Read Iain in the Herald and Sunday Herald.
Shortly before the 2014 referendum, I was asked what I thought Scotland might look like in the long term if it didn’t seize the opportunity of independence in Europe. I replied that it might resemble a tartan theme park with a shrinking population largely composed of pensioners eking out a marginal living in a post-industrial tourism economy. I hate to sound negative, but I fear that future may be upon us sooner than anyone expected.
Unionists used to say that Scotland dodged a bullet by voting No to independence in 2014 just as the oil price collapse got underway in earnest. Unfortunately, the Brexit bullet has hit Scotland in the vitals. The Scottish economy shrank in the last three months of last year and it looks like a recession cannot be avoided.
Conservative politicians have argued that the First Minister’s talk of an independence referendum is to blame for this economic downturn, but that’s rather like blaming the ambulance for causing alarm when it turns up at a road accident. Short of independence, there’s very little Nicola Sturgeon can actually do to turn this situation round and the impact won’t just be in jobs.
Brexit is turning into Project Fear on steroids. Standard Life, the financial behemoth that infamously threatened to leave if Scotland became independent in 2014, is now looking at moving its European hub to Dublin because it can no longer do the business based in the UK. The irony could not be greater. A company that shunned the prospect of an independent Scotland in Europe is talking about relocating to an independent Ireland to secure access to the European Single Market. Where it goes, many of our footloose financial services companies may follow.
Inward investors from Japan and America will also be looking twice at Scotland in future. The days when we were a beachhead for gaining access to Europe are gone, like Silicon Glen. The Fraser of Allander Institute calculate that Scotland faces the loss of 80,000 jobs as a direct result of the UK being locked out of the European Single Market (ESM). That’s why Nicola Sturgeon has been desperately trying to keep Scotland in the ESM.
It’s not all Brexit, of course. The Scottish economy was anyway in dire straights because of falling oil prices. Some 120,000 oil-related jobs have disappeared since 2014, which is an unprecedented shock. For decades, the Scottish economy has been far too dependent on this depleting fossil fuel. Big infrastructure projects like the Forth Crossing have now been completed, adding to the slump in construction .
In England, it is services and consumer debt that have kept the economy shy of recession, but Scots can’t borrow against their houses in the same way because house prices are lower here than in the south of England. In some central London postcodes, average house prices are now £1.5 million. There are only around 10,000 houses in the whole of Scotland worth that much. The colossal wealth tied up in London property is one of the great destabilising factors in the UK economy.
Last week, the Scottish Government acquired the dubious responsibility of raising all income tax in Scotland, just at the moment the tax base is shrinking. This means it will be harder to mitigate cuts in benefits and reverse things like the phasing out of tax credits. It is bad news for public services too. This is the trap people warned about when the Scottish Government accepted the Fiscal Framework in the 2016 Scotland Act. Income tax rates and bands are devolved but not National Insurance, wealth taxes, corporate taxes, VAT or excise duties.
The dawning macro-economic problems are mainly to do with the curbs on immigration, current and future, and the belated realisation that the UK is actually leaving the European single market. Scotland needs 24,000 mainly skilled migrants a year and they simply aren’t coming here any more. This has hit sectors like health and education especially hard as the Markit recruitment report confirmed last week.
Scotland’s world-class universities are being slowly throttled as international students have stopped coming and leading academics shun a UK that denies the most basic guarantees of security for EU nationals. Ironically, the biggest drop-off is among students from non-EU countries like India, who are now favouring more welcoming countries such as Australia and Canada.
The skills drought is fatal to a knowledge economy like Scotland’s, which depends on getting the right people to fill the right jobs at the right time. It will also hit the NHS as much of its recruitment in recent years has been from Europe and India. At the same time, many highly qualified Scots are being lured to the southeast of England, location of 80 per cent of the jobs created since the financial crash. The companies they used to work for are being lured abroad to retain access to the European Single Market. It’s the double whammy that Better Together forecast would be the result of a Yes vote in the 2014 referendum.
Then there’s the disproportionate impact of austerity cuts. Scotland has traditionally had a higher level of public sector workers and this is being winnowed by the UK Government’s austerity programme. The Scottish economy will contract further as the UK Government’s £12bn programme of welfare cuts works through to 2020. Working-age benefits are frozen and benefits for people with disabilities are being reduced or eliminated.
The Scottish Government has pledged to reverse many of these cuts, like the bedroom tax, but it is going to have to do it with squeezed tax revenues. There is a real danger that the Scottish Welfare Minister, Jeane Freeman, will find herself under pressure to halt the scrapping of tax credits for families with three or more children (unless, shockingly, they can somehow prove they have been raped) without the resources to do so. The Scottish Government has marginally increased taxes on those earning around £45,000 relative to England, but that will only yield around £60m a year.
The next few years will test devolution to the max. The Scottish Government lacks the broader borrowing and taxation powers that might alter the impact of Brexit, while building expectations that it can create a more humane welfare system. Nicola Sturgeon has ruled out increasing top rates of income tax on the grounds that it would discourage business and might reduce the overall tax take. Tories will argue that the logic of this is that taxes should be cut to attract more high earners.