Suddenly, London has woken up to the prospect of a Yes vote in the Scottish referendum. Its two centres, the City and Westminster, are both in a panic. Even opinion poll guru Anthony Wells, who, until last week, was convinced the No camp would win, is now not so sure.
There is a serious chance, then, that we could be about to witness one of the most catastrophic acts of self-sabotage in our nation’s history.
This country faces some difficult challenges over the next decade or so. We are still reeling from a severe economic thumping during which one of our most profitable industries collapsed and from which the path to recovery still looks unclear. Whoever wins the election next year faces the difficult task of balancing fiscal deficit reduction with tax increases and spending cuts. Wages are stagnating, tax receipts are disappointing and the social security bill remains stubbornly high. Another £33bn a year, or possibly more, in extra borrowing or taxes has to be found just to prevent the cuts to public services from getting any worse. Even then, the NHS will start to run out of money by the end of the decade. Politicians avoid talking about this because the size of the problem is huge and they don’t want to scare the voters.
However, there seem to be some people in Scotland who think they can walk away from all this. One of my posts was quoted recently by a Yes campaigner as an argument for independence, the implication being that these problems would magically disappear if Scotland became independent.
It’s rubbish, of course. These are problems that face all developed economies. As Edward Hugh said in his wonderful Last Days of Pompeii post a couple of years ago, we have a generalised debt, demographics and growth crisis:
The point to get is that it isn’t simply the level of debt that is the problem, it is the level of debt in the context of the implicit liabilities (in terms of health and pensions) which such population ageing represents, and the reduced growth outlook that having declining and ageing populations represents.
Europe’s leaders are essentially in denial on the extent of this problem, and are putting all their eggs in the “structural reforms to raise trend growth” basket.
The next few decades will see an unprecedented ageing of populations and, in all likelihood, much lower rates of economic growth. We don’t know how low but it will almost certainly be lower than that which we got used to in the last half of the twentieth century. The financial crisis has made this worse, leaving all developed economies with much higher levels of public debt that they had anticipated.
In some form, most developed economies face the 2015 dilemma. The numbers are different but the combined pressures are the same.
Scotland’s position is particularly bad, as Tomas Hirst explained last week.
Public sector net borrowing, the amount the country has to borrow on top of what it raises in tax revenues, is projected to leap from around 4% in a decade to over 10% by the middle of the century. This would send public debt rocketing up to 200% of GDP.
That’s a larger hole than the one Greece is in.
As the IFS said, Scotland’s ageing problems are likely to be worse than the rest of the UK’s and its tax revenues weaker. Diminishing North Sea oil would not make up for that. As a result, Scotland would need an even greater level of austerity, or else it would rack up an even larger debt.
The IFS conclusion:
Our model suggests that public sector debt across the UK will decline from 2017–18 until the end of the 2030s. However, all but one of the scenarios we have presented for Scotland suggest that Scottish debt would rise as a share of national income every year, in the absence of further policy action. The fiscal pressures facing an independent Scotland would therefore be more immediately pressing than those facing the UK as a whole.
That’s calm, measured think-tank speak for ‘your economy will most likely be a basket case’.
But what if an independent Scotland were to simply walk away from its share of the national debt, as some in the Yes camp have suggested? Wouldn’t a debt-free country be in a better position? The general consensus of opinion (and we don’t really know because no-one has tried this recently) is that such a move would be seen as a default and lead to Scotland facing much higher borrowing costs. A country running a deficit with high interest rates doesn’t take long to build up a significant public debt, even from a standing start.
As Tomas says, Scotland has similar structural problems to the wider UK, only worse, so it could end up needing to implement more severe austerity measures than the rest of the country. Far from turning its back on the 2015 dilemma, Scotland could end up with one that is even worse.
What’s this got to do with the rest of us? Wouldn’t it just be a problem for Scotland?
We should be so lucky. The UK’s recovery is very fragile for a number of reasons. The Eurozone’s recovery has ground to a halt. The US economy looks stronger but even there, things look a little shaky. Last week, Goldman Sachs warned of severe consequences for the UK as a whole in the event of a Yes vote. Already, Sterling and share prices are taking a hammering.
It’s worse still, though, because untangling our 300-year-old state is likely to take up much of the next parliament’s business. The SNP’s March 2016 target date has been called risible and preposterous, not by politicians but by academics and former civil servants. The best analogy I have heard was from a senior Scottish soldier interviewed on Radio 4. “You can’t unscramble a scrambled egg,” he said. And he was just talking about the military aspects.
It will be just as much of a headache for businesses. A friend of mine who works for a financial services company reckons that all the money they have earmarked for investment over the next 3 years will have to be diverted into re-organising their company to operate in two different countries, one inside and one outside the EU (maybe) and with two different currencies (maybe). It’s no wonder shares in Lloyds and RBS have taken a hit. Remember, these are banks in which the state owns a substantial share. In one sense, then, you’ve already taken a hit from a potential Yes vote.
Financial markets don’t like instability. The amount it costs governments to borrow has as much to do with political stability as its levels of debt. One of the reasons the UK has such low borrowing costs is because it is a long-established state. It’s the dividend we get for a relatively high level of political and social cohesion. And it seems we are just about to piss that all away. Borrowing costs are already edging up. Not by much but it’s a sign of what’s to come.
The most important task for any government during the rest of this decade is to come up with a plan for dealing with the considerable challenges we face. What will be the consequences of an ageing population? What can be done about wage stagnation? How will we manage increasing public service demands when there is less cash available to spend on them. What will be the implications of a much lower growth rate than the one we got used to during the last half of the twentieth century?
At least, those ought to be the priorities. Instead, though, most of the government’s time and energy will be spent trying to unscramble the egg. That will take at least half of the next parliament, if not longer. As I, and others, keep saying, the task of the rest of this decade should be designing a state that is able to cope with the next one. Instead, it looks as though we will spend most of it dismantling the state, rather than redesigning it. That won’t solve the problem though. It will just put it off until a later date. By the time it’s all sorted out, the pressures on both the UK and the new Scottish state will be that much more severe. The 2015 dilemma will become the 2018 dilemma. And it will be that bit worse, for both countries.
This isn’t about England versus Scotland. It’s about how we will cope with the next few decades. A stable and united country has a far better chance of managing the challenge.
If Scotland does become an independent country, the problems we face won’t go away. They will just be split between two states instead of being shared by one. And they’ll be that bit worse for being left to fester for another few years. Scotland might have enjoyed a post-independence party but we’ll all have the hangover afterwards. When you consider what we are up against, splitting up our state is sheer folly and self-indulgence. In the face of the most severe economic challenges we have faced for generations, we are about to break up one of the world’s most stable and prosperous states. It’s absolute madness!