Caught out – Better Together’s assertions on the leaked John Swinney letters are unfounded

So on our page somebody shared this resource along with a set of revelations of an SNP cover up.  It turns out to be a leaked letter from John Swinney to the Scottish Government.  It purports to be a secret letter the SNP didn’t want you to see and claims that they tell you one thing in public whilst saying something else in private.  There are no names, no watermarks and only the makeshift cover page presented above.

It is included on the Better Together website under the title “One thing in public, another in private” along with the same assertions made by the author who put the post on our page.  On the site they point out that the media was slow to run with it, but thanks to their BetterTogether social media sharing campaign they had made it the top news story in Scotland.  Since reading it, I understand why the media didn’t pick it up at first, as it’s basically a letter from around 2010 on how the research into an independent Scotland was proceeding.  But it was picked up and presented as a big blow to the SNP.  Why? Well for one, while I imagine most people are able to read it themselves, someone at BetterTogether has:

“added notes throughout to help you understand what each paragraph means for an independent Scotland.”

They are stated as fact, though they come with no corroborating evidence or context.  They portray the SNP in a very negative light, as underhanded and not saying in public what they know to be true in private.    Curiously, but importantly, nowhere is it made clear who added these notes or what qualifications they have to interpret the implications for an independent Scotland better than Mr Swinney.

Now, this is an old story from March 2013 and I was surprised to find it still being circulated.  But more worryingly, it occurred to me that many of the assertions made were clearly misleading, designed to paint the SNP in negative light despite the careful and considered tone of the letter itself.  More worrying is the idea that it was on the basis of these assertions, not the content of the letter itself, that resulted in the successful social media campaign and the resulting media attention.

So here I will take each one of these notes in turn and see if it is indeed a reasonable interpretation of the paragraph and its implications.  Regardless of whether it is or is not, I will then examine the validity of each assertion, providing where I can the evidence and context that the mystery annotator omitted.  I will also endeavour to relate some of the spirit of the sections of the original “secret” letter, in the context that I think it was intended. My aim is to illustrate why letting someone interpret something for you, with no knowledge of who it is or their credential, with no sources and no context is a dangerous risk and can lead to a news story going from an almost non-event to a media highlight.  Before I begin, I would like to make it clear that neither I, not any member of the Autonomy Scotland team, are affiliated with, or have ever been members of, the SNP.  The purpose is simply to highlight the highly questionable tactics used in this one instance and how they can create false interpretations that are deliberately designed to damage reputations, spreading often unquestioned through the already murky waters of social media and into the mainstream news media.

“5. The focus of this paper is the fiscal dynamics of an independent Scotland.  All independent nations address these issues – getting the balance right between our revenues, which will be subject to more volatility in future as the block grant comes to an end, and our expenditure, where we will have more opportunities for innovation and prioritisation but also more responsibility, for example for benefits and defence.”

So yes, it does say the economy will be more volatile, but also that we’ll have more responsibilities and control.  Out of context our mystery annotator’s comment sounds quite scary, but the letter itself seems to be positive.  But credit where credit is due, they did accurately sum up 1 phrase of 1 sentence.

“Including a geographical share of the North Sea revenues, both Scotland and the UK are expected to run a net fiscal deficit each of the years to 2016-17.  Before 2016-17, Scotland is projected to have a smaller deficit, as a share of GDP, than the UK.  However, in 2016-17, OBR forecasts suggest that Scotland would have a marginally larger net fiscal deficit than the UK.”

There are figures that go with this point stating that those  after 2011/12 are projected and also that the source is the Government Expenditures and Revenue Report (GERS – you can find the up to date report from March 2013 in our Information without the Cherry-Picking section of our site).  These are old figures from prior to the SNP majority win.  For the record, the new report does confirm that Scotland’s deficit (8.3%) will be a larger proportion of GDP than the UK (7.3%).  However, “better off” or “worse-off” does not boil down to just the deficit and so these terms are misleading.  For instance, though it’s still not enough to make general conclusions, this difference in deficit is only 1% despite the oil price crash, and tax revenues in Scotland were £800 higher per person than the UK as a whole. So at best it’s an over simplification of the issue and at worst it is grossly misleading.

