The recent electoral success of the SNP throws the spotlight back on the question of Scottish independence. It seems few people remember that the economic forecasts of the nationalists were discredited within months of last year's referendum. Perhaps therefore a summary of the crucial points might be appropriate.
In December 2013 The SNP published Scotland's Future,
a document long on words and short on numbers. Yet amongst the
numbers it did contain, one received surprisingly little attention.
It was projected that in the first year of independence the Scottish
fiscal deficit would be £4.4 billion, or approximately £1,000 for
every adult member of the population.
Remember that figure, it is important. At a time when
people were blithely talking about being one of the richest countries
in the world, creating a more caring society and setting up an oil
fund for the benefit of future generations, the numbers actually
showed that Scotland was already living beyond its means and proposed
to go even further into debt.
In order to arrive at this deficit figure, they made
assumptions about likely sources of government revenue. Large
receipts were expected from taxes on Scotland's oil and finance
industries, which together form a disproportionately large component
of our national income. Assumptions were also made that Scotland
would continue to use the pound sterling as its currency and that
Scotland would run a Balance of Payments surplus. All four of these
assumptions were flawed.
Official statistics were pessimistic about future oil
prices, given the threatened slowdown of the Chinese economy and the
rapidly expanding supply of cheap shale gas from the USA. Alleging
deliberate manipulation of the figures to disparage the potential
riches of an independent Scotland, the nationalists substituted their
own oil price estimate (of over $110 per barrel).
In fact the official statistics turned out to have been
2015 oil prices are in the range $50 to $60, around half the
nationalist projection. So far from supporting an independent
Scotland, the oil industry was soon in need of UK government help.
The UK Chancellor of
the Exchequer challenged the assumption that Scotland would continue
to use the pound sterling. He expressed himself poorly. What he meant
to rule out was a currency union
by which the rest of the UK would continue to underwrite Scottish
finances. Fresh from the 2008 banking crisis in which UK taxpayers
had been required to find £46 billion to bail out Royal Bank of
Scotland, that was hardly surprising.
His lack of clarity was misrepresented as a threat.
"No-one can stop us using the pound," Alex Salmond
declared. This was of course true. Surprisingly he did not go on to
explain that no-one could stop us using the dollar or the yen or the
Zambian Kwacha either.
An independent country may use any foreign currency it
likes, provided it can get hold of enough by means of a trade
surplus. Panama, for example, uses the US dollar. All that you have
to do is give up any desire to control your own monetary policy. If
Scotland were to use the pound without a currency union it would have
no choice but to accept UK monetary policy as its own.
It also means the Scottish government could only run a
fiscal deficit to the extent that it could cover the revenue
shortfall with reserves of sterling.
An odd sort of independence, you might think, that
resulted in less economic powers than Scotland already has?
When the currency problem became clear, the large
Scottish financial institutions announced plans to move their
services to UK customers south of the border. This was not simply a
brass plate technicality to comply with EU regulations as
Banking profits derive
from the difference between the interest rates at which banks can
borrow and those at which they can lend. Essentially a bank's lending
operations create new money and most of the money supply in a modern
economy consists of bank deposits, not cash. In order to perform
these money-creating operations, banks must be within the
jurisdiction of, and accept regulation by, the central bank
responsible for that currency. A bank attempting to create new
foreign currency would
be acting illegally; it can only operate in a foreign currency to the
extent that it possesses reserves of that currency.
The net result of this alleged technicality would
therefore be twofold.
1. Scotland's financial institutions would be
responsible to the Bank of England and pay their taxes to the UK
2. Without financial exports it is unlikely that
Scotland could run a Balance of Payments surplus. This would
eliminate the Scottish government's ability to acquire reserves of
sterling and thereby to run a fiscal deficit.
Now please remember the important figure that I quoted
at the beginning of this article. By the SNP's own projections, the
fiscal deficit in the first year of independence was to be £4.4
This was before
accounting for the fall in the oil price and the loss of the
financial services industry. It was before
losing control of monetary and overall fiscal powers as a result of
sterling becoming a foreign currency. This £4.4 billion deficit was
actually a serious underestimate, perhaps not within several orders
of magnitude of the reality.
Not only would a future Scottish government be unable to
afford the promised fairer society, it would have to borrow
improbable sums just to keep public spending at present levels.
Why improbable? Because in order to borrow you must
first establish that you are creditworthy. Why might the
international financial community suspect that Scotland was not
creditworthy? Because the SNP threatened that if they did not get
their own way on the currency they would walk away from
responsibility for Scotland's share of the UK National Debt.
Let us leave aside whether one could throw over this
debt without sacrificing Scotland's claim to a share of the national
assets and infrastructure which that debt has financed, much of which
is not located in Scotland and nearly all of which would need to be
replaced by an independent country starting from scratch.
Let us also leave aside the fact that a country involved
in a major financial dispute with an existing EU member would
struggle to find an easy path to re-joining the EU.
Just consider this single point. What international
lenders would offer reasonably priced funds to a new government whose
first independent monetary act had been to deny any responsibility
for debts accumulated jointly under the previous political union?
I am an economist. But of course I am also human. I
might be wrong. To persuade me that I am, would enthusiasts for
independence please not shout at me. Just show me your numbers.
And before you do, please check that they add up.