Saturday, 13 September 2014

Reasons to oppose Scottish independence, #8: Scotland's fiscal balance

Right, now we're getting onto the biggies in the debate over Scottish independence. The first of the really, really (really) big reasons to oppose independence is that it will make poorer Scots worse off and potentially eviscerate Scotland's public services. A bold claim, but hear us out here.

The main reason for this is that the central reason Scotland has been able to aspire towards economic independence over the last few decades is North Sea oil and gas. The black gold has flowed in for decades now, making Aberdeen (for instance) a very rich city indeed - if you have a job in the oil industry, that is. It's bringing in between £5bn and £6.5bn to the Treasury every year as we speak - quite a lot of money in a country with a tax take of around £46bn, we're sure you'll agree.

Now it's true - as Scottish Nationalists have absolutely rightly pointed out for many years - that this would have made Scotland very rich in the 1970s. Perhaps, like Norway, an independent Scotland could have built up an oil fund and invested the money - all the better to spend when a recession called for it. But those days are long gone, and they're not returning. Given the present state of Scotland's precious energy reserves, estimates of her tax take for the next few years vary - from £4bn to £6bn. Few think that the Scottish Government will make its ambitious targets for oil and gas revenue. Even if we split the difference between the outliers among what projections we have, that means cuts. Lots of cuts.

Let us be clear here: Scotland is not a supplicant or a 'drain' on the rest of the UK. Her 'net fiscal balance' (the gap between her income and outgoings) has in some of the last few years been better than the rest of the UK's (rUK's) - meaning that she's 'contributing' more than others. Her tax take is bigger (per head) than anywhere else in the UK except London and the South East. Scotland's long been a key part of what success the UK economy has enjoyed, overall. The country has a high per capita income. She is full of innovative industries. She has a really strong brand. Oil, gas, tourism, whisky, high-tech manufacturing, new green energy production and education would eventually make an independent Scotland one of the richest nations in the world. Things would be fine - eventually. Some of the more apocalyptic statements from our banks are a bit overdone. Deutsche Bank's assertion that Scottish independence would be as bad a decision as the UK's return to the Gold Standard in 1925, or even the Federal Reserve's disastrous reaction to the onset of the Great Depression, are some way wide of the mark. Gross Domestic Product fell by 4% and 29% in those crises; that is unlikely this time, though there may well be falls in GDP (and renewed recession) if things go badly. The problem is how we get from here - with a budgetary reliance on oil and gas - to the 'there' of a Scottish economy that's broadly deeper and more able to handle rapid changes on the international exchanges and markets.

Because North Sea oil and gas prices have been falling - even further and faster since this referendum campaign began. Were we to experience an oil price shock downwards on the scale of the mid-1980s, Scotland would be in deep trouble indeed. And although estimates of reserves quite properly vary (and therefore the tax take will be different depending on who you listen to) the key point to take away is that this is a highly unstable and moving target. There may be more in there. There may not. The highest estimates of the Scottish Government are clearly unrealistic. And if oil prices do fall in the next few years, there won't be any incentive to extract more. Quite the opposite. Want to plan your budget three to five years ahead, before Scotland's economy is diversified? Impossible. Far better to be inside a customs and currency union that allows for slower diversification and for more sharing of economic risks and shocks.

The upshot? Scotland's budget balance is deteriorating, and looking strategically at the oil and gas market might deteriorate even further (as it has been doing for some time) if US and Canadian shale gas and fracking fields continue to come on stream with such rapidity. The much-respected Institute for Fiscal Studies has been doing some good work on this (you can download one of the key reports here) and they reckon that Scotland's budget deficit in the first year of independence might be rather worse than we've hitherto thought, at £8.6bn. Scotland's budget balance was some 5% worse than the UK's as a share of GDP in 2013/14. That might mean that Scotland was in the red on present figures to the tune of £6bn more than the country taken as a whole, a gap that must be closed eventually - especially if the 'yes' camp are really serious about a Currency Union (which they can't be, but more of this next time).

Consider for a moment. The entire Scottish Further and Higher Education budget for fiscal year 2014/15 is just a shade under £1.6bn. Think that free university tuition is safe as oil prices shoot up and down? Think again. Just as left-leaning 'yes' supporters have closed their eyes to Scotland's real economic identity as a petro- and financial-services economy, they want to say that they are the real friends of public spending - that they will 'defend the NHS from privatisation', from instance. This is - how shall we put this? - false. A fiscal hole of the order of £6bn means that all the things they hold dear - free prescriptions, free university tuition, free care for the elderly at the point of use - might have to go. They'd certainly be under threat, and a new independent Scottish Government would face deeply invidious choices that would, within a year or two, lead to a sense of deep disillusionment, even fury, north of Berwick and Carlisle. That'd be for Scots, of course, and they're likely to sweep whatever government is in power at that point from their offices. That'll be good for them. But they won't be able to avoid the hard choices that the relatively light and the relatively fair Barnett formula has provided for them in the last few years.

We're going to come on the banking structure in our next post (really, don't get us started), but note also that this is even without having to build up a currency reserve, run a public spending surplus (or smaller deficit) to prevent capital flight - or spend money on transition and administrative costs. That's tens of billions more on your cuts for you. Think that an independent Scotland would be a 'Nordic' social democracy? Think again. Any such move is likely in reality to mean that austerity would get even worse - a cruel trick to play on all those 'yes' voters who will turn out on Thursday to vote for a better future. Now it might be worth it to be free - to be independent - but we're willing to bet that most Scots who lose their jobs, benefits or services won't think so.

We offer you this closing thought: you can't eat a flag.