GERS day came and went last week with the usual headlines cut and pasted from previous years. Scots in hock to UK…Union Dividend…Black hole. Just fill in the blanks: £15bn deficit; £2000 per head; 8% of GDP. It’s become something of an annual ritual. Perhaps they should make it a national holiday. TWITS Day: too wee; too poor; too stupid.
Only this year, of all years, the General Expenditure and Revenue Scotland figures were turned on their head, thanks to Covid. Suddenly 8% doesn’t seem so ruinous now that the UK deficit is heading to 20% and Britain’s debt pile is over £2 trillion. Rishi Sunak is has borrowed nearly ten times the Scottish budget in six months. Curiously, the roof hasn’t fallen in
The whole debate over debt has radically altered as even Conservatives have abandoned the discredited logic of austerity. The “cost” of a budget deficit, crucially, depends on interest rates. As the UK government and the Bank of England keep telling us, interest rates are currently so low that financiers and banks are actually paying the government (after inflation) to take their money.
Suddenly, independence doesn’t seem such an expensive luxury. There are many issues and problems associated with Scottish independence since Brexit, but GERS isn’t one of them. The figures are anyway largely discredited. Whatever GERS measures it isn’t economic viability.
Scotland has labour productivity and employment levels comparable to England’s with a highly educated workforce, world class universities and a developed financial sector. It also has prodigious natural resources, both hydrocarbon and renewable, plus high-value food and drinks brands. Few countries would be a safer bet for foreign investors.
However, there is no disguising that independence would entail readjustment, hard choices, even a degree of sacrifice in the interest of reconstructing the underdeveloped Scottish economy. Just like Brexit in fact. No pain no gain. GERS is, if anything, an index of dependency: a measure of how Scotland has lost out being a backwater of the UK, not a country with the economic powers – tax, borrowing, debt – required to run a national economy.
But even then, as the tax expert Professor Richard Murphy has pointed out, it is absurd to claim, as GERS has in recent years, that Scotland with 8% of the UK population accounts for nearly 60% of the entire UK deficit. This just doesn’t make sense. GERS crudely measures the taxes raised narrowly in Scotland and assigns a great heap of spending from all over the UK – like defence – onto the spending numbers. It is an arbitrary carve up, which can be challenged under international accounting conventions. But let’s not bother with all that, because GERS is irrelevant for a much more important reason: pandemic economics.
The catastrophe that is coronavirus has demonstrated how malleable and transitory debt and deficit figures really are. GERS is based on the discredited Thatcherite logic of the household budget. “Spending what you can afford…balancing the budget…never a lender nor a borrower be”. These are out-dated fiscal homilies, which have no bearing on how economies actually work, which is through issuing debt.
You don’t have to be a devotee of Modern Monetary Theory (the idea that governments can raise debt indefinitely and spend as much as they wish) to see that balanced budgets are a recipe, not for economic strength and productivity, but often for economic stagnation and decline. John Maynard Keynes told us that much seventy years ago.
Now even Boris Johnson has made debt the centrepiece of UK financial policy, justifying prodigious borrowing on the basis of historically low interest rates. This is as near as we get to free money. The UK government can issue 30 year bonds locking in these evanescent interest rates, even making money out of being in debt. Central banks are now talking about negative interest rates.
Of course, there are limits to this. If a government really did spend like there was no tomorrow, and if this spending did not generate economic activity, there would be inflation – possibly hyper-inflation as in Zimbabwe. But for an advanced economy, under current world conditions, this is a remote risk.
So, even if Scotland had this 8% independence deficit, ex-Covid. The answer has to be: so what? Countries are coping with much larger deficits. This is not Scottish exceptionalism or romantic nationalism. There is every reason to suppose that Scotland would perform better as an independent country than as a remote region of the UK. Look at small countries across Europe, from Slovakia to Norway, in and out of the EU. The idea that Scotland is uniquely cursed is not just offensive, it is economically illiterate.
Debt is a bogus bogey man, always has been. But Covid has finally made this clear to everyone who looks at the national accounts. How could Boris Johnson be borrowing to invest when the UK deficit is heading into orbit and UK debt has just topped £2 trillion? The European Union was the last redoubt of austerity economics, which was used brutally to impoverish Greece. But even Brussels has abandoned the Maastricht Stability Pact limiting debt to 3% of GDP.
Actually, there is one final, final redoubt of austerity economics: the Scottish Labour Party. Having recently supported a leader, Jeremy Corbyn, who proposed the greatest borrowing and debt in economic history, it obediently applauds the scary logic of GERS every year – but only for Scottish viewers. If Labour wanted to make itself relevant again it would recognise that, in the real world, debt problems would largely vanish in the course of reconfiguring the UK after Scottish independence.
Labour could seize the political moment by calling for a new Union of equality. As this column has argued, the first act of an independent Scottish government would be to strike a new union with the rest of the UK to ensure economic continuity, free movement, common trading standards. Scotland is too wise to opt for autarky. In the process notional debts and deficits would be diminished as politics took over.
The UK will want to be on good terms with an independent Scotland, not least because of the disruption that will follow Brexit. When Ireland became independent its nominal debt of 80% of GDP was negotiated away. Similarly, in Scotland there would be debt trade offs – such as leasing Faslane for 20 years, or as a quid pro quo for accepting most rUK trading deals with other countries. Debt is malleable because it is essentially political.
The real lesson of GERS has always been this: there is no obvious way that Scotland can reverse its historic decline while remaining in the United Kingdom as it currently exists. This dependency culture can only get worse. Like unemployment benefit, Barnett bungs are no alternative to self-sustaining employment, to economic regeneration.
GERS cheerleaders haven’t realised that the window of opportunity here is relatively narrow. Ideally, Scotland needs to become independent while interest rates remain at historically low levels to smooth the path to autonomy. Perhaps GERS should really stand for: get out while the going is good.