Sunday 7 April 2013

Could an independent Scotland avoid austerity?

There have been a lot of complaints recently from Scottish independence supporters about cuts and austerity. Leaving the UK is portrayed as a way of avoiding all of the nasty things that the Conservatives are once again doing to us Scots. Not only would we get rid of the “bedroom tax” and other such horrors, we would get rid of the Tories to boot. What’s not to like?

The Tories have become a sort of mythical hate figure in Scotland that children learn about at their mother’s knee. I’ve met lots of Scots who read the Daily Mail and agree with much of what is written there. But on the suggestion that they might be Conservative supporters, they recoil in horror. The folk memory of Margaret Thatcher and the poll tax is just too strong, almost as if she were Cromwell in Ireland. But the danger is that the sort of prejudice, which most Scots feel against Tories, will prevent us from sensibly analysing the present economic situation in the UK and the potential economic situation of an independent Scotland.

Like most people I’ve received benefits. When I was a student there were full grants, plus dole and housing benefit during the holidays. I used to spend the summers studying and had absolutely no need to look for work. It was great. I benefited. I loved it and I’m very glad that I had such advantages. I spent around 9 years studying at public expense and came out of it with a considerable profit. Having benefited so much, it would hardly be sensible for me to oppose public spending or welfare. But that does not mean that I should be incapable of trying to understand the problems of today.

Let’s all agree that it would be great if the NHS had an unlimited budget, if everyone got as much unemployment and housing benefit as they desired and that pensions were twice average earnings. Fine, but all of these nice things have to be paid for. Where does the money come from? Obviously it comes from the wealth of a country. After all, poor countries tend to have a very limited welfare state. Now let’s look at the present economic situation in the UK. We have a national debt and we have a deficit. I used to be a bit confused about these terms until I began to think of them in a more manageable way. Let’s say, I run a small shop. In order to start my business I might have had to go to the bank and taken out a loan. That’s the scale of my debt. But in running my shop if I make a profit I am running a surplus, which I can use to pay down my debt, while if I make a loss I am running a deficit, which gradually increases my debt. Would anyone call a shopkeeper who continually ran a deficit wealthy? Obviously not. But neither should we call the UK wealthy. Our national debt amounts to £1.1 trillion, or £18,000 per person. Our deficit last year, despite all the talk of austerity, was nearly £100 billion. The UK has been running a deficit since 2001, which means we’ve been making a loss for over a decade.

What can a government do in these circumstances? It can raise taxes, cut spending and it can hope that economic growth will bring it more profit. But there’s a tricky balance. If you raise taxes too high, it will discourage growth. Clearly, if my small shop is taxed too highly, it is unlikely to make a profit. But what goes for shops goes for people, too. There’s a limit to how high a government can raise taxes without seriously damaging economic growth. At present, UK public spending as a percentage of GDP is around 45%. But ideally it would be somewhat lower. This is owing to the fact that when public spending rises above around 25% it begins to have an adverse impact on growth. There’s a trade-off between economic growth and funding the things we want, like welfare, the NHS and education. At 25% we would have ideal conditions for economic growth, but less than ideal social provision. Therefore, it is reasonable to sacrifice a certain amount of potential economic growth in order to pay for things which make our society more pleasant. But any government has to be aware that the nice things we want come from economic growth and so a balance has to be struck. Raise public spending too high and you will do lasting damage to the welfare state, because you will damage the source of its funding. What this means is that there comes a point when a government cannot sensibly continue to raise taxes, otherwise the economy would become a planned economy along Soviet lines. That way lies North Korea, poverty and madness. Politicians can debate where to put the line, but they cannot change the reality. If you want a competitive society with economic growth, you can only raise taxes so much.

Any government faced with the present UK economic circumstances would have to cut public spending. The Labour Party are often pretty good in a national crisis. They too would be making cuts. The only question then is where the cuts fall. The difficulty is that most public spending is on things we really want. The areas we spend most on are pensions 18%, welfare 17%, healthcare 17% and education 13%. So if we are to make any sort of serious cut in public spending, it is in these areas that we have to do it. That’s why making cuts is so painful.

Could Scotland avoid all of this by becoming independent? The problem is that an independent Scotland would also have a national debt. It would retain a proportion of the UK national debt. Dividing it according to population would make it somewhere around £100 billion. If an independent Scotland were to be immediately making a profit, we could use that profit to pay down a proportion of our national debt. But just like the UK now, Scotland would be making a loss. North Sea oil would be a large contributor to an independent Scotland’s budget, but we would still be running a deficit. Both sides of the independence debate dispute the size of an independent Scotland’s deficit, whether it would be smaller or larger than the rest of the UK. But it is uncontroversial to point out that an independent Scotland would be running a deficit. No one disputes this. Given then that Scotland would have a large national debt and would have a deficit, we would face the same choice as the UK does at present. Scotland’s public spending as a percentage of GDP is somewhat higher, at around 50%, than the the UK average as we already have a larger public sector and have certain benefits which are unavailable elsewhere. An independent Scotland could not sensibly raise taxes and indeed, Alex Salmond with good reason favours cutting corporation tax. What this means is that an independent Scotland would have to make public spending cuts. Some of these cuts would have to fall in areas like pensions, health, welfare and education, as these are the areas where we spend the most. But given that we want all of these nice things, public spending cuts would inevitably have to be painful.

The biggest danger to the future prosperity of an independent Scotland is if the Scottish public voted for independence thinking that this was a way of avoiding austerity, cuts and Tories. This might mean that a future Scottish government would be unable politically to make the same sorts of attempts as are at present being made by the UK government to cut the deficit and eventually bring the UK into profit. If an independent Scotland were to fail to address the issues surrounding an unsustainable deficit and an ever increasing national debt, the markets would soon look at the creditworthiness of this new nation. That way leads to bankruptcy and the fate of small nations like Greece and Cyprus.

An independent Scotland, is perfectly viable economically. Whether we would be better or worse of is a matter for debate. But a new nation cannot be built on false promises. Trying to con the Scottish people into voting for independence as a means of avoiding austerity and cuts, which while painful, are necessary is to fail to face up to reality. Supporters of independence have to show that they are willing to make hard economic choices, as failure to do so would lead to the long term destruction of our wealth and a lowering of our standard of living. There’s nothing fair about this except for the fact that it would harm us all equally.