Gavin McCrone’s Weighing-Up the Economics Chapter 1: How Well Off Are We?

Professor McCrone has contributed to the growing debate on independence with a new book on Scotland’s economic position. As the government economist who predicted the riches that the North Sea could bestow on Scotland and Britain, and who insisted on the importance of a taxing mechanism for this, he is a man who has been long acquainted with the issues of Scotland’s economy.

These blogs are intended to outline the points that Professor McCrone highlights as being pertinent to the economic case for or against independence, and, since we are of the independence party, provide some positive response to any points that do not seem to support the Cause. However, we will attempt to be honest and give full weight to all of the arguments, even those heavily against our own view.

Foregoing a little  of Scotland’s economic history in the first couple of pages of the chapter, Professor McCrone  goes onto state that outside of London and the South East, Scotland is the richest area of the UK. If we take the Gross Domestic Product (GDP) per head then an independent Scotland is only exceeded in wealth in Europe by Luxembourg, Norway, Switzerland and Monaco. This includes North Sea oil and gas which increases our output (GDP) by 21%. These North Sea estimates are based on the territorial waters being divided -up in accordance with international law and the output from the 90% of the North Sea that would fall in Scotland’s territory being included in these figures.

When it comes to tax and spend, Scotland provides a tax revenue equal to the share of its population, however it spends more than it takes in tax. According to the best estimates in Professor McCrone’s book, the current deficit between what Scotland earns and what it spends is 14%. This would be reduced to 5%, the SNP claim, if the tax revenues from the North Sea accrued to a Scottish Treasury. Still a deficit, but a more manageable one, and near to the 3% deficit required by the EU.

Professor McCrone makes the reader aware of some important factors to take into account. We do not know the share of the North Sea an independent Scotland would secure in negotiations; we do not know the future price of oil, fluctuation in the price of oil could have a huge impact on Scotland’s deficit; we do not know the share of the UK’s national debt that Scotland would have to take on, or the interest payable on that debt. These are areas that need clarification to make sure that Scotland has a reasonable chance of starting off as a prosperous state, he believes, and common sense agrees.

The worst case scenario is fairly obvious – Scotland might not be able to attain its 90% claim of North Sea oil and gas; it would then require a large reduction in its public spending; it would receive a larger portion of the national debt and at a higher rate of interest than it would like, and the oil price might fall. This would create severe economic difficulties. Certainly, the beginning of Scotland would be quite chilly if this were to be the case. There would be savings available to be made, nonetheless, finding 10% of any budget to cut is a hard task, and a thankless one, probably capable of destroying any political party for a generation.  Add to the fact, that, if the SNP formed the first government , we would still be using Sterling, then there is not a huge amount of room for manoeuvre with an independent Scotland’s finances.

Should we be pessimistic about the these obstacles? If we look at the figures more closely, then there is less cause for alarm. There’s an element of a fiction to all statistics. If North Sea oil production disappeared tomorrow, we’d really only miss the tax revenue, because most of the profit and wages from North Sea oil by-passes Scotland and goes to pension funds, trust funds, shareholders and workers who do not live in Scotland. So, despite being told we’re the sixth richest nation in the world by GDP, we probably wouldn’t feel any different. There’s no reason why Scotland should receive less than 90% of the gas and oil producing territory of the North Sea, but even if it does, again only tax would make a difference. The impact might look traumatic as far as GDP goes to have only 60% or 70% of the gas and oil territories but the tax revenue would not be so substantially harmed. (We’d still want 90% though.)

Having said that, there would still be a series obstacle. A deficit of any sort is going to be extremely difficult and, without a Scottish currency, near to unmanageable in the short term. We would be at the behest of the Bank of England. Their protection of the Sterling currency would mean that Scotland would have to run deficits at the level the Bank of England required; this would then mean that Scotland would have to tax and spend at the level the Bank of England believed would keep our deficits under control, possibly giving directives on business taxes and raising the possibility of corporation tax being higher in Scotland – a flight of capital may then ensue. Our borrowing would be regulated, subject to the Bank of England,; the interest payable on our debt would be controlled by the Bank of England, although the portion of the national debt Scotland takes responsibility for would be arrived at through negotiation. If Scotland votes Yes and then elects a SNP government which continues with a Sterling currency, in the short term, Scotland does not have the independence we and others would wish for it.

This is why we believe an independent currency is vital. It is possibly acceptable as a political tactic to state that Sterling should be kept, as a form of reassurance to voters, and there’s no doubt that some kind of peg to Sterling or another currency after independence would be useful for stability; however, to launch Scotland into independence with Sterling would mean forfeiting all our cards in the negotiations. These negotiations would quickly become the Scottish representatives surrendering Scotland’s advantages to stave off economic armageddon.

