Setting out the economic case for Scottish independence
If Scotland votes to become independent, it will be the richest country ever to do so. The economics of the independence debate start with this clear and simple fact.
Such an undertaking would be a substantial challenge, there is no doubt. And the Scots remain a canny bunch, unlikely to choose such a move unless the case is made substantially and well. But the positive argument rests on a simple enough proposition: if Ireland, Finland, New Zealand, Norway and Denmark can all be highly successful economies with a similar population, why can’t Scotland?
Small countries dominate the top of the rankings of the International Monetary Fund’s (IMF) league table of economic performance measured by GDP per capita; so Scotland could surely make the policy choices to emulate them? If it chooses policies that will help the economy achieve its potential, then it will succeed, over time. Rome wasn’t built in a day, but it was worth building.
Of course, if Scotland makes bad choices the country won’t achieve its potential. The question is whether it’s more likely to get the policy mix right on its own than as part of the UK, with a government it doesn’t support. Policies it would make as an independent country include a pro-migration stance agreed across all the parties in Scotland, in contrast to the approach of the UK Home Office. The economic imperative for this in Scotland is clear, as is political consent.
This argument is by no means a slam dunk for proponents of independence. Some countries do get it wrong. The Paris-based Irish author, Michael O’Sullivan, looked at this in his 2019 book The Levelling; he pointed out that in 1924 Argentina was three times wealthier than Japan but today is half as rich. Simply put, countries can fail to deliver on their own best interests. The evidence of this is at the heart of the negative economic case for Scottish independence, which has probably never been stronger because of the UK’s economic performance.
The UK once had the richest economy in the world. Today on the IMF league table it sits 28th. This long, relative decline in performance has been accelerated by Brexit, which is the catalyst for Scotland’s choice now.
It’s not just the fact of Brexit, but the manner of it. A choice that Scotland opposed in substantial numbers has been imposed with literally no plan of how to go about it. No prospectus was laid out in advance of the vote about what it would mean, nor what the transition would be like. When an agreement was eventually struck on the detail by the UK government it was for a deal that it now describes as “self-harm”.
The economic truth, which is now universally accepted, is that the UK is one of the most unequal economies in the industrialised world. The gap between the richest and the poorest local areas is – by some distance – the largest of any European country. This is why the UK now has a whole government department for “Levelling Up”.
It’s one of the great ironies of the Scottish debate over the last half-century that the very need for “levelling up” is the basis of the main economic argument for the Union. The UK economy does most of its flying on the one engine of London and the South East. The other UK nations and regions underperform economically but “benefit” from fiscal transfers from the south in higher public spending. This notional “deficit” is higher than the UK average in most places, including Scotland. So, the argument goes, Scotland would miss this funding if it voted for independence. An unsustainable deficit would in most countries be an urgent reason for reform – in the UK it is the central argument for the status quo. We’re a nation of ironies, but not all of them are funny.
In fact, the Scots raise enough in taxation in non-Covid times to pay for all the policy responsibilities of the Scottish government (health, transport, education etc) plus state pensions and social security. The deficit is therefore made in the notional allocation of UK programme costs to Scotland in defence, debt interest and the many other reserved areas. Many of these Scotland would have to fund; some they may choose not to.
One obvious departure would be the choice not to fund the replacement of Trident. Andrew Marr argued in New Statesman recently that Russia’s actions in Ukraine weakened the case for Scottish independence and strengthened the case for Trident’s replacement. At the twentieth read, I’m still struggling to understand his point. But he did get one thing right: an independent Scotland will not be a long-term host to the next generation of nuclear weapons but will seek to be an active and supportive member of NATO. Just what our “independent deterrent” is currently deterring in Ukraine is not clear to me, but that is for a different essay.
Regardless, what is certainly true is that Scotland will require to make its public finances sustainable in an orderly fashion. All countries must. What would make no sense is a self-defeating austerity programme, such as that which most economists now agree was a damaging mistake by the Conservative government in the years following the global financial crisis of 2007-8.
The priority right now is investing for recovery and the net-zero transition. But if Scotland is to borrow on the debt markets sustainably and cost-effectively, it will need a credible plan. This is a large part of the reason why the SNP’s currency policy is to retain GBP sterling for a transition period of some years before launching a Scottish pound. Ireland did this and it makes sense for many reasons, not least in removing currency risk from the cost of borrowing while credibility is established by the Scottish government’s financial policies and institutions.
A central bank will be created early, however, as lender of last resort and regulator. An anchor institution for the new country as it begins its transition back to the European Union, it will need to be led by the best talent that can be found. In due course Scotland will naturally have its own currency, but only when it is practicable, and the time is right to ensure its best interests. That timing will depend on key tests published by the Scottish government for markets, companies and individuals to understand with certainty.
There are always trade-offs of course. Currency stability and de-risking is traded off against monetary policy sovereignty for a transition period. This is sensible. The other trade-off Scots will need to weigh up is what the transition back to the European Union will mean for trade. It’s clear that Scotland’s economy would benefit from diversifying its trade and growing in markets outside the UK just as Ireland has done. When Ireland joined the EEC in 1973 its trade was vastly dominated by the UK; today Britain is a fraction over 11 per cent of Ireland’s exports and its economy is all the healthier for it.
But it stands to reason that if Brexit is problematic for Britain’s trade, then Scotland returning to the EU will create challenges. The difference of course is that if Brexit is a choice to exit the benefits of the single market, independence would be a choice to return to them. Transitional challenges will therefore be about benefits sought rather than departed from in Brexit.
The Scottish electorate has not yet heard an updated case for independence from the Scottish government, which won the Scottish Parliament election on a manifesto commitment to give people a vote on the issue. Its focus has been entirely and rightly on covid. But work is now under way to remedy that. It will be the antithesis of, and an antidote to, Brexit’s self-inflicted problems. Where Brexit had no plan, the Scottish government is working on a prospectus to make clear why the choice should be made and what the transition would look like. Much of the thinking to underpin this work has already been agreed.
The Scots have the choice of independence and a return to the European Union. Not choosing that would be economically high-risk. The process will not be simple; it will be hard work and take effort; but, like most acts of self-improvement, it will also be satisfying and meaningful. Of course it will be challenging, but it will be worth it.
Andrew Wilson is founding partner of Charlotte Street Partners and chaired the SNP’s Sustainable Growth Commission