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If the Scots want independence, they’ll have to pay a lot for it

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If the Scots want independence, they'll have to pay a lot for it Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. These are heady days for supporters of Scottish independence. Fifteen polls in a row have shown net support for independence among those likely to vote, the latest from Ipsos-Mori for STV showing 56% support for Scotland breaking free from the rest of the UK. Support for Scottish independence has risen as a result of the Covid-19 crisis. It could have gone either way. Scotland’s death rate per million people from the coronavirus in recent weeks has been higher than in England, although the cumulative total is slightly less, as it is lower than in Wales,

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If the Scots want independence, they'll have to pay a lot for it

Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

These are heady days for supporters of Scottish independence. Fifteen polls in a row have shown net support for independence among those likely to vote, the latest from Ipsos-Mori for STV showing 56% support for Scotland breaking free from the rest of the UK.

Support for Scottish independence has risen as a result of the Covid-19 crisis. It could have gone either way. Scotland’s death rate per million people from the coronavirus in recent weeks has been higher than in England, although the cumulative total is slightly less, as it is lower than in Wales, though higher than Northern Ireland’s.

Scotland has benefited massively from the UK’s ability to borrow vast sums to fund its crisis response, with the help of the Bank of England, and has gained massively from UK schemes. As its own independent economic and fiscal forecaster said in September: “The largest increase in spending in Scotland has been through UK-wide schemes.” Separately, the Scottish budget has been boosted by 14% since the projections set out in February, “largely driven by extra funding from the UK government”.

Despite all this support for independence has grown, because of the perception that Nicola Sturgeon, the Scottish first minister, has had a good crisis, while Boris Johnson has had a bad one. Even the Scottish Tory leader concedes that she has the better communication skills. Johnson’s jovial old Etonian schtick does not work north of the border. He was toxic even before he described devolution as “a disaster”.

It is Sturgeon, however, who has again exposed the Achilles heel of independence; the economics of it. Her announcement of a £500 bonus for “Scotland’s life-savers and care-givers” – all NHS and care home workers - together with her plea to the UK government to waive tax on it, has again highlighted the weakness of Scotland’s public finances. The Scottish government describes the bonus as an “investment of around £180m”.

Every country is borrowing hugely this year because of the pandemic. The official forecast for the UK budget deficit this year, 2020-21, is £394bn, 19% of gross domestic product. But Scotland went in this crisis with a budget deficit of 8.6% of GDP, compared with 2.5% for the UK as a whole, according to its own GERS (government expenditure and revenue Scotland) exercise, published in the summer.

Scotland’s budget deficit this year is likely to be a sky-high 26% to 28% of GDP, according to calculations by David Phillips of the Institute for Fiscal Studies, and it will stay above 10% of GDP for years even when this crisis is over. If anything, this year’s deficit could be even higher, because of recent additions to spending. As the IFS pointed out: “Under full fiscal autonomy or independence, the deficit would be the Scottish government’s responsibility, and the need for tax rises or spending cuts would be starker.”

The arithmetic behind this is straightforward enough. Even leaving aside the £500 one-off bonus and this year’s boost, public spending per head in Scotland, £14,829 in 2019-20, was more than 12% higher than the UK average of £13.196. Taxation, meanwhile, brings in less per head than in the UK as a whole, even including a geographical share of North Sea revenues, £12,058 versus £12,367. You don’t have to be Mr Micawber to know that this is a recipe, if not for misery, then for a big budget deficit. Scotland’s budget deficit per head last year was more than three times the UK average

Supporters of independence, though not yet the Scottish government or its fiscal watchdog, have tried various devices to escape from this economic and fiscal reality. Some say an independent Scotland would not be obliged to assume its share of UK debt on independence and, indeed, the former SNP leader Alex Salmond said in the run-up to the 2014 referendum that Scotland would renege on its share of the debt if the UK government did not allow continued use of sterling. Some on the wilder wings of the independence movement say that an independent Scottish government should adopt the modern monetary theory (MMT), dealt with here a few weeks ago. That is never going to happen.

Independence supporters are fond of drawing a parallel between Scotland and successful smaller economies, particularly Scandinavian countries. A common feature of them is that they have higher levels of taxation, around 43% of GDP in the case of Sweden and 46% for Denmark. That compares with a pre-crisis 37% of GDP for the UK as a whole and less than 35% of GDP for Scotland. If the Scottish people want fiscally credible independence and the public services they currently enjoy, they and their businesses would have to pay for it with higher taxes.

Scotland’s public finances are not the only issue. The noted US economist Barry Eichengreen, who has taken a close interest in Scottish independence, writing recently, was happy to describe the prime minister’s EU negotiations as “shambolic” and a reason for rising support for Scottish independence.

But he also lamented the lack of any plan for post-independence currency arrangements. This has become more, not less, difficult since the 2014 referendum, he pointed out. The plan suggested by some a few years ago, that an independent Scotland could enter into a monetary union with the rest of the UK and continue to use the pound, would not work now if Scotland wanted, as it does, to join the EU. A country in a monetary union with a non-EU country, which the UK now is, cannot join the EU.

Scotland could try to start a currency from scratch, with its own central bank, but it takes time to establish the credibility of a new currency and an independent central bank in what he described as a “politically charged environment”. Or, continued use of sterling on a temporary basis. Either would be staging posts on the road to euro membership. None of the options are palatable, which is perhaps why we have not seen a currency plan.

Stranger things have happened than people voting for what they think of as independence even though it will damage the economy and make them poorer. Look at Brexit. The economic challenges faced by an independent Scotland would be even greater.

If the Scots want independence, they'll have to pay a lot for it
David Smith
David Smith is economics editor of The Sunday Times. His website is http://economicsuk.com . His latest book is Something Will Turn Up.

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