Jim Gallagher
Professor Jim Gallagher is a Visiting Professor at University of Glasgow, Honorary Professor at St Andrews University and an Associate Member of Nuffield College, Oxford.
Wishful thinking and economic policy don’t mix. Just ask Liz Truss, and her hapless ex-chancellor Kwasi Kwarteng. They believed very, very hard that imaginary growth in the British economy would somehow balance the books. The markets didn’t believe in it, or them. Result – a financial crisis that isn’t over yet, and the sack for Kwarteng, and quite possibly Truss too.
Wishful thinking is all over the SNP’s latest economic argument for Scottish independence as well, only much more of it. In fact, it’s fairytale economics, because there are three wishes. The first is the wish about the currency a new Scotland would use. The second is about how to balance the books on taxing and spending. And the third is wishing that the new economic border with England won’t really be there.
"Wishful thinking is all over the SNP’s latest economic argument for Scottish independence as well, only much more of it."
All three of these wishes have to be granted for independence to be an economic success. But there is no fairy godmother, just the hard headed men and women who lend money to governments. When people talk about “the markets” that’s what they mean. Often they are lending so that they can use the return to pay people’s pensions. Realising you’ve got to pay out pensions every month makes you very cautious about whom to lend money to. I know, I’ve been one of them.
Let’s look at the three wishes in turn. First, the currency. Back in 2014, the SNP were going to stay in today’s currency union with the rest of the UK, even though they had left the UK. They were told at the time that wouldn’t work. They now accept that, but their alternative plan might be even worse. That’s to keep using the pound anyway, but say they will turn it into a new Scottish currency when they are ready.
That isn’t going to work either. A country that uses another country’s currency is just like a family or a business. It can’t create money, just earn it or borrow it. Unfortunately, Scotland as a whole runs a big balance of payments, or current account, deficit with the rest of the world. That doesn’t matter today, because it’s offset by the pooling and sharing of tax resources inside the UK. But, on our own, we’d have to find the money somehow, and that means borrowing. From those pesky markets.
"But there is no fairy godmother, just the hard headed men and women who lend money to governments. When people talk about “the markets” that's what they mean. Often they are lending so that they can use the return to pay people’s pensions. Realising you've got to pay out pensions every month makes you very cautious about whom to lend money to."
That’s where the problem starts. Somebody who lends Scotland pounds will want pounds back, not some new currency that Scotland might soon start using. And even if Scotland promises to give them pounds, it will find it much harder to do if it is running a new, devalued, Scottish currency. And, make no mistake, a new Scottish currency would be devalued relative to the pound, even in the pound’s current weak state.
The markets understand this very well, and will drive the Scottish Government towards a new currency very quickly, by not lending or demanding very high interest rates indeed to cover the risk of getting paid back in a new currency. That’s what markets do: they bring forward events driven by economic fundamentals. The SNP paper even discusses having both the new currency and Sterling at the same time. So state pensions and public salaries would be paid the Scottish currency, but shops and businesses free to do business in sterling.
It gets worse. Scotland’s public sector, its government, runs a big deficit. We take in a lot less in tax then we consume in public spending. Up to £3000 pounds a year for every man, woman and child in the country. That’s a lot of borrowing for any country, never mind a new one. The SNP’s plan just ignores this reality. Next year could be a good year for oil revenues, they say, so everything would be fine. We can borrow, and keep borrowing every year to fund that deficit, whatever it is, and set up an investment fund and capitalise an new central bank. This is Truss on steroids. Hard headed lenders won’t swallow that for a minute. They’ d see a country with an unmanageable accumulation of debt in a very short time and demand very high interest rates from a country with an economic plan like that, if they lent at all.
Credit where it is due, however. There are those in the nationalist movement who just deny the deficit exists. Others claim England will pay for it, English taxpayers will keep paying Scottish old age pensions, while Scottish taxpayers won’t contribute to English ones, or that Scotland won’t pay its share of UK debt. Sturgeon doesn’t accept this nonsense. But nor does she set out any figures at all for Scotland’s borrowing and the balance of tax and spend. The result is a plan that no responsible lender would lend on.
"This is Truss on steroids. Hard headed lenders won't swallow that for a minute. They’d see a country with an unmanageable accumulation of debt in a very short time and demand very high interest rates from a country with an economic plan like that, if they lent at all."
Now maybe Scotland could cut some of its public spending. If we had no defence at all, say, it would save us £3 billion a year. Just don’t tell Mr Putin. And maybe we could put taxes up, even by a lot. But on the basis of what the SNP say today, we’d still be borrowing more and more every year for a decade or longer, hoping somehow the economy would grow. It took the markets a whole day to tell Liz Truss that kind of thing won’t do. On these plans, Scotland would be in an economic crisis even before it was independent.
The idea of growing the economy takes us to the third bit of wishful thinking. That creating a border between Scotland and England somehow won’t damage the Scottish economy much. Maybe a million Scottish jobs already depend on trade with England. If Scotland gets into the European Union, Brussels will demand a border with England. We are not Northern Ireland, and don’t enjoy an international treaty, supported by the EU, which guarantees special treatment.
The lesson of Brexit is staring us in the face. Borders are barriers, barriers to trade, investment and growth. Before Brexit, the UK economy was 90% the size of Germany’s. Today it’s 70%. An LSE study recently suggested that the border effect of Scottish independence could be two or three times bigger than Brexit. Sturgeon’s answer is the same as the Brexiteers: new, magical technology to make the problems just go away. That would be ironic were it not so dangerous.
"Instead of wishful thinking, we need practical plans that will give most people in Scotland most of what they want. A more powerful Scotland, with more say in the UK. Two Governments prepared cooperate, to work together for a better Scotland in a reformed UK, that would invest together to grow Scotland’s economy in the industries of the future, alongside private sector investors."
That’s three wishes not going to be granted, leaving an independent Scotland in an impossible position. The UK’s present crisis, dire though it is, is only a hint of how bad it could be.
It doesn’t have to be that way, and the majority of people in Scotland don’t want it to be. Instead of wishful thinking, we need practical plans that will give most people in Scotland most of what they want. A more powerful Scotland, with more say in the UK. Two Governments prepared cooperate, to work together for a better Scotland in a reformed UK, that would invest together to grow Scotland’s economy in the industries of the future, alongside private sector investors. Not wishful thinking, but real, practical, possibilities, that need change in both London and Edinburgh. A responsible Scottish Government would be working to make them happen, not daydreaming about the economics of fairyland.