 “Meeting interest payments on inherited debt will be a significant feature of Scotland’s budget after independence. A shared understanding of the issues is therefore important. The position following independence will of course depend on negotiations with the UK Government. This section concentrates on the position to 2016-17.  The OBR forecast that, as a share of GDP, UK public sector net debt will peak in 2014-15 at 78%.  By 2016-17, UK public sector net debt is forecast to be 75 per cent of GDP (£1.5 trillion).”

So yes, Scotland will start with a proportional share of the UK debt.  This isn’t a surprise, though the SNP have threatened not to take that share unless a currency union is agreed upon.  So here our anonymous annotator is correct.  Although there is no note for paragraph 17, I’ll include it for context, which the annotator doesn’t provide:

“Scotland’s population share of the UK public sector net debt in 2016/17 would be worth £122 billion, equivalent to approximately 70 per cent of Scottish GDP in this year.  As a share of GDP, Scotland’s population share of the UK net debt is lower than the equivalent UK figure.  This is because, when North Sea production is included, Scotland’s share of UK GDP exceeds its share of the UK population.”

So actually, Scotland would start with a smaller debt as a proportion of GDP as the UK. So this is a lesser burden than that which the UK has.  But there is still no analysis of interest rates we would face.  The analysis on interest rates actually IS covered in paragraph 18, which conveniently has no post-it note either.  I’ll not provide the whole paragraph as the annotator is clearly mistaken, but 2 of the key lines are:

“In GERS, Scotland is assigned a population share of the interest rate payments that the UK Government pays each year on its debt.”

And:

“As Scotland’s population share of debt interest payments is projected to rise from £3.7bn in 2010-11 to £5.2bn in 2016-17.”

Now this seems like a deliberate omission in order to make a point.  But it is so blatant that I’m very surprised the annotator thought they would get away with it.

“North Sea tax revenue are a key source of tax receipts in Scotland.  Based on the OBRs forecasts, Scotland’s geographical share of North Sea tax receipts is expected to increase from £8bn in 2010-11 to £10.1bn in 2011-12.  It is then forecast to fall to £4.8bn in 2016/17, as outlined in paragraph 12.  Including North Sea receipts, Scotland’s share of UK tax receipts is projected to fall from 9.6 per cent in 2011-12 to 8.8 per cent share in 2016-17.”

So according to GERS 2011/12, Scotland did actually contribute 9.9% of the UK tax receipts, so actually it was higher than the estimated start point taken by this letter.  As such, this was the most recent figure available and the SNP were correct in using it.  The most recent GERS report for the period 2012-13, which I mentioned above, quotes a figure of 9.1%.  As predicted in the letter it has declined.  So despite the scepticism of our annotator, there was nothing erroneous going on here and John Swinney was correct.

“North Sea tax receipts have been more volatile than onshore receipts.  Forecasts of North Sea tax receipts have also been subject to larger year on year revisions than onshore forecasts.  For example, the March 2011 UK Budget forecast that the North Sea would generate £61.3bn in tax revenue between 2011-12 and 2015-16.  By Budget 2012 these forecasts had been revised down to £44.1bn, a reduction of £17.2 (25%).  These downward revisions were attributed to production being lower than previously envisaged and higher operating and exploration costs.”

Here our annotator does have a point.  The SNP originally claimed there was £1.5tn in oil in the white paper, which has come under heavy criticism as being an overestimate, as it is based on the most optimistic but still technically valid method of calculation, and as already out of date as it was based on a price of $100/barrel.  So the SNP were aware that oil prices had dropped in 2010.  The recent OBR report has also confirmed that on top of the 41% drop in oil revenue last year, it may drop as much as another 24% in the coming year. So at least here, the SNP do seem to be opting for an overly optimistic appraisal of the expected revenue from oil while knowing that the revenues were in decline.

