The then 32 counties of Ireland had a GDP of $11,891 in 1913 (in 1990 Geary Khamis Dollars). It took till 1960 for the 26 counties of the Republic of Ireland to overtake that level.
Of course since then, despite a hiccup in the past 10 years because of the Irish property crisis, the Republic has turned into one of the world’s economic success stories. But even in the 1960s few in the Republic would have reacted to the weak post-independence economic growth as a reason for regretting independence.
So any discussion of Scotland’s economics and independence should take into account the fact that the economy, while important, should surely not be decisive in deciding whether the country should be independent.
However, it is worth understanding the latest economic and financial facts. First, growth in the Scottish economy has slowed virtually to a standstill. The latest data released last week showed that the Scottish on-shore economy had grown by 0.7% in the year to Q3 2016. The equivalent figure for the UK over the same period was 2.2%.There are three reasons for this. First the North Sea oil economy has been hit by the fall in oil prices in recent years. Despite a slight recovery in the past 12 months as the world economy picked up, most leading analysts (eg the BP Energy Outlook 2035) expect oil prices to stay low. The knock on effects of this on the onshore economy have hit Scotland, especially in the Aberdeen area. Second, there are some companies shifting staff away from Scotland for fear of the impact of independence. They may be wrong to do this but there is a fear that, especially in financial services, companies would lose business if they were not in the same regulatory zone as their customers. Third, there is a squeeze on public spending in Scotland taking place now. Four years ago according to the official GERS figures, public spending in Scotland as a share of GDP was lower than in the UK as a whole. In 2015/16 the share was 3.6 percentage points higher and in the past year the Scottish government has had to rein spending in.
Looking forward, with growth slowing in the UK generally and top tax allowances in Scotland now lower than in the rest of the UK, it seems likely that growth in Scotland this year will be close to zero and around 1% in 2018.
Meanwhile, the last published official data for the Scottish fiscal deficit show a deficit of 9.5% of GDP for 2015/16. Our forecasts suggest that this will remain above 9% for the next three years despite cuts in spending and tax increases. While the union persists this problem is manageable but with independence Scotland’s finances would come under close scrutiny. A credible plan to cut spending would probably buy up to three years of grace to get the deficit within shouting distance of zero. But the cuts required would be substantial – not far short of £20 billion after allowing for the negative multiplier effects.
There is another way, though that a post independence Scotland could sort out both its growth and tax problems. One trick would be to copy Ireland and make the country into a low tax centre, with low rates of income and corporate taxes. Obviously public spending would have to be constrained, at least initially, but small economies can benefit substantially from low rates of tax on that attract in high earners and corporates. Another would be to allow the Scottish pound to devalue. Clearly it would be difficult to issue bonds in these circumstances so Scotland would have to negotiate loans to tide the economy over while it adjusted. But making Scotland a much lower cost business environment would attract business over time and help grow the Scottish economy.
I warned 15 years ago that Scotland was en route to becoming a ‘Third World’ economy. This was a prediction that I made in the hope that policies would change to prove my forecast wrong. Today the concept of a ‘Third World economy’ is meaningless as previously poorer economies have caught up with those in the West. But if a post independence Scotland is to become an economic success, it will need to hold public spending down. In 2015 public spending in Ireland was 35.1% of GDP. The equivalent figure for Scotland was 43.7%. The gap between the two figures gives an indication of the magnitude of the change that Scotland would have to make to get on to a high growth low tax growth trend.
Douglas McWilliams, President
+44 7710 083 652