The Economics of Scexit

Next week the SNP will publish their economic case for leaving the UK. Here's ten of their more preposterous positions and how they should be challenged on them.

The next few days will see an explosion of economic debate as the SNP Government, for the first time in a decade, publish an official economic plan for leaving the UK. On the basis of interviews like those already seen on Channel Four, the BBC and ITV News, things might get a bit spicy.

This is a slightly longer edition than usual because this feels like an important moment. To make all this information more manageable, I’ve split this edition in two. Below are my top ten questions that should be asked of the SNP in the days ahead. In the first section, I summarise these questions. In the second section I go deeper, offering a little more background, some examples of the absurd arguments nationalists make, and more questions on each issue.

Photo by Steve Smith on Unsplash

Part 1: Top Ten Questions

1. Why does Nicola Sturgeon now support a currency plan she warned was terrible for Scotland?

Nicola Sturgeon said that keeping the pound was best for Scotland because it meant no costs or risks when buying or selling from our biggest customer: England. What changed? It can’t be because of changes in the value of the pound because they propose pegging to Sterling. So why does she now propose something which she knows is bad for Scotland?

2. Will they tell us exactly how long we would be giving up the security of having control over our own currency?

How long will Sterlingisation last? A vague target is meaningless. We need to know because too long and Scotland, lacking the protection of a real central bank and the ability to control currency in our economy, will slide into crisis. Too short a timeline and it means obscene cuts to our NHS, schools or welfare to deal with the deficit before launching a new currency. It’s time to stop pretending that Sterlingisation is “a continuation of what we have now.”

3. Will they continue to pretend that we wouldn’t need to pay the costs of a seperate Scottish state?

Scotland’s share of UK funding - the money redistributed around all parts of the UK - has been roughly £10 billion a year for most of the last decade. The SNP repeatedly say that any spending not already devolved or related to social security is optional - that excludes everything from a national rail network to defence or foreign aid from their sums. They should admit that they cannot say how we can fund these essential functions of a state, or explain where the cuts or tax rises are going to land.

4. Will they pretend that someone else will pick up the costs of the big ticket items like pensions?

The SNP have to find a way to fill their fiscal hole before the markets pass judgment on the unsustainability of Sterlingisation. Desperate times call for desperate measures: like pretending Scotland won’t have to pay for things like pensions or debt. The central question here is whether in these economic plans, as in 2014, will the full cost of all existing state pension liabilities, and our share of debt, be assumed by an independent Scottish State?

5. Will they stop talking about other countries and start talking about Scotland?

To avoid talking about the realities of Scotland’s economy, and the costs of leaving the Union, the SNP choose random groups of countries to talk about instead. For example, the SNP consistently use Ireland as an example of what Scotland’s economy could be like. But when we look at their public sector they don’t have an NHS, and when we look at their private sector it’s based on being a corporate tax haven. Is that going to be the model for Scotland’s economy? If not, why talk about them? Either commit to another country’s model or create one that fits Scotland’s economy.

6. Can they explain why erecting a new border was a disaster when the Tories did it but won’t be when they do the same thing?

Scotland sells three times more to the rest of the UK than to the EU. When the Tories proposed their hard border after brexit, the SNP Government published a Brexit analysis suggesting the new barriers to trade would cost 100,000 jobs. We know that the same analysis of the costs of moving that same hard border from Dover to Gretna would find that three times as many jobs would be lost as through a hard Brexit. Have they asked the same researchers to do the same analysis on the costs of the same border, or do job losses from Scexit not matter?

7. Will they address the realities of Scotland’s economy today or spend their time on imaginary futures based on one-sided projections that ignore the negatives?

The SNP ask us only to imagine what isn’t there, not examine what is in front of us. To give up real funding for public services and real jobs for fairy tales full of ifs, buts and maybes. The key test of reality is whether they accept the figures for Scotland’s deficit or continue to pretend it doesn’t tell us the starting point for a separate Scotland. Throughout the 2014 referendum Nicola Sturgeon said that these GERS figures meant that “the starting point for an independent Scotland will be — relative to the UK — a strong one.” Now she says “GERS is not a statement of an independent Scotland’s opening position.” Did she change her mind or did the figures change and make the case for remaining in the UK more attractive?

