Monday, 9 March 2015

How can we diversify Scotland's economy?

One of the main reasons Scots voted 'no' to independence last autumn was fears over the economy's vulnerability to external shocks. Now, events since then have entirely borne out the wisdom of the electorate's doubts. Oil has plunged in price. It would have punched a £5bn-a-year hole in the accounts of an independent Scotland. Massive austerity would have followed. On this, as on little else, there can be no argument, no counterpoint, no debate, no controversy. It's just a fact - a set of risks the silent 'no' constituency that said little, but then came out and voted 'no', just weren't prepared to take. Fortunately for them.

But let's leave all this to one side. It's just a totally boring and otiose argument now, and we're unlikely to have another independence referendum for a little while. There's no point raking it all over again.

Let's look instead about what that massive potential hit tells us about the Scottish economy. And it's this: it's too specialised. Its tax base is too narrow. It depends on oil and financial services to a greater extent than almost any other OECD country. It needs more strings to its bow. Many more.

It needs diversifying, a case to which everyone can put their shoulders. For if the Scottish economy was more diverse - if the tax raked off from the oil fields wasn't more than ten per cent of the whole net take from the entirety of the Scottish economy - then those of us who are very sceptical about Scottish independence could rest easy. Polls show that the Scottish National Party is about to win a historic victory in Scotland's part of the UK Westminster election, a potential landslide so huge that it's hard to write about it in sensible, relative psephological terms. The SNP will then move on to try to win another majority in the Edinburgh Parliament, before perhaps thinking about another referendum late in their third term in charge there.

They are much more likely to win the 2016 Scottish elections, and then have much more chance of actually triumphing in an independence referendum, if they have a coherent set of answers to Scotland's economic challenges. So, we say again: how to diversify the Scottish economy?

Well, the first thing to say is that there's plenty of raw material to work with. Scotland's whisky industry, for instance, makes up for 25% of all the income of the UK food and drink industry. It brings in £5bn a year and ensures the employment (either directly or indirectly) of more than 40,000 people. Look elsewhere and you've got plenty of other bricks to build with. Scotland's universities are some of the finest in the world. Tourism; computer games; high-end engineering; financial and business services. All solid. All thriving.

But how to bring them together? Well, a good old export drive never goes amiss, and the 2014 announcement of a Scottish Food and Drink Export Partnership was a step in the right direction here. But such moves are usually palliatives. They can make a difference at the margins, but structural transformation is also required.

Here's three or four ideas. Scotland is now able to borrow much more in its own right, following the adoption of the Calman Commission proposals on the Scottish constitution before the independence referendum campaign had even got going. It could use some of these to get its sleeves rolled up in the North Sea and help support oil and gas supply, exploration and re-equipment. The Scottish government could then take a stake in the management and (if there are any) the profits in the long run. Many Scots have talked of becoming a second Norway for many years. Maybe now's their chance.

Then there's earnings from Scottish airports. The Smith Commission that followed the 'no' vote to independence recommended Scotland take control of Air Passenger Duty. Cutting it would divert numbers from Heathrow and Gatwick, thus relieving the pressure on London's skies while earning up to £1bn more for Scotland.

Next comes movements in public spending. Scotland already has the slower austerity that the SNP has been calling for (in many ways rightly) across the UK as a whole: the Barnett Formula guarantees it much higher public expenditure than England and Wales, and makes sure that this total won't fall much - if at all. It means that Scottish debt is guaranteed by the UK exchequer, greatly to Scots' advantage. But Scotland next desperately requires a shift in that public spending, from spending on in-work benefits to investment. Welfare spending is by far the single greatest part of the public spending mix in Scotland, and reducing inequality (very similar in Scotland to the rest of the UK outside London), as well as raising wages, would chip away at that total. There has been little challenge, in Scotland or across the rest of the UK, to the idea that we just have to accept this and pay for it. But a fundamental re-alignment of our political economy is required here. A living wage campaign, a higher top rate of income tax in Scotland, and a whole different set of tax thresholds (all now possible, following the Smith Commission) might all help.

Better public transport could be a fourth element in the mix. The new Borders Line, from Edinburgh to Galashiels, is a great start here. Scotland's population is concentrated in a relatively small and dense strip between Glasgow and Edinburgh. More advanced investment, faster trains, a re-nationalised railway (and wider roads across the rest of the country) are further potential means of economic advance that could help Scotland take advantage of the clustering that all modern economies need. Again, further borrowing (and slower austerity) could be adopted to pay for such projects.

So here are four ideas that might help us all out: take out a government stake in North Sea oil and gas; cut Air Passenger Duty; shift public spending away from supporting economic inequality and failure; use some of the proceeds to speed up Scotland's public transport.

The main challenge to Scotland's prosperity - independence or no independence, fiscal autonomy or no fiscal autonomy, separation, devo-max or devolution - is its over-concentrated economy. It lives on oil, financial services and whisky. It's exposed to fundamental exogenous shocks just like the energy price crash we're living through now. If it could build up more of its smaller battalions - give more room to the sharp shooters, rather than the behemoths - it would be far, far safer and wealthier if it does strike out on its own (or even if it becomes fiscally autonomous within the Union, the probable and potential long-range alternative).

Whoever is in power, in Edinburgh or in London, and however we govern our affairs, this reality will be there, day in, day out. It needs addressing, urgently, before the oil's gone entirely. In all the punch-up and all the tears over powers and authority, we could work together and start thinking about that challenge. Ladies and gentlemen, shall we begin?

1 comment:

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