on 6 May 2014
Gavin McCrone was for 20 years Chief Economic Adviser to Secretaries of State for Scotland. He is now Professor of Economics at Edinburgh University Business School. He writes, “This is not a book beholden to either the independence or the ‘Better Together’ campaigns; its purpose has been to set out the issues for both independence and a greater degree of devolution so that people can better understand what would be involved before voting.”
Scotland’s output per head has recently improved compared to Britain as a whole. Its public spending per head has been above the British average since at least the 1960s. The Scottish government’s figure is 14 per cent more in 2011-12 for identifiable spending only (that is, excluding defence, national debt interest and international services). Scotland’s revenues roughly equal its population share of Britain. All this produced a Scottish deficit of 5 per cent in 2011-12, which is unsustainable (even including a geographical share of North Sea revenues).
North Sea oil production peaked in 1999, gas in 2000: both are now at less than half their peaks. North Sea revenues were £6.5 billion in 2009-10, £8.8 billion in 2010-11, £11.3 billion in 2011-12, and £6.5 billion in 2012-13. The GDP from oil and gas includes profits going to foreign oil companies.
He notes, “Oil & Gas UK announced in April 2013 that production is expected to increase to some 2 billion barrels of oil equivalent compared with 1.5 billion in 2013. This follows a big increase in investment by the oil companies, notably BP in its Claire Ridge project, a major field that should be in production until 2050. Nevertheless, over the long term, the decline in output of both oil and gas is expected to continue at a gradual rate, despite these developments.” Norway’s gas output is down too.
On setting up an oil fund, McCrone writes, “while paying the North Sea revenues into such a fund would be very desirable, the government of an independent Scotland could not do without this revenue to finance its budget, so long as the balance between expenditure and revenue remained as it is now. Setting North Sea revenue aside for a special fund would therefore only mean that even more draconian steps would have to be taken to eliminate the budget deficit. … there would have to be big tax increases or public expenditure cuts on top of what the Coalition Government has already imposed. The Scottish economy would be pushed into an even worse recession and the level of unemployment would rise even further.”
On energy, McCrone comments, “If shale gas in the United States is having such a big effect in lowering costs for industry, especially for chemical manufacture, there is a real danger that competition will result in a loss of jobs in Europe. The plan to import shale gas to Grangemouth may save a plant that would otherwise have had an uncertain future, so why not develop the industry here on our own doorstep? … [fracking] could give Scotland a cheap source of energy that could greatly benefit consumers and improve the competitive position of industry in Scotland.”
On currency, he warns, “while the Chancellor’s intervention does not rule out some form of monetary union, it does make a formal, fully integrated union with the Bank of England continuing as central bank and lender of last resort for both countries extremely unlikely. … It has been suggested that the Scottish government might continue to use sterling on an informal basis, as Panama and Hong Kong use the US dollar. But to use sterling without a last resort to help Scottish banks if they get into difficulty and without any influence at all on monetary policies followed by the Bank of England, would be dangerous and much less satisfactory than at present as part of the UK union. … To join EMU in anything like present conditions, and so long as there was any danger that Scotland could not match the low inflation rates of other members, notably Germany, could be disastrous.”
So, in sum, “it seems virtually certain that Scotland would have to have its own currency, and monetary union would then involve that being pegged to sterling …”
McCrone warns, “had Scotland been an independent state in 2008, it would not have been able to cope with the losses incurred by its banks … there are grave dangers in having banks that have so clearly outgrown the size of the economy, as was evident in Iceland. … their problems would have overwhelmed the country’s finances, just as the insolvency of the Irish banks did in Ireland.”
On finance, he writes, “if having the bulk of their clients outside Scotland means that a business would do better in England, it will move. The implications are very large. The financial sector is of major importance to Scotland; it is a part of the economy that has grown enormously and is one of the country’s strengths.”
McCrone concludes of the Union, “Breaking this up would certainly involve costs in disengagement, with the potential for damage to some important industries, especially perhaps the financial sector.”
on 17 August 2014
I felt I needed to understand the issues more surrounding Scottish Independence before the referendum and so I downloaded this book. Gavin McCrone has written an excellent, thought-provoking book. He sets out both sides of the argument and it is clear when he expresses his own personal view. As the former Chief Economist in the Scottish Office, he has a depth of information and gives in an insight into how things have changed since the 1970's.
This book is not just about the referendum. He usefully highlights what could happen if there is not a vote in favour of independence. He explains the terms Devo-Max and Devo-Plus and what their implications for Scotland would be; for example - "Devo-Max offers the opportunity for greater independence in economic policy but would probably provoke major resistance from other parts of the UK....like indendepence, it would end the social pact with the rest of the UK. whereby there is a pooling of resources to achieve equality of social provision".
