Tuesday, 29 March 2016

Fun with numbers

Here's an Easter story.

Imagine that Scotland had been given full powers over income tax back in 1985. Imagine that Holyrood had introduced a package of measures designed to reduce the wealth gap;

  • A 60p top rate of tax
  • A cap on top salaries in the public sector, and amongst firms bidding for government contracts
  • A wages top-up for the lowest paid

These measures had changed the discourse, so that company bosses talked about their social responsibility in boardroom salaries. Fergus Ewing  chaired an annual conference with the Scottish CBI and the unions, and gave a prize for the most innovative way of making pay fairer in companies.

While in the rest of the UK the wealth gap continued to grow (you don't have to imagine that bit. It did), in Scotland the wealth gap was static or mebbe even shrunk a little.

What would have been the effect on the Scottish economy?

The OECD has calculated that the growth in the wealth gap in the UK slowed down the growth of the economy. When you leave the poor to get poorer then they miss out on schooling and the result is that the economy does not benefit from their talents. The UK economy was slowed down by 0.35% per year because Westminster allowed the wealth gap to grow. The OECD figures are based on the growth of the wealth gap 1985-2005, and the subsequent effect on the growth of GDP 1990-2010.

Back to our Easter story. If the wealth gap had not grown in Scotland, our economy would have grown faster.

Now let's do the maths. We will use the same time period as the OECD;

In 1990 Scotland's GDP was £90.9 billion (Source: calculated from Scottish Government)

By 2010 it was £131.8 billion, excluding offshore oil share (Source: Scottish Government)

If we had stopped the growth in the wealth gap, the economy would have grown 0.35% more per year.

By 2010 it would have been £140.9 billion

That would have been an extra £9.1 billion, thanks to the three measures introduced in 1985, that stopped the growth in the wealth gap.

It was a package of measures, so we'll assume that each measure had an equal effect. The 60p tax rate was responsible for one third of the effect, as was the salary cap and the wage top-up.

So one third of the £9 billion in extra GDP is due to the 60p tax band; that's £3 billion extra, as the result of the tax band.

You can see where I am going with this maths now; the Scottish Government has said that it will not introduce a 50p tax band for fear that it might lose £30m in tax receipts (I'm paraphrasing, so do read the full report to see the details.)

But a 50p or 60p tax band as part of a series of measures designed to tackle the wealth gap, could have grown GDP by much more. If you follow the maths, the potential benefit is £3 billion more, against a risk of losing £30m in tax revenues. A 100:1 opportunity. Too good to miss.

This is the upside; by tackling the wealth gap, using tax as one of a range of measures designed to change the discourse about incomes and wealth, you make your country richer.

Let's hope that the new Scottish Government  does the maths.

Disclaimer: So's we're all clear, I am not an economist and I live in Catalonia, not Scotland. So this is just a wee grain of grit for the debate that you are having, and voting on, in Scotland.

Anon, 2014. Focus on Inequality and Growth, Paris, France: OECD Directorate for Employment, Labour and Social Affairs. Available at: https://www.oecd.org/social/Focus-Inequality-and-Growth-2014.pdf [Accessed March 29, 2016].

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