Reformulating the economic case for independence

25/06/2016
Ben Wray

Laurie McFarlane gives his take on the big economic issues facing the case for Scottish independence, issues which are suddenly urgent in the post-Brexit context

THE United Kingdom has voted to leave the European Union. David Cameron has resigned. Sinn Fein have raised the prospect of Irish Reunification. Sterling has fallen off a cliff. Scottish independence is back on the agenda.

Brexit marked a crisis point in the history the United Kingdom, and the ramifications will likely be felt for generations. It may spell the beginning of the end of the United Kingdom’s very existence.

In the short term, we must be mindful of all the EU citizens working and living in the UK who have been made to feel unwelcome and whose livelihood has been cast into doubt. In Scotland and elsewhere, we have a duty to ensure that all non-UK citizens feel welcome. It also seems likely that we are about to witness a rightward lurch UK politics, and so it's important that we keep reminding people that the problems in the country aren't caused by immigrants, but by our own government.

In the longer term, another referendum on Scottish independence now seems inevitable. Those who voted No in 2014 now need to consider whether they see their future as an independent country within the EU or as part of the UK outside the EU. I have spoken to many people for whom Brexit has triggered a change of heart on independence.

“Much work remains to be done to make a compelling economic case for independence which learns from the shortcomings of the campaign in 2014. In my view, there are five key issues which need particular attention.”

Although it’s unlikely that a referendum will be held any time soon, it’s important to start thinking about strategy straight away. In particular, much work remains to be done to make a compelling economic case for independence which learns from the shortcomings of the campaign in 2014. In my view, there are five key issues which need particular attention.

The first issue is currency. The insistence that Scotland would continue to use Sterling under independence, despite the protestations of the UK Government, was undoubtedly a weak point of the campaign in 2014. Brexit has only made this weaker. This time round it is critical that the long term vision for independence involves neither Sterling or the Euro, but monetary sovereignty. Interest rates, exchange rates and liquidity provision are vital levers for managing a small and open economy in a turbulent and globalised world. To surrender these in favour of a monetary union – whether Sterling or the Euro – would be a mistake. There would likely need to be a transition mechanism in place, either using Sterling or a currency peg, but it should be made clear that this is not a desirable long term solution. This is a complex but critical issue – perhaps the most critical issue – which needs detailed consideration.  

The second issue is oil and gas. The collapse in the oil price has highlighted to the public just how volatile a revenue source the North Sea is. Moreover, combatting climate change means that in the medium term we need to be transitioning our economy away from fossil fuels. Predicted oil and gas revenues should therefore play no part in the economic case for independence, and any fiscal forecasting should be done on the basis of an assumption of zero tax receipts from the North Sea. It should be made clear that any receipts from oil and gas will be ring fenced in an investment fund and not used for day-to-day spending.

“We need be honest about the fact that Scotland’s public finances are not sustainable in their current form. This means making some difficult trade offs.”

This undoubtedly poses challenges for Scotland’s public finances, which brings me on to the third issue: taxation and spending. We need be honest about the fact that Scotland’s public finances are not sustainable in their current form. This means making some difficult trade offs. Firstly, there is undoubtedly scope for tax increases. Local taxation, income tax, national insurance and capital gains tax are all ripe for reform, and an increase in the level of overall tax take can be justified as a price worth paying for maintaining our public services and our EU membership. However, this alone will not be enough. The SNP’s White Paper proposed “savings or increases in revenue” of only around £600 million from leaving the UK. This isn’t sufficient – more needs to be done to identify areas of spending which were justified as part of the UK, but which are unnecessary in the context of small independent country of 5 million people. This may require a radical rethink of provision in areas such as defence if frontline public services are to be protected.

The fourth key issue is industrial strategy. Transitioning away from a low wage economy dependent on oil and financial services to a high wage, high productivity and low carbon economy won’t happen by itself. Far from being a natural phenomenon, the type of economic activity that occurs in a country is to a great extent a matter of systemic design. Markets, despite their pervasiveness, are not innate laws of nature; they are human constructions which are shaped by the laws, regulations, taxes, subsidies and incentives that are put in place by the Government. While the private sector has an important role to play here, the key is to develop proposals which combine a programme of public investment with a broader industrial strategy to foster private sector growth in the key industries of the future. Much remains to be done in this regard.

“Transitioning away from a low wage economy dependent on oil and financial services to a high wage, high productivity and low carbon economy won’t happen by itself. Far from being a natural phenomenon, the type of economic activity that occurs in a country is to a great extent a matter of systemic design.”

The last key issue is immigration. Scotland’s aging population poses a number of challenges in areas such as tax revenues, public services and pensions. To help address this, a key part of the economic case for independence should be ambitious plans to encourage people from Europe and beyond to come and work and study in Scotland. However, with anti-immigration rhetoric currently at boiling point in the UK, this will require spelling out the positive case for immigration to voters. Migrants tend to be relatively younger and contribute positively to the public finances, and also bring useful skills and cultural diversity which complements the indigenous workforce. Increased levels of immigration would therefore help create a more diverse and resilient economy for the future.  

None of the above issues are straightforward, and in addition to doing the technical work it is important to start having a public debate on these issues. As for the UK as a whole, there will now be a period of prolonged economic and constitutional uncertainty. With a newly emboldened UKIP, a rightward march of the Tory party and Jeremy Corbyn’s future looking increasingly uncertain, the prospects for progressive politics in the UK looks increasingly bleak. With or without independence, Scotland will always remain economically, culturally and geographically intertwined with the UK. It is therefore important to work with allies across the UK to ensure that social justice and democracy are at the heart of the negotiations between the UK and the EU.

Laurie McFarlane is an economist at the New Economics Foundation, writing here in a personal capacity