Scottish Independence: Weighing Up the Economics  Gavin McCrone

McCrone presents the case that Scotland is a relatively wealthy country capable of being independent if that is what the people choose. The transition may be bumpy and the unknowns depend on negotiations. He predicts that a NO vote will also mean no more devolution and that the next surge for independence will carry the day.

This book was a delight to read. The cacophony of misinformation and exaggerated scare stories relating to the Scottish economy is drowning out objective discussion. Even the Treasury’s so called independent analyses published in a series of papers seem selective in the information presented. It is therefore a great delight to find this book written unemotionally and objectively setting out both sides of all the main arguments.

Gavin McCrone was the Chief Economic Advisor to the Scottish Office from 1970 to 1992, in his career this was preceded and succeed by academic posts in Cambridge, Glasgow and Edinburgh. The style of the book reflects both these elements in his career. The book, like any well written academic work, is well referenced, it also reads like a briefing document for a minister, setting out the issues and explaining the consequences of various policies that might be adopted. It seemed to me that McCrone was writing an advice document on the economy for Alex Salmond, here are the issues, here are the options, and here are the consequences. I’m sure the Scottish Government has read it carefully. They may well have consulted Gavin McCrone there is probably no better source of knowledge on the Scottish economy.

Gavin McCrone is, of course, best known for his 1974 report compiled for ministers on whether North Sea oil revenues would allow an independent Scotland to manage financially. He concluded not only that it would but it had the capacity to transform Scotland’s fortunes. The report did not become available until recent years. Dennis Healy freely admitted in a TV interview that they suppressed the report in order not to bolster nationalism or the SNP. Gavin McCrone’s account is civil service professionalism stating that confidential advice to ministers is confidential. Today the McCrone report has iconic status as an example of the deceit of Westminster Governments. They will only present the information that suits their cause. As Marr records in his book ‘The Battle for Scotland’ there never has been over the last 100+ years any evidence of Westminster Governments considering, objectively , what would be good for the governance of Scotland and have only reacted to external forces, currently the SNP. The suppression of the 1974 McCrone report is an example.

Scotland is relatively wealthy and could perfectly well be an independent country if that was the wish of the people. Scotland is wealthy by UK and international standards and among the wealthier countries of Europe. Scotland’s economy is in a better relative position than the rest of the UK. Scotland has been badly hit by the current recession which has created unsustainable budget deficits and high public debt. Which makes this perhaps not the best time to choose independence but the political opportunity is there. Scotland will get 90% of North Sea oil and this will influence what interest rates the markets charge Scotland for her debt or new borrowing.

Public spending is higher in Scotland than the UK average and as Scotland’s tax revenues per head, excluding the North Sea oil, are the same as the UK the additional public expenditure would need to be met from the oil revenues. The output of oil is expected to continue but to decline gradually. The tax revenue depends not only on the revenue but also the price of oil. The price of oil will be determined by the growth in economies like China and India, the discovery of new fields and the possible impact of fracking. All of which indicates possible volatility. But who would bet on oil prices falling?

The possible creation of a Scottish oil fund is a good proposal but the rest of the economy would need managing to create the slack to allow the fund to be created.

The choice of currency is an important issue. The SNP favours a sterling union and this would require the agreement of the rest of the UK. The price would be to agree items such as the budget deficit and perhaps some tax rates such as corporation tax. Whilst a monetary union is a good starting point whether it would be advantageous to sustain it in the long term can be questioned as Scotland will require its own freedom to follow its own policies.

Had Scotland been independent when the two largest banks collapsed Scotland would have needed external support. It is important to learn from this experience and when Scotland is independent policies must be put in place to protect the Scottish economy. These policies include effective regulation and for the banks headquartered in Scotland when they are trading in other countries they should do so through subsidiaries thereby passing the risk to the countries where they operate.

