechanism for making provision for a significant element for the extra costs associated with Scotland’s relatively ageing population.

  • - Failure to allow for the implications of quantitative easing.

However, the problems with the Treasury’s approach go much deeper than these technical flaws. Its failure to model the way the Scottish government is funded under the union, allied to its failure to look at variant scenarios for UK public expenditure growth, means that the Treasury entirely miss the lose/lose situation which Scotland is in under continuation of the union. On the one hand, if the Treasury’s optimistic growth scenario is realised, then there will be a Barnett squeeze. But on the other hand, in the very likely case of continued austerity, then the Barnett formula would mechanistically deliver increasing levels of per capita expenditure on devolved services to Scotland relative to England: in the face of universal austerity in the UK, this would make the continuation of Barnett politically impossible. Either way, Scotland loses.

The Treasury calculations also fail to allow for the adverse effects which are, in effect, baked into the UK baseline from which the Treasury attempts to measure its “union dividend”. These negatives include:

  • - The very serious risks of a UK financial crisis.

  • - Having successive Conservative governments which Scotland has not voted for.

  • - Illegal wars.

  • - Trident, which is based on the doorstep of Scotland’s largest conurbation, and which polls show is anathema to the bulk of the Scottish population.

  • - The adverse effects of Scotland’s lack of direct representation in international bodies like the EU and the UN.

  • - The inefficiencies in the operation of reserved functions in the UK, which means that Scotland has at times to seek permission to allocate part of its own budget to overcome deficiencies – and is on occasion even penalised for so doing. (A classic example of the latter was free personal care for the elderly, where the Scottish government hoped to use the attendance allowance of those in care homes to help meet the overall costs. The UK government refused to transfer the attendance allowance monies, so Scotland was penalised by over £20 million per annum).

  • - The fact that Scotland has to take on board, without any option, divisive UK policies in areas like social security.

In effect, the Treasury approach is fundamentally and implicitly union-centric: so that the present state of the union is inherently regarded as being natural, beneficial, and risk-free. What should have taken place was a proper assessment of the pros and cons of the union, going into the risks and costs attaching to continued membership of that union.

And last, but not least, is the question of the assumption that the Treasury made about the independence scenario - in areas like start-up costs, oil, and debt. These assumptions have, rightly, been strongly challenged by others: see for example oil expert Donald MacKay in the Sunday Times on 6th July. While it is not the primary purpose of this paper to go into these areas in detail, there are good grounds for believing that the Treasury has chosen to be unduly pessimistic. 

The Treasury paper is, of course, meant to tell us something about Scottish independence: but actually, what it does do is to indicate something very significant about what has happened to the Treasury itself. The two fundamental failings in the Treasury paper are the failure to take on board in their modelling known, and essential, features of the real world – particularly the funding arrangements for devolution: and the failure to produce a balanced view by addressing the risks attaching to the UK economy. These failings tell us that the once proud Treasury has become a thoroughly politicised organisation, and one where technical standards have badly slipped.

Overall, where does our critique leave the “union dividend”? Is it just a question of reducing the Treasury’s assessed dividend in relation to those technical mistakes that we have identified and which can be quantified? Absolutely not. What we argue is that the whole concept of a single figure “union dividend” is nonsense and must be abandoned. The decision that the Scottish people will take on independence involves many factors. To try to boil that decision down to a single monetary amount is basically meaningless: and when the method adopted essentially assumes away all the risks and costs attaching to staying in the union the result is not merely meaningless, it is intrinsically biased. When the Treasury produced their results, their use of children’s lego men to explain their findings to the simple minded Scots was widely, and rightly, seen as insulting. In fact, the real insult was not in the use of lego men to present the results: but in the fact that the Treasury adopted a flawed and biased methodology in the first place.

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