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A very useful study of the economics of the September decision
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.”