SNP’s Growth Commission promises “Austerity Max”

SNP’s Growth Commission promises “Austerity Max”

by Murdo Fraser
article from Friday 25, May, 2018

ONE OF THE MANY acknowledged weaknesses of the 2014 ‘Yes’ campaign was the Scottish Government’s White Paper on Independence, particularly in relation to economic issues. In more than 600 pages, there was just one devoted to the financial situation that would be faced by a newly independent Scotland. Difficult questions on how the deficit revealed in the GERS figures would be filled, or on currency, went unanswered.

Four years on, and with the First Minister Nicola Sturgeon agitating for a second referendum – clearly breaking a promise that the 2014 vote would be “once in a lifetime” – the SNP has accepted it has to do better. Their former Finance Spokesman Andrew Wilson was asked to assemble a team to produce a fresh blueprint. Today this appears as the report of the Growth Commission, or, to put it more accurately, Nicola Sturgeon’s independence blueprint.

It is a substantial piece of work, as we might have expected given its author. But whether it actually takes us any further forward in answering the questions as to how an independent Scotland would operate is a moot point.

There are at least three significant challenges in the area of finance and economics facing any future independence campaign – how to tackle the deficit, how to grow the economy, and which currency to use. Andrew Wilson’s report attempts to address all three.

In relation to growing the economy, a number of ideas are put forward but no conclusions reached. Various other small countries are held up as examples of what can be done – among them Ireland, Sweden and Singapore. But no one economic model is chosen as the route to follow.

The reality is that the Scottish Government currently has substantial powers to grow the economy, by using a range of tax levers – including income tax, LBTT, and Business Rates; by investing in education and skills; by spending on infrastructure including digital connectivity; and by promoting Scottish goods and services internationally. The SNP has been in government for eleven years holding extensive levers of power, but its track record has been a dismal one.

We learned this week from the Scottish Government’s own officials that over the four quarters of 2017 our economy met the criteria for what is defined as a “Scotland-specific economic shock”, which occurs when Scottish GDP growth is below one per cent for four consecutive quarters, and for the same period at least one per cent below UK growth. This is the experience of SNP mismanagement of the economy. If it really were that simple to produce rapid economic growth, then why is the SNP not delivering on this already?

In contrast, when it comes to the issue of currency, a clear choice has been made. A new Scottish currency should be created, and in the meantime a policy of “Sterlingisation” should be followed, in other words, Scotland continuing to operate the pound, but without any formal currency union with the rest of the United Kingdom.

Sterlingisation would leave us having to adopt the monetary policies of another country, but without any input into how these were established. So the Bank of England could continue to set interest rates affecting Scotland, but without having to have any regard for the impact these would have on Scottish economic performance, unlike at present where it isa factor.

A new currency for Scotland would undoubtedly create substantial challenges for Scottish businesses trading with our biggest market by far, the rest of the United Kingdom. There would be transaction costs that are not currently being incurred. It would be devastating for our vital financial services industry. With refreshing honesty – that was lacking in 2014 – the report’s authors accept that this would mean Scottish banks relocating their operations out of the country and moving south.

In addition, as the leading macroeconomist Professor Ronald MacDonald pointed out this week, Scotland would need to carry substantial reserves in order to protect such a currency if it were to be pegged to the pound, somewhere in the range between £30 and £300 billion. There would be practical problems too, for those with loans, mortgages, pensions, and investments in Scotland, and every commercial and personal financial contract would have to be rewritten.

When it comes to the public finances, the messages from the Growth Commission Report are stark. The report accepts that the GERS figures, much disputed by nationalists, are an accurate starting point for the finances of an independent Scotland. This means that there is a deficit of nearly £8 billion that would have to be addressed – running at around eight per cent of GDP, well above the UK rate of around two per cent, and by far the highest in Europe. 

The report accepts that a budget deficit of this scale is simply not sustainable, particularly in a new country, and most particularly one that is trying to float its own currency. Reducing the deficit requires both economic growth (by measures still to be determined), and spending reductions. Although the report does not spell this out in detail, this means both tax hikes and spending cuts. 

The irony is that for the last eight years we have had to put up with SNP politicians blasting “Tory austerity” being imposed on Scotland from Westminster. And yet the SNP’s very own report, its blueprint for independence, is making it clear that any austerity we have seen up to now is but a shadow of what would come in the event of a future Yes vote. Independence means Austerity Max, £27 billion over 10 years, and a devastation of public services coupled with crippling tax rises.

It is clear from the Commission’s report that an independent Scotland would be no land of milk and honey. There would be hard choices to be made, and difficult times to face. It is a more honest perspective than that offered in 2014, but at the same time, much less attractive. How many of those who enthusiastically voted ‘Yes’ in 2014 will be as keen to do so again in light of these cold hard truths remains to be seen.

There is little appetite for a second independence referendum, with opinion polls suggesting that even amongst those who voted ‘Yes’ in 2014, substantial numbers don’t want the country to go through the same thing again anytime soon. It is all a needless distraction from the important work that the Scottish Government should be doing in turning around our weak economy, and delivering improvements in our public services.

It is hard to see how anything in this report is likely to increase support for a second independence referendum, when even those who believe passionately in a separate Scotland see such a difficult road ahead.

 Murdo Fraser is the Shadow Finance Secretary and has served as a Scottish Conservative & Unionist MSP since 2001.

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