8. Given England is the biggest customer for our most important industries will they be honest about the damage of leaving the UK’s single market?

In the minds of the nationalist all negatives are reasons why we shouldn’t stay in the UK and all positives are reasons we should leave. Will this analysis recognise that the rest of the UK is the biggest customer for all of Scotland’s most important industries: energy, financial services, food and drink, shipbuilding, creative industries… It is better that we maintain a single market with those customers but if they are determined to unstitch our economic fabric, they should be honest about how it will damage our economic strengths.

9. Will they pretend that the only choices open to Scotland are different kinds of crisis?

The SNP have a history of trying to put the economic pain of Scexit into a context that makes it look more normal. They compare Scotland’s structural budget deficit to the deficits of countries dealing with crises such as the bank bailouts or borrowing to pay for Covid wage replacement. They are doing the same by comparing the emergency action needed after the recent budget to their own plans. Of course, countries facing the global pandemic, a currency crisis or a banking crisis might create a deficit the size of Scotland’s. But is there an example of a government creating a crisis-sized deficit that size deliberately and with positive results? The recent budget shows that warnings about irresponsible choices ignored in Ministerial offices are soon heard in homes around the country.

10. Will this really be an economic case or will it be more appeals to emotion and an excuse to denigrate opponents as lacking belief in Scotland?

All previous economic cases for leaving the UK have been 10% economic analysis and 90% emotional appeal. Those who ask questions based on rational scepticism are attacked as lacking belief in Scotland. A government secure in the quality of its economic case doesn’t need to use confrontational nationalism to shut down dissent.

This last point matters above all others, because the last few days have been a warning about what happens when the prospect of an economic crisis is shrugged off by politicians.

In the Brexit referendum, Boris Johnson was challenged about the damage a hard border to trade would do to our economy. He discounted it it as:

“Scare tactics and project fear.”

In the Tory leadership debate Rishi Sunak warned that Liz Truss’s economic plans would lead to disaster and rising mortgage rates. Her dismissive response was:

“This is scaremongering. This is project fear.”

In 2014 the markets fell in response to the prospect of the UK breaking up and experts warned of economic disaster. Nicola Sturgeon disregarded it as:

“project fear scaremongering”

Sturgeon was stopped before her project could create a crisis. Johnson and Truss weren’t. When someone attempts to shut down the economic debate in this way, we should remember that this is a movie we have seen before. And we didn’t like the ending.

Now, if you want more information, keep reading below for part 2. And a new regular section at the bottom.

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Part 2: Going Deeper

1. Why does Nicola Sturgeon now support a currency plan she warned was terrible for Scotland?

It has been eight years since the SNP gave up on the idea of a currency union with the rest of the UK. In that time we have not been given an economic explanation for this change of policy, only a political one: the currency union policy gave opponents of the SNP a veto over their economic plan and made it more difficult to win a referendum, so it had to go.

We are promised a new currency policy will be published in the next few days. It is likely to be a refinement of the policy set out in the SNP’s Sustainable Growth Commission in 2018:

• use the UK Pound informally, through Sterlingisation, for a possibly extended period when we would lack the protections of a Central Bank;

• followed by a transition to a separate currency after a period of austerity to get our deficit was under control;

• and after we had gathered enough reserves to defend a 1-2-1 peg with Sterling.

However the SNP choose to present the transition from our present currency union, through years of sterlingisation, and then onto a new separate currency, they will be offering something they know is bad for Scotland. How do we know this? Because Nicola Sturgeon told us we should reject anyone who says Scotland should give up the pound. She says...

