Sunday, September 22, 2013
Scotland will find it cold outside the UK
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

scotland-snow2.jpg

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

In less than a year, on September 18 2014, Scotland will have a referendum on independence. Though polls currently suggest otherwise, more than three centuries of union between England and Scotland could end.

People have strong views on this and I don’t want to get into the politics. But with Tories perennially unpopular north of the border and a lacklustre Labour leadership making the case for continued union, it is good the Better Together campaign is in the safe hands of Alistair Darling.

Like many in England I don’t want the Scots to go but they have the right to decide. Independence wouldn’t mean border guards at Berwick on Tweed.

There is, however, a strong economic dimension to the debate - many Scottish voters say they will be swung by the economic arguments - hence this piece.

Several recent assessments have been published on the economics of independence, from the Institute for Fiscal Studies (IFS), the National Institute of Econokmic and Social Research (Niesr) and the Westminster government.

To sum these up: Scottish public spending per head is significantly higher than the UK average. Allocating Scotland a 90% geographical share of North Sea revenues would make it easier for Scotland to pay for this higher spending initially, but with those revenues set to decline, tough spending decisions would be needed.

Scotland’s need for spending cuts would be made greater by having to pay more to borrow, and by some revenue losers. Scotland could no longer discriminate against UK students by charging them tuition fees.

The central issue is Scotland’s higher public spending, £12,629 per head in 2011-12 (in today’s prices) according to the IFS, 11% higher than the £11,381 for the UK as a whole. On the basis of population, Scotland’s public spending in 2011-12 was 50.6% of gross domestic product, five percentage points above the UK average.

Proponents of independence will argue that if most of the North Sea is allocated to Scotland, public spending is lower, relative to GDP, than the UK average. But this does not get Scotland off the hook.

Under projections from the Office for Budget Responsibility, the IFS points out, “Scotland’s budget deficit may be 2.2% of GDP further into the red than that of the UK as a whole in 2017–18. To fill this hole would require a further £3.4bn of tax rises or spending cuts.” This is as well as the £2.5bn of cuts already planned.

The National Institute (Niesr) was no more comforting. In Scotland’s Currency Options it highlighted one important monetary consequence of independence, a Scottish economy dependent on oil would not be suitable for a one-size-fits-all monetary policy operated by the Bank of England.

An independent Scotland would also face the task of issuing a huge number of bonds to fund the share of UK government debt it would acquire on splitting. Such debt issuance would threaten market indigestion. Scotland’s borrowing costs would be between 0.72 and 1.65 points higher than for the UK, Their broad message is that, fiscally, it would be cold out there.

“Our baseline scenario ... indicates that a very tight fiscal adjustment would be necessary for Scotland to achieve a 60% debt to GDP target in 10 years,” it says. “The greater the share of debt and the smaller the share of assets (primarily oil and gas) which Scotland receives at independence, the greater the fiscal adjustment necessary.”

The government, quoting the Centre for Public Policy for Regions, also knocks down the idea that an independent Scotland could use oil revenues to establish a Norwegian-style sovereign wealth fund. Scotland will need all the revenues it can get, and more, to fund annual outgoings.

So the fiscal prospect for an independent Scotland looks grim, even compared with the less than rosy prospect for the rest of the UK. This should make Scottish voters pause. But so should what in my view is even more important.

In the end, the success of an economy depends on its ability to create wealth, through private sector businesses.

The Westminster government’s latest Scotland analysis has useful background on the border effect; how separation leads to a drop on bilateral trade. Prior to the split of Czechoslovakia 20 years ago, 22% of what are now Czech Republic “exports” went to Slovakia. Within five years it was less than 10%. The effect for Slovakia was even more dramatic, a drop from nearly 45% to 15%. Ireland saw a drop over decades from 90% of trade with Britain to around 25%.

So Scottish businesses will face the challenge of replacing a likely loss of trade with the rest of the UK. Nine in 10 customers of Scotland’s financial services industry are in the rest of the UK; as are 60% of its business services exports and a third of the exports of its key food and drink sector.

Behind these dangers lies what is perhaps a bigger challenge for Scottish businesses. There are not enough of them.

I am not disparaging Scottish entrepreneurial talent when I say Scotland is one of the least entrepreneurial parts of the UK. But, since the days of empire, many Scots have been entrepreneurial only outside Scotland. Scotland has long been the natural home of the public sector.

The number of private businesses per 10,000 adults is just 735 in Scotland, compared with 1,231 in London, 1,098 in the rest of the southeast, 1,096 in the southwest and 1,080 in the east of England. The Scottish figure is lower than in Northern Ireland (798), Wales (769) and every other region of the UK except for the northeast.

The yes lobby will say Scottish entrepreneurs have been held back by Westminster’s southern bias. I cannot think of a single reason why this should be. Scotland has enjoyed greater prosperity than most English regions, as well as Wales and Northern Ireland.

Would independence rekindle the entrepreneurial spirit in Scotland? Some pro-independence business people argue that it would but they are in the minority.

Certainly, if the intention of a Scottish government would be to keep public spending high, thus requiring high rates of taxation, on and offshore, it is hard to be optimistic about prospects for the country’s brave band of entrepreneurs.

It is hard indeed, in such circumstances, to be optimistic about the economic prospects for an independent Scotland.