In remaining in the EU the view of Sir David Edwards that this would be done by a treaty amendment rather than the full process of an Accession Treaty would seem to be more likely than any other suggestion. Scotland would not join the Euro or the Schengen Area but may lose the budget opt outs held by the UK but the compensation would be receiving funds directly from the Common Agriculture Policy and the Structural Fund.These funds are currently unadvantageously filtered through the UK Treasury. The EU is important to Scotland to attract inward investment from companies seeking a platform for access to the EU markets. If the rest of the UK leaves the EU as seems increasingly likely, especially supported by a Euro-sceptic press, then membership of the EU would be even more important to Scotland and could be a telling factor in the upcoming referendum.

Excluding North Sea oil Scotland’s energy resources are the envy of many other European nations. More than a quarter of the energy produced in Scotland is exported south and to Northern Ireland via interconnectors. However the subsidy for renewable energy regardless of where it comes from is paid by consumers throughout Britain, this may not continue.

Welfare expenditure is singled out for special scrutiny as the biggest element in public spending of which the state pension is a significant element and growing faster than in the rest of the UK. The constraints on cutting welfare spending are highlighted and the expected close integration with the rest of the UK may make it difficult to have greatly different pensions and welfare.

So Scotland has a lot to think about and many of the unknowns rely on the outcome of negotiations and it could be a bumpy ride until things settled down and the new independent Scottish Government learned how to use their new responsibilities to develop Scotland. It should not take too long a time.

At present opinion polls suggest that there will be a NO vote on 18 September 2014. McCrone with more than two decades working inside the political system warns that officials in Whitehall and Westminster Government Ministers will think that they can put away the files and not think about Scotland anymore, a view that I have to say is widely held by every one that I have exchanged views with on this. He is clear a NO vote means no independence; it also means no more devolution. In the event of a NO vote if the aspirations of Scotland for greater control over her own affairs are not subsequently met then the next surge for independence will carry the day. McCrone forecasts this in 10 or 20 years. I wouldn’t think it would take that long.

In this book McCrone establishes the current strength of the Scottish economy. Scotland’s gross added value at 98.6% of the UK average is exceeded only by London. Thus Scotland is a wealthy country by UK and international standards. Alex Salmond has claimed that Scotland is the sixth wealthiest in the OECD rankings; this is achieved by adding 21% to Scotland’s GDP from North Sea Oil. The tax revenue is equal to Scotland’s share of population. Public expenditure is higher. McCrone’s conclusion is that an independent Scotland would have a budget deficit. But this analysis takes no account of North Sea Oil which would greatly reduce the deficit to about 5% (in 2011-12) which is lower than the UK deficit of 7.9% for the same year.

McCrone, as others have, doesn’t believe that the Barnett formula for distributing funds to the Scottish Government for its devolved responsibilities will survive and Scotland will face an increasing squeeze on its public spending remaining in the UK.

What this means is under the scenarios of independence, greater devolution or the status quo Scotland is likely to face pressure on the level of public spending.

McCrone reviews the options of Devo-Max, Devo-plus and the status quo; his conclusions are that these are a variety of options as to how much of the public expenditure is met by taxes raised in Scotland. These options may offer opportunities to finesse a different spread of taxation but substantial differences in policy may not be as great as some may wish.

In reviewing the independent option McCrone discusses fiscal policy and the constraints that exist through relationships within the EU, also discussed is the effects of North Sea oil. Should Scotland have an independent currency its value could be inflated by the presence of the oil revenues thereby damaging the other economic activities. On currency the issues of a separate currency pegged to sterling or a monetary Union McCrone’s view is that, like Ireland in 1922, an independent Scotland could continue in a monetary Union but considerable constraints would come with that decision. McCrone observes that the Czech Republic and Slovakia started in a monetary union when they separated but this lasted only six weeks. McCrone then discusses the need for a Scottish Central bank.

McCrone reviews economic policy within existing powers and focuses on the provision of vocational education and training which he strongly argues has been neglected. He also reviews the regional implications of activities such as takeovers. The key issues he sees are vocational education, support and finance for new and small businesses and takeovers. McCrone recommends a good model to follow would be Germany.