“Given the relative importance of North Sea revenues to Scotland’s public finances, these downward revisions have resulted in deterioration in the outlook for Scotland’s public finances.  Scotland’s forecast cumulative net fiscal deficit between 2011-12 and 2015-16 has more than doubled from £12bn to £28bn as a result of the revisions to North Sea revenue over the past 12 months.  This high level of volatility creates considerable uncertainty in projecting forward Scotland’s fiscal position.  The OBR forecasts set out alongside the UKS March budget have not been seriously challenged by the industry or by independent commentators.  Such volatility also means that outturn North Sea receipts can also be higher than forecast.  For example at Budget 2009, the UK Government forecast that the North Sea would generate £20bn in tax receipts between 2009/10 and 2011/12.  Outturn receipts over this period were ultimately £25.6 billion.”

So reading this, the annotator seems to claim that the SNP know the price of oil is “VOLATILE” and don’t tell us.  But in the letter it’s clear that the information is public as it’s in the budget and the GERS or OBR report.  Anyone who buys petrol knows that the price of oil changes.  Moreover, by capitalizing the word volatile, the annotator makes it seem super important.  It’s also the second time “volatile” has been referred to as a hidden negative.  So what exactly does the word “volatile” mean?  According to the Oxford English Dictionary (OED) it means:

“liable to change rapidly and unpredictably, especially for the worse.”

So indeed, this suggests that volatile oil prices can change erratically and often in a damaging way for the economy.  But John Swinney is a financial expert and therefore most likely uses the finance definition of “volatility”, which is simply:

“The term volatility indicates how much and how quickly the value of an investment, market, or market sector changes.”

So here the use of the word “volatile” is simply a measure of the rate at which the oil prices change.  Indeed, as the letter points out, prices also can lead to HIGHER than predicted returns suggesting this is the usage Mr Swinney intended.

“In an independent Scotland this will have important implications for budget setting and estimating public sector borrowing requirements.  Careful consideration will need to be given to managing this revenue source while ensuring effective and competent oversight of public finances over time.  One approach is to reduce dependence on oil revenue to support annual expenditure budgets, by using oil revenues to accumulate an oil fund.  However, this would, on present assumptions about on-shore tax revenues, require some downward revision in current spending.”

Firstly, “volatile oil prices” implies nothing about “public spending”.  This is misdirection as can be seen from the full content.  Cuts in public spending are required in order to reduce long term dependence on oil, which I think all would agree is a good thing given the volatility acknowledged in the previous paragraph.  The purpose of such cuts would be to establish an oil fund, which has benefited every country that set one up.  Interestingly the UK has never made this investment and instead spent the oil revenue as was generated (see this article on oil). It is also worth noting that the OBR expect the revenue from on-shore tax receipts to actually increase, in part offsetting the reduction on off-shore tax receipts.

“From 2017-18 onwards public spending is therefore expected to grow in line with the economy.  This would imply real term growth in Scottish public spending of between 1.5% and 2% a year.  There will therefore be some opportunities to provide additional resources to priority areas. However, there are also inherited real term cost pressures with public sector budgets.  One of these – debt repayments – I have already set out. There is also likely to be an increase in the real terms cost of providing existing public services in Scotland after 2016-17.  We will need to be mindful that these pressures could reduce the resources available to provide additional public services”

Nowhere here does it mention jobs or cuts. They say that real term growth will lead to an increased growth in spending, which allows for targeting priority areas for additional resources, but that there may be less available in general for additional public services.  So there is a chance that they can provide no new services, but that doesn’t imply cuts to existing services. Again our annotator has made erroneous assumptions that were not in the letter.

“An important consequence of independence is that responsibility for benefits and welfare will be discharged in Scotland in response to Scottish conditions and priorities.  While expenditure on welfare benefits is influenced by demand, especially recently when the Scottish economy was in recession, demographics is an important factor within this for Scotland given the ageing population.  At present, HM Treasury and DWP absorb the risk of growth in demand in the widest sense and therefore all associated costs.  In future we will assume responsibility for managing such pressure.  This will imply more volatility in overall spending than at present, especially as there is little we can do from a public policy perspective in the short to medium term to manage Scotland’s demographic position.  Of course I recognise that volatility cuts both ways – offering the possibility of cost reductions.  I think we should be wary, however, of assuming savings can be found quickly – the fact remains that careful management will be important.”

