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The economic case for Scottish independence

May 24, 2013

I’ve just ploughed through the report from the Scottish government released this week on the economic arguments for independence. I’m quite impressed.

The case is split into four parts:

1. Scotland can afford independence. There’s loads of oil still left and government finances have been in much stronger shape over the last five years than England’s.

2. Scotland has lots of potential based on its high levels of education, natural resource wealth, international reputation and desire to stay inside the EU. Key industries are the life sciences, tourism, creative industries, digital and ICT, energy, renewable energy, low carbon technologies, food and drink, financial and business services.

3. The union is damaging Scotland via income inequality and the concentration of economic activity in London. Economic policy can’t currently be tuned to Scottish circumstances.

4. Independence would help Scotland fulfil its promise. Small countries are more nimble and better able to adapt to changing global conditions.

One of the best things about the report is that it sees the economy as controllable. As I argue in my book Reflexivity and Development Economics, economic relations are socially created and should be moulded to suit human ends. “The economy” isn’t an autonomous, independent object which acts on us and which should be left to its own devices; it evolves and mutates. Seeing economic relations as part of human society means actively nurturing and developing the levers of policy, something which has become unfashionable over the past few decades under neoliberalism.

But beyond such sweeping statements many economists fail to go. The Scottish government’s dismal scientists are unusual in identifying 10 specific fiscal levers which they says the government will use in the event of independence:

  • Oil and Gas Taxation
  • Excise Duty
  • Value Added Tax (VAT)
  • Air Passenger Duty
  • Capital Borrowing
  • Welfare and Social Security
  • Corporation Tax (base and rate)
  • Public Sector Pay/Pensions
  • Capital Gains Tax
  • Rural and Environmental Taxation

The document also identifies eight non-tax policy levers:

  • Consumer Protection
  • Industry Regulation
  • Energy Markets and Regulation
  • Implementation of EU Legislation
  • Competition Law
  • International Trade
  • Immigration
  • Public Provision and Procurement

As someone who spends a lot of time in the world’s poorest countries, it’s interesting to see Scotland try something of a strategic, developmental approach. Current UK economic policy doesn’t view these tax and non-tax levers as having anything to do with strategic economic goals (and nor does most mainstream economic development policy). They’re seen as necessary evils or about revenue collection. An ingrained laissez-faire attitude means that these tools aren’t used to tailor policy to the regions or toward equality, poverty reduction or even economic growth. Leave the economy alone, the free-marketeers say, and it will look after itself. Tinkering will only mess with the supposedly efficient outcomes of markets. But the events of the last half-decade have proved that the economy isn’t very good at self-care and that governments need to intervene to produce desirable outcomes and to mitigate the worst impacts of markets.

Presenting specific policy controls, as the Scottish government does, takes chutzpah, as does the naming of specific economic sectors for development. A senior Scottish civil servant tells me that the government is forthright about naming sectors and suggesting methods for their support, and they aren’t the high-employment, low-value-adding industries of the past: there’ll be no return to ship-building or mass manufacture. The future is in the life-sciences, whisky,  tourism, the creative industries, digital and information communication technology and renewable energy.

This week the government formed a fund for the support of the wave-power industry, something which it sees as important for meeting carbon-reduction targets and as a possible source of exports. This isn’t the discredited import-substitution or ‘picking winners’ policy so derided in the past; it’s smart, targeted investment in sectors with obvious potential (Scotland is very windy and wavy, for example, and has lots of good scientists and engineers), in conjunction with the private sector. Of course there will be a few failures, but it also looks likely that the success stories will outweigh the balls-ups. Most governments and economists lack the imagination to go beyond the same old low-tax, hands-off, light-touch policy that has dogged economics for the past few decades. Alex Salmond’s government should be congratulated on its courage and foresight.

Another admirable thing about the report is its stance on London and the southeast. Over-dependency on Britain’s capital isn’t just an issue of geography but of inequality. As the report points out (the panel which oversaw the report includes Joseph Stiglitz), rich people (read financiers) spend a lower proportion of their income than the poor. And cutting welfare payments further sucks demand out of the economy. If there’s one thing that Britain’s economy needs at the moment, it’s an increase in demand in the marginalised regions. Inequality is also demotivating: people don’t work as hard beneath a glass ceiling. In general, unequal societies tend to under-perform economically.

The document rightly points out the need for economic policy to move away from the kind of one-size-fits all measures that characterise current British economic policymaking and move toward a decentred, context-sensitive approach. It’s probable that only further ceding of powers to various parts of the UK can achieve this.

I’d have liked to see measures aimed at reining in finance. London’s boom emanates from the City. Any new Scottish government should enact measures to restrain the financial sector and stop Scotland itself becoming Edinburgh-centric. The report’s a bit vague here, talking of a “thriving financial service sector” (p. 24) and making “the right services available to all of Scotland’s people. This will go beyond big high street banks, and include credit unions and, potentially, new forms of finance, and pensions.” This vagueness is politically understandable given that Salmond probably doesn’t want to scare off the financiers (and that he used to work for the Royal Bank of Scotland), but Scotland should avoid reliance on the bankers who caused the crash, building sustainable and responsible industries which have positive social spin-offs.