Currency is the most problematic issue for Scotland. A Scotland that could not allow its currency to weaken would have to borrow at unsustainable rates to keep up public spending. If this cannot be done which, to be honest, will not be allowed, and if Scotland cannot have its own currency and not allowed to borrow independently then it would have to cut about 5% to 10% of its budget, which, if we include the sort of multiplier effect we’ve seen in Spain and Greece, could drastically effect the Scottish economy. (The multiplier effect is when a government cuts spending and how much that effects other groups individuals’ spending in the economy.) In fact, it could eviscerate the Scottish economy in the short term, since compound interest on debt means that we could be trying to close a deficit that is continually running away from us.

In the long-term, Scotland will be a much more successful economy with independence than it is now. We are certain of that. But, we cannot be disingenuous and state that independence with Sterling and the kind of deficits Professor McCrone identifies is not storing up difficulties and may force concessions which in the near future will have ill effects. We’ll still be for independence, but we can skip most of these problems with an independent currency.

Our own currency would see us able to finance our own deficits; weaken our currency to boost exports, and encourage the buying of Scottish-made goods and services. From this position we could slowly strengthen our currency and peg it to the Euro, Sterling or another, so that our needs are suited and stability is gained with a balanced economy. We could even let a Scottish currency strengthen and use it to purchase assets – but we should not have our currency, deficit funding, interest payments and fiscal powers be dictated to us.

Professor McCrone does not countenance a Scottish currency, but assumes a SNP government with unmoderated policies. This makes the reading of the first chapter of his book unduly pessimistic as he assumes we are handed an unfavourable economic situation and the professor describes the lack of control we would have in rectifying it.  This is exactly what independence is about – changing our economic and social reality.

Why do other countries want their own currencies?

There is a potential storm brewing in France. It is a country that is not used to financial sacrifice. It has had for decades now good state benefits, state support for industry and strong unions that fight to uphold the social contract at a moment’s notice. Up until the most recent financial crisis, although having difficulties with unemployment, particularly youth and immigrant unemployment leading to local difficulties in the banlieues, France and its people have not been particularly scarred by the free market reforms of the 1980s in the way that Northern England has been or de-industrialised Scotland.

Yet the Euro crisis now threatens their economy and their often talked about and seemingly much-prized social model. A model of higher taxes, regulation combined with state intervention and living benefits. France’s deficit of what it spends and what it takes in tax has been growing larger, and to cover the gap requires borrowing. Debt has reached the level where the costs of borrowing could become exhorbitant (leading to eventual bankruptcy and default) if the deficit in spending and income is not cut.

To do this means that state support of industry must be withdrawn. Job losses. Benefits must be cut. Job losses. And social programmes abolished. Job losses. The accumulated loss of money from the economy will hurt other businesses. Job losses. This eventually will feed into a spiral of less money in circulation, leading to more unemployment, leading to less money. Yet France cannot do anything else. It has lost the ability to manage its own economy and must implement the reforms favoured by the EU and Germany: the superpower of Europe and the world’s third largest exporter.

The European Union policy is called ‘internal devaluation’. It requires a country to cut its spending so that its workers will work for less. This means that the workers will become competitive with other nations and that the products of their country will be sold to other countries at a lower price. This selling of products to other countries brings cash and tax revenue to the home country, making the home country’s books balance. It also means that the people in the home market should buy the cheaper home-made goods too. It’s a virtuous circle of, for instance, Germans buying cheap German goods and exporting those goods across the world.

There are several issues with this approach in the specific case of France and the application of it by the European Union. The first issue has two sides: the deflation spiral and the social consequences. To cut spending is to cut the money in circulation in the economy: this forces wages down. Wages being forced down means that prices should be forced down. Prices being forced down means that wages drop even further. Job losses are an inevitable part of this process. Monetarists hold that eventually when wages and prices meet an equilibrium then the negative spiral stops and a positive one will begin, or at least people on even nominally lower wages will have their spending power returned to them because prices will be lower too. But, and this is a very important point, in our system, there is no natural point of equilibrium, not logically and not in actuality. Not only can, logically, this cycle continue until there is no one left in employment, but the debts built-up by individuals and companies, and the regular interest payments they demand, means that they will go bust before equilibrium is reached.  Traditionally, the state steps in to arrest this downward spiral. Under the Euro and its Austerity policies it cannot as it would have to borrow at too high an interest rate, endangering the states ability to fund itself. Given we are in a world recession, and countries are trying to export their way out of it by the same methods, including currency devaluing, the likelihood of France or any country being able to offer goods at knock-down prices is rare (no, impossible).