So, 2 claims on this paragraph (though the first is labelled 20, this is an error as par. 20 is about Scotland’s share of tax receipts).  The first claim, that the pressure faced by Scotland is greater than that faced by the UK, isn’t found anywhere in the document.  It most likely refers to the fact that Scotland’s population is ageing faster than the UK (read the report here). Given that Scotland has a lower life expectancy than the rest of the UK, an ageing population is potential indicator that this is changing. And yes, it’s rising faster than in the UK as the divide between the two countries narrows. So there may indeed be increased costs relative to the UK, but while this may be a strain on an independent Scotland’s fledgling economy, surely it should be seen as a positive for Scotland’s people.  Furthermore, that the UK carries the pension risks associated with changing demographics at the moment is not a surprise.  Pensions are managed by the UK Government, so of course at the moment they carry the risk.  If Scotland becomes independent, of course they will shoulder the risk, as it will be a sovereign nation.  So the second point is invalid.  Pensions in an independent Scotland are a very important issue, and currently, in my personal opinion, it is not well dealt with by the Yes campaign.  I will actually cover this in a separate blog post soon, as it is a very delicate and very important matter in the debate.  But suffice to say, all our annotator has done here is point out the obvious while deliberately omitting relevant context and include some misdirection to make it seem like there is obfuscation on the part of the SNP.

“An independent Scotland in a formal monetary union would have the fiscal and wider economic policy freedom to tailor policies to enhance the performance of the Scottish Economy.  Scotland would decide on the best overall fiscal stance which is appropriate for the Scottish economy, whilst ensuring that it remained in line with any agreements for the monetary union”

Okay, so no mention of a “veto” anywhere here.  It simply says that in the event of a currency union Scotland would ensure that its financial programme fits in with the conditions agreed on with the UK when the currency union agreements were put in place.  There is an implied power that the UK could in theory reject some parts of Scotland’s budget, but only if they were careless enough to not meet the conditions laid out in the agreement with the UK, which is a far cry from a wholesale veto.

“The Working Group will also support the engagement with key business institutions and external experts to help develop the Scottish Governments proposals. The Scottish Government has already had informal meetings with officials at the Bank of England and a number of the major Scottish financial institutions to discuss the practicalities of an independent Scotland operating within a Sterling Zone.  These discussions will continue and will help build on the economic proposals already outlined by the Scottish Government.  I will also ask that officials supporting the Working Group ensure that other ministerial interests are factored in. For example, I expect that the Working Group will consider the affordability of state pensions as its work on fiscal sustainability proceeds.  Our fiscal rules will also need to take into account the issue of how Scotland funds counter-cyclical expenditure (with welfare, specifically payments to those who become unemployed, being probably the biggest component of this).”

So, there is one line on pensions and it is about the Working Group examining the affordability of old age pensions.  It doesn’t say they are considering cutting them anywhere, or even that this will be a negative appraisal.  The SNP have claimed they will actually raise the state pension, and have subsequently come under fire as it may not be feasible with their current model.  In actuality there is support for having a lower state pension age in Scotland due to the lower life expectancy than that in the rest of the UK, and that tax increases may be required to fund this at the same pension amount as in the UK.  But nowhere is there any talk of having a lower pension in Scotland than in the UK.  So this was just misrepresentation.

“Undoubtedly there will be a cost associated with setting up and running the necessary institutions and in some cases these are likely to be significant.  Initial work has shown that we will have a number of choices around how we set-up and design our economic and financial institutions based around best practise and degree of Ministerial control.  I have been clear that we will need to focus on the functions rather than looking at the institutions.  This will provide opportunities to think creatively and innovatively around the way we design institutions to ensure that they will be as efficient and low cost as possible using new technology and an enhanced digital service.”