As much of the independence debate revolves around North Sea Oil, he discusses it in some depth. It is interesting to know that there is no clear accepted division of these oilfields with the different parts of the UK. He discusses the various possible solutions but recognises that in the end it will be down for negotiation.
He covers Scottish financial expenditure and possible future tax policy. He highlights that Scotland would have "serious difficulty in funding its above-average level of public expenditure" unless it gets sufficient share of the North Sea oil fields. He highlights that if "personal taxation was different from the rest of the UK, there would be a risk that some people would vote with their feet and move either to or from Scotland".
On the issue of currency, McClone usefully highlights the experience of the Czech Republic and Slovakia who wanted to intially at least to have a monetary union but which collapsed in less than six weeks.
He sets out the arguments about an independent Scotland's possible EU Membership. He includes both those who argue that it would be nigh on impossible for Scotland to join because of Spain and those such as Sir David Edward who argue that the it would be possible, given the Treaty of Lisbon
McClone does not just cover Scotland's independence debate. He also writes articulately about austerity, explaining why the analogy of why an individual spending more money than they earn is misleading. He covers European Union membership, highlighting the irony that "much of the irritation with the EU in Britain , stems from the rules for the single market, which has been supported by both mainstream UK political parties and the brainchild of a British EU Commissioner.
As a former insider, he writes about issues which are not known to the general public such as that Scotland receipts from CAP and for environmental projects is much lower than other countries "because the UK was anxious to restrain growth in the total EU budget". He writes passionately about the idea of setting up a sovereign fund similar to Norway; an idea he proposed in the 1970s and 80s but it was rejected by politicians at the time.
I found this book fascinating and I would highly recommend it for those wishing to understand more of the issues surrounding the independence debate. As a non-economist, I appreciated the way McClone explains the economic points in a clear, easy to understand way.
on 25 April 2014
This review is of the 2nd edition of the book, published in early 2014, but late enough to include mention of George Osborne’s intervention speech in Edinburgh.
During the past 6 months I have read a fair amount in the media and another book on the topic of the referendum on Scottish Independence (Arguing for Independence by Stephen Maxwell); in addition, I have thumbed through and read sections of the Scottish Government’s White Paper, ‘Scotland’s Future;’ which incidentally, you can obtain for free online or by writing in to request a hard copy from the Scottish government.
Unlike some books on the subject, McCrone claims to present an unbiased assessment of the pros and cons of Scottish Independence viewed through the lens of an economist. McCrone’s credentials for this task are excellent, since he spent a large part of his career as a civil servant in Whitehall briefing on economic issues concerning Scotland, followed by an academic career as a Professor of Economics at Glasgow University and more recently at Edinburgh University’s Business School.
Also, whatever McCrone’s personal politics, I should not pay too much heed to reviews that claim he is a mouthpiece for Westminster and/or Whitehall Conservative interests keen to push the Better Together Agenda. This certainly does not come out in his writings, either in this book or in other articles I have read by McCrone in the past few years on this issue. The conspiracy theory about the ‘secret’ McCrone report back in the 1970s does not hold water, since this was an internal government briefing paper (which are often confidential) and as he himself points out in this book, at the time he was acting as Chief Economic Advisor to the Scottish Office and was duty bound to keep it confidential. Furthermore, much of what was said in the report in 1974 was “. . . based on information mostly from public sources and at least one newspaper [The Observer] was making the same arguments.” pp129-130. It has since been placed in the public domain.
So what about the book? Essentially, it starts by setting out an assessment of the current economic state of Scotland and how we got to where we are today from an historical perspective, with particular emphasis upon various government policies during the past 50 years. It then proceeds to define the nature and key characteristics of further devolution through to full Independence facing Scotland at this time. For anyone unfamiliar with the economic and political history for this period as well as the options for devolution it provides a good overview. It also highlights how (as with much of Scotland’s history in its industrial past) that Scotland’s economic landscape has been moulded by the interaction of difference political economic policies of the right and left, which has both aided and hindered the region’s economic development depending upon the time period under consideration. In particular, the efforts to rebuild parts of Scotland’s industrial base in the 1960s and 1970s by the establishment of the relevant development agencies was virtually sabotaged by the shift towards monetarist policies and free market operations after the conservative victory at Westminster in 1979. As a result, much of the older heavy industry (as in other parts of the UK) was left to sink or swim. Most of it drowned. However, later in the book, McCrone points to the fact that whilst the continuation of this laissez-faire economic policy during the 1980s and first half of the 1990s destroyed much traditional industry, coupled with the ‘Big Bang’ of deregulation in financial services during the 1980s, it also led to the significant growth of Scotland’s financial services industry, which apparently now employs about 100,000 people. Sadly, due to reasons outlined later in the book and dealt with in great depth in other publications on the subject, the expanded financial services business of Scotland, particularly its two flagship companies of the Bank of Scotland and Royal Bank of Scotland for different reasons were right at the centre of the UK’s financial meltdown in 2008-2009. McCrone paints a balanced picture of such events, pulling no punches about executive hubris and poor government policies at the Treasury and Financial Regulator. It was this treatment of the facts that I liked in the book, since I did not feel I was reading a sanitised version of events.
