The nonsense of the ‘independence bonus’

Alex Salmond said on Wednesday that Scottish households could expect an “independence bonus” of £2,000 by 2030 if they voted Yes in the referendum in September. What is the first minister talking about? And does this seem likely?

These questions matter. Voters’ perceptions of the economic consequences of independence will be crucial to the outcome of the vote in four months’ time. This is especially true of undecideds. The UK government understands this. Elsewhere on Wednesday, Danny Alexander, chief secretary to the Treasury, presented a report that claimed Scots benefit from a “UK dividend” worth about £1,400 each.

The £2,000 Alex Salmond is referring to stems from “analysis” in chapter four of the Scottish government’s report on the economy and public finances of an independent Scotland. The report estimates how much extra tax revenue could be expected if one or more of the following nice things happened between 2018-19 and 2029-30:

  1. Productivity growth increased by 0.3 percentage points;
  2. The employment rate increased by 3.3 percentage points; and/or
  3. Scotland’s working age population increased.

It estimates that if all three scenarios occurred, “it could provide an additional boost to tax receipts of over £5bn a year.” There are about 2.5m households in Scotland, so hey presto, that works out at £2,000 for each of them. (If we convert the Treasury “dividend” figure to a household basis, it is £3,500.)

“All scenarios model an improvement in one or all of the drivers of economic growth rather than a specific policy”, notes the report. Nowhere is there an analysis of how productivity will increase or how Scotland will improve its demographics. The “bonus” is therefore not a reflection of the Scottish National party’s proposed policies, as laid out in Scotland’s Future, its white paper. It assumes good things will happen and works out how to share the bounty. There is nothing wrong in speculating what a more productive Scotland would look like but to pass fantasies off as robust pieces of analysis is an insult to the country of David Hume and Adam Smith.

An independent Scotland could certainly do with a boost to productivity and more workers. The chart below from the Scottish government’s report compares an independent Scotland’s projected debt under three scenarios. The first, shown by the blue line, is based on its current demographics and assumes no improvements in productivity above that assumed for the UK as a whole. The red and green lines show what happens to Scotland’s debt when the bonus assumptions are introduced.

The report does not go in to what the blue line would mean for the bonus.

It is probable that an independent Scotland would have a more liberal immigration policy than the remaining UK. The SNP has also said it would try to encourage the diaspora to return. Both policies could help with its demographic problem. But the reader of the report is left to assume that these will magically lead to the bonus. It is tautological: there will be more tax revenues because there are more taxpayers.

When considering Mr Salmond’s bonus, one should also ask what is meant by “an additional boost” to tax revenues. Compared to what? One would assume that he means compared to what Scotland would expect under the current UK. But that is not right. The “boost” is relative to another hypothetical independent Scotland, rather than what Scotland could expect if it remained as part of the union.

Take a second to consider this sleight of hand. Even if the average Scottish household were to be £3,500 better off because of being in the UK, as the Treasury suggests, then Mr Salmond could still claim his bonus because he is talking about something different entirely. Indeed, it is not really an independence bonus at all.