The FT has published the first part of what it says will be a series on the risk of the UK breaking up. The article considers the economic risks of Scotland becoming independent. It begins by saying:
An independent Scotland would inherit a large hole in its public finances because lower than expected tax revenues, Brexit and the coronavirus crisis have increased the country's budget deficit, according to a Financial Times analysis.
The analysis is depressingly familiar. The argument suggests that Scotland's fiscal position has deteriorated since 2014 and that it now faces major budget deficits.
Given that all such comments are, of course, based on assumptions as well as economic data, none of which are free from bias (meaning, of course, that I accept that I am not) I checked out what the sources for this article might be. These are a little hard to find, except when it comes to the charts, where it becomes clear that there are just three of them. The first is the UK Office for Budget Responsibility. The second is GERS (Government Expenditure and Revenue Scotland) and the SNP Growth Commission.
Of these three the OBR fully buys into recharging Scotland anything that can be attributed to it within UK government accounting.
GERS has been long criticised by me for its false accounting. It only records tax revenues in Scotland but records expenditure for Scotland. The latter need never have been incurred in Scotland, and what is more the tax paid on it is not attributed to Scotland. In addition, tax paid by English and overseas residents on rents and interest paid by Scottish people is not attributed to Scotland either. Of course it shows a serious deficit. It was designed to do so.
And then there is Andrew Wilson's utterly discredited Growth Commission report, which was a giant own-goal by Sturgeon in permitting deeply orthodox neoliberal economic thinking to supposedly dictate Scotland's future, resulting in a precription of deep austerity because it actually assumed GERS was right.
Added to this is an obsession apparent though out the article with the collapse of oil revenue, which was over-emphasised in 2014.
It also seems very likely that the Wilson view on currency - or the continued use of sterling - is implicit in the FT view.
And so they come out with an opinion so often heard before. In that case let me suggest what they have got wrong.
First, there is oil. That is yesterday's news. Have they not heard of the fact renewables are now the story? And it just so happens Scotland has more renewable energy per head of population than any other country in Europe. It is already 97% renewable in electricity. It will become well over 100%. So, first, it will export to a desperate England, and second, it will become an absolute hub for businesses with high energy consumption who need to make that green which can only be done in a location with an excess of renewable energy. The likelihood of a new industrial revolution in Scotland as companies are required to restrict what are called their Scope 1 greenhouse gas emissions from electricity consumption, which will be zero in Scotland, is very high indeed. But the analysis seems not to notice this.
Then there is the fact that Scotland will collect all its own taxes, including on corporate profits, financial income and rents, the vast majority of which likely leak right now. And it will, of course, design its own tax system to make sure this happens. The analysis ignores this.
It will also not incur a significant part of the expense now charged to it by London. It will begin b6yonly paying for one government for a start, and move on from there.
After that, it will use its own currency. The supposed threat from the bond markets that the article talks about will not exist. Just like the UK now, Scotland will be able to neuter such silly games by bond financiers by using quantitative easing. The article ignores that possibility.
And Wilson got foreign currency reserve requirements very wrong, firstly because he assumed Scotland would use a fixed exchange rate when Scotland will actually float its currency. Fixed rates require large reserves, as Denmark needs. Floating rates do not. He also forgot, as Tim Rideout points out, just how much sterling Scotland will hold as currencies swap.
Then, Scotland will not have to service UK debt. It will have no obligation at all to repay any of that debt precisely because the UK itself makes no such repayments, whilst on interest the charge would at most be on debt net of QE shown to be attributable to Scotland. There will be almost nothing owing.
And, the report assumes that there would be no growth spurt in Scotland after independence, but all the evidence is that when independent Scotland will have a new vigour that is bound to fuel that.
It will also, of course, be headed back into the international community as fast as possible, which will help no end, and drive business to it.
I could go on, but did the FT take any of this into account? No, of course it did not.
Instead it said Scotland cannot survive without oil, it will beholden to bond markets and it must balance its books. That is an analysis so out of date it is hard to credit that they have the nerve to use it, except for the fact that it is the only basis on which they can come up with their gloomy prediction.