Having laid the foundations of the history and concepts surrounding Scottish Devolution and Independence, McCrone then handles some key issues under the following topics:
Currency and Taxes – with the core debate surrounding the options for an independent Scotland in terms of its currency, monetary union and fiscal policies.
Scotland and Europe – explores the legal views expressed by both sides in suggesting Scotland would be able to have ‘special treatment’ in the event of becoming independent, given it has been a member of EU and its predecessor, the EEC for forty years within the UK. In contrast, the well-rehearsed views that Scotland would have to join the queue to apply for membership. What is clear from this chapter is that this is an unprecedented situation within the EU and legal opinions are divided. However, the Yes campaign’s bullish view is perhaps less secure than they claim, even when one sets aside the resistance by Jose Manuel Barroso in protesting at an easy path for Scotland.
The next chapter considers the question of whether an independent Scotland could have coped with the financial crisis and the failure of its two big indigenous banks, which of course were both bailed out by the UK government. Again, the chapter presents an interesting discussion of how the Bank of Scotland and Royal Bank of Scotland got into their mess in the first place and considers paths that might have placed Scotland in the kind of problems experienced by Ireland, but also reviews ways in which this might have been avoided. Of course, such ideas are speculative, but going forward, if Scotland were to gain independence, they do raise issues of policy that should be considered by a future Scottish government to minimise risks to the economy. Given the current and recent past scale of the financial services sector to Scotland’s economy, it is clearly not a trivial matter.
Scotland’s Energy Future follows and reviews the breakdown between carbon based fuels, nuclear and renewables for generating Scotland’s current surplus of energy needs. Again, anyone familiar with this topic is unlikely to learn anything new here, but for the novice, it is useful to see how the structure of Scotland’s energy generation has changed over the past decade towards renewables on a scale not matched in other parts of the UK. The chapter reviews the SNP’s intent to continue rapid deployment of renewable energy sources, whilst reducing coal fired energy in favour of gas. The surprise for some will be that despite the SNP’s clear policy to avoid investment in future nuclear power stations, nevertheless, currently, these produce 33% of output in 2011 for Scotland. A non-trivial amount, which has already had its decommissioning postponed at one of the two nuclear power stations. Again, this chapter highlights how future energy policy of an independent Scottish government following the SNP’s direction towards eventually achieving 100% renewable output is not only highly ambitious, but somewhat unlikely in the proposed time frame. Of course, this is not a reason not to pursue the policy, but the uncertainty surrounding substitute energy sources, such as those available through fracking have the potential to seriously impact relative costs of different energy sources going forward. The point made in this chapter is that uncertainties surrounding the relative cost and price of different energy sources makes it difficult to speak with much certainty about how things might turn out.
This leads into the chapter on the North Sea oil and gas supplies. Essentially, given McCrone’s close proximity to the energy management of the UK, once North Sea supplies started to come ashore in quantity, his view seems to be that it was seriously mismanaged by successive UK governments. Again, the chapter provides history and contemporary data. Key conclusions include the fact that one should not be under any illusion that North Sea oil is somehow going to pay for all of Scotland’s bills were it to gain independence and legal rights over 90% of the supply going forward. Furthermore, whilst everyone recognises that we have passed peak-oil and gas in the North Sea, nevertheless, it might well have a further 30 years to continue flowing in commercial quantities. However, in terms of the revenue contribution such flows would make to an independent Scottish exchequer, the volatility of the international markets for oil means that future income streams are really open to very wide speculative assessments. What seems clear is that the SNP’s forecasts appear far more optimistic than most others. McCrone makes the point that this lack of stability in the income stream and its subsequent impact upon budget expenditure plans by an independent Scottish government is probably one reason why the Yes parties want to remain in a sterling monetary union in order to enjoy benefits of access to government funding options in lean years. An independent currency such as the Scottish pound would be much more sensitive to market forces surrounding government bonds and costs of government borrowing (essentially due to a lack of sovereign credit track record as a new state), especially in the absence of a reserve fund along the lines of Norway. Despite the intention to build such a fund, McCrone points out that this cannot be done (as recognised by the SNP) whilst the budget deficit is too high, like at present.
