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
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
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.
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
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 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.
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
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.
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
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
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 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.
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
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, http://thenextrecession.wordpress.com/2013/04/28/icelands-electors-how-ungrateful/). 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
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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