Saturday, September 6, 2014

Scotland: yes or no?

by Michael Roberts

With two weeks to go, the latest polls suggest that the upcoming referendum vote on independence for Scotland could be close, although the average of all polls still suggests that Scots will vote no to independence. It’s going to be a big turnout though.

In this post, I want to try to analyse the arguments for and against independence mainly from the point of view of whether an independent capitalist Scotland would be better for the Scottish working class in economic terms, and for that matter the rest of the British working class, than remaining in the Union with the rest of the UK.


But first let’s start with the principles. A united world in a fair and equal federation or commonwealth of states would be the most beneficial to the majority. It would mean sharing resources, culture and ideas to the benefit of all through a democratic process. So, a federation of the old nation states of the British Isles would be better, in principle, for the majority who live by their labour and not by profit and ownership of capital. But this implies a socialist federation.

Of course, if any nation wants to stay separate, or to become separate, from such a union, then that is up to them. They should be able to decide in a free and fair vote. And a union or federation of nation states that is not equal and is more of an oppressive union of the large and powerful over the small is not good news – and this is the model of all capitalist federations. On the other hand, staying separate as a ‘nation’ for the sake of it is an antiquated and backward idea in human social development, and particularly for working people. It also ensures the continuation of the capitalist mode of production.
The decision for yes to independence or no should not be based on whether Scotland needs to be a nation – it is one, in geography or territory and, to some extent, in culture, although that has been diluted over centuries with the gaelic language almost dead and ‘scots’ seriously reduced. Catalonia in Spain, also possibly considering independence from Spain, is more of a nation in that sense, as it still has its own living language. But then Ireland is clearly a nation, but uses English. And the Scots clearly consider themselves a nation.

And yet there is little difference in attitudes between the majority of English and Scots. Polls show that Scots have similar views to the rest of the UK when it comes to welfare, immigration, benefits, unemployment and public spending. Summarising the data from social attitudes surveys, Lindsay Paterson of Edinburgh University writes: “These differences, though generally placing Scotland to the left of England, are not so huge as to signal a fundamental gulf of social values.” Most people in the UK did not vote for the Conservatives in 2010. Most people in Scotland did not vote for the SNP at the Holyrood elections in 2011.

For the English working class (if we can talk about such a thing), the issue is clear. It is much better for the English if the Scots stay within the Union as an important part of the electoral and industrial struggle against the pro-capitalist parties. Only the most reactionary of the English working class favour independence for Scotland – i.e. ‘getting rid of the moaners north of the border’. In all polls on the issue, those south of the border favour the Scots staying, including those Scots living south of the border.

The reality

Of course, in the real world, principles do not apply. The Union of Scotland with England and Wales first became a reality under absolute monarchy, with succession of James VI of Scotland to the English throne in 1603, although the parliaments of the English and Scottish aristocratic elite remained separate. Formal Union with the ending of the Scottish parliament was established by decrees from both parliaments in 1707. Article 1 of the Act of Union of 1707 states that: “the two kingdoms of Scotland and England shall on the 1st of May and for ever after be united into one kingdom by the name of Great Britain.”

The Union was forced on the Scottish ruling class by economic circumstance. Its wild speculative schemes to set up a ‘colony’ in Panama (ironically raised as model for an independent Scottish currency now – see below) as a pale shadow of English colonial development, had bankrupted the Scottish economy. The Scottish ruling elite then agreed to a ‘merger’. Actually, the majority of the English ruling class was opposed to the Union as they thought it was too costly to bail out the Scots (similar to the arguments about Scottish bank failures now). But Union was forced through by the strategists of the rising English capitalist class and backed by the budding urban bourgeois of the Scottish lowlands. It was opposed by the rural highlanders and chiefs who wished to preserve their clan system and looked to a reactionary Catholic monarch, then in exile, as a saviour from English/Scottish capitalist takeover.

But let’s return to now. The question for the Scottish working class is whether having an independent capitalist government operating out of Edinburgh is better than having a British government operating from Westminster – for their living standards, control over production and distribution, defence and security, health, housing and education.

