During the 2014 independence referendum campaign the No side came up with some decent slogans and simple concepts: Better Together, the UK’s “broad shoulders”, Pooling and Sharing resources and towards the end the firmer “No Thanks”: a call for a polite but firm rejection of the case for Yes.
On our side we also made much use of some loose language they revealed to a journalist when they admitted their case was also based on what they called Project Fear.
That meant in fact that they had a nice balance (in slogans at least) between the warm, cuddly idea of all working together across the UK for the common good and the direct warnings of calamity under independence.
Today, because of the chaotic, damaging UK experience of the last 12 years (Brexit, Truss, Johnson, stagnant living standards etc) all the positive stuff has had to be junked. In its place there is a flat “No” to an independence referendum despite repeated pro-independence majorities in the Scottish Parliament, and when there is rare engagement with substance then instead of Better Together type ideas the case for the Union seems to be rather blunter, in effect: “You’re trapped suckers”.
That can be seen most clearly with the idea of the border between an independent Scotland and the rest of the UK in the event of independence, something that wasn’t much of an issue in 2014 as, from the Yes side anyway, the relationship we envisaged was one between two countries both within the EU.
We now have the situation where Westminster parties are saying to people in Scotland: “we’ve taken you out of the EU against your will, therefore we’ve made your life harder now (because of the substantial costs of Brexit) but we’ll make it even harder in the event of independence because of the economic border that would exist between us. Sorry, not sorry.”
In fact the Scottish Government has addressed the border issue here, while also drawing attention to the benefits both Ireland (and it seems Denmark) have enjoyed through trade diversification away from over reliance on the UK.
So when it comes to the border we’re not quite as trapped in Brexit Britain as Unionists like to think.
This week while doing a long training run in Glasgow’s beautiful Pollok Park (hence Pollok House in the photo above) for the Great Scottish Run half-marathon in October, I was thinking, as I’m sure a lot of runners do, about another strand of the “you’re trapped suckers” Unionist case - the public finances.
A few things prompted these thoughts - the recent publication by the Scottish Government of this year’s Government Expenditure and Revenue Scotland (GERS); the news that UK government borrowing was unexpectedly high in July (£1.8 billion instead of a forecast balance), a bewildering set of figures relating to the Scottish Government’s budget for public services, and also a story in the FT reporting that last year a single company - Apple - paid Ireland $17billion in taxes.
To be clear I am not, of course, an objective participant in the debate on Scottish independence.
As I’ve said before I would like to see a Scottish nation state - quite badly really - because Scotland is a country and democratic countries should really get the governments they vote for - ie in Scotland’s case no Thatcher, Cameron, Johnson, Truss (future Farage/Badenoch anyone?) We should also not pretend that anyone can be genuinely objective in this debate. I’m just upfront about it.
Up until this year part of my summer, as the Scottish Government’s constitution SpAd, was devoted to thinking about the response to the annual publication of GERS and the fall out, which to be honest just became a bit of a rehearsed ritual.
The Fraser of Allander commentary and indeed the Scottish Government publication itself should give you all the background you need to know about this year’s GERS figures (which were first published back in 1992 by one of those Tory governments we never voted as part of its campaign to prevent a Scottish Parliament from being established). I’ll come to those later in this post.
(At the outset I should acknowledge that if you live in Modern Monetary Theory land discussions around reducing fiscal deficits (in Scotland or any country with “monetary sovereignty” - ie one that issues its own currency) usually just invite accusations of ignorance of money creation and how public spending is financed. But, apologies, I’m not a citizen of MMT land.)
More generally the publication of GERS is another opportunity for political opponents of independence to say to people in Scotland you’re just too poor for this independence malarky: it would be too painful to get there and things won’t get any better even if you did.
In fact it’s worse than that - there could even be a sneaky acceptance that if we had been independent for some time then things could indeed be very different. But we haven’t been so there you go, you’ve missed your chance. Suck it up guys.
So, they say, let’s not compare ourselves to Norway with its $2.3 trillion sovereign wealth fund because that ship has sailed.
And please don’t bother us with stupid comparisons with Denmark with its national income around one and a half times or so the size of ours because they’re home to domestically owned and headquartered huge multinational companies such as Maersk, Orsted, Novo Nordisk and Pandora.
And whatever you do, they add, don’t make a fool of yourself with Ireland comparisons because of their low corporation tax/EU single market membership which in combination results in all those tech companies basing their European HQs along the Liffey and and which is currently bringing in staggering amounts of tax which, if carefully stewarded, could be the basis of another sovereign wealth fund.
