There are many laudable reasons to campaign for Scottish
independence. But how far should those who passionately want independence be
prepared to go to achieve that goal? Should they, for example, deceive the
Scottish people about the basic economics involved? That seems to be what is
happening right now. The more I look at the numbers, the clearer it becomes
that over the next five or ten years there would more, not less, fiscal
austerity under independence.
The Institute for Fiscal Studies is widely respected as an
independent and impartial source of expertise on everything to do with
government spending, borrowing and taxation in the UK. It has produced a
detailed analysis (recently updated) of the fiscal (tax and
spending) outlook for an independent Scotland, compared to what would happen if
Scotland stayed in the UK. It has no axe to grind on this issue, and a
considerable reputation to maintain.
Their analysis is unequivocal. Scotland’s fiscal position would
be worse as a result of leaving the UK for two main reasons. First, demographic
trends are less favourable. Second, revenues from the North Sea are expected to
decline. This tells us that under current policies Scotland would be getting an
increasingly good deal out of being part of the UK. To put it another way, the
rest of the UK would be transferring resources to Scotland at an increasing
rate, giving Scotland time to adjust to these trends and cushioning their impact.
Paying back, if you like, for all the earlier years when North Sea oil
production was at its peak.
The SNP do not agree with this analysis. The main
reason in the near term is that they have more optimistic
projections for North Sea Oil. The IFS analysis uses OBR projections which have
in the recent past not been biased in any one direction. So how
do the Scottish government get more optimistic numbers? John McDermott examines
the detail here, but perhaps I can paraphrase his
findings: whenever there is room for doubt, assume whatever gives you a higher
number. In my youth I did a lot of forecasting, and I learnt how to be very
suspicious of a series of individual judgements all of which tended to move
something important in the same direction. It is basically fiddling the
analysis to get the answer you want. Either wishful thinking or deception.
I personally would criticise the IFS analysis in one respect.
It assumes that Scotland would have to pay the same rate of interest on its
debt as the rUK. This has to be wrong. Even under the most favourable
assumption of a new Scottish currency, Scotland could easily have to pay around
1% more to borrow than rUK. In their original analysis
the IFS look at the implications of that (p35), and the numbers are large.
So what would this mean? Could Scotland just borrow more? I am
all for borrowing to cover temporary
reductions in income, due to recessions for example, which is why I have been
so critical of current austerity. However, as the IFS show, North Sea oil
income is falling long term, so this is not a temporary problem. Now it could
be that the gap will be covered in the longer term by the kind of increases in
productivity and labour supply that the Scottish government assume. Governments that try to borrow today
in the hope of a more optimistic future are not behaving very responsibly.
However it seems unlikely that Scotland would be able to behave irresponsibly,
whatever the currency regime. They would either be stopped by fiscal rules
imposed by the remaining UK, or markets that did not share the SNP’s optimism
about longer term growth. So this means, over the next five or ten years,
either additional spending cuts (to those already planned by the UK
government), or (I hope more realistically) tax increases.
Is this a knock down argument in favour of voting No. Of course
not: there is nothing wrong in making a short term economic sacrifice for the
hope of longer term benefits or for political goals. But that is not the SNP’s
case, and it is not what they are telling the Scottish people. Is this
deception deliberate? I suspect it is more the delusions of people who want
something so much they cast aside all doubts and problems.
This is certainly the impression I get from reading a lot of
literature as I researched this post. The arguments in the Wee
Blue Book are exactly that: no sustained economic argument, but just
a collection of random quotes and debating points to make a problem go away.
When the future fiscal position is raised, we are so often told about the past.
I too
think past North Sea oil was squandered, but grievance does not put money into
a future Scottish government’s coffers. I read that forecasting the future is
too uncertain, from people who I am sure think about their future income when
planning their personal spending. I read about how economists are always
disagreeing, when in
this case they are pretty united. (Of course you can always find a few who
think otherwise, just as you can find one or two who think austerity is
expansionary.)
When I was reading this literature, I kept thinking I had seen
this kind of thing before: being in denial about macroeconomic fundamentals
because they interfered with a major institutional change that was driven by
politics. Then I realised what it was: the formation of the Euro in 2000. Once
again economists were clear and pretty united about what the key macroeconomic
problem was (‘asymmetric shocks’), and just like now this was met with wishful
thinking that somehow it just wouldn’t happen. It did, and the Eurozone is
still living with the consequences.
So maybe that also explains why I feel so strongly this time
around. I have no political skin in this game: a certain affection for the
concept of the union, but nothing strong enough to make me even tempted to
distort my macroeconomics in its favour. If Scotland wants to make a short term
economic sacrifice in the hope of longer term gains and political freedom that
is their choice. But they should make that choice knowing what it is, and not
be deceived into believing that these costs do not exist.