It will be a pro-capitalist government, whether Scottish Nationalist or Scottish Labour. The SNP see their vision of an independent Scotland as one where banks and big business continue to accumulate profits and capital; and where land ownership is the most concentrated in the developed world (half of Scotland’s land is owned by just 500 people).  “We are now six years into an SNP government which has done absolutely nothing legislatively about the most concentrated, most inequitable, most unreformed and most undemocratic land ownership system in the entire developed world”, Jim Hunter, Land Reform Review Group.

An independent Scotland will retain the Queen and the British monarchy as the official head of state, the (English) pound will remain the currency, a ‘nuclear deterrent’ is still accepted and the armed ‘defence’ of the country will remain in the hands of others (NATO). Private education and health sectors will remain (and even increase), and housing will continue to be dominated by private landlords and construction companies, with the public housing playing little role. And the SNP wants Scotland to join the EU, a reactionary ‘free market’ based union, but with all the ‘opt-outs’ that were ‘won’ by the Thatcher government for the UK (something that will not be granted). And the EU is now imposing severe public spending targets on its members.

That part of the Scottish business class that favours independence is pleased with this vision. “The SNP is patriotic, well organised and has prominent business support just like the old SUP. My suspicion is that, whatever he says publicly, Alex Salmond is well aware of his potential support from the patriotic right wing in Scotland, which is why he was so keen to back the Scottish regiments and abandon opposition to Nato. Whatever happened to the Scottish Tories? They turned into Scottish Nationalists. You read it here first”, says Jim Walker, a hedge fund adviser., And “It will be fascinating to observe Scotland becoming more Thatcherite while pretending not to do so. “ says another City economist Andrew Smithers, in the FT.

So it’s a moot question whether much will change for the working people of Scotland. But let’s consider the economics of it.

The oil

The mainland (excluding offshore energy) Scottish GDP per head is almost bang on average for the UK as a whole. If it included all the oil, Scotland’s GDP per head is about 18% above average. Unemployment, inequality, growth and the structure of the economy is closer to the UK average than in Northern Ireland, London or northeast England. Over a long-period, real GDP growth has been a touch slower than England’s.

Scotland’s exports to the rest of UK (rUK) account for 70% of its exports. Exports to Scotland account for 11% of rUK exports. So Scottish capitalism is heavily integrated into British capitalism, more so than Canada into the US. In 2012, Scottish exports to rUK amounted to £48bn while rUK exports to Scotland were £59bn. So an independent Scotland would run a trade deficit with its main trading partner, the rUK, thus requiring investment or credit funds from ‘abroad’ to fill the gap.
Scottish exports
Scotland would be a small capitalist state dependent on trade with rUK and little possibility of reducing that dependence. Now it could be argued that Scottish capitalism would have more flexibility and it’s true that some small states sometimes do better economically than large ones. But small states are also more vulnerable to the vicissitudes of global financial and production crises like the Great Recession, as the experience of the Baltic states, Ireland, Portugal, Greece, Iceland and Cyprus has shown in the last six years. They have suffered far more than Scotland did as part of the UK.

Energy-rich Norway has one of the highest living standards in the world, it remains outside the EU and has huge financial reserves. Could an independent Scottish capitalist state become another Norway? Well, if we analyse the projections for future oil and gas production in the North Sea, the answer is no.

Even if Scotland were to gain rights to 90% of UK energy revenues through taxing the multinational oil and gas companies after independence, most forecasts suggest a decline in those revenues over the next decade or more. Forecasting revenues is extremely difficult given that volatility in prices, fluctuations in output and oil industry investment have a direct impact on the tax take. Technological advancement and policy reform could help turn marginal fields into profitable ones. An independent Scotland would depend on oil for 18% of its wealth, yet North Sea production has been falling 6% a year for the past decade.

Professor Rowthorn from Cambridge has pointed out how oil price uncertainty was “one of the strongest arguments against independence”. Over the next 25-30 years, most estimates are that North Sea oil revenues will decline whatever happens to the price of oil. David Phillips, a senior research economist at the Institute for Fiscal Studies think-tank reckons that “even with a geographic share [of revenues], Scotland’s finances get worse by the middle of this decade”.

The Aberdeen-based billionaire Sir Ian Wood, former head of oil services supplier Wood Group, who in the past year has led a government-commissioned review into how best to exploit the North Sea’s remaining resources, has also warned of a sharp tail-off in production from 2030. Sir Ian acknowledged that as many as 24bn barrels of oil equivalent may remain, but he suggested 15-16.5bn as a more likely total – compared with the more than 40bn extracted since the 1970s. Oil & Gas UK puts the range between 12-24bn. The Department of Energy and Climate Change reckons UK oil production will decline from 43m tonnes this year to 23m a year by 2030.

