18 December 2019
By David Smith
The election, on which the dust is now settling, has clarified quite a few things. Labour’s John McDonnell will never be chancellor, so it’s just as well I did not develop a close relationship with him. The Tory victory means that only an earthquake will prevent the UK from formally leaving the EU on January 31. Nobody has died in a ditch. The other key date — coming out of the transition period at the end of 2020, to be enshrined in law — is more up in the air than the government would have us believe, though markets have responded with a sterling sell-off.
The other bit of clarity is on Scottish independence. Though Boris Johnson has rejected Nicola Sturgeon’s call for another referendum, and ministers have said that there will not be one over the next five years, which would take us beyond the tenth anniversary of the September 2014 vote, this is an issue that will not go away.
The Scottish National Party, which won 47 out of 59 Scottish seats, will not be fobbed off easily. Its vote went up sharply, while the Tories’ went down. For every eight seats held by the SNP in Scotland the Tories have one. Mr Johnson’s northern appeal did not extend to Scotland.
Some argue that the SNP’s share of the vote, 45 per cent, suggests that opinion has not changed much since 2014, when voters rejected independence by 55 to 45 per cent, but it may not be that straightforward. Ms Sturgeon has said that some voters who backed the SNP may not have been supporters of independence and, by the same token, some independence backers may have decided their votes were best used for other parties. A Tory government in Westminster with a big majority may itself increase support for independ-ence.
If so, I have to feel sorry for those Scots who want to break free. For, even if the politics of independence may be moving into line, the economics has rarely been worse. An independent Scotland is not economically viable.
It was not always this way. In 1979, there was a referendum on Scottish devolution; the establishment of a devolved assembly. Of those who voted, 51.6 per cent were in favour, 48.4 per cent against. But the additional requirement was that 40 per cent of the electorate, as opposed to those who voted, had to support it. The actual number was 32.9 per cent, so devolution stalled.
Many people, particularly overseas, were surprised that on matters of such constitutional importance there was not something similar in the 2014 Scottish and 2016 EU referendums. It is water under the bridge but on that 40 per cent hurdle, the Brexit vote would have fallen well short.
Anyway, had devolution happened in 1979 and been followed quickly by independence, albeit over Margaret Thatcher’s dead body, the economics could have worked. This was the era of North Sea oil as a tax bonanza and in 1979 there were still 20 years to go before the oil peak was reached.
In the 1980s, even with Scotland’s higher public spending, North Sea oil revenues meant Scotland’s public finances were in rude health. While the Thatcher government was struggling to bring borrowing under control, Scotland was in budget surplus, by thousands of pounds a head.
Some Scots are nostalgic for those days. Others think that a rosier fiscal past entitles them to an independence dowry from Westminster. It does not work like that. Scotland’s superior deficit performance came to an end 30 years ago and for the past decade the picture has been one of significant deterioration relative to the rest of the UK.
The position, set out in the official GERS (Government Expenditure and Revenue in Scotland) assessment, is clear. In 2018- 19, Scotland ran a budget deficit of 7 per cent of gross domestic product, compared with 1.1 per cent for the whole of the UK. Scotland’s revenue per head, even including a geographic share of North Sea revenues (ie the overwhelming majority of them), was £11,531, compared with £11,838 for the whole of the UK.
Scotland’s public expenditure per head is significantly higher than the whole of the UK — £13,854 versus £12,193. Higher spending and lower taxes mean that Scotland has a fiscal problem. Nobody, including the SNP’s Growth Commission, has come up with the answer to this. Scotland needs either substantially higher tax revenues or an austerity programme much more severe than that experienced by the UK over the past decade. Neither is going to happen.
A very weak fiscal position is not the only barrier to independence.
These Islands, the think tank established by the businessman Kevin Hague and his colleagues, has done a better job analysing the economics of independence than the Westminster government. Its recent report discussed in detail the weakness of the post-independence options of “sterlingisation” — continuing to use the pound — or launching a new currency. Immediate euro membership would not be an option and both of the alternatives would be scuppered by the fact that, alongside a big budget deficit, Scotland would have a larger balance of payments deficit and a lack of currency reserves. It would, as an expert reviewer of its paper said, be prey to “hugely disruptive” speculative attacks.
These Islands has also researched the importance of the UK single market for the Scottish economy. Frictions on trade between England and Scotland could be highly damaging. Roughly 60 per cent of Scotland’s exports are to the rest of the UK, compared with 18 per cent to the EU’s single market.
Economics does not always play as big a part as some of us would like — Project Fear had its origins in the 2014 referendum — but the economics of Scottish independence are clear. It is about 40 years too late.
David Smith is Economics Editor of The Sunday Times
You can access the full article on The Times website here.