Scotland’s economy would be viable

I’ve tended to steer away from the debate over Scotland’s finances because it’s not my professional area and because it all gets a bit “he-said”, “she-said”. Westminster concocts one set of figures and Holyrood another. I’ve no independent yardstick by which to measure which numbers are more accurate. Much of the answer comes down to logic and clear-thinking, free as far as possible of material interests or ideological predispositions. For those reasons i’d be more than happy to receive constructive comments on the following.

What seems clear is that Scotland’s fiscal situation would be viable in the early days, despite the scaremongering. And in the long term Scotland would have the opportunity to pursue an expansionary economic policy which would in turn create the finances to sustainably pursue its social goals. A new Scotland could surely pay for itself?

Looking at the short-term data you’d be forgiven for thinking that the inevitable currency union with England or the less-preferred option of using the pound independently would restrict Scotland’s fiscal options. Under a currency union the Bank of England would impose spending limits on Scotland. Without a currency union the cost of borrowing would increase as international borrowers demanded higher returns, leaving Holyrood with less cash.

There wouldn’t be oodles of money around. In addition fiscal space would be limited because higher taxes would, all other things being equal, tend to frighten away companies and may reduce investment (although the corporate fearmongering of the last week is vastly overblown and is really about shifting brass plates. These companies are just sending a signal to a future Scottish administration not to regulate them or make them pay more tax. Most of them already threatened to leave in 1979 and 1997.) Lower taxation might reduce revenues and encourage a mutually-destructive race to the bottom.

Some people argue that despite political separation that this economic straitjacket would limit true independence. Where would the money come from to pay for Scotland’s enlightened social policy?

It’s a question certainly worth asking. With a budget deficit of 5.9 per cent of GDP using a geographical share of oil, according to this perspective Scotland’s fiscal options appear further limited in the near term, just like the UK’s.

I’m not one of those starry-eyed nationalists who insists on the holiness of everything after independence, but a few reservations need to be voiced about this story.

First, it’s important to look at the long-term data rather than just the last year. As pointed out by the Scottish government’s Fiscal Commission Working Group (Profs. Andrew Hughes-Hallet, Jim Mirleess, Joseph Stiglitz, Frances Ruane and Crawford Beveridge) over the period 1980-81 to 2011-12 Scotland is estimated to have run an average net fiscal surplus equivalent to 0.2% of GDP. The UK, in contrast, ran a net fiscal deficit of 3.2% of GDP.

“Taking both spending and taxes into account Scotland’s national balance sheet has been healthier by £12.6 billion over the past five years for which data is available”. There’s no reason to believe that over the long-term a similar trend might not re-establish itself as global stability increased. Oil, sustainable energy, tourism, food and beverages, tourism. Scotland is a world-leader in them all.

Second, austerity has not only been unjust but economically counter-productive. It’s worse than useless. Paradoxically (and to heavily simplify Keynes) when interest rates are almost at zero during a recession the less the government spends the more the economy stagnates. Paul Krugman, despite his faults, has been one of the better critics of austerity. There’s no magic level of debt below which governments must unfailingly remain. Private debt is anyway a much worse problem, at around four times that of government debt.

So Scotland’s current budget deficit isn’t crippling and wouldn’t rule out spending to stimulate growth or to redistribute wealth. We’ve been sold the lie that governments are like households and that we’re all in some sort of collective belt-tightening exercise. This is nonsense. A sensible government could try to stimulate domestic savings and investment. Government infrastructure spending can reap higher returns than the likely borrowing costs (which in the UK are at historic lows), even after independence.

And if you believe in infrastructure crowding investment in, not out, and in a multiplier effect, then the long-term broader economic benefits can justify the rise in debt (which might be lower than England’s if they do a deal based on refusal of the use of Sterling). None of these ideas are original – they’re all well-known to economists of a broadly Keynesian persuasion, like Krugman.

Funnily enough Krugman came out in recent days in support of the union because he believed separation risked emulating the euro crisis. The problem with the Eurozone, lots of economists say, is that it comprises separate countries with no mechanism for fiscal transfers and has no free movement of capital or labour.

Now I’m no Nobel prizewinner but even I can see that Scotland’s and England’s economies would be similar enough to prevent a euro-style crisis. In the neoclassical jargon, they’re an optimal currency area. Workers and capital will still be able to move freely over the border after independence. Yes, a key problem with the eurozone was that it didn’t have fiscal powers – ie. it couldn’t spend more in the economic blackspots and rein in the overheating areas — but that’s only a problem because the euro economies were so different and because it’s not an optimal currency area. I can’t see any scenario under which an independent Scotland would end up like Greece or Portugal.

In the long run when credibility is established, and when the English and Scottish economies began to diverge Scotland should launch its own currency, giving it more freedom to pursue its social and political objectives. That’s what Ireland did after independence.

As it happens Scotland only controls 58% of its spending under a block grant. Self-evidently, full control of the budget would create far more fiscal freedom. Members of the Scottish Parliament would become more accountable if they were responsible for raising revenue as well as spending it.

Even with the fiscal constraints that would undoubtedly exist there’s a certain amount of wiggle room. Mainstream economists talk as if there is a direct one-to-one correlation between monetary and fiscal policy when in reality there are significant avenues for divergence. Real economies aren’t carbon copies of the university models. Panama ≠ the US ≠ Hong Kong. Brunei ≠ Singapore. And how can the Westminster parties talk of allowing Scotland to raise its own debt under devo more or max but predict economic collapse under full independence?

As the Fiscal Commission Working Group points out, even if the overall budget is fixed, an independent Scotland could decide how it shared out the pie. Fiscal flexibility is a necessary part of a successful currency union: “Limitations on borrowing and deficits are typically at the composite level, and still allow for flexibilities in the design of the underlying tax system and a range of specific policies suitable for each Member State. Indeed, such flexibility is vital to the success of a monetary union as it provides the autonomy and policy levers to target country specific differences (advantages and weaknesses) which cannot be tackled with a common monetary policy. This should help ensure alignment in terms of economic performance. It is also vital for democratic accountability and legitimacy.”

I see newly-independent countries as successful insofar as they seize and develop the levers of economic and political power and use them to shape policy to their particular circumstances, rather than imagining that they are victims of capital. Expansionist or statist policies actually work — they stimulate economic activity — rather than just being a bulwark against the erosion of social welfare.

The Working Group details the levers of economic control that would be available to a Scottish government given suitable currency arrangements but which aren’t available now.

On the fiscal side these include:

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

Non-fiscal levers of policy include:

• Financial Regulation
• Consumer Protection
• Industry Regulation
• Energy Markets and Regulation
• EU Legislation
• Competition Law
• International Trade
• Immigration
• UK-Level Public Goods
• Public procurement.

Ultimately Scotland’s economy wouldn’t be all that different, at least in the early days. But it would be viable, and fears about fiscal straitjackets are vastly overblown. Even the Financial Times says so. In many ways the naysayers fall victim to the austerian hype that’s pervaded Britain since the crisis. There’d be wiggle room. Scotland could distribute the pie how it wanted even if the overall sum stayed similar. And in the long run an expansionary policy would generate the tax revenues necessary for a more fair and just social system. In my eyes much of the debate boils down to an economics of short-term accountancy versus an economics of dynamism and possibility: beancounters versus visionaries.

None of this viable economic future is guaranteed under an independent Scotland, and of course I could be wrong about the prospects for an expansionary Scottish policy. But what’s all-but-certain under Westminster rule is more of the same old inegalitarian, uncaring, me-first policy which puts private interests before the public good and works to shrink the state. As the Yes campaign has said all along, a vote for independence is about hope, not fear.