One of the features of modern life is the way that official policies invariably start counter-trends. For example the federal policies of the European Union seem to be leading to more divergence and not convergence as we see pressure for constituent nations to split. There is the example of Catalonia in Spain and also my subject of today Scotland in the UK whose government plans to hold an independence referendum on the 18th of September next year. This would potentially end a union which began back in 1707 – ironically the union began partly because of the financial problems in Scotland caused by the Darien colonial scheme. So both the way into union and the way out could be triggered by financial crises or at least be correlated with them.
As ever the politics of the situation are not for me. Instead I will concentrate on the economics and finance issues. However one area where political influence can and indeed probably will seep into the economics is in forecasts of future growth. The more that the pro-independence campaign can nudge and push growth forecasts higher the better the numbers will look to them. The anti-independence campaigners will presumably try to resist this, but for them there is the issue of looking anti-Scottish and pessimistic. If we look back to the UK General Election of 2010 we saw forecast fantasies of around 3% per annum go unchallenged by our political class as for one reason or another it suited them. However reality has proved much more grim and the forecasts from back then should be only used for chip paper.
The Institute for Fiscal Studies (IFS)
There was some good news for independence supporters in the initial thoughts of the IFS on Scotland.
In 2011–12, 9.9% of the UK government’s revenues were generated in Scotland (assuming a geographic share of North Sea revenues). Since the Scottish population accounted for 8.4% of the UK population the average revenue raised per person in Scotland (£11,079 in 2013–14 prices) was higher than for the UK as a whole (£9,342 in 2013–14 prices).
So at this point, supporters of independence will be smiling. But a current strength of the numbers is revenue from North Sea oil which was 18.6% of tax revenue in 2011-12 for Scotland. But as we go forwards it is expected to do this.
which are volatile and expected to decline in the long run.
So there is something of a shark in the water here. If we add in the fact that Scotland spends more per head than the rest of the UK then the IFS considers that the fiscal position is more dangerous. Both the UK and Scotland spend more than they get in from tax but the Scottish position is more reliant on a fading source of tax revenue. This is what leads to the following conclusion.
For Scotland, greater demographic pressures, combined with the OBR’s forecast that revenues from the North Sea will fall sharply between 2012–13 and 2017–18, mean that PSND would increase continually from 2015–16 onwards.
So assuming falling North Sea oil revenues then the finances of Scotland will be under much more pressure than that of the overall UK. This will be added to by the fact that the expected demographics of Scotland are more unfavourable which put simply is that it will age more.
Accordingly we have another story which starts well for independence.
the Scottish debt-to-GDP ratio would be 71.8% at the end of 2015–16, somewhat lower than the 85.1% for the UK.
But would then deteriorate rather alarmingly.
The projection from our basic model is that Scottish debt would (absent further fiscal consolidation) exceed 100% of Scottish national income in 2033–34 and would exceed 200% in 2057–58.
Care is needed here as that far ahead one can forecast almost anything! For example new oilfields could be tapped or a higher oil price maintained. But the underlying thesis is that an ageing population and declining North Sea Oil revenue pose a particular problem for Scotland as expressed below.
The fiscal pressures facing an independent Scotland would therefore be more immediately pressing than those facing the UK as a whole.
I do not know about you but this leaves me thinking that the best time for Scotland to press the independence button was when North Sea Oil was discovered.
The blueprint for Scottish independence
This takes entirely the opposite opinion to that of the IFS above.
On independence in 2016, Scotland’s estimated financial position will continue to be healthier than the UK as a whole. We will set out on a firm financial footing.
I think that the crucial word there is estimated! By whom we may wonder? Anyway as you can see it contradicts the IFS analysis although cunningly it does leave the matter open to some interpretation as whether it means then (perhaps true) or in the future (much less true). Intriguingly it seems to be planning to improve revenue by cutting taxes.
reducing corporation tax by up to three percentage points; and improving international connectivity by cutting Air Passenger Duty by 50 per cent
There is some talk about cutting tax avoidance and simplifying the tax system to save £250 million a year. Virtually every political scheme has something like that which usually turns out to be the economic equivalent of a mirage in a desert.
