Summary of findings: a fiscal shortfall of at least £4,746 million

I have been prompted to post again here by this post directed to me on the Scotman forum:

AM2, regardless if there are a number of minor errors in ‘The Great Deception’, the argument still stands, that the GERS do not show an honest account of the total revenue taken from Scotland. Even with these errors ironed out Scotland still does better than brake [sic] even.

The post reflects a common misunderstanding (wilful or otherwise, I can't say) that the errors I have identified below don't amount to much. So here is a summary. I have not included the overestimation due to double taxation treaties, because although Niall admitted that net receipts would indeed be reduced, I did not take the time to identify the monetary significance of the discrepancy.

	£ million
Surplus claimed by The Great Deception	9,632
Less: fuel excise duty overestimation	-3,782
Less: oil & gas revenue overestimation	-250
Less: VAT on fuel and whisky overestimation	-1,548
Less: company HQs outside Scotland overestimation	-2,189
New "surplus"	1,863

Now, the SNP said in a November 2006 press release that their planned oil fund would grow, within 10 years, to £90 billion and then produce annual investment revenues of £5.5 billion. That corresponds to a 6.111% return.

Except to hint that it would be at least half of all North Sea revenues, the SNP hasn’t said how much money each year would need to be diverted out of public services into the fund.

Thankfully, the calculation isn’t difficult. I used monthly interest and the same 6.111% annual compound returns that the SNP assumed, reinvested over 120 months (0.4955% monthly). On that basis, the fund would grow to £90 billion only if the annual capital investment was £6.609 billion.

So that £6.609bn would have to come out of the public purse for each of the first ten years of an independent Scotland. This, even using Niall Aslen's figures would leave us with an initial fiscal gap of at least £4,746 million to fill through some combination of additional taxation, government borrowing and/or public service cuts.

Finally, I would stress that I have not sought to reconcile The Great Deception with GERS 2005. My objective was only to show that The Great Deception is so pitted with errors that even its broad conclusion must be rejected, and that proved easy.

Finally! Niall Aslen replies.

Having been told by Niall Aslen on 27th March that he would reply "when time is available" to my first post on this blog, yesterday I posted on the Herald forum a not-so-subtle reminder to him that I was still waiting for his data. This morning he decided to reply.

Niall's reply is in indented italics, with my comments in plain text.

I do not have the time at present as I have been asked to analyse the 2005/6 Government figures with the remit to examine the viability of Independence based on them. Its an interesting task and one I will relish.

So, Niall evidently no longer intends to give any consideration to critique of his 2004/05 "analysis" before pushing ahead with a 2005/06 version. Might not some contend that such an approach could indicate a political motive rather than concern for the facts of the matter?

As for replying to your blogspot, If I were you, I would wait for the Treasury response to my paper "The Great Deception" The economists and statisticians at the Treasury are well qualified to comment seeing as they have had 13 days to study the paper. So far they have not yet responded which indicates that they are so far in agreement with the figures. I would have expected triumphalist trumpetings if they had discovered any errors.

The Treasury, as a matter of course, do not respond to such submissions. It is ludicrous to imply that for 13 days its economists and statisticians have had little else to do but dissect a letter sent them from a fringe political party (the SEP) and that contradicts well-established methodologies without even providing reasons. Further, to state that their wholly predictable lack of response indicates their agreement (thereby invalidating my findings, of course) is clearly disingenuous.

My time is limited, I get dialysis three times a week and have to run a busy accountancy practice, so you will understand if I do not waste time pulling sheets of data from the folders which contain around 1,800 pages of data, just to satisfy your queries. Your can appreciate the amount of time required just to retype or even cut and paste.

I have already expressed sympathy in respect of the dialysis. But Niall's overall message is clear here: for various reasons, he will be finding time only to repeat the meaningless exercise for 2005/06 and so no more data will be forthcoming. The specific underlying assumptions of even the wildest unsubstantiated claims of The Great Deception (such as a 35.9% allocation of the UK's spirits duty to Scotland, when GERS 2004/05 uses 8.9% and even the SNP only claims 9.5%) must now go unchallenged, as the author is not prepared to devote the requisite time to facilitating such challenges. How convenient.

Finally I despair at the mentality of some supporters of the Union who have got hold of my address. Such a waste of postage stamps and envelopes. Pages from the daily Rectum screaming pure Labour propaganda and hogwash posted to me with "Get to F**k" and "Fenian B*****d" (some of the least nasty comments). I just put them through the office shredder to be used as compost for the potatoes. Hope the ink is not toxic.