Chris Giles, who co-wrote the article, is a long-established, strongly right-leaning, deeply conventional and if I might say so, rather small-minded economist in the sense that he seems only able to deal with the facts laid before him and cannot imagine anything but that which has been the status quo. The whole point of Scottish independence is to shatter the status quo. He cannot comprehend that, and so forecasts for independence as if a scenario written between 2014 and 2017 might still exist. But everything has changed for a multitude of reasons in macroeconomics, QE, the politics of Scotland, our understanding of GERS, Covid and the importance of sustainability. The FT missed all that. They produced a hopelessly misjudged article as a result.
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Extremely helpful – how can we disseminate this information so we can feel empowered to be able to challenge MSM views that Scotland is too poor? To me, that is our key obstacle to getting ‘Yes’ to IndyRef2, & we need to be able to address this.
It think it is going into The National
A well considered response. I would like to be able to say that I am a little surprised that the FT should lend itself to this kind of outmoded faux analysis, but I am not; the FT rises only to my expectations of disappointment. I understand why they are doing this; the Union has nowhere else to go, save regurgitating the same old discredited waffle again; and while the FT can accept tearing us out of Europe, they cannot face up to the consequences of where forty years of Anglo-centric neoliberalism, plus Brexit unsurprisingly takes the Union; tearing the Union apart (the FT will, however accept it readily enough when it happens).
I would merely add to your observations that Scotland will not only not be servicing UK debt, it will begin independence with no responsibility for UK debt whatsoever, virtually debt free and able to chart its own course; and the source for that decision was not any Scottish choice or opinion over the matter (incidentally Alex Salmond was totally wrong about this in 2014, but then he is, after all – a banker …. ): the source for that decision is the UK Government itself in the 2014 Referendum. The UK made clear to the whole world in 2014 that full ownership and control over pound sterling (£) would remain solely and wholly with rUK alone and with it, full and sole responsibility for UK debt. This outcome is no longer disputed by anyone, at least anyone with a shred of credibility in the matter.
It is forgotten that this decision by the UK/rUK also had other consequences; Scotland joined an incorporating Union (and paid dearly for that in many ways); but is now seceding from a 300 year federal Union that did not in fact exist during the Union; a fiction which Westminster simply made up ‘on-the-hoof’ now, in order to square its own fracturing circle of realpolitik.
Agreed
It may be worth observing that the now famously, elusive Mackenzie-grey Scott/Chapman paper uses the terms “secede” and “secession” extensively to describe Scotland leaving the Union. The Union is an Incorporating Union, beyond argument. It is however, also clearly now a Federal Union, a sudden transformation conjured up by the British Government simply waving a magic wand, ex-nihilo. You can do anything you like, when you claim absolute sovereignty, and are prepared to act on it in your own interest.
Lets hope Scottish readers of the FT take these points up with them. Especially relevant is the fact that Scotland has a major clean energy industry and the fact that if they have their own currency then will not be constricted by English neoliberalism.
With the recent Northern Independence party there is a move for divorce from Westminster and London may end up as separate from the UK. Like Vatican city but god as money and keep the royal family. The UK being England, Wales, Scotland and the whole of Ireland. Would this make financial sense.
No
There will be four countries
And no UK
Wales may take a while to get there, but it will
Ireland is not part of UK.
Northern Ireland will eventually join it.
Agreed
You make so many assumptions here on the upside with no source to back it up. Perhaps supple supporting evidence would move this from being fantasy to plausible.
You need to deal in facts when you are preparing to ruin everyone’s pensions, mortgages and lifestyles for a dream and ultimately a big gamble.
The big gamble and dream might work for some and certainly younger people who have nothing to lose.
If you want the majority, you need to be honest. This is a dream and hope. You have no idea about what the renewables will be for other countries in the future. They will all have their own and won’t require Scotland’s long term. If they so desperately need it they will come to Scotland anyway so Indy isn’t needed for this transformation.
