Thursday, 12 March 2015

The need to diversify Scotland's economy just got a lot more acute

So when we last left you, we were talking about the need to diversify Scotland's economy. It's based on oil, financial services and whisky. That's too narrow a base, especially for a small country that may aspire to statehood in the medium term. It's not enough to aspire to the level of public services that Scots (rightly) demand and require. Hopefully this was uncontroversial.

It's a warning that just got a whole lot more newsworthy, for this year's Scottish Government and Expenditure Revenue report makes for dire reading. Scotland's net spending deficit is 8.1%, and getting better, but there's more red ink than for the rest of the UK (rUK), which is running at a nominal 'loss' of 5.6%. Put another way, that's £800 more net spending per head in Scotland, taking everything into account, than across the rest of the country. Scotland's running a £12bn budget deficit, much more per head than rUK. Not all of that would have to be cut were the London Exchequer not responsible for public spending everywhere, but some of it would - especially if Scotland were thinking of establishing its own currency, joining the Euro, or indeed just preventing capital flight from uncertainty should there be Full Fiscal Autonomy or independence. Getting to the rUK deficit level, right now, might cost £4bn in public spending cuts.

And that's not the most worrying thing. Take a deep dive into the data, and (weighting for capital spending) the balance of the non-oil economy is slipping further behind rUK norms too. And remember - this report applies to 2013/14. It's got little to do with the recent dive in the oil price. That might add yet more cash to the deficit - perhaps £2bn in next year's GERS report alone. In the slightly longer term, the independent Institute for Fiscal Studies reckons that the decline in oil and gas revenues might see Scotland's deficit mount up to £6-7bn more than rUK's. Another £2bn of potential cuts and/ or tax rises on top of where we are now. Another massive dose of austerity.

Now a lot of this stuff is pretty technical, and it's unlikely to make a big difference to the landslide win that we expect the SNP will be able to pull off in May - an electoral triumph really unparalleled in modern political life since the Irish part of the 1918 General Election. This General Election will probably be a triumph for the SNP. Will their Scottish opponents really want to go about saying 'we're too poor for autonomy, we're using up more taxes than we're paying in?' Er, no, because they'll be sent away with a flea in their ear. If they're lucky.

Independence-minded Scots will also point out that, if we take a ten-year look at the situation, Scotland is nearly in budgetary balance with the rest of the country. Over a thirty-year period, Scotland has probably 'paid in' quite a bit more than it's 'got out'. Which is absolutely fair enough, and a point we've made here many times. That wouldn't help Scotland now. Not at all. But it's important to bear in mind, as unpleasant anti-Scottish sentiment rises in England, that anyone who says Scotland is a 'drain' is talking through their hat.

But the facts as they are now can't be shifted, argued about or moved. Scotland's SNP government argues that more powers would mean that they can shift productivity figures and help obviate some of this spending gap. Well, no - or not, at least, on any timeframe that would alter these figures before the huge public spending cuts would have to come in. Governments across the developed world have been searching for the key to productivity increases for decades. Are we economists any closer to finding one? Not really. More immigration and a renewed focus on diversification would help, and an independent Scotland might be in a better place to effect those changes, but there's really nothing on the horizon that would effect the kind of productivity shifts that would help any time soon.

Scotland's budget deficit is bad, it's not getting better at the same rate as the rest of the UK's, the country's public spending is much higher than its revenues - and that situation is about to get worse. A lot worse. The ten-year picture isn't too bad looking backwards, but in four out of five of the last financial years Scotland's situation has been worse than rUK's. Independence is off the table for now, partly for just this reason. Full Fiscal Autonomy will also probably get dropped straight away if there are any post-election negotiations to be had at Westminster. Why? Because it would amount to the budgetary equivalent of machine-gunning yourself in the face while burning your own house down.

Whatever happens politically - devo-plus, Full Fiscal Autonomy, confederation, independence, all potential endpoints on our journey - these outstanding facts are the elephants in the room. In fact, they're not even an elephant. They're an entire zoo. Everything that the UK and Scottish governments do should be aimed at diversifying Scotland's economy before that country's shift into the red tests relations between Scots and other Britons even further than they are being stretched at the moment. Unionists and Nationalists can and should unite around this cause.

No-one will be served by ignoring these stark numbers. No-one.