'Tis But A Scratch
The SNP's response to the annual GERS figures reveals a party totally unwilling to engage with reality.
Normally the GERS statistics tell us about the value of the billions extra for the NHS and other public services that we get from being part of the UK. In this year of Covid, the figures also speak of the value to Scotland of having access to the UK’s financial infrustratucture.
I have written before about the SNP’s need to reframe the higher public spending we have inside the UK as a bad thing. In their minds, the greater the support Scotland gets as part of the UK, the more it makes the case for giving up that support. There’s no point repeating those points here, instead I want to look at what GERS tells us about the crisis we’re in and the crisis we avoided.
The Crisis We’re In…
The headline from GERS this year is that our deficit (the difference between the taxes we raise and our spending) has grown by £20 billion from £16 billion in last year’s numbers to £36 billion. Most of this is accounted for by emergency covid spending rather than a fall in taxes collected due to economic crisis (revenues dropped by about £3billion, but spending went up by £17 billion).
These are extraordinary times and they certainly produced an extraordinary set of numbers. The SNP tried to hide behind Covid as they responded to the size of the decifit. Finance Minister Kate Forbes, for example argued:
“a few years ago you would have told me that 14% was an unsustainable level of deficit, which is what the UK Government currently has….It is not an obstacle to making the case for independence, because deficits across the world have risen exponentially and having the highest deficit in Europe does not seem to be an obstacle to the UK government being independent, and the same argument would apply to us.”
Stop to think about it and you realise this is a self-own. Forbes can only make a seperate Scotland’s deficit in normal times seem reasonable by comparing it to the deficit of the UK during the most extreme economic crisis in history. As the Institute for Fiscal Studies put it in their response to the figures:
“there is a difference between a temporary surge in borrowing like the UK’s – especially at a time when the household sector is massively boosting its saving – and the large structural deficit that an independent Scotland would start life with.”
Often the arguments about Scotland’s currency and Sterlingisation seem abstract. This GERS report is a reminder that this is anything but a hypothetical debate. Three times over the last decade Scotland has faced a fiscal crisis: the bailout of Scottish banks, the oil price crash and the pandemic. Each of these times, the financial infrastructure of the UK has literally saved us - the money in our bank, our public services, our jobs.
The SNP propose that we would do without a central bank for around a decade, meaning we could not do the quantitative easing (creating money) that has allowed the UK, and other nations, to fund the NHS, develop and deliver vaccines, or pay furlough wages.
Andrew Wilson, who was tasked with trying to rebuild the credibility of the SNP’s case, claims that we would be able to borrow to fill the hole that leaving the UK would leave us in. There’s three very serious problems that he ignores.
First, in the decade when we operate under Sterlingisation, and contrary to what the SNP assumes, we would almost certainly need to run a surplus rather than funding a deficit through borrowing, given the macroeconomic imbalances (including a large trade deficit) the new state would be subject to.
Secondly, the borrowing we have seen in the UK, and around the world, to deal with covid has been made possible by central banks creating money which they then use to buy their own government’s debt. It is self-evident that under Sterlingisaton Scotland wouldn’t control a currency so we would not be able to create currency.
Thirdly, Wilson acknowledges that borrowing in a new currency would be more expensive because of the expectation that new currency would be volatile. So he suggests we should borrow in reliable Sterling to offset that risk. As Sam Taylor from These Island’s points out just because you borrow in Sterling, lenders aren’t going to forget that you plan to shift to a new volatile currency during the repayment period.
The IFS expand on this point:
“If an independent Scotland were to use the pound informally, as is current SNP policy for the short-term, such monetary financing would unlikely be available to it on the same terms. On the other hand, a separate Scottish currency, the SNP’s preferred option for the longer-term, could come under pressure if Scotland’s public finances were seen as unsustainable by the financial markets, pushing up the cost of any sterling-denominated debt obligations of the Scottish Government, households and businesses.”
In other words, it’s lose-lose.
Will there ever come a point for nationalists, as they wrestle with the hugely costly problems they would create, when they ask themselves why they choose to create those problems in the first place?
The GERS figures show why having a central bank and control of our own currency matters: during the pandemic, spending in Scotland increased by more than £3,000 per person, backed by the institutions of the UK.
The Crisis We Avoided…
Remember that normally the deficit is not a result of covid. It is a result of the higher public spending Scotland receives due to us getting our share of the funds redistributed around the UK. Not subsidy, but our share of something that is ours. The SNP asked us to give up our share but we said No.
It hasn’t really been commented on, but these GERS figures give us the numbers for what that forfitted share of funds would have been the first five years for Scotland outside of the UK. It shows us that:
The oil taxes, which the Nicola Sturgeon’s White Paper on leaving the UK predicted would be worth £7-8 billion in one year were, in reality, worth half that amount over five years.
Every single year we have paid less than our population share of UK taxes, amounting to us paying £1,829 less per person over the period than the UK average.
Despite that, over those same years, we have received £8,537, per person in spending more than the UK average.
Keeping our share of UK funds has been worth more than £10,000 for each of us in Scotland over the last five years.
In the face of this overwhelming evidence of the damage they would do, the SNP look increasingly deluded as they simply ignore the financial realities of their central political mission. Like the zealous Black Knight, defending the meaningless cause they have sworn their lives to, they have convinced themselves that all this is just a flesh wound.
We might think that this lack of interest in economic credibility on the part of the SNP should be welcomed by those of us who oppose leaving the UK. Undecided voters care most about the economics of Scexit and the SNP are making the same mistake as in 2014: treating the economy as a secondary issue when it is the issue. Really it should worry us more that those who propose such a huge change to the way we fund our NHS, schools and social security have no plan for how to protect people from the pain of their political project.
In case you missed it…
If you want to go deeper into why the whole Sterlingisation plan is a huge lie, Professor Ronnie MacDonald of Glasgw University has a good column in the Herald which concludes with the truth that the whole SNP strategy seeks to obscure:
“financial markets will from day one of independence, if not before, be expecting an abandonment of sterlingisation and a move to a sharply devalued Scottish currency at around 20-30%. Such a large expected devaluation would have to be reflected in borrowing costs along with a default premium.”
John Ferry has a great article today asking us to imagine what we would think if a UK Prime Minister proposed what the SNP do:
“imagine a prime minister in receipt of those borrowing numbers announcing that the future path for the UK is clear: we must disband the Treasury and Debt Management Office; shut down our central bank; start again from scratch with brand new institutions undertaking all those crucial things like issuing government bonds - which will henceforth be denominated in a foreign currency as the new central bank will have no monetary power.”
Professor Jim Gallgher expands on the argument about borrowing in the Times, where he notices that:
“despite unprecedented borrowing, taking UK debt to 100 per cent of GDP, the interest bill actually fell, because the UK can borrow at rock bottom rates. Its credit is good because it hasn’t defaulted on gilts for over 330 years, and sterling remains a currency investors worldwide want to hold. So as a result, via the monetary policy of quantitative easing, about a third of that debt ends up owed to the Bank of England, saving Scottish taxpayers billions.”
There isn’t space here to go into the wilder end of the nationalist response to GERS. I do have to mention Richard Murphy’s claim that GERS is named thus as it is short for the football team of choice of unionists. I’m not kidding, read it. His central argument now is that if Scotland was a net beneficiary within the Union, the UK would not want Scotland to stay. This is, of course, a self-supporting conspiracy theory where no evidence that Scotland benefits from being part of the UK can ever be accepted, however overwhelming the proof.