Honesty and facts are what are needed in the debate from both sides. But given the fact that Sterling, GERS etc are all real life, the Indy movement needs to deal in the real world too.
GERS is an accounting fabrication
Sterling will not be the Scottish currency
And the Wilson review was an outdated world view
Plus GERS says it is no indication of what an independent Scotland might do
So, I forecast – using the facts – and I note many of them because they are facts that I use
Giles is also forecasting, but with outdated data and assumptions
We have had regular run-ins
He’s always been on the losing side
Mr Moffat,
You offered not a vestige of “facts” in your comments and presented your own plethora of “asumptions”, with abandon. Rhetorical flourishes and bumptious assertions are not argument. The sources you rely on are controversial, misinformed or discredited. Taking your sole foray into factual territory, renewables; other countries “will all have their own [renewables] and won’t require Scotland’s long term.”
Unfortunately it is not possible simply to conjur up renewables ‘ex nihilo’ (it isn’t like Westminster, with QE; or passing whatever costs are convenient to the UK’s Unionist narrative that it can deliver to Scotland through GERS, without let or hindrance). Like oil, “renewables” are essentially a matter of geography; a maritime climate for virtually constant wind or perpetual with tide, at scale are prime requirements – in which Scotland is beyond question the natural prime, unmatched source for the whole of Europe – and that is just a simple fact.
John
You commit the sin of using facts
And even knowing they are true
Richard
“You have no idea about what the renewables will be for other countries in the future.”
This is an area where I am active both as an adviser to elements within the European Commission and oddly, as somebody building a renewable business plan for a Uk council. On-shore wind in Scotland (west coast) can be built for around £20 – 25/MWh. This is quite cheap and roughly half the price of, for example, on-shore wind in North Germany. Spain can do PV now for around Euro15/MWh and by 2025 probably Euro10/kWh – again very cheap (between now and 2030, ONE project in Spain will build 100GW of PV – not bad). Near-shore off-shore in Scotland (e.g. 3 kms off the coast of the Firth of Clyde) could be built for circa £25/MWh. Financing any & all of this would be trivial.
One issue poorly tackled by successive English governments is an industrial policy that leads to high levels of local (or UK) content in wind turbines or indeed electrical equipment. The only factory of note, in England, is the Vestas blade factory in the Isle of Wight. There is one English cable supplier of note, and a couple of steel fabricators. There is very very little in Scotland of note. Although Scotland has amongst the best wind resources in Europe, the ability to build an industry around this has eluded the English/British and over the last few years the SNP. I have some sympathy for the SNP – after all they are +/- a superannuated county council in terms of powers and may struggle to develop an industrial base in Scotland given that “industrial” is not a word in the Toryscum lexicon. Given this, independence would at least allow the Scots to call the shots on industrial development. Funding said development, (& the development of wind in Sctoland in terms of project development would be trivial – I speak from experience, having regular contact with “the money men”.
The SNO has to commit to this….
Thank you, Richard, for that excellent article of clear explanations and rebuttals. Good news that it might go into The National.
I have just had it confirmed that it will be, later today
It is up on the National already, they’re catching up with it having already been widely disseminated on blogs and social media.
I have seen on Twitter
I saw the headline online when I went in (as a non-subscriber) to download some X-Words. As we were going out into the sunshine to bike ride I didn’t even have time to fire off my favourite Wilsonian put-down: “I haven’t read, don’t propose to, but I disagree with it.” But I somehow knew Richard Murphy would be deconstructing the nonsense as I pedalled and I see it’s already in The National with a couple of commentators certain there should be a job for you with NS or AS.
I’m sure it’s just coincidence but The National are also running a story about an LSE Blog opinion piece from a couple of days ago which has now been taken down, ostensibly at the request of the authors, which argued that Scotland would probably do just fine as an independent country, just like the Czech and Slovak republics when they disunited and didn’t fall into an economic black hole. One of the authors is an advisor to the UK Govt.
That blog is very odd – why would they take it down?