A separate currency is against our best interests:

“An independent Scotland will keep the pound because it is in everyone’s best interests, and to try and suggest otherwise flies in the face of the facts.” Source

A separate currency is economically sub-optimal:

“There is an optimal currency zone between Scotland and the rest of the UK.” Source

A separate currency makes it harder for people and companies:

“A shared currency is in the economic interests of both Scotland and the rest of the UK, as key trading partners. It will make it easier for people and companies to go about their business across the two countries.” Source

A separate currency means incomes and expenses in different currencies, with mortages and pensions becoming a matter of foreign exchange:

“[keeping the pound] will make it easier for us to trade with each other and will also mean that things like our mortgages and pensions will continue to be paid in pounds and pence, just as they are today.” Source

A separate currency means adding hundreds of millions in costs to everything we buy and sell from the rest of the UK:

“my proposition is for the use of Sterling within a currency zone, which avoids those transaction costs for businesses in England and in Scotland.” Source

A separate currency would leave businesses up in arms:

“if a Westminster Chancellor tried to force Scotland into a separate currency with the rest of the UK, they would have their own business community up in arms and furious with them.” Source

A separate currency would cost jobs:

“the lost jobs that would come from having a separate currency.” Source

The SNP argue that they cannot be expedited to give up on leaving the UK just because their rivals have opposed a currency union. I would argue that if you know the policy you are arguing for is this bad, you should give up on it. The SNP are putting politics ahead of economics, and we’ve had enough of that lately.

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2. Will they tell us exactly how long we would be giving up the security of having control over our own currency?

The SNP rely on the seeming complexity of currency issues to avoid simple answers. Their positioning is strategically obtuse in order to leave voters unable to understand the fundamental differences between keeping the pound, using the pound informally, or establishing a separate Scottish currency. As their Business Minister admitted in a recorded briefing of SNP activists, their position is a very deliberate deception: telling voters we will keep what we have now when they know there will be a fundamental change. Take this example from the First Minister of the ‘it’s our currency’ argument:

“The term sterlingisation that is often used is when a country chooses to use a currency that is not its own. The pound is Scotland’s currency right now. The pound as everyone knows is a fully tradable international currency. There is absolutely nothing to stop Scotland from using the pound and it would be a continuation of what we have now.”

• Sterlingisation isn’t what we have now. It means Scotland becoming the only advanced economy without a currency of our own, without the insurance of a central bank, without control over interest rates, without the ability to create currency. There would be no lender of last resort for Scotland’s banks. No other advanced economy does this, there is no precedent so the SNP are left to cite Ireland 100 years ago - an agrarian economy with almost no manufacturing or financial services. Almost nobody thinks this is a good idea.

• Scotland has twin deficits: fiscal and current account. The second is tricky to understand, but its most important component for an independent Scotland is relatively simple: in trade with the rest of the UK, Scotland imports a lot more than it exports. Currency exists in the banking system. An independent Scotland would be paying for its imports in pounds that would leave the Scottish banking system and stay in the rUK system. An independent Scottish banking system would literally be running out of money. So, a Scottish Government would have to sell sterling denominated bonds to keep the system afloat, and financial markets would not look kindly on an obviously unsustainable arrangement. That means higher rates for borrowing. We’ve just had an example of how financial markets punish foolish governments, and what was handed out to Kwasi Kwarteng would look mild compared to the thrashing that Scottish Government debt would receive, with no Bank of England there to step in and stop the beating.

• When later, though probably sooner for the reasons set out above, the move to a separate currency is made, this won’t be what we have now either. Although SNP politicians sometimes pretend we already have a separate Scottish pound because we have Scottish banknotes, this would be a brand new, unproven currency. This currency need to be defended with large currency reserves which Scotland would need to build up. This would be money going into defending the currency, not into the NHS and other public services.

• To avoid currency fluctuations impacting businesses and individuals, the SNP proposed pegging the new currency to the pound. For example, you don’t want Scots being paid a UK workplace pension in Sterling to find their income fluctuates month-to-month. However to maintain that linkage between the new currency and the pound, you need to be able to defend that against speculators. The cost of this could be enormous - as high as £100 billion.

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3. Will they continue to pretend that we wouldn’t need to pay the costs of a seperate Scottish state?

Having built the entire economic case for leaving the UK on GERS, the official public finance statistics for Scotland, the SNP were hoisted by their own petard when it became clear that the positive numbers they cited were the result of a temporary spike in oil prices and so oil revenues. Ever since the SNP have been confronted with the huge austerity that would result from giving up Scotland’s share of UK funding - which in most years is equivalent to the entire NHS hospital budget in Scotland. A common response to this is to pretend that essential things will no longer need to be paid for. Versions of this are all over the place is an example from a few weeks back from Deputy First Minister John Swinney:

“revenue raised in Scotland covers all devolved expenditure as well as all social security spending – devolved and reserved – including state pension provision in Scotland.”