This deflationary cycle, unsurprisingly, has an impact on the tax income of the state. Less jobs equates to less taxes; less taxes means the gap between government income and government spending grows. Usually, governments can borrow at this point, but Austerity means they cannot. The state is now chasing a finishing line that is always moving away from it. It’s like Zeno’s paradox of Achilles and the tortoise. The economy contracts, the state contracts, the tax take contracts; the deficit increases, the debt increases, the interest on that debt increases in real terms.

The social consequences are there for everyone to see: 50% youth unemployment in Greece, Spain and  near it in Portugal. 25% unemployment in the same countries. Loss of skills and industry that took decades to build-up. But this is not the worse: Italy and France are next. And even this isn’t the worst news – the worst news is that the debts have not gone down. All the suffering so far has not led to a decrease in debt, so the sacrifice of these populations has been for nothing and will be for nothing. Poverty is increasing; social services are decreasing, and life prospects, in all senses of the term, are thinning. The fact that people have a ‘capital inheritance’, that they have homes to live in or family ones to go back to, that there is flexible part-time working so that even a minimum amount of money is coming in, and the explosion of food banks, are the only things keeping a lid on what would be a dangerous situation. How will people feel when they realise that their standard of living has permanently gone and their sacrifice was to no avail?

A decade and more ago, Germany followed Austerity policies and it has worked brilliantly for them. However, this policy was followed during the middle of the largest economic boom in human history by the largest exporter of manufactured goods in Europe, and relative to its size, the largest exporter in the world. The German people suffered slightly while its economy hardly veered off-course. It is not the same circumstances now. Applying Austerity now is like using the tactics of the Somme in the Ardennes forest circa 1940.

There’s another important economic point that is not commented upon, usually for reasons of national pride. The Germans do it better. The Germans have invested in machinery, skills and quality for decades and it has paid off. Germany’s success as an exporter does not rely on its low price tags: it is built on quality, reliability and high-spec goods. The German car is never the cheapest, yet if we had the money, we’d more than likely buy German. The same for furniture, technical goods, electronic goods, chemicals, engineering parts, engineering projects and football players. Germany rarely lets you down. A brand like this is invaluable. Spain, France, Portugal, Greece, Italy do not have this reputation to the same extent in anything except the odd area here and there, and high end luxury goods. Culturally, there is no reason to think that a policy that succeeds for the German economy will succeed for the French one. (There’s also another unspoken factor – during the 1990s the Germans bought-up many prize assets in Eastern Europe and Russia, turning some countries into satellite economies of a greater German economy i.e. captive states that unwittingly buy German all the time. This economic strength is invaluable in producing an account surplus.)

So, how does this relate to Scotland and it having its own currency? Marine Le Pen, daughter of radical rightist Jean Marie Le Pen, has re-positioned herself as the saviour of the working class with a policy that calls for the return of the French franc. The return of the franc will kill the policy of Austerity imposed by Brussels. “I cannot imagine running economic policy without full control over our own money,” she said. If Greece returned to the drachma, it would be scorched alive. It’s too small and its debts could be held over it so that an asset stripping would leave it with nothing. France is too big to bully in this way. France can walk away from its debts, re-write its debts and dictate its debts and have default as its last  reserve – a default that tear through the financial system and create such a black hole that all economies except subsistence ones would be pulled into it. France has the power in reserve to reflate its economy and wipe-out its debts relatively painlessly.

Scotland isn’t in that position of crisis, or strength, but the point should not be lost. Scotland cannot meet its own economic needs without its own currency. With our own currency, all options are viable and on the table; lacking our own currency, we have no options. It would take years, probably decades, to build-up enough Sterling reserves to be a serious player at the table and have serious influence at the Bank of England. Yet overnight, we can be one of the most prosperous and flexible countries in Europe, if we use a Scottish pound.

A return of the Scottish pound with the return of our independence would mean we can fit our interest rates to the needs of our people. We can issue our debt. We can pay off our debt. We can find the right level of currency for our exporters and for imports. At the moment we’re in a seemingly benign version of the Euro, the British pound, but that’s partly because the damage has been done – the British pound has been set in the interests of the London establishment, not the Scottish, or even the English, Northern Irish and Welsh people and our manufacturing has suffered – and partly because we have not even started Austerity yet. Although this is not the current policy of the Scottish government, we feel sure that parties for the first independent Scottish government in 2016 will adopt this as a policy. Events will have made us even wiser by then.

An independent Scotland. An independent currency.