If you assume that the oil price will rise from $102 a barrel in 2015 to $160 by 2040, in other words, stay much the same in real terms, then revenues from the North Sea will not rise in real terms at best and probably will fall. Robert Chote, chairman of the OBR, predicted a sharp fall in UK oil and gas receipts from £6.1bn in 2012-13 to £3.5bn by 2018-19, with far steeper declines after that. The UK culled total revenues of £4.7bn from the North Sea in 2013-14.
oil revenues
Public finances
And this brings us to government finances under an independent Scotland. The latest Scottish official figures show that, if calculated on the same basis as the rest of the UK, a so-called per capita basis – with oil revenues shared equally across the UK – Scotland’s public sector had a budget deficit of 13.3% of GDP in 2012-13, the latest year for which figures are available. That compares with 7.3% for the UK as a whole; the Scottish deficit is nearly twice as large. Even with 90% oil, Scotland’s budget deficit in 2012-13 was 8.3% of GDP, bigger than that for the whole of the UK. Indeed, it has been bigger on that basis for the past 25 years. The Institute for Fiscal Studies reckons that, over time, a Scottish government will run bigger fiscal deficits than the UK over the next 50 years.
This is because Scotland will have a population that ages more than the rest of the UK, so pension and health costs will rise more. Also public spending per head in Scotland is 10% higher (maybe for the best reasons). Yet the SNP plans to cut corporate taxes for business to attract more investment, so relying on foreign capital to boost growth and jobs.

So it is not going to be easy for a Scottish government to maintain slightly higher levels of public spending for Scots than south of the border without running larger fiscal deficits that will have to be financed by borrowing (issuing Scottish government bonds) from the City of London and elsewhere. The energy revenue stream has varied between 5-22% of Scottish tax receipts over the last 20 years, averaging around 12%. Managing such violent swings, with such a large fiscal deficit as a starting point, would be no easy task. The government will face rising interest costs on that borrowing compared to the cost of borrowing by the Westminster government, perhaps an interest rate premium of 50 to 100 basis points, potentially more. Scotland would also inherit a significant proportion of UK government debt. This is what the SNP wants to negotiate.

Also, if Scotland joins the EU as a separate member, it will be subject to the severe fiscal austerity targets now being imposed on the likes of Greece, Portugal, Spain and others by the EU under its fiscal pacts. That threatens the ability of the government to sustain better health and education services as well as welfare benefits, especially if corporate taxes are being cut at the same time.

Already, it has been revealed that current Holyrood control of the health service has led to significant privatisation of contacting services, just as in England. A major study by the Nuffield Trust in April suggested the performance of the health service in Scotland had improved in relation to England. But the policies that had made the difference were UK-wide – such as waiting list targets – not the result of devolved decision-making.

The currency

The cost of borrowing by a Scottish government raises the issue of Scottish banks and the role of the Bank of England, which has been a major issue of debate between the yes and no camps. Scotland’s banking assets – in practice the potential liabilities of an independent Scottish government in the event of independence – are a staggering 1,100% of GDP. Scotland has a potential banking liability of Icelandic proportions and much bigger than those (700% of GDP) which almost bankrupted the Irish economy. This oversized banking sector will shrink as the likes of Lloyds and others take their Scottish base away (with the loss of jobs and income), but RBS apparently plans to stay. Ironically, this is 86%-owned by the Westminster government and regulated by the Bank of England (BoE).

Under a proper currency union of Scotland and rUK using the pound, the BoE would set interest rates independently of government and parliament. So a Scottish government would still have no say over the basic interest rate, which would be determined by unelected BoE members using just the inflation rate of the UK as a guide. Scotland would remain under the grip of the City of London and the fluctuations of economy and the financial sector of rUK, as before.

A sterling monetary union is the Scottish Government’s preferred option for an independent Scotland (new report). So this would mean accepting the interest rate decisions of the BoE and allowing fiscal control to remain with Westminster or the EU, just as happens now in the UK. These would include submitting budgetary plans to Westminster, accepting some continuing oversight of its public finances by UK authorities and limiting the degree of tax competition between Scotland and the rest of the UK.