Finally, the last two chapters prior to the concluding chapter look at the joint issues of Welfare and Inequality together with Pensions and Mortgages. Here, McCrone points to differences in ideology between Scotland’s traditional left of centre politics and support for the Welfare state, versus the Westminster view (apparently held by all three major parties, including New Labour) to embrace the concept of liberal capitalism and business. This is particularly pertinent when he reviews the problems of economic inequality in Scotland, which although not as bad as down south, nevertheless is real. The chapter on Pensions and Mortgages is largely a descriptive section followed by speculation upon how independence might affect the Pensions business in Scotland and the property market. Again, like so many of the issues which have gone before in this book, they are highly dependent upon the outcome for currency and monetary issues.
The final chapter draws the key ideas of the preceding chapters together.
As a reader, I should concur that McCrone’s overview is relatively impartial. Where he does express opinions, these are based upon logical arguments linked to the facts presented. It is therefore not a book that sells one view or the other.
Having read this book following my previous reading of other works on the subject it helped to tease out some more detail about certain economic issues than I might have recognised previously. However, at the same time I felt a sense of confirmation in my view that the economic issues surrounding Scotland’s prospect of independence remain too fluid to call. What I mean by this is that the book (like many other sources) presents historical and contemporary economic data which is fine and good, but by necessity it is then forced to speculate as to likely outcomes.
This for me is the key problem surrounding the plea by members of the voting public who I have witnessed on various television debates and investigative programmes surrounding the referendum, who ask for more certainty. Neither McCrone’s book, nor in my opinion any others are going to be able to provide that kind of certainty. The bottom line is that McCrone helps the reader identify some of the key economic issues in the debate, but he also highlights how complex and interconnected the range of economic issues are surrounding an independent Scotland compared to business as usual in the Union. Of course, political economic policy always has to deal with a complex range of competing interests and priorities and the outcome is largely a function of the policies chosen by the party in power and the actual developments in the economic environment which nobody can accurately forecast.
Given a Yes vote for Independence would have its impact felt for many generations of Scottish residents, too fine a focus upon the question of whether independence, greater devolution or business as usual will deliver a better or worse Scotland seems artificial and dishonest to me. The truth is nobody knows. Voters can weigh up the economic issues and this book can help identify many of their peaks, but the outcome will be determined by policies and environments that unfold over the coming decades. If one looks back at history and reviews the then existing government policies and plans for the future, most of them turned out to be wrong or were subsequently change to take account of shifting environments and surprises. The reality of the economic and political landscape is that whilst one can plan specific projects, such as whether to build more wind farms or nuclear power stations, it is a very different proposition to try and plan the likely outcome and impact of proposed macroeconomic policies and expect them to be right.
As McCrone’s book emphasises without certainty about the nature of a final currency and monetary structure, then in the event of a Yes vote wining, many of the other economic issues examined in his book are subject to considerable uncertainty. However, this is the political reality and anyone wanting to get a handle on some of the key economic issues at the centre of the Scottish referendum issue is likely to find something of interest here. Just don’t expect certain answers.
on 25 April 2014
This will be a momentous decision for Scotland and if the vote is 'yes', there will be no going back. I have a few friends of a nationalist persuasion and I am a bit surprised by their level of knowledge on some of the main issues that Scotland will need to address. They seem to be content to make their decision on the basis of emotion, slogans and cliches ('we're big enough to stand on our own two feet', 'no more Tory toffs in charge', 'outpouring of energy in a new Scotland', 'things couldn't get any worse'(oh no...?)), etc etc.
They should dip into McCrone's book. He is well qualified to speak on all of the main issues covered, including welfare policy, constitutional arrangements, energy policy and the revenue contribution from oil and gas production. If I can comment on a detail from one of the positive reviews above, I think he was chief economist at the Scottish Office/Executive for all or most of his career, not Whitehall. This only adds to the authority of his credentials.
This book is thorough and readable. Most important, he tries very hard to be impartial, though I guess that he may be mildly sceptical about independence and probably favours 'devo max'. But if so, it's not that obvious. In an ideal world this book would be compulsory reading for voters in the referendum.
I personally think there is a case for independence, but it's not the one made by the nationalists. Scotland probably should go its own way, but as the same reviewer above said, the country's prospects will be subject to great uncertainty. Scotland could be materially worse off as a result, but at least it would have its stand alone dignity and enhanced freedom of action. But the sixth richest country in the world? Unlikely.
There seem to be only two negative reviews in the list, both giving the book one star. Neither has any serious critique to offer. As usual from the nationalist side, it's a litany of name calling and verbal abuse. Such a parcel of rogues indeed......