IF ONE were to read what the Scottish National Party Westminster leader wrote in for The Times back in February of this year, one might be fooled into believing independence represents some sort of manna from heaven. An option which, if only a majority of the Scottish electorate could be convinced to pull it, would miraculously resolve all manner of economic and quality of life challenges currently faced.
“As UK taxes, inflation, interest rates and energy bills all go up, the Bank of England has warned families face the biggest fall in living standards since records began…The Tory cost-of-living crisis, and the damaging decisions of the past decade, demonstrate why Scotland needs to be an independent country — free from Westminster control” – Ian Blackford, SNP Westminster Leader
Naturally, things are invariably never so simple as the populist nationalism of the current governing party suggests. In fact, so misleading is the claim that independence would help not worsen the underlying challenges faced by the Scottish economy, that it beggars belief.
Millions are facing a prolonged period of real hardship as the economic forecasts for the UK look ever-increasingly grim. But even a rudimentary understanding of inflation, unemployment and stagflation should quickly dispel the pig-in-a-poke offer that Mr Blackford is seeking to sell the electorate.
So, let’s explain the relationship between inflation and unemployment, before going to understand the concept of ‘stagflation’. Once we do this, we can easily see the nonsense being peddled by Ian Blackford, MP.
Let’s start with inflation and its relationship to unemployment. The Phillips Curve explains that when we experience periods of low unemployment, we typically witness a corresponding period of higher inflation. Likewise, periods of high unemployment correspond with periods of lower inflation and potentially even deflation.
Thus, low unemployment means more consumers having the discretionary income to spend on good and services. This rising demand pushes up prices. But when an economy suffers high unemployment more people have less discretionary income to spend on consumer goods thus prices fall and this in turn reduces inflation.
But there are times when this economic theory as per the Phillips Curve does not hold. For example if we cast our minds back to the 1970s – those old enough – can remember the United Kingdom being in the nightmarish grasp of high inflation and high unemployment.
This is known as stagflation. It is where an economy experiences – for a plethora of reasons – a period of prolonged high inflation and high unemployment, alongside sluggish or low economic growth. All in contravention of the economic principles of the Phillips Curve.
The UK right now is perilously close to repeating the stagflationary long night of the 1970s. Wages are falling behind inflation, with public sector workers being harshly hit right now. Furthermore, this situation is highly likely to get worse, not better. British workers are looking down the barrel of the largest fall in living standards in a generation.
Energy and commodity prices rising and supply chain disruption all feeding into ever more inflation. Then there’s the pandemic, Brexit and the Russia-Ukraine war (and subsequent western sanctions) all conspiring to keep this economic horror show of inflation going for the foreseeable future.
The UK is witnessing unemployment averaging at 3.8% in the three months to April, thus returning us to pre-pandemic levels. But hold on, don’t go cheering just yet. British businesses right now are experiencing the problem of increasing demand – as the economy switches back on after the deep-freeze of the pandemic period – alongside struggling to fill job vacancies.
Put simply, in a situation like this we are dangerously close to a new stagflation era. Prices continue to rise over time as supply continues to fail to keep pace with this demand. Economic output and economic growth are likely to remain low, therefore households (remember wages are not keeping pace with inflation) will be able to afford less. Unemployment under these circumstances could very well begin to rise.
After all, to dampen down inflation, traditionally governments will raise interest rates. In the UK currently the Bank of England has raised the base rate of interest from a record low of 0.1% (December) to a current level of 1.25% (as of June). This incidentally is the highest in 13 years.
The theory here is, if its more expensive to borrow money people spend less of it. People stash money in banks to benefit the higher rates of interest rather than spending it, thus less demand for goods and services in the economy. This reduces inflation but at the price of dampening down economic growth.
Right now the UK economy is already experiencing amoebic growth, which will need to be slowed even more if the dragon of inflation is to be slayed. UK figures show GDP growth rose by a paltry 0.5% in three months to May. Growth forecasts reckon on a 0% ‘rise’, all as the cost of living will worsen and bite harder entering the autumn. By the winter we are likely facing negative GDP growth.
Remember a recession is two concurrent periods of negative growth. The UK could easily be facing that by the winter. Stagflation is unlikely to be far behind, where we suffer a mixture of economic stagnation and rampant inflation. A situation where our economy simply isn’t growing and the prices of goods and services get ever more expensive for households.
How does this link to Independence?
The UK is struggling amid labour shortages and a labour force which is smaller now than it was pre-pandemic. So, businesses are being compelled to pay higher wages and thus prices are likewise going up. This is wage-driven inflation.
Independence will – obviously – worsen this situation. Independence means barriers to movement between Scotland and Wales, England, Northern Ireland. Put simply, Independence right now or next year means an even smaller labour force for Scottish businesses to grapple with, which in turn means higher wages and higher prices for people to grapple with. It is a nonsense for Ian Blackford to even suggest or imply independence is a solution for what ails our economy right now.
But this is not all, global supply chain chaos is also a factor to be considered. Supply chains producers are reliant upon are heavily disrupted by the pandemic, China continuing with zero-covid policies, the Russia-Ukraine war fallout and any brexit disruption.
Again, it does not require an MSc in economics to comprehend that a scexit (Scottish exit from the UK) will worsen this for Scottish producers. Scottish businesses have supply chains welded into the UK internal market. Independence will disrupt these supply chains across the UK by erecting barriers to trade by creating a physical border between Scotland and the rest of the UK. It is ludicrous to argue that independence will do anything other than worsen producer-driven inflation.
So Ian Blackford and the SNP are arguing for scexit, despite knowing it would worsen wage and producer-driven inflation. All as we’re on the verge of the nightmare of stagflation. It is the economics of the Neanderthal to even entertain the idiocy the nationalists are selling. Do not be taken in by it, do not choose to become significantly poorer and face a deeper hardship because of flags, nationalism and romanticised language. The SNPs prescription will not help, merely worsen, what threatens us.
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