On the Irish case, to be clear, I am not for a second suggesting an independent Scotland considers copying Ireland’s corporate tax regime. They’ve done that; that market is theirs (I’m not sniffy about it, by the way as some others are: if your country is partitioned with the main industrial part removed then you have to get creative).
The point is not to copy the precise policy choice of those countries (I could have mentioned others, such as Switzerland or Austria or Sweden - where something amazing is happening with green steel and hydrogen). It’s that those countries - similar in size to Scotland, in our geographic neighbourhood of north-west Europe - have the ability through independence to pursue long-term policy platforms which are compatible with their political and social cultures; their natural resources and natural or obtained advantages and which tends to result in them becoming wealthier, in some cases an awful lot wealthier than the UK or Scotland as a devolved nation.
They also, in the context of this post, tend to have strong public finances.
The UK’s economic performance, of course, has been poor for decades with low productivity and stagnant living standards. You would think therefore there might be more curiosity here about the contrasting success of those comparable independent countries and what the appropriate policy and institutional platform might be for an independent Scotland.
For developed countries at the technological frontier it is hard to improve national economic growth rates - unless there is catch up potential. Looking at both the evidence of those other countries (they are wealthier with higher growth rates) and also thinking about Scotland’s advantages and resources it is clear catch up potential does indeed exist. Denying this seems perverse: almost as if just because we were Scottish, we could not match the success of our independent peers.
As an independent state within the EU (for the very first time in our own right) with the ability to produce low cost, clean energy for both people and businesses, with a liberal, welcoming attitude to migration among policy makers (sadly something that looks like becoming a bit of a USP for Scotland), and something really remarkable: the potential that comes from an east-west corridor with world-leading universities at either end as well as an east coast corridor also with brilliant universities, then Scotland could be on to something.
That’s on top of our strengths in areas such as high end food and drink, tourism, financial and business services and creative industries.
But getting back to those various public finance figures the argument usually comes back to saying - well ok, but all that growth stuff, it it happens at all, will all take ages and how you are going to deal with the immediate large fiscal deficit (sorry BLACKHOLE!!).
In fact as has been said countless times the GERS figures tell us nothing about the economy of an independent Scotland (as we are self-evidently not independent) and are rather a description of how the UK economy is run with a massive over-concentration of wealth and investment in London. The latest figures show an overall estimated fiscal deficit for Scotland within the UK of 10.9 per cent of GDP (the UK’s as a whole is 4.2 per cent but as previously noted this aggregate masks the massive geographical imbalance in the UK economy.) So yes Scotland has an estimated sizeable notional “deficit” but the Prime Minister’s super soaraway North West of England, for example, has a considerably larger one.
That’s not to say GERS is irrelevant - I’ll come to that below but because Scotland is currently part of the UK, just as our growth rates tend to follow the same pattern (if the UK improves so will we; if it underperforms so will we) so the same is true for the “deficit” - if the UK figure rises then absent a big oil tax windfall so will Scotland’s notional deficit. Although the UK Government has rules in place designed to bring the deficit down, some of the more recent data (such as that £1.8 billion figure for July) suggests this task may be difficult. So these figures have nothing to to do with the performance, good or bad, of the Scottish Government.
As an aside it can be hard to fully understand the current determinants of the SG’s budget for devolved services. Thankfully I was never involved in the devolved finance side of things - cleverer people than me deal with that. But in the context of constitutional arguments it’s important to note just how little control, despite the devolution of income tax powers, the SG has over the revenue raising side of things - less than 30 per cent of revenue raised from the businesses and people in Scotland is currently devolved.
But the real complexity lies in the fact that funding for public services relies on income tax decisions in Scotland (as well as some smaller taxes); tax decisions at a UK level; public spending decisions at a UK level; whether or not per head earnings and tax revenues in the UK as a whole rise more or quickly or slowly than in Scotland - for whatever reason regardless of whether this is connected to decision making either here or at Westminster; UK economic performance and ultimately political decisions made at Westminster. Clear?
And that is before you even consider what a future right wing Badenoch/Farage style government might to do Scotland’s spending.
So what if we were independent? To state the obvious things would be a lot simpler for a start. Like all independent countries Scotland would be responsible for managing the public finances.
Before turning to “what if” scenarios on specific figures, the most important thing from my perspective would be to agree the institutional framework for decision-making. I’ve written before about what I believe should be the centrality of a formal, deliberative social partnership body which brings together properly funded and representative employers’ and trade union organisations as well as government in a newly independent Scotland.