• That sounds good but if we take this seriously what they are saying is that the other spending is optional. That optional spending includes all defence spending (sorry Clyde and Forth shipyards); all international aid spending (sorry Africa), all coastguard spending (sorry fishermen); the wages of all reserved tax, pensions social security civil servants (sorry Gran); all debt costs (sorry credit rating) all Network Rail spending (sorry Thomas).

• They are saying we’d be able to afford a separate Scottish state if we didn’t have to pay for a separate Scottish state.

Our share of UK funding - the money redistributed around all parts of the UK - has been roughly £10 billion a year for most of the last decade. Specifically, cutting which spending that they have designated as optional for a separate Scottish state would add up to anything near the amount that has been lost?

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4. Will they pretend that someone else will pick up the costs of the big ticket items like pensions or debt?

One argument goes that because Scots paid into “the UK pension pot” it would be for the UK to pay for Scottish state pensions, even after we have left the UK. Facing a huge hole in public finances after giving up our share of UK funds, this is an attractive idea for nationalists as it removes from the balance sheet the single biggest item of public expenditure. Many SNP politicians, including their Westminster Leader Iain Blackford, have made this case, but let’s take as our example Ivan McKee, the Minister for Business from earlier this week:

McKee:"People who paid into the UK pot for their state pension would receive that money back from the UK pot. I suppose the way we look at it is if someone living in Scotland choose to live in Spain or Italy, for example, to enjoy their retirement, they would still receive their UK pension, so if they were living in Scotland why wouldn’t they? Because there’s no difference in that regard…”

Questioner: "But the SNP position remains that those pensions should be paid for out of the settlement as part of UK taxation rather than Scottish?"

McKee: "Sure."

• Most importantly, this is a change in SNP pensions policy. In 2014 they gave a clear, absolute guarantee that an independent Scotland would meet the cost of the state pension. The whole cost of existing pensions was allocated to the Scottish state in the Independence White Paper launched by Nicola Sturgeon. That guarantee has been replaced by the suggestion that England will pay for our pensions, or that what was once guaranteed is now a matter of negotiation. Why the change?

• There is no savings pot. There is no asset to be carved up, only liabilities. Pensions are paid by today’s taxpayers, not yesterday’s contributions. Do they really believe that taxpayers in England will pay for their own pensions and Scotland’s pensions while Scottish taxpayers don’t pay a penny?

• The SNP have, on occasion since 2014, backed away from their earlier promise to take on a per-capita share of UK debt as a way of reassuring international markets of our credit-worthyness. This is another area that may shift in their revised plans from a clear guarantee to a matter of negotiation because they have a huge fiscal hole to fill and they don’t how to fill it before the markets take apart Sterlingisation.

• If the only way you can make the public finances of a separate Scotland add up is to pretend you don’t have to pay for the most expensive things government does, that is just cheating, surely?

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5. Will they stop talking about other countries and start talking about Scotland?

Faced with such difficult questions about Scotland’s economy, the SNP choose to talk about almost any other country. Because if we weren’t Scotland we wouldn’t have Scotland’s economy. Their first paper in this series of papers on independence repeated a trick they have used many times before: pick an arbitrary group of other small nations, pick the most attractive parts of their economy, and claim Scotland would achieve this purely by dint of being an independent state. Take the First Minister a few weeks ago:

“Ireland, Switzerland, Norway, Denmark, the Netherlands, Iceland, Sweden, Austria, Belgium and Finland. The evidence is overwhelming that these countries – now and over time – perform better than the UK. Compared to these countries, many of them smaller or similarly sized to us, Scotland – under Westminster control – is being held back. With independence, we too would have the levers and the autonomy that these countries take for granted to help fulfil their potential.

• If you pick the wealthiest small countries, you can say being small makes you wealthy, but that’s because you don’t pick the less wealthy ones.