In a review of the austerity policies of the last few years McCrone declares that Chancellor Osbourne’s policies have been misguided and needlessly harsh and have failed to meet his own targets either for eliminating the budget deficit or to have the national debt falling before the next election. As a result austerity is to be extended. The analogy that as an individual who is spending too much the solution is to spend less, but for a country this analogy is misleading. Cutting public expenses and raising taxes causes unemploymentthis raises expenditure on benefits and causes a fall in taxation revenue. Osbourne misjudged the fiscal multiplier where it was predicted that a 1% cut in public expenditure would only lead to a fall of 0.5% in GDP but the IMF’s recent research was that the reduction in GDP would be 0.9% to 1.7%. This difference is due to an assumption that the policy was applied to one country and that monetary policy cannot be relaxed further.

A smaller economy like an independent Scotland would have a lower multiplier so the effect of cuts on growth would be smaller.

On the banking crises of 2008 McCrone discusses at length where the burdens would lie, whether with the country of the head office or where the trade is conducted. His conclusion is that Scotland would have most likely had to seek external help to deal with the failing RBS and HBOS. He advises the Scottish Government to think hard about the management and regulation of the banks and financial sector and the avoidance of a housing price bubble.

On energy the wealth of Scotland in Energy potential is described. The export of green energy to the South and to the rest of Europe is a huge potential benefit. The issue that will need to be addressed is the current subsidies that are available to develop green energy; these may not be available from the rest of the UK. It seems to me that this should be resolvable within an appropriate pricing policy.

McCrone’s review of North Sea oil is that it is likely to last longer than predicted. The output of North Sea oil and the price fluctuations are likely to make the tax revenues variable and that this will be a difficulty in managing the economy. He support’s the SNP’s ambition to have an oil fund, when the budget conditions allow it to be created. He is scathing on the Labour and Conservative governments of the 70s and 80s for not creating an oil fund then. He describes this as a tragedy. The oil revenues forced up the value of the pound in the 80s with catastrophic consequences on the manufacturing industry and saw the oil revenues fund the resultant unemployment. The position of the Shetlands and Orkney will need special attention; they already have an oil fund and feel in need of special treatment. McCrone alerts the Scottish Government to the need to talk to these island groups to keep them on board.

McCrone has succinctly set out the issues to be addressed by an independent Scottish Government. The attendant warning is that a NO vote means probably less devolution than today so he has placed the criticality of the referendum decision in sharp focus.

Contrast this book with the recent report from the Institute for Fiscal Studies in November 2013. McCrone offers solutions and ways ahead to the difficulties an independent Scotland might face. Both the IFS report and this book agree that Scotland is wealthy enough and well capable of being independent and the IFS acknowledge that there were different spending priorities under devolution and in an independent Scotland these could be more focussed on Scotland’s needs. The IFS also say that independence would give the opportunity for creating an optimal tax system. What would the consequences of these be? Perhaps more growth and greater tax revenue but this didn’t find its way into the IFS predictions. McCrone on the other hand argues for vocational training and support and finance for new and small businesses. Yet they are both dealing with the same data. However the headlines from the IFS report were shrinking oil revenues and an aging population and a subsequent financial black hole in about 50 years time. Who promoted these headlines? Every London based newspaper and the state owned TV channel. The IFS report came out the day before the Scottish Government published a report on economic policy choices on 19 November by which time the media was full of the two negative headlines from the IFS report. As a piece if media choreography it was evidence of the effort that the Unionists are making to see off this latest irritation of a referendum. What particularly amused me was UK Government Ministers who have been known to be vitriolic in their critism of the IFS in the past emphasising the IFS’s independence and the respect in which they are held. Yes only when it suits.

Can’t wait for the Scottish Government’s white paper on independence due on 26^th November.

Ronald McCaffer