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.