• The SNP only ever tell a partial story. Grow the economy with Irish style tax cuts without mentioning the lack of an NHS or the charges for seeing a doctor; promise Scandinavian social provision, but no mention of the high taxes that pay for those services.

• It is a sign of how weak their case is that Scottish nationalists want to talk about any other country other than Scotland. If they had a plan for Scotland, they’d be confident enough to talk about Scotland’s economy.

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6. Can they explain why erecting a new border was a disaster when the Tories did it but won’t be when they do the same thing?

The excuse given for re-running the referendum result is that the hard border created by Brexit is causing economic harm to Scotland. However, when it is pointed out that her proposal is to move those barriers to trade from Dover to Gretna and to create a new border across our island, Nicola Sturgeon says that when Boris Johnson introduced that border it was an economic disaster but that when she imposes an identical border it won’t impact trade:

“If we are in the single market and the rest of the UK is outside the single market then yes there are issues in terms of regulatory and customs requirements that need to be made what I’m saying is not that these challenges don't exist, but these challenges can be managed in a way that doesn't present disadvantages to our businesses.”

• The big problem with this argument is that in Scotland we sell three times more to cutomers down south than we do to customers in Europe. Leaving Europe isn’t good for jobs but leaving the UK would be far, far worse.

• The SNP talk about the number of *potential* customers in the EU in the same way that Brexiteers used to pretend that new customers in China or India would replace the trade lost by leaving the EU. Swapping real customers to imaginary ones costs jobs.

• Moving the border from Dover to Gretna creates a bigger headache for us, it doesn’t solve Brexit. The SNP’s cure for Brexit is worse than the illness: a hard border with England, PLUS changing currency, and giving up money for the NHS that’s spread from the SE to all parts of the UK.

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7. Will they address the realities of Scotland’s economy today or spend their time on imaginary futures based on one-sided projections that ignore the negatives?

We should expect the next few days to include projections of economic growth, based on imagined benefits, without any accounting for the measurable downsides. We are invited to ignore what we know and to imagine the unlikely instead.

In 2014 Nicola Sturgeon’s based her entire argument on the idea that Scotland’s public finance figures showed that Scotland would prosper outside the UK. Now her approach is that an analysis of Scotland’s finances today should be discounted because it isn’t an analysis of Scotland’s finances in the future. Leaving aside the tautological nature of this argument, it is an attempt to say that because we can’t know anything for sure we should discount what we do know. Take this example from Nicola Sturgeon’s publication on the GERS public finance figures:

“Much of the debate on the economics of Scottish independence doesn't, paradoxically, concentrate on independence. Instead the focus tends to be on the estimated fiscal position of Scotland within the UK. That tells us nothing about how Scotland would perform as an independent country and is, in any case, an argument for change, not against it.”

• In 2014, almost every day, Nicola Sturgeon told us Scotland’s public finance figures were proof that Scotland would be more prosperous standing alone. The only reason they now discount that same analysis is that it shows Scotland would lose, rather than gain from leaving the UK.

• This isn’t just about public finances. On Brexit Nicola cites the analysis of the LSE on the border costs of Brexit but says the same experts’ analysis of her own border proposal isn’t accurate . She isn’t interesting in creating an economic plan that will help her people, only a political case that will help her party.

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8. Given England is the biggest customer for our most important industries will they be honest about the damage of leaving the UK’s single market?

Alongside a focus on grievances that would not be solved by leaving the UK, the SNP take positives about Scotland’s economy within the UK as proof that we should leave it.

We see it in nationalist discussion of Scotland’s economic strengths like food or drink or renewable energy. On food and drink, they point to Scotland’s strong exports, without ever wondering if being in a seamless single market with tens of millions of people on our island has had anything to do with the rest of the UK being our biggest export market for food and drink.

We saw an example of it from the First Minister on renewable energy this week:

“We are a net exporter of electricity. We have vas current generating capacity from renewables and even vaster potential…We’ve just given in an auction for seabed licences the potential go ahead for 28GW of offshore wind. To put that into context that is double our current capacity of renewable energy.”

• The First Minister knows that the first generation of renewable investment was paid for by the sharing of the costs investment across tens of millions of electricity bills across Britain.