The argument seems to rest on a couple of dubious counterfactuals:

Firstly, that the proposed oil fund would have been bigger if Scotland had been in charge. But who’s to say that Scotland wouldn’t have squandered the funds, like many other countries have, and like Westminster did? Why can we be so sure that it won’t do so in future? There’s no guarantee that the SNP will stay in power.

Secondly, that the UK economy engaged in a “massive boom in credit and debt expansion”. Why wouldn’t Scotland have done the same? Lots of other small countries overspent and deregulated finance too much, like Iceland. The report points out that Scots save slightly more than the English, but its now increasingly understood that debt can be created irrespective of the stock of savings. This recognition should place even more emphasis on regulation of the finance industry in order to stop it creating too many loans and dodgy financial instruments.

On page 9 the document falls for the notion that austerity will help reduce debt: “Even with an unprecedented eight years of austerity planned by the UK government…net debt is forecast to reach over 85% of GDP”. The phrase “even with” is misplaced. Lower government spending in a downturn tends to increase unemployment, lower tax revenues and raise benefit payments. Austerity will  prevent a reduction of the debt pile.

The discussion on capital spending on page 27 somewhat contradicts this austerian view, suggesting that capital spending under a Scottish government would have been £7 billion higher over five years, and that this would have helped prevent recession by creating 19,000 jobs. Probably true, but it would have been better to put this kind of analysis at the centre of the document rather than hiding it halfway through.

Finally i’d have liked to see some mention of measures of economic growth other than Gross Domestic Product. I know that the independence campaign is currently facing allegations of fudging the numbers and that this sort of document has to put forward a very precise view at a critical time in the independence campaign, but Salmond has in the past talked of a new approach which places emphasis on happiness and wellbeing rather than competition and money-grabbing. Stiglitz himself has written extensively about new measures of economic development which move away from the old GDP model toward life satisfaction and fulfilment. An independent Scotland would have the chance to pioneer these approaches as national policy.

Overall, I don’t know whether that the report convinces me about independence. More devolution looks likely, and devo-max could probably deliver most of the goals of the report. The SNP think that Scotland is going to escape all the failings of Westminster, and that stupidity and greed won’t exist in the new nation. So far the government’s proven quite enlightened but there’s no guarantee that the nationalists would  stay in power after independence or that they’d stay sensible when they got their hands on the chocolate box. Too many newly-independent nations predicted a sparkling future but encountered a disappointing reality.

———–

Update: Robin McAlpine of the Jimmy Reid Foundation has an article in today’s Scotsman criticising the report for being too conventional. The analysis is correct, argues McAlpine, but the prescriptions unambitious.

McAlpine’s comments on the creation of a new currency are vague. As I wrote in the same newspaper last year, beginning independence with a new currency would be risky and difficult and would probably limit Scotland’s fiscal and monetary options still further by making Scotland vulnerable to the confidence of international debt markets. Launching a Scots pound sounds radical, but if rushed, the outcomes wouldn’t be. Better to become independent using the pound then launch a Scottish currency after a few years of hopefully sound economic performance.

McAlpine coruscates Salmond for considering a three percentage point cut in corporation tax, suggesting that it might attract low wage employers. I’m in no way in favour of a race to the bottom whereby we try to outdo England and others, but fiscal policy has  formed part of the development strategies of lots of successful countries, and the SNP would be silly to rule it out. A few percentage points off the normal corporation tax rate wouldn’t be disastrous and it would still leave the rate well above Ireland’s disastrous 12.5%. On the contrary, tax breaks can sometimes attract good employers and encourage domestic industry.

McAlpine accuses Salmond of trying to “recover the very economic structure that caused the crisis in the first place”. But nowhere does the report imply that we should return to the bad old days. The argument is actually rather forward-looking, placing huge emphasis on low-carbon, environmentally-sound industries with genuine value addition. It’s far more progressive than Westminster ever would be — for example talking about the need for equality. Yes, the report fails to say how an independent Scottish government would control the financial industry, but in no way is its general thrust a continuation of the policies of the Labour and Con-Dem administrations.

McAlpine’s charge that Salmond isn’t considering a “proper industrial policy” is just plain mistaken. The government report talks of the need for new, innovative industries which build on Scotland’s strengths. We can’t turn back to the days of mass manufacture — these things are done far more cheaply in China and other low-cost destinations. When China gets too expensive, manufacturers will find another low-wage country. The government document is in direct opposition to the idea of trying to attract “another thousand supermarket jobs”, suggesting that low-carbon energy, the life sciences, tourism, creative industries, digital and ICT are the future.

I don’t think that McAlpine really disagrees fundamentally with Salmond — he’s just trying to sound critical so as to paint the SNP as more conventional than it really is.

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3 Comments leave one →
  1. Alan Gay permalink
    May 29, 2013 6:26 pm

    Great summary. Good to see Scotland taking a positive, interventionist, approach to national economics, not just leaving it to market forces. As Engand luches further to the right an independent Scotland would at least be able to choose its own direction on the long road to socialism.

  2. James Lamb permalink
    January 2, 2014 8:34 pm

    Excellent article full of useful analyses. Thanks.

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