A Fate Worse than Debt
In the New Statesman today, George Eaton challenges the spin the SNP has put on the Treasury’s announcement that it will underwrite Scottish debt after a Yes vote.
The announcement is not, as the First Minister claims, an indication of the UK government’s willingness to ‘pre-negotiate’ the fiscal terms and conditions of Scottish independence.
Instead, George says, it is a reflection of the lack of confidence investors have in the Scottish economy to cope with the effects of independence. The Treasury’s pledge is an attempt to ward-off a rise in UK borrowing costs precipitated by a Scottish credit downgrading.
George bases his argument that independence will leave Scotland in a weakened fiscal position on a recent IFS report. Here is the key passage from George’s blog:
As the IFS (which has no stake in the race) noted, Scotland’s lower birth rate and lower immigration rate means it automatically incurs a larger “fiscal gap” (the difference between spending and revenue) of 1.9%, compared with 0.8% for the UK. Even in the most optimistic scenario, Scotland would need to raise taxes or cut spending by an additional £2bn (such as through a 8p rise in the basic rate of income tax or an increase in VAT to 27%, or a 6% reduction in public spending) to achieve a sustainable debt level. Should oil revenues prove less buoyant and borrowing less cheap than the SNP anticipates, this figure could rise to £9.4bn (the equivalent of an 18p rise in the basic rate or a VAT rate of 36%), a scale of austerity that makes George Osborne look like a Keynesian. This doesn’t mean that an independent Scotland wouldn’t be economically viable, but it does mean that most voters would be worse off.
Firstly (and I may be wrong about this), but I think the Scottish government’s oil revenue estimates are based on an aggregate of revenue projections. So they don’t, as George and the IFS suggest, offer “the most optimistic scenario” – they are in fact tempered by the highly conservative estimates of the OBR. More optimistic estimates can be found in the work of Alex Kemp, professor of petro-economics at Aberdeen University (and official historian of North Sea oil). In 2011, Kemp estimated that oil would generate between £50bn and £100bn in tax over the next 10 years alone. I trust his judgement on these things more than I do the OBR’s – in 2011/12, North Sea revenues were £11.3bn.
You might argue that Scottish borrowing costs could rise because Scottish expenditure is dependent on oil revenues and oil revenues fluctuate wildly. But the focus on annual revenue flows seems to me misleading: low revenues one year can be (and have been) compensated by high revenues the next. For instance, ‘08/9 revenues were £12.9bn, ‘09/10 revenues were £6.5bn, ‘10/11 revenues were £8.8bn and ‘11/12 revenues were £11.3bn. Over a four year period, that averaged out at a very healthy £9bn a year. Surely the creditworthiness of an independent Scotland would be based more on the overall or long-term value of its assets than it would the extent to which the value of those assets varies on an annual basis? (Perhaps not. Again, I’m happy to be corrected.)
Secondly, George doesn’t take any account of the (more or less) immediate savings to be made from independence. I and others have been over this countless times, but independence would give Scotland the freedom to radically reduce its defence expenditure. The SNP has set out plans to reduce Scottish defence spending from its current level of £3.3bn per year to £2.5bn – a saving of £800m. More radical defence strategies would free up more revenue. If we trimmed our defence spending to Irish levels we could save more than £2bn per year. That would cover, in an instant, the supposedly “optimistic” shortfall George identifies. Scotland also spends £700m a year on what the UK government calls “foreign office and other services”, £100m a year on the House of Lords and £10m a year on the Scotland Office. There are big savings to be made in each of these areas.
Thirdly, and this seems to me a key point, independence would enable Scotland to address its fiscal gap through a liberal immigration policy. In purely economic terms, the case for a separate Scottish immigration system is overwhelming. Scotland’s population is ageing faster than the UK’s but growing at just half the rate. Scotland needs more young workers. Perhaps credit ratings agencies would be less likely to downgrade Scotland if an independent Scottish government began opening Scottish borders. (Separately, am I the only person not remotely upset by the prospect of having to flash a passport at Carlisle or Newcastle?)
Then, finally, there is the question of “sustainable debt”. Unfortunately, George is quietly echoing Tory austerity rhetoric here. Compounded by a lavish welfare settlement and unstable public finances, an independent Scotland would face a debt crisis. Market pressure would force cuts to Scottish expenditure. The need for fiscal discipline would kill Scottish social democracy stone dead.
However, both the Scottish government’s Fiscal Commission report and GERS show that Scottish debt and deficit levels are currently lower than those of the UK as a whole – and on the basis of Kemp’s oil estimates, they are likely to remain so for the foreseeable future.
More importantly, though, I simply don’t accept that Scotland’s debt, which is expected to reach upward of 70 per cent of GDP by 2017, is, in the short-to-medium-term at least, “unsustainable”. In fact, I’d argue that any responsible independent Scottish government should borrow more in order to finance new capital expenditure programmes. If this results in increased borrowing costs then so be it. The long-term effects will be beneficial, and we will have avoided the social vandalism wrought by Osborne’s cuts.
George is right, of course, to say that Scotland faces significant financial pressures. They are the same or similar pressures faced by the UK and the most of the world’s developed economies. But Scottish debt should be reduced over a period of 10 or 15 years, not two or five, with tax increases for the wealthiest ten per cent, higher corporation taxes and new levies on the financial sector. To argue that independence will result in cuts to Scottish expenditure so severe as to be terminal for the Scottish welfare state is to accept the narrative of the tartan libertarians – and of libertarians south of the border, too.