Actually it appears that extra spending is being promised too.
ensure that benefits and tax credits increase at least in line with inflation (as opposed to the current 1% per annum cap for many benefits).
uprate the State Pension by the triple-lock from 2016. This means that pensions increase by average earnings, CPI inflation, or 2.5 per cent – whichever of these is highest – and provides protection for the value of pensions over time.
reducing your energy bills by around five per cent by moving the costs of some environmental schemes from your energy bill and funding them from central government resources
ensuring that the minimum wage rises in line with inflation
The Bank of England and the Pound
The pound is Scotland’s currency just as much as it is the rest of the UK’s
This is an odd assertion in so many ways as surely the point of independence is exactly that. Yet in this area Scotland seems willing to submit to a type of English hegemony. If we move on from the obvious issue of an organisation called the Bank of England running matters post independence there are a litany of issues here.
1. The Bank of England will presumably set interest-rates to suit England (and Wales and Northern Ireland). This may or may not suit Scotland.
2. The value of the pound will mostly be determined by the much larger English economy in some respects similar to the way that Germany dominates the Euro. That has not worked out well for many of the Euro nations.
3. This is to say the least awkward, if further bank bailouts are required. Will the Bank of England be the “lender of last resort” in Scotland? How does this work when it has an independent treasury? Just as a guide, individual nations in the Euro area had their own central banks which survive to this day partly because of this issue.
4. There is also the issue of currency reserves and intervention which presumably also stay with the Bank of England.
5. What about the money supply of Scotland which will again presumably be controlled by the Bank of England and set for the rest of the UK?
6. Has anybody bothered to ask the citizens of the rest of the UK if they are willing to take the risk of having Scotland in a currency but not a political or fiscal union? This would take place just as the Euro is demonstrating many of the risks of such an arrangement. But added to it for the rest of the UK would be new oil or gas discoveries pushing up the value of the pound and thereby making their businesses and industry less competitive.
Anyway staying with the pound is unlikely to be as bad a choice as the previous effort. From 2006 when it was policy to join the Euro a plan which has presumably been binned.
Alex Salmond, the SNP leader, claimed that Ireland, Iceland and Norway demonstrated that small independent countries were amongst the richest in the world.
As to the banking sector, well matters hit trouble there too. From a speech given to Harvard University in March 2008.
Take financial services. With RBS and HBOS – two of the world’s biggest banks – Scotland has global leaders today, tomorrow and for the long-term.
As they say on a Question of Sport ,what happened next?
Also those wondering how the bailout costs for Royal Bank of Scotland might like to look at the word I have emphasised in the quote from the same speech below.
consider the remarkable success of indigenous companies that have become global, Nokia in Finland, Ericsson in Sweden, Maersk shipping in Denmark or for that matter the Royal Bank of Scotland.
I guess that is why they are trying to retain some flexibility going forwards.
The key point is that sovereignty over the decision with respect to the currency would rest with the Scottish Parliament.
How would a change work exactly?
For example a guide might be gained from the Euro area where we are regularly informed that it is impossible.
The banking sector
As there are banks which apparently were indigenous to Scotland what is the situation now? If Scotland takes the UK’s oil wealth some might argue it should take the socialised banking liabilities too. Of course that is easier said than done as the Bank of Scotland was subsumed into the Lloyds Banking Group but in theory at least it could be resurrected.
The whole independence argument could swing on this matter alone.
It is hardly a surprise that the future economics of Scottish independence are disputed as the debate is likely to be heated. However we even start the debate with disputed facts as for the last fiscal year (2012/13) the IFS informs us that the situation was this.
we estimate that public sector net borrowing (PSNB) was 7.0% of national income in Scotland compared with 7.4% for the UK.
However the independence blueprint tells us this.
In 2011/12, the latest year for which data is available, Scotland is estimated have run a net fiscal deficit equivalent to 5.0 per cent of GDP. In the same year the UK is estimated to have had a deficit of 7.9 per cent of GDP.
Quite different pictures are they not? In many ways the case for Scottish independence resides with which one is the more accurate and I will leave readers to make up their own mind on this. Although should the independence movement extend, the case could go further if say islands like the Orkneys (think oil reserves) decide that they do not want to be ruled from Holyrood. It is not only geographical distance that is a factor in such matters as I do not like being ruled by Westminster either (because of what it has become) and I live about two miles away!
As a final point – all the forecasts depend on assumptions which may not (indeed probably will not..) be true. But there are so many begged questions here as well, debt share, oil share, bank share, currency share.