Alex Salmond's Fantasy Economics

Graeme Cook and Guy Lodge writes:

The Scottish government’s long awaited white paper is a piece of fantasy economics. More spending and lower taxes: everybody wins. Alex Salmond’s argument today is that Scottish voters can have it all. All gain and no pain.

Nowhere is this truer than on welfare where there is a long list of commitments to repeal unpopular policies and offer new goodies. Other than a (contentious) assertion that the tax base north of the border is stronger than in the rest of the UK, it is unclear how any of this can be paid for.

On pensions, the SNP want to make the state pension more generous, increase it faster and delay the rise in the age at which people can claim it. This is for a Scottish population that is ageing more quickly than the rest of the UK.

It is as if Scotland is immune from the affordability pressure on pension provision across the developed world. And that’s before the administration question is considered. The proposal today is for two quite distinct state pension systems across the UK to be run through one system. Is anyone clear whether this is feasible?

On working age welfare, the SNP are calling for a halt to reform. Plans to implement Universal Credit and replace Disability Living Allowance would be abandoned under an independent Scotland.

There are problems with both these measures, but it is more than a little worrying that the Scottish government is so vague about what would come in their place. These are major benefits affecting hundreds of thousands of Scots, many of whom depend on these payments for their day to day living.

One of the headline grabbing aspects of today’s announcement is on childcare, where the Scottish government rightly advances an argument for following a Nordic path of extending provision for parents with young children.

The first obvious point to note in response is that childcare is already a devolved issue, so there is no need for independence for such important progress to be made. The trickier problem for the SNP is, again, how the extra provision would be paid for.

There would be fiscal gains if the maternal employment rate increased, which an independent Scotland could recoup, but in every country where a similar shift has taken place, a sizable upfront investment has been needed to get things going.

What the white paper fails to mention is that Scotland stands a much better chance of meeting the future costs of welfare if it remains part of the UK social union. By coming together the nations of the UK are able to pool financial resources and share risks across a large and resilient political community.

This matters because economic shocks tend to be asymmetric, affecting individuals and places in different ways and at different times. Equally different parts of the country vary demographically, with some parts like Scotland today ageing more quickly than others, creating different pressures over time for public services.

The social union therefore ensures that if one part of the UK endures a period of economic or social hardship, it can be supported both by itself and by the other parts.

This can be seen operating in both directions, in Scotland’s history. Scotland today benefits from relatively high levels of welfare spending from the UK pool to allow it to meet the pressures it faces (today Scots benefit from financial transfers and additional spending per-head on welfare overall – £3,255 per head in 2011/12, nearly 2% higher per head than the UK average of £3,200).

But, similarly, oil revenues from what would be Scottish waters contributed very substantially to that UK pool during the 1980s.

A commitment to the UK social union is not anathema to further devolution. There is a strong case for strengthening the powers of the Scottish parliament in respect of welfare (an issue IPPR will cover in its devomore programme).

Housing benefit could, for instance, be devolved to allow Holyrood to respond to the housing supply shortage by switching spending from benefits to bricks. And, once devolved, there would be nothing to stop the Scottish government ridding itself of the bedroom tax.

Independence, however, would permanently break the UK’s social union weakening the ability of Scotland to cope with the fiscal and demographic pressures welfare states the world over face.