So this is an observation.  Albeit a one-sided observation as it could be observed that the UK government will talk up the costs.  Probably both sides have a reasonably good idea of how much they expect it to cost, but exaggerate in either direction to win votes.  Here, it seems that they are taking seriously the issue of costs, which isn’t a bad thing, but as there are no numbers presented you cannot conclude that at the time this was written the SNP were misleading the public.  Of note is that they were at the time looking at all the options available to Scotland and to ensure low costs. So regardless of the result, behind closed doors their heart and brains still seem to be in the right place.

“The Scottish Government will build on this work to develop proposals, drawing on an international best practise, for a modern and efficient tax system for an independent Scotland.  Taking Ireland and New Zealand as examples of international best practice, tax authority running costs in Ireland are approximately £329m a year – approximately 1.16% of the total revenue raised, while in New Zealand they are approximately £350m, about 2.25% of total revenue raised.  Tax revenues in Scotland are approximately £40bn. Corresponding annual costs of tax administration in Scotland would on this basis be expected to lie in the region of £576 to £625m.”

Here, our annotator is actually correct.  This is twice what it costs to run a devolved government. Many functions at the moment are run and paid for at a national level, and would be turned over to Scotland in the event of independence.  As such, it’s unlikely anyone would be genuinely surprised by this increase. Furthermore, as the letter points out, this is actually comparable to similar small nations. What’s more, they are looking at as range of options to evaluate best practice and so may eventually opt for a cheaper tax system model.  In the interest of completeness the SNP have had to revise their original set up costs for the new tax system upwards since the publishing of the white paper.

“Defence: Scotland is assigned a per capita share of UK defence spending.  This represents the cost of defence activities undertaken by the UK Government for Scottish residents.  Historically, defence spending in Scotland has been lower than Scotland’s population share of the UK defence budget. I have made clear to the Defence Workstream that a much lower budget must be assumed.”

There is no mention of the number of soldiers or bases, or that we won’t be able to fund such a military. The UK is a military nation, with a powerful Navy, Air Force and formidable nuclear deterrent to be used on an international stage.  An independent Scotland would not require such a military presence, even if it were to want to be a world player, and so it is more likely that the cut in defence will be reflected in the downsizing of Scotland’s international capabilities, not the resourcing and manning of homeland defence.  The costs are as yet unknown, and the figure quoted by the SNP of £2.5bn seems small. But it is still a tiny fraction of the UK defence budget of £34bn, which is the 4^th largest defence budget in the world.  Of this, Scotland pays around £3bn so £2.5 is a “much lower budget” as laid out in the letter.  You can read the details of the planned Scottish military here.  There is also the plan to remove the Trident nuclear facility from Scotland, which costs £170m, but there are associated costs of removing it of approximately £150m, while relocation could cost upwards of £20bn.  The SNP have claimed they will aid in relocation but they will not pay for it.

So, we’ve been through the letter and taken each of the notes in turn, examining whether they “help you understand what they mean”.  None actually help understand the paragraph and all seemed written with the intent of harming the SNP.  A couple do make valid points, however as a reader you had no way to know that unless you did a lot of research yourself.  Whilst I have tried to do this for you here, I hope I’ve convinced you that if you had done the research yourself you would still not have drawn the same conclusions as our mystery annotator.  I’ve tried to be fair here, and where the SNP have been erroneous or misleading I have said so.  But this is hardly a damning indictment of the SNP or John Swinney misleading the public.  If anything it shows that they are thinking long and hard about the implications independence has for Scotland and how to set up future institutions that are both fit-for-purpose and low-cost by looking around the world at where the systems work best.  I feel more confident now that they have our interests at heart, even if for the cameras they present an overly optimistic picture of the initial conditions in an independent Scotland. It saddens me that the Better Together campaign, or supporters, have chosen to resort to misrepresenting a letter examining the serious issues that will affect an independent Scotland. They have misrepresented the SNP stance on these issues, rather than stepping up and presenting their own evidence that the UK Government gives Scotland’s future as much thought as John Swinney has in this one letter.

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