2020-08-02 08:57:49 UTC
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9:57 AM (less than a minute ago)
The economics of an independent Scotland don’t add up
Although Covid has strengthened the political desire for change, it has laid bare the economic case
2 August 2020 • 7:00am
The Union and Saltire flags blow in the wind
Support for Scottish independence has risen recently CREDIT: Jeff J Mitchell /Getty Images
Pandemic was, for once, not top of Boris Johnson’s agenda on his flying visit to Orkney last week. To mark an eventful first year in power, the prime minister dashed north of the border to grapple with the prized local crabs and help produce the Scottish islands’ protected cheddar cheese.
Trailed from photo op to photo op by a smattering of pro-independence protesters donned in masks, Johnson was already eyeing the next major battle of his premiership.
The Covid-19 crisis had demonstrated the “sheer might” of the union, Johnson claimed in one of the few parts of Scotland not controlled by the SNPs. The nationalists said the visit smelled of panic and recent polling suggests why nerves in Westminster are beginning to fray.
Support for Scottish independence has risen into the lead in recent opinion polls with one putting those in favour of a breakaway eight points clear at 54pc. Holyrood elections next year could make calls for a second referendum difficult to ignore.
Few disagree that the crisis has helped to advance Nicola Sturgeon’s cause, allowing the First Minister to plot a different course for Scotland through lockdown.
But it has also delivered another blow to an already dubious economic case.
“If there is another referendum, the 2014 line of argument, making the rational case versus the emotional one, is going to be even harder but both still matter,” says Prof Jim Gallagher, a former secretary to the Commission on Scottish Devolution and a Better Together adviser.
“There never was an economic case for independence, there was an emotional case and some nonsense made up to make it sound economically good. That’s even truer now.”
In six chaotic years since the vote, the economic case for independence has been flipped on its head but Scotland has edged further away from the rest of the UK politically.
The economic case has deteriorated on several fronts in 2020. Nationalists claim the SNP’s long-term economic vision is more important but more difficult and pressing questions remain.
First Minister Nicola Sturgeon, wearing a Tartan face mask
First minister Nicola Sturgeon is widely perceived as having dealt with the coronavirus crisis better than Boris Johnson CREDIT: Jeff J Mitchell /PA
The jump in public debt makes the task of stabilising the country’s finances even more tricky. Another oil price crash has exposed the vulnerability of what little revenue the UK still makes from the North Sea. The Covid shock has underlined the importance of fiscal credibility and a proactive central bank.
And Brexit has complicated the calculations further. While the 2014 referendum was dubbed a “once-in-a-generation” chance for the nationalists, they now argue Brexit has radically changed the rules of the game.
“The whole issue comes down to one thing: public sector debt,” says Angus Armstrong, director of Rebuilding Macroeconomics at NIESR and former head of macroeconomic analysis at the Treasury.
“If the debt is divided by population, a newly independent Scotland would start life with a public debt burden of over 100pc of GDP, which would have consequences for its currency options.”
Armstrong says an independent Scotland would have to “work hard to establish financial credibility” and could try to win confidence by running budget surpluses.
Like many governments, the UK’s public debt has skyrocketed to fight the economic fallout of the pandemic, rising from around 80pc of GDP to above 100pc – levels not seen since the Sixties.
Ultra-loose Bank of England policy and bond yields at record lows have capped the debt’s risk while Britain already has a solid reputation on financial markets. The Bank has calmed gilt markets by snapping up hundreds of billions of pounds of UK government bonds. Scotland’s public finances would be on rockier ground, however.
In 2018-19, Scotland’s notional deficit was at £13bn, or 7pc of GDP, and rises to almost 9pc without North Sea oil revenue, the annual Government Expenditure and Revenue Scotland report revealed.
If independent, that deficit, which economists believe would be unsustainable, would be higher than any other developed economy in normal times.
Flagship SNP policies from free tuition fees to free personal care for older people have made independence more alluring for voters but has damaged their fiscal credibility by keeping the notional budget shortfall high. The extra spending has been financed by the rest of the UK.
Armstrong says: “An independent Scotland would start with bigger deficits than the rest of the UK, the same debt burden and you want to use someone else’s currency? Do you really think that is credible?
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