For the public finances this body would be important because it would demonstrate a large degree of consensus and buy-in, with an approach that will be seen as long-lasting and crucially capable of withstanding changes in government.
If a newly independent Scotland was indeed facing a deficit deemed unsustainable or too high (3 per cent is a recognised benchmark with borrowing used for capital rather than current spending) then like all countries in that position the deficit would have to be tackled.
Scotland would however start off with some characteristics not applicable to other countries.
Any deficit would not have been the result of loose fiscal policy, poor economic policy decisions by Scotland or even a large exogenous shock. It would simply be an inherited position from an unbalanced, poorly performing UK economy which we had been part of.
An independent Scotland would also start of with either zero or a very small national debt owed to external creditors. As HM Treasury has acknowledged the UK debt is the UK debt. Scotland would only start to build up its own debt from the point of independence.
It is highly likely that Scotland would agree to pay a share of the UK’s debt servicing to the UK Treasury after a negotiation which would involve among things how UK assets would be accounted for (GERS in effect charges Scotland a population share of the UK debt which last year was nearly £9 billion - cheers UK policy makers).
These are all relevant factors for any potential external lenders to Scotland to consider:
is there likely to be a long-term, consensus based approach to maintaining sustainable public finances? (yes)
is there growth potential for the Scottish economy over and above the current trend rate? (yes)
has there been poor stewardship of Scotland’s public finances by Scottish policy makers (no)
If there is a deficit to be brought down in the early years of an independent Scotland it seems clear that a sharp, front-loaded fiscal consolidation would not be the correct thing to do. (Interestingly the EU’s reformed economic governance framework aims to reduce debt ratios and deficits in a gradual and sustainable way, while enabling growth and competitiveness. Also to note that member states including France, Poland, Romania, Slovakia have recently run deficits considerably higher than the 3 pc target set down by the Growth and Stability Pact).
It would be for the Scottish government of the day, working within the consensus building social partnership institution to decide the manner and pace of any deficit reduction programme.
The SNP’s Sustainable Growth Commission report in 2018 chaired by Andrew Wilson, who has done a power of work for the independence cause over the years, suggested an independent Scotland would be able to make some savings by making different choices to the UK, which were described by the Institute for Fiscal Studies as “not implausible.”
(As an aside, and apologies for all the asides - must work on my footnote game - there is evidence of concern about the growing cost of the UK’s nuclear weapons, which an independent Scotland of course would not be funding. In addition and more positively there would be clear public finance benefits from an improving economy (if that catch-up was achieved) lower poverty rates and better health.
Andrew’s commission recommended a formula to cut an unsustainable deficit: raising spending but by less than the overall growth rate. This general idea may be something a newly independent Scotland might want to consider: although this would be dependent on the growth picture and forecast, decisions over the tax base, as well as the inherited deficit position, none of which are of course known at present.
More broadly it is essential not to see a Scottish nation state (more and more I prefer this term to an independent Scotland but it means the same thing) as a mini-UK with mini UK institutions and continuity of current thinking about the economy. If you start to consider Scotland as a member state of the EU that leads to a different thought process with different ambitions, rights, obligations and a very different view of policy making.
As I have may have said once or twice before Scotland as a devolved nation has very limited capacity to grow the Scottish economy given we are part of the UK with Westminster holding economic powers.
That is a problem because the UK has a long history of now endemic economic underperformance, punctuated by some better years at times because of specific transient factors. The under performance has been particularly acute sine the financial crash with stagnant living standards, high inequality and flatlining real income growth.
It follows that for the public finances there is also little if anything Scotland can do to change the picture - we get what we are given.
The question then is less can Scotland afford to be independent (of course we could - we are a developed nation with resources and advantages I’ve outlined above). The question is what is best for Scotland’s future: to be taking decisions here or have them continue to be taken at Westminster?
There will be an inherited position to deal with - one we can’t forsee in precise fiscal terms at present - but with the right institutional structures, buy-in from social partners, cross-party consensus building, and a convincing growth plan based on membership of the EU there really is no need to accept that our fate is forever to be trapped in Brexit Britain.
Ewan, thanks for this. In endorsing Andrew Wilson's idea of spending at a lower rate than the economy is growing, aren't you confirming that in the early years (decades?) of independence, public spending would be lower than it would have been had Scotland stayed within the Union?