At one level, the economic case for independence is rather straightforward.
Economic growth in Scotland has been 0.5-1% slower than in the rest of the UK (rUK) for 30 years or more.
Business investment runs at about half the rate, per unit produced, of that in rUK. To compensate, Scots work harder than their counterparts in rUK (labour productivity is higher), but the overall productivity level remains lower.
In fact, rUK-owned firms spend 1/20th on R&D of that spent in rUK.
That reduces the investment and innovations spending which could create the gains in productivity that would allow Scotland to become more competitive independently of England.
At the same time the UK economy has become weaker. Growth is slowing down.
The burden of public debt has worsened (even if the year-on-year deficit has shrunk, the austerity chosen to achieve that has reduced the growth in national income and hence the means to reduce that burden).
The UK trade deficit is growing, which means more of the country’s assets have to be sold off to pay for that deficit, and rUK productivity has actually shrunk to below the level of 2007.
It is now at only 90% of the EU level. Who would not want to break free of that?
This explains a lot about the UK’s weakening performance.
It certainly explains the inequality of low real wages, as relatively cheap labour gets substituted for more expensive capital – the source of new productivity gains.
The current devolution arrangements do not permit any policies that would address those problems.
On the budget deficit, there have always been deep concerns about subsidies flowing north, but few about those flowing south.
North Sea oil production costs have halved since 2013, development costs have fallen by a factor of three, while output is up 20% and prices up 60%.
Yet the tax revenues appear not to increase.
Other “hidden” subsidies include: inflated interest payments on the perceived Scottish share of public debt, taxes paid by commuters who work in the south, housing and pension subsidies created by a uniform system based on English conditions.
Independence would rectify these imbalances, offset the loss of UK subsidies, and lower the budget deficit to that which reflects the revenues actually raised and spent in Scotland.
It is easy to supplement these natural corrections with a debt targeting rule that defines how much the budget can be expanded, or must be contracted, each year.
Since 2012, this has been official EU policy after I had helped the Dutch presidency formulate specific proposals for the EU Council of Ministers. Scotland could do the same.
On the currency, the report is very clear.
We recommend staying with the pound for perhaps five years until everything has settled down, after credibility for responsible fiscal and currency management has been established, and until six specified tests have been satisfied.
Then we may make the decision to go to our own currency. Or not, whichever is most advantageous.
We costed the reserves needed for a currency board to support a new Scots currency, and found we had enough reserves already to defend that currency when compared to Hong Kong (for example).
Hong Kong has had a currency board to defend its currency for 40 years (with all the shocks of that period).
It has not had to raise taxes or cut spending.
None of this arises if we use Sterling in the first period.
There is no reason we would need any reserves at all since there would be no Scottish currency to attack.
Any speculation would have to be designed to cause Sterling to collapse.
That is a clear, if small risk to the UK; not Scotland.
In the second period, when credibility is established (meaning the budget has been stabilised at a 3% deficit, debt at about one-third of the UK level, oil revenues are flowing and a sovereign wealth fund manages the reserves), the pressures would be for a rise in the currency – not a fall.
Beyond that, any commitment to keep the EU option open creates the opportunity for a guarantee from the ECB to hold the parity (as Denmark now has).
Are the speculators really going to go up against the ECB? I think not.
For trade and stability, the key is how to ensure the gaps (deficits) in the economy are financed: the private savings vs. investment gap must equal the budget deficit and the trade deficit.
The issue then is whether fiscal policy or investment in excess of savings can accommodate a trade deficit.
The latter is how it happened in the Euro economies (Greece excepted).
Hence the risk is that excessive trade or fiscal deficits could deter investment or cause a run on the financial system.
The report shows how to deal with the fiscal part; if the fiscal flows are as before [the report shows that they would actually be more favourable], the problem becomes a private sector matter; nothing to do with taxes or spending.
It is harder to judge the extent of the trade risk since Scottish trade statistics are incomplete.
But oil revenues are currently credited to the UK trade deficit; and transferring them to the Scottish deficit would be a huge boost towards a trade surplus.
In that case why, if private markets follow their own interests with investments protected by either UK or EU legislation, should we expect to their behaviour to change?
- Prof Hughes Hallett is a member of the SNP’s Growth Commission and honorary professor at St Andrews University’s school of economics and finance
