Scotland’s economic future – a contested space

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By Russell Bruce

There’s that old joke that if you ask 10 economists a question you will get 11 answers. If one thing is certain the numbers and opinions being bandied about by economists, think tanks and Uncle Tom Cobley and all is set to rise exponentially as the Independence Referendum gathers pace.

In the latest edition of the National Institute Economic Review there is an interesting article by Dr Angus Armstrong.

By Russell Bruce

There’s that old joke that if you ask 10 economists a question you will get 11 answers. If one thing is certain the numbers and opinions being bandied about by economists, think tanks and Uncle Tom Cobley and all is set to rise exponentially as the Independence Referendum gathers pace.

In the latest edition of the National Institute Economic Review there is an interesting article by Dr Angus Armstrong.

Interesting because as the divisions between those writing from a Unionist perspective and those writing from an independence perspective crystalise we can begin to see that there is in fact some agreement in some areas but differing conclusions on others from the selected evidence.

As Dr Armstrong’s paper contains a lot of sound analysis on which agreement exists, that is the best place to start.  Dr Armstrong’s contribution to the debate was welcomed by John Swinney.

On the question of retaining the pound Dr Armstrong sets out the common criteria for a monetary union as:

• a high degree of cross-border trade relative to domestic trade including intermediate and final products

• capital and labour market mobility

• both nations have similar structures and cycles

Around 40% of Scotland’s exports go to the rest of the UK.  We would continue to be part of a single market at existing UK level and within the EU.

With that comes capital and labour mobility, and given common language and a long standing history of free movement plus starting from a similar structural base, there is no doubt about the value to both nations of a common currency at least in the immediate term.

Some of the more extreme Unionists may well argue that as England is the larger economy it can manage very well without access to the Scottish economy, but this is far from the case in a global market in which we would both be competing.

Present interdependency and mutual trading interests demand a continuing open market in both directions.  Of course it is in Scotland’s interest to expand trade with other markets and encourage investment from other parts of the world.

That process is already well under way as the long list of those who have signed up to invest in Scotland over the last few years prove, laying a basis, not for any reduction in cross border trade between Scotland and rUK, but for a continuing expansion into world markets just as the Irish achieved in the post 1950s period.

Dr Armstrong argues that sharing The Bank of England would place Scotland at potential disadvantage, having to share bank interest rate but not necessarily obtaining the same credit rating and implied present low interest rate on borrowings.

I will come back to that when we get into the detail of debt share and asset distribution.

In the concluding part of his introduction Dr Armstrong says:

”There may be many intangible benefits from independence but the Scottish Parliament [Scottish Government] is likely to find the implicit financial constraints on economic policy, especially fiscal policy, are even more restrictive than being a full member of the UK”.

For ‘many intangible benefits’ read ‘unrealised potential’ to explain the nature of a contested future.  The implication is that independence is a move into unknown and uncharted territory, forgetting it is a well-trodden path.

Staying within the Union is presented as stable, but that is equally open to question and may be much more an act of blind faith given the growing difference in both social and economic policy direction between Scotland and Westminster.

A separate article in the National Institute Economic Review (NIER) on the UK economy notes that the UK currently suffers from deficient demand, and that present fiscal policy is contributing to this deficiency.  It is suggested an easing of fiscal policy would provide an economic boost.

This update on the UK economy forecasts that real gross national income and GDP will contract during 2012.  The forecast ‘growth’ areas are Public Sector Net Borrowing (£7bn) and unemployment reaching 9.1%.

All of which points to a further deterioration in the UK economy.  Perhaps time for the Plan MacB that George Osborne has refused to consider.  The longer he leaves it, the more difficult it will be to get recovery underway and restore some confidence in the UK economy.

There is an estimated £700 billion in company’s bank accounts just waiting for the right conditions to invest.  With the right signals and incentives that money would at least begin to flow and help stimulate growth.

I came across an everyman’s guide to fiscal intervention that suggested building a bridge would create lots of construction jobs as an example of something that would cut unemployment, raise tax and National Insurance revenue, increase the money supply at local level as money circulates through local businesses and cut the dole bill.

Scotland is doing just that with the construction of a second Forth road bridge – the biggest Scottish infrastructure project for a generation.

Dr Armstrong’s article discusses statistics relating to Scotland’s fiscal debt and share of UK debt, but there is no comparative analysis to set this in context.