But so far, all three major parties south of the border say that the Bank of England should not act as ‘lender of last resort’ to Scottish financial institutions after independence if they get into trouble. Of course, a Scottish government can adopt the pound as its currency without being part of currency union with rUK, or the credit backing of the BoE. This is what Panama does with the US dollar. But then Scottish capitalism is on its own if things go wrong in the night with its banking system or if inflation takes off north of the border. That risk means that the City of London will want to charge more to lend to a Scottish government and corporations because of the extra risk involved.

The only faction of pro-capitalist economists who think that the Panama solution would be best is the extreme ‘free market’ Adam Smith Institute. Research director Sam Bowman, commented “the ‘Panama option’ may be his best bet for an independent Scotland… emulating Panama could give an independent Scotland a remarkably robust financial system because Scotland’s banks could not depend on an unlimited central bank lender of last resort.” No central bank for Scotland would be good news.

It’s true that other ‘currency pegs’ (as they are called) have been successfully sustained over lengthy periods. Hong Kong’s link to the US dollar has been maintained since 1983 and the exchange rate between the Danish krone and the euro has been fixed since the formation of the Eurozone. But these are separate currencies from the dollar and the euro. And the Hong Kong Monetary Authority has accumulated massive dollar reserves. The Scottish situation would be different. Scotland could presumably expect to receive a pro rata share of Britain’s gold and foreign exchange reserves. But the £10bn or so that Scotland might expect would be hopelessly inadequate to defend a fixed exchange rate from speculative attack.

Alternatively, a variable exchange rate between Scots and English pounds would be a mess. The queues at the bureau de change at Edinburgh’s Waverley railway station would be the most visible result. More important, Scottish households and companies would have to decide how to denominate their assets and liabilities and choose the currency in which they wished to trade. This is what Hungarians and Poles found after taking out ‘cheap’ euro mortgages and watching their income in forints and zlotys to service them plunge.

Three models

We could sum up the future of an independent Scottish state from three possible models. The first is that Scotland becomes an energy-rich Norway with huge oil and gas revenues, staying outside of the EU, with the highest living standards in the world and huge reserves for a rainy day. This is not possible for Scotland with declining North Sea output and revenue in real terms and the need for multinational investment in energy technology.

Second, it could become an Ireland based on a low corporation tax and incentives for multinationals to come and invest. Ireland achieved this in its Celtic tiger period, but mainly because it was part of the EU and the Eurozone, as well as having access to the UK market. This will not be possible for Scotland as Ireland has already occupied that space and Scotland would have to be in the EU as well (possibly at a time when the UK withdraws!). To get into the EU, Scotland would probably have to agree to join the Eurozone at a certain point (that’s what every new member must now agree to), thus dropping the pound, for rule by the ECB and the EU fiscal pact.

The third model is Iceland: a small independent state with a high standard of living relying on fishing and bauxite mineral mines, outside the EU and with the ability to devalue its own currency in crises. However, Iceland is only the size of Coventry and it did not escape the global financial crisis either.
Both Ireland and Iceland were brought their knees by an oversized banking sector that took ‘hot money’ and relent it recklessly to destruction. The banks were bailed out in Ireland at huge and continuing cost to Irish households. Iceland was forced to devalue, creating sky-high inflation and it had to negotiate a deal for repaying lost bank deposits with the UK and Holland, again at a huge loss to the living standards of its small community (see my post, Scotland would face the same issue.

At best, the majority of the Scottish people will find little difference under Holyrood than under Westminster and it could be worse if a global crisis erupts again. Scotland as a small economy, dependent on multinationals for investment, still dominated by British banks and the City of London and without control of its own currency or interest rates, could face a much bigger hit than elsewhere in terms of incomes and unemployment.

So independence would not bring dramatic economic improvement to the majority of Scots; indeed, it could mean a worse situation. But then the decision on independence is not just a question of the economy and living standards. That brings us back to the issue of the Scottish and English/Welsh (and Irish) working class sticking together in the struggle against British capital. Will an independent Scottish capitalist state strengthen that in any way?

If the vote is yes, I’ll look at the repercussions for the UK and Europe in a future post.

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