• She knows that any development of that potential she talks up will also be on the backs of English and Welsh energy bills.

• Nationalism sees everything as a zero sum game but outside of the UK, Scotland could not have achieved its scale in renewables. Without Scotland, the UK would not have reducing emissions so quickly. If renewable electricity flows south, investment to build those renewables flows North.

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9. Will they pretend that the only choices open to Scotland are different kinds of crisis?

From the start of SNP conference we can already see the SNP trying to frame the reaction to the disastrous Tory budget as a reason for making similarly bad decisions. Presumably the logic here is: they created an economic crisis so they can’t criticise us for doing the same.

So weak is the economic case for leaving the UK that the SNP consitently find themselves comparing the economic situation they want to create with economic shocks nobody would choose. We first saw that when the oil price collapsed and the gap between Scotland’s tax take and expenditure grew and grew. We heard it from Finance Secretary Kate Forbes in response to the GERS numbers:

“Across the world, countries operate with deficits…we have just seen unprecedented borrowing from countries around the world. Small and large countries, including the Uk government whose deficit is set to rise to £372 billion this year. I don’t see any of those countries suddenly deciding that they no longer want to be independent.”

• Here the SNP is trying to put the structural deficit that Scotland records, a deficit that only becomes a problem if we give up on our share of UK funds, into a context that seems less scary. The only way she can do this is by comparing Scotland’s pre-Covid deficit to the UK’s deficit during Covid - a time when furlough borrowing was paying the wages of millions.

• Yes countries can deal extraordinary crises like the financial collapse of 2007, the Eurozone crisis, or the closing of the economy due to a deadly pandemic, but nobody should choose to create a crisis of this magnitude. That is what the SNP are doing when they make this argument: trying to justify consciously choosing to create a crisis.

• Moreover, the UK survived the fallout from the recent budget because it had strong financial institutions, such as a central bank that is able to do quantitative easing. These are the very institutions they want us to do without.

10. Will this really be an economic case or will it be more appeals to emotion and an excuse to denigrate opponents as lacking belief in Scotland?

The last refuge of the economically inept is nationalism. The longer an economic debate continues with a nationalist, the higher the probability is that they will accuse their interlocutor of hating their country. Any questions or doubts will be dismissed as scaremongering, project fear, or talking down the country.

For a generation, stretching all the way back to the conference speech by then SNP Leader John Swinney we have heard the same argument:

“they will always run down the Scots - why they will always say we are too stupid and too poor to be trusted to run the affairs of our own country.”

This “too wee, too poor, too stupid” line is the Pavlovian response of those too witless, too pernicious, or too stupid to care about the economic costs of nationalism.

• The only reason to turn questions of economics into a test of national pride is that you know you will fail the economics exam. We should have learned that lesson after hearing the same language, word-for-word coming out of Brexiteers mouths and, in the last few weeks, from Liz Truss in response to warnings from economists.

• There is always an attempt at reframing. They want to move off the economic issues that are weak for them: borders, jobs, cost of living, currency. They want to move onto the emotive ideas where their strength lies: the divisive politics of them and us.

Scotland won’t be any more or less proud a nation because of questions around which decisions we choose to share with our neighbours. Nor will our success be determined by national pride: if that were the case all the poorest nations in the world would simply have to believe in themselves a bit harder.

Our success as a Scottish nation will be determined by how we educate our youth, care for our elderly, raise up our poor, and support our friends. Those are the things Scotland’s two Governments should be focussed on now.

A decade of slowly and painfully replicating the financial institutions we already have; replacing the public funds we already enjoy; and replacing the customers we would lose will only distract from that.

Culture Corner

I know this already far too long, but I want to start offering a more balanced diet in these newsletters. I’m going to try to end each edition with a link to something creative that I think speaks somehow to the values internationalism, openness and solidarity. Suggestions for a better section title than the cliche above are very welcome.

Anyway, this poem, If We Have No Compassion, by Wendell Berry was in my mind this week, especially the opening verse below.

If we have become a people incapable of thought,
then the brute-thought
of mere power and mere greed
will think for us.

You can read the entire poem here. I read it as a warning about the incompatibility of ignorance and compassion. Hope it does something for you.