I too would despair at such a mentality. However, if there is a next time, instead of destroying all evidence that such hate mail ever existed, perhaps passing it onto the police would be a more appropriate response?

Have a nice day at Labour party HQ, The day of doom is fast approaching when the rotten Labour burghs will be cleansed and Scotland will be rid of the Neu Liebour parasites who regarded them as their private feudal fiefdoms. You will be out of a job and on the buroo whilst the rest of us set about rebuilding Scotland as an Independent Nation.

Airson Alba!
Niall Ban.

This bipolar attempt to cast Scottish politics in terms only of the SNP and Labour, the resultant conspiratorial presumption that as I can't be SNP I must be Labour, the evident historical romanticism, the apocalyptic language and the apparent triumphalism all speak for themselves. I won't open myself to spurious allegations of libel by expanding upon the obvious.

As I said, Niall - message received. I won't ask again.

Scottish companies with business units outside Scotland

The Great Deception claims 100% of all Scottish-headquartered companies’ corporation tax for Scotland. This is demonstrably incorrect.

In 2004-05, the Royal Bank of Scotland paid £2.38 billion corporation tax to the British exchequer. RBS is such a huge company that this was over half of the total non-oil corporation tax for the whole of Scotland!

The Great Deception credits this whole £2.38bn to the Scottish account. But a huge proportion of RBS’s business is outside Scotland (NatWest, Ulster Bank, Direct Line, Coutts etc). If Scotland were to become independent, business units of companies like RBS, HBOS, Standard Life and Abbot Group that are incorporated outside Scotland would pay corporation tax to Scotland only in respect of the small proportions of their operations that were actually within Scotland itself.

The GERS 2004/05 estimate of £2.422bn is therefore a much more reasonable estimate of the non-oil corporation tax revenue than the £4.611bn claimed by The Great Deception. The resulting revenue overestimation amounts to £2.189 billion.

VAT on whisky and fuel exported to England

GERS uses 8.1% as the proportion of UK total VAT revenues that can be attributed to Scotland, thus estimating a credit to the Scottish account of £5.949bn. The SNP suggests 8.5% (£6.50bn).

However, The Great Deception uses 10.3% (£7.497bn) giving as a reason that “this 10.3% distortion is due to the fact that VAT is charged on Bottled Whisky and Hydrocarbon Fuels as soon as they leave the Distillery bonded stores or the Refinery gates”.

But that’s not true for export goods. It's not an issue within the UK of course, but in an independent Scotland, Scotch whisky and Grangemouth-refined fuel exported to be sold in England would pay VAT only to the English exchequer. I would therefore contend that The Great Deception has overestimated Scottish VAT revenues by up to £1.548 billion.

Double taxation treaties

From the Herald forum (link):

Niall,

I am wondering what assumptions you may have made about the nature of any double taxation treaties negotiated between a future Scottish state and other countries.

Regards,
AM

Another poster followed up with specific detail:

"...take our big two banks. Most of their income is made outside Scotland despite having (even bogus) H.Q.s in Edinburgh. Have you repatriated their corporation tax as a whole or apportioned it on the basis you describe? This would apply to our big insurers, indeed to every company trading beyond our boundaries perhaps even down to our Tunnock’s Carmel Wafers.

You see, your figures show a total Corporation Tax (incl basic North Sea but not North Sea SCT) payment for the U.K. of £33,641 [million] and Scotland’s share of that is shown as £7,367 [million] or almost 22% (if you add in SCT that jumps to 24%)."

This was Niall's reply:

[I] admit that in an Independent Scotland a proportion of these Taxes would be subject to double taxation relief and the the gross receipts would be reduced by some 55%.

In other words, Scotland's share would actually be nowhere near the 22% used in The Great Deception.

Percentage allocation of UK oil to an independent Scotland

The Great Deception says:

When the Scottish Parliament was established, the UK Government annexed 6000 square miles of Scottish Waters rich in Oil, Gas and Fish and transferred them to English jurisdiction.In these cases, I have re-allocated this areas Tax revenues to the Scottish Tax Revenues account under the original international boundary.

What original international boundary, one might ask? There can't have been an international boundary, in the accepted sense of the phrase, since before the 1707 Act of Union. The much-misquoted Continental Shelf (Jurisdiction) Order 1968 (link) only defined a Scottish area for purposes of application of Scots Law at sea. It certainly did not establish an international boundary.

