Alf Young: Forecasts can never really add up

As the SNP's fiscal arithmetic comes under scrutiny, Alf Young reflects that projections are always going to be fallible. Picture: Getty
As the SNP's fiscal arithmetic comes under scrutiny, Alf Young reflects that projections are always going to be fallible. Picture: Getty
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I’VE always loved numbers. Ever since those relentless rounds of speed arithmetic in Ardgowan primary school in the 1950s.

I even studied maths for three years at university, until the challenges of strands like number theory began to defeat me and I opted to concentrate on what Glasgow University called natural philosophy. physics, to you and me.

But my affection for numbers never left me. They seem to promise clear rules and hard certainties. But also speak of hidden surprises and deep mysteries. I was captivated, the other morning, as Melvyn Bragg and guests, on Radio 4’s In Our Time, discussed the search for absolute zero, the theoretical floor for all temperatures, where all movement, even at the sub-atomic level, ceases.

No-one has ever quite managed to get there, even now. But in the 1880s, when the experimental race to reach absolute zero resembled the race to the South Pole, two of the main protagonists, much discussed on the programme, were the Scottish scientists, James Dewar and William Ramsay. They worked near each other in London, Dewar, from Kincardine, in the basement of the Royal Institution, Glasgow-born Ramsay at University College London.

Theirs was one of the great rivalries in the history of science. Not to put too fine a point on it, Dewar and Ramsay loathed each other with a passion and would do anything to frustrate the other’s progress. Dewar, a “professional melancholic” according to one of Bragg’s guests, was the first to liquify hydrogen. He also invented the vacuum flask. Ramsay discovered the rare or noble gases, like argon and neon. In 1904, he received the Nobel Prize for chemistry, an honour that, despite several nominations, eluded Dewar.

How fitting then that their bitter struggle to be the first to reach absolute zero should be aired again in a week when Scottish politics was once more gripped by its own perennial numerical scrap, over the comparative fiscal arithmetic of staying part of the United Kingdom or becoming an independent nation state. No, I’m not going to plunge yet again into who’s going to win that prize.

But I do want to say something about the numbers that underpin the debate between the two sides. On Wednesday we had the latest edition of GERS (Government Expenditure and Revenue Scotland) an annual desk-top exercise to come up with a proxy for public sector accounts for a stand-alone Scotland. It’s been a political football, booted hither and thither, for more than 20 years.

However this year’s version, covering 2011/12, coincided with the leak of a private memo about the “fiscal dynamics of an independent Scotland”, which John Swinney had circulated to cabinet colleagues last year. In it, Scotland’s finance secretary strikes a cautionary note about the consequences for future public spending commitments in an independent Scotland of the anticipated volatility of oil and gas revenues and a forecast more-than-doubling of Scotland’s net fiscal deficit, to £28bn by 2015/16.

Funding interest payments on Scotland’s share of existing UK debt will become “a significant feature of Scotland’s budget after independence”. Money will also have to be found to create new agencies of government, like an estimated £600m for a national tax collection agency. And an increase in the real-terms cost of providing existing public services after 2016/17 is also “likely” for two reasons.

Public sector wages will have to rise at a similar rate to those in the private sector in the longer term, to ensure recruitment and retention, the memo suggests. And demographic pressures on budgets like health and on spending on state pensions and public sector pensions will also grow. “We will need to be mindful that these pressures could reduce the resources available to provide additional public services,” Swinney warned his colleagues. As news of the leak spread, the Better Together campaign started handing out the ammunition. One tabloid doorstepped the finance secretary in Dundee, demanding to know whether he would fill his “£28bn black hole” by cutting the state pension, further slashing benefits or by axing more public sector jobs.

Back in Holyrood, First Minister Alex Salmond insisted public spending would rise, in real terms, in an independent Scotland from 2017/18 onwards. And, having dismissed forecasts of falling oil prices from Westminster’s Office for Budget Responsibility (OBR), on which some of the Swinney memo’s conclusions were based, as “wrong”, the Scottish government is now planning forecasts of its own on the level at which North Sea output will be priced.

The trouble with all these “numbers” is obvious. They are not hard measures of current realities. They are mere forecasts and projections of what might come to pass several years hence. And forecasts have a nasty habit of being wrong and having to be serially revised. In its own short life, the OBR has been consistently over-optimistic about the trend in UK growth. So it may well be wrong on the future trend in oil prices. But so too might a rival Scottish government forecaster.

We will only discover how many of the assumptions in the Scottish government’s annual GERS analysis are wide of the mark, if we do become independent and have to match that analysis against future constitutional reality.

For instance, there’s a table attached to the Swinney memo (Table A4) which tries to project Scottish revenues from all the major taxes through to 2016/17. It sees Scottish revenue from income tax, £10.8bn in 2011/12, rising swiftly above £14bn by 2016/17.

That 30 per cent rise in five years is a heroic assumption, given how slow recovery still is and how much austerity is still in the pipeline. There is, of course, another elephant in the room. The SNP leadership is currently minded to negotiate a formal monetary union with the rest of the UK, if independence happens. There’s even a little diagram attached to the leaked memo (Annex B), showing what it thinks Scotland’s macroeconomic framework might look like if such a deal were struck. But while the diagram sets fiscal policy quite separate from the conduct of monetary policy through a central bank (presumably the Bank of England), paragraph 35 of the memo acknowledges that Scotland would be deciding its fiscal stance “while ensuring that it remained in line with any agreements for the monetary union”. Most observers, this one included, expect any formal monetary union to hinge on strict fiscal rules being agreed by both sides.

We started with Dewar and Ramsay, at each other’s throats in the race to reach absolute zero. Now, whether it’s Salmond versus Lamont or Swinney versus Darling, trading much more fallible numbers, projections of things we cannot yet know, in their protracted constitutional joust, one thing is clear. This battle won’t be won on this set of forecasts versus that set of projections. It will be won, to borrow another phrase from the leaked Swinney memo, by whoever delivers the most “compelling narrative”. And, on the evidence of this week, “compelling” doesn’t quite capture either camp’s current pitch.