The UK Government’s budget deficit for this year will reach 19 per cent of GDP for 2020/21, according to Chancellor Rishi Sunak. It’s worth reflecting on that figure in the context of the Scottish independence debate. For years, we have been told by opponents of independence that a prospective budget deficit in an independent Scotland of around 7 per cent was impossibly large and would have to be managed by “austerity to the max”. Whatever one wishes to say about Sunak’s Spending Review, which resolutely sticks to the great Tory tradition of hitting the poorest hardest (plans to increase the national minimum wage are scrapped and there will be no permanent increase to Universal Credit), the budget deficit is being funded without any problem whatsoever. The costs of debt servicing are actually set to fall this year.
So that’s one hole punched through the scaremongering narratives around independence. Unfortunately, the weaknesses of the unionist arguments on public finances are matched by the weaknesses of the SNP’s independence case, the Growth Commission, which is stuck in a 2010 time warp, where everyone believes George Osborne’s austerity economics make sense. Indeed, as economics commentator Laurie Macfarlane, has explained, in many ways the Growth Commission’s proposals for fiscal policy in an independent Scotland – to keep its deficit under 3 per cent of GDP in the first “five to ten years”, to keep total national debt below 50 per cent of GDP, and to always limit public spending to 1 per cent below the growth rate for the first ten years – would make Osborne blush.
“Applying these rules retrospectively reveals why they are problematic,” Macfarlane explains. “In 2019, GDP growth in Scotland was 0.7 per cent. Under the Growth Commission rules, this would mean that public expenditure would have shrunk by 0.3 per cent. In reality, public spending increased by 3 per cent – under a fiscal framework overseen by a Tory treasury.
“Applying the same assumptions going forward would see public spending as a proportion of GDP fall by around 4 per cent over a decade. To put it another way: the Commission’s plan would see the size of the state in Scotland shrink at a faster pace than when George Osborne was chancellor. At a time when the world is turning its back on austerity, the Growth Commission seemed determined to bring it back to life.”
One would think the realities of the pandemic would be an opportune time for the Growth Commission’s architect Andrew Wilson and First Minister Nicola Sturgeon to re-think such a plan, but inexplicably both have sought to double-down on it, Sturgeon happily tweeting a Wilson piece in The Spectator last week re-iterating the Growth Commission case.
As Macfarlane, who was involved in developing the new Scottish National Investment Bank which was launched this week, has again pointed out, this piece is “littered with falsehoods”, but the most relevant one here is that Wilson claims an independent Scotland under his proposals for Sterlingisation could finance a large deficit while keeping interest rates low in the same way as Sunak can. But the only reason the Chancellor can do this is exactly because the UK has monetary sovereignty – Sunak’s Covid borrowing is being bankrolled by Bank of England QE. A Sterlingised Scotland, which would likely start with an even greater budget deficit than the UK, would not have BoE QE available to it, and would have to go to the City of London instead.
“Were a sterlingised Scotland to attempt to borrow from financial markets on anything like this scale, it would most likely lead to a vicious cycle of rising borrowing costs and deteriorating budget deficits, as higher interest payments led to a worsening budget position, which in turn led to credit rating downgrades and higher borrowing costs, eventually requiring steep cuts to public expenditure and asset sales,” Macfarlane writes.
It’s time for a reality check on the Growth Commission case for an independent Scotland. Sterlingisation might be appealing to the City of London, but it’s extremely hard to find any good reason why it would be in the interests of the people of Scotland.
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