A current account deficit comes about where annual expenditure is greater than income.  The shortfall identifies the Public Sector Net Borrowing Requirement (PSBR).  This is then added to Public Sector Net Debt (PSND) being the amount of accumulated national debt.

Of course in the good years the current account should generate a surplus enabling total national debt to be reduced.

Both measures are usually expressed as a percentage of Gross National Product (GDP) and it is these figures that are used for international comparison and by the markets to calculate a country’s credit worthiness.

Dr Armstrong calculates Scotland’s average annual fiscal deficit at 4% and Scotland’s share of UK national debt at 70% of GDP based on a geographic share of North Sea oil.

NIER expect the UK’s deficit on the current account to be around 7% of GDP and UK net debt at 60.5% of GDP in the current year.  The bad news is they are projecting net debt to grow to 75.7% of GDP by 2016/17.

Dr Armstrong notes that to meet Maastricht Treaty obligations the annual general government deficit should be no higher than 3% of GDP and gross debt no more than 60% of GDP.  A country above these percentages has an excessive deficit.

The UK government has to report these figures under Maastricht Treaty obligations but there are technical variations in the way these figures have to be calculated.

Using the Maastricht calculation formula the UK general government net borrowing rose from 2.7% of GDP in 2007 to 10.2% in 2010.  Gross debt rose form 44.5% of GDP in 2007 to 76.1% in 2010. (ONS)

The Treasury prefers is own methodology and complains it is ‘assessed uniquely’ within the EU.  Terrible thing it is to be unfairly treated by a Union of which you are a member!

I have already mentioned NIER’s October projections of UK net debt so it is only right to also look at the Chancellors figures in his Autumn Statement last November as they are required to be reported under Maastricht.

The Chancellor’s statement shows UK gross debt at 84.2% of GDP for 2011/12 rising to 93.9% in 2014/15 and easing slightly to 89.7% of GDP by 2016/17 using the Treaty formula.

Finally I think a comparison with other EU countries places the UK situation and Scotland’s independence inheritance in a wider context.  For this purpose I am using my tables of estimated fiscal debt and gross debt as a percentage of GDP for 2011 from Global Finance.  The actual outturn figures are likely to be slightly different when known, but that will be the case with all future projections quoted in this article.

Only three EU countries, all Northern European, have a projected deficit under 3% – Sweden, Finland and Estonia.  Sweden has a population of 9 million, Finland 5.3 million and Estonia 1.4 million which puts the perspective of size advantage in perspective.

Germany, the EU’s largest economy, projected deficit stands at -3.7%, an improvement on their 2010 outturn of -4.3%. The average for all EU countries is -5.1%.

The 2011 projection for the UK was -8.1% but the Chancellor’s Autumn Statement projects the Treaty deficit at -9.5%.

The projection for UK gross debt as a percentage of GDP stands at 83% against the EU27 average of 63.7%. George Osborne thinks the outturn will be 76.5% but on a rising curve as reported above.

Giving the Chancellor the benefit of the doubt with gross debt at 76.5% of GDP, the UK, the second largest economy in the EU, would be the 8th most indebted nation of all 27 members.

Scotland will start from conditions it will inherit from the UK.  Those figures stand comparison with other EU nations.  Dr Armstrong’s calculations of a 4% budget deficit and debt of around 70% of GDP do not look insurmountable.

Scottish Government competence, as supported by the electorate, suggests that our potential is to rank much higher in the European league tables than is the case with the UK’s current poor ratings.

Dr Armstrong suggested that Scotland could not rely on getting the same low interest rates on its debt as the UK.  Truth is nobody knows for certain but Scotland’s assets and as the highest performing national/regional economy in the UK after London and the South East suggest that AAA rating does not look elusive.

Dr Angus Armstrong was Head of Macroeconomic Analysis at HM Treasury from mid 2004 until he joined the National Institute of Economic and Social Research as Director of Macroeconomic Research in September 2011.

 

References

Armstrong, A., Scotland’s Currency and Fiscal Choices in National Institute Economic Review No 219 January 2012 ppF4-F9

Autumn Statement, November 2011, HM Treasury, The Stationary Office

Eurostat, Government finance statistics Summary tables — 2/2011

Data 1996 – 2010

Kirkby,S. and Whitworth, R., Prospects for the UK economy in National Institute Economic Review No 218 October 2011 pp54-76

NIER The UK economy in Economic Overview, National Institute Economic Review No 219 January 2012

ONS (2011) Statistical Bulletin Government deficit and debt under the Maastricht Treaty