The SNP's Mike Weir, MP for Angus has said:

The fishing boundary between Scotland and England has been recognised for hundreds of years. This move showed up Labour's contempt for our fishing industry.

This is entirely incorrect, as explained by Fisheries Minister Lord Sewel in a 1999 letter (link):

Much has been made about 6000 square miles of fishing grounds being seized. But the reality of the situation is that 140,000 square miles of British Fishery Limits has been transferred from the UK Government to the Scottish Parliament. We must not lose sight of this.

The boundary has been set by drawing a median line. This follows the accepted convention on such matters. Any point on the boundary line is of equal distance to the mainland of Scotland and of England. In other words every inch of the 6000 square miles is closer to England than to Scotland.

There has been no transfer of "Scottish fishing waters" to England. In fact, this Order allows the transfer of responsibility for regulating sea fisheries from the UK Parliament to the Scottish Parliament - not in the other direction. The rights of Scottish fishermen to fish throughout British fishery limits are unaffected by the Order.

The following is from Ross Finnie, Minister of Environment and Rural Development speaking in the Scottish Parliament on 3rd June 1999 (link):

The most important point is that it is also wrong to claim that a legally enforceable boundary line has been shifted. This is the first time that a fisheries boundary has been fixed in law. Before devolution, there were no Scottish fishing waters. There were only British fishing limits. The so-called existing line is simply part of an administrative arrangement within a UK-wide management regime. The boundary lines in the order are being drawn in accordance with international convention on such matters and-as members who have studied this matter will be aware-have involved the use of median lines.

The method of using median lines is indeed the established UN convention; see Part 2, Article 15. So, the upshot of this is that while The Great Deception uses 95% as the percentage of UK oil production that would be allocated to an independent Scotland, that figure is based on wishful thinking about where the international maritime boundary would in fact lie. A truer proportion would therefore be about 90%.

The monetary significance of this error would be in the amount of 5% of £4.985 billion, which is approximately £250 million per annum.

Hydrocarbon oils (fuel excise duties)

This blog has been set up to examine the conclusions of Niall Aslen's article The Great Deception (link).

This is the first of a number of analyses of Mr Aslen's figures and methods that I will publish here, as my time permits.

GERS 2005 used 5.6% (£1.313bn) as the Scotland:UK ratio for fuel excise duties. The SNP used 9% (£2.098bn) in “Scotland in Surplus”.

Mr Aslen used a massive 20.8% (£4.839bn) in The Great Deception but apart from referring to “the dominant position of the Grangemouth Refinery in the UK” and saying that he had “calculated the fuel duty from the production figures” he did not provide any further justification.

I also calculated the fuel duty from the production figures, but the following suggests that around only 4.53% (£1.057bn) of the total UK fuel excise duty comes from Grangemouth, Scotland's sole fuel refinery. This is £3.782bn below Mr Aslen's estimate.

FUEL TYPE	PROPORTION OF OUTPUT	DAILY OUTPUT (litres)	2004 EXCISE DUTY (£/l)	DAILY EXCISE DUTY (£)	ANNUAL EXCISE DUTY (£)
Petrol	22%	2,090,000	0.5170	1,080,530	394,393,450
Diesel	24%	2,280,000	0.4852	1,106,256	403,783,440
Kerosene & jet fuel	13%	1,235,000	0.2895	357,533	130,499,363
Gas oil	8%	760,000	0.0664	50,464	18,419,360
Fuel oil	15%	1,425,000	0.0624	88,920	32,455,800
LPG/petrochemical feedstocks	12%	1,140,000	0.1303	148,542	54,217,830
Fuel gas/other	6%	570,000	0.1110	63,270	23,093,550
		GRANGEMOUTH TOTAL (£)			1,056,862,793
		UK TOTAL (£)			23,314,000,000
		GRANGEMOUTH AS % OF UK			4.53%

Proportion of output data:
http://www.ukpia.com/industry_information/refining_uk_refineries/refineries/ineos_grangemouth_refinery.aspx

Hydrocarbon duty rates 2004-05: (some assumptions on fuel type breakdown were required - please critique)
http://customs.hmrc.gov.uk/channelsPortalWebApp/downloadFile?contentID=HMCE_PROD_009002

Total daily Grangemouth output is "over 9 million litres". I used 9.5m.
http://www.innovene.com/genericarticle.do-categoryId=9002816&contentId=7005620.htm