Possibly because of UK Gov’t pressure? If you don’t already have the link here it is:
http://web.archive.org/web/20210330073808/https://blogs.lse.ac.uk/politicsandpolicy/scottish-independence-cost/
Congratulations on landing the assignment with the National: it will prove very educational for many National readers to be exposed to rational analysis of economic matters. Can I suggest a topic for a future article? You already know that there’s a paucity of firm, reliable data for Scotland – a classic example being VAT, which is supposedly devolved to Scotland, but nobody knows how much VAT is raised here and there is currently no practical means of arriving at an accurate figure, so it is estimated with retrospective alterations made in future years, but these alterations themselves will be estimates, so we just go further down the rabbit hole. It could be resolved easily by enforcing unique Scottish VAT numbers for all businesses trading here, but that would be politically unacceptable to UK Gov, being a clear step towards independence.
If Scotland’s data are questionable, the same will be true for Wales and almost certainly NI, which then begs the obvious question: how reliable are the figures for UK as a whole? If they can’t be verified, then the data for all 4 UK nations is automatically unreliable, given the estimates and allocations that characterise the devolved nations’ data. Even if the UK figures are robust and reliable, the figures for England on its own can’t be, given that they would arrived at by deducting the unreliable figures for Scotland, Wales & NI from the UK totals. This farcical situation could be down to classic the British “muddle-through” attitude, or it may be an entirely intentional chimera to disguise the UK’s economic realities.
Noted Ken
For after the election…..
Why indeed? Interesting to note that the authors have a paper published, which is clearly the basis of the taken down LSE blog. Also clear that they (whoever they are) wouldn’t dare unpublish an academic paper.
The paper abstract is at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723298, and the full paper can be downloaded from there.
LSE say the blog has been taken down temporarily at the request of the authors, or perhaps (dare I say) of the author who is an advisor to the UK government.
There was an archive of the LSE blog circulating, but it seems to have been taken down.
Interesting paper
And of course the building up the necessary institutions of an independent country such as a Foreign Affairs Dept, a proper Finance ministry, a Central Bank, a Defence Ministry and new armed forces etc.
Then there are all the consulates in Edinburgh which will get uprgaded to Embassies. As well likely as more Embassies.
The problem will be spreading enough of this economic activity not just from Edinburgh but the Central Belt. There will be an economic boost from those activities and the wages and salaries alone.
Richard – here’s a link to the missing LSE article. Someone archived it while it was still up on the LSE site: //web.archive.org/web/20210330073808/https://blogs.lse.ac.uk/politicsandpolicy/scottish-independence-cost/
Thanks
Brilliant!
Great that it’s in the National but how do we get it out to the wider public, like the non-committed Daily Mail readers?!?
When will the SNP stop being stubborn and admit that the Growth Commission concept is dead, and should be buried?
I don’t think the Mail is interested.
Great contribution to an important debate, Richard. Two comments on the points you make:
1. It could be an advantage for Scotland to design its own tax system, as you suggest, provided that it can resist the temptations of tax competition. Nationalists are depressingly prone to offering tax incentives to attract investment or activity. Let’s hope that the international negotiations through the OECD can achieve a strong global minimum corporate tax (along these lines https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3798887 ) to help head this off.
2. What evidence is there that a a country with a small economy and its own currency could indulge in quantitative easing without spooking the bond market?
Sol
Thanks
I have written a second white paper on Scottish tax after independence that will , I think, be published this month which very clearly embraces your concerns
I only hope it influences debate
Richard
You might also want to look at the demographics: Scotland’s dependency ratio is lower than England’s, and projected to continue diverging, downwards, away from the rest of the UK:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/557610/ForesightTrendsAgeing-2016-08-22.pdf
Beyond that, I see that the fiscal picture presented in Westminster has all the same distortions as the regional exports and balance-of-trade statistics: in particular, the way that the profits generated by the service sector in Scotland are booked to the Head Offices in London.
That will look very different with the national Head Offices, and their profits, based in Edinburgh and Glasgow.