Breaking up the UK – everyone’s a loser

The rest of the world thinks we are mad, as well they might. Viewed from outside the UK, the minor differences which separate the Scots from the rest of us don’t look like that big a deal. Why would you want to break up a prestigious well functioning state with a good credit rating on a whim?

New York Times economist Paul Krugman has written several posts in the last week, starting with Scots, What the Heck? and the most recent Maastricht in a Kilt

It would be one thing to make the sober case that independence is worth it despite the economic costs and risks; but the SNP has been claiming that there are no costs and risks, which is just wrong.

He links to a strong post from Simon Wren-Lewis which accuses the SNP of “Fooling yourselves and deceiving others.”

Scotland’s fiscal position would be worse as a result of leaving the UK for two main reasons. First, demographic trends are less favourable. Second, revenues from the North Sea are expected to decline. This tells us that under current policies Scotland would be getting an increasingly good deal out of being part of the UK.

He goes on:

Is this a knock down argument in favour of voting No. Of course not: there is nothing wrong in making a short term economic sacrifice for the hope of longer term benefits or for political goals. But that is not the SNP’s case, and it is not what they are telling the Scottish people. Is this deception deliberate? I suspect it is more the delusions of people who want something so much they cast aside all doubts and problems.

And concludes:

I have no political skin in this game: a certain affection for the concept of the union, but nothing strong enough to make me even tempted to distort my macroeconomics in its favour. If Scotland wants to make a short term economic sacrifice in the hope of longer term gains and political freedom that is their choice. But they should make that choice knowing what it is, and not be deceived into believing that these costs do not exist.

He’s right about the costs to Scotland but I’m not sure he’s right about not having skin in the game. I reckon we’ve all got skin in the game. Those of us in the rest of the UK certainly have but so have people in other countries. None of them want to see a weakened economic and military partner. The UK, for all its faults, is one of the countries that helps to bring stability to the world. That’s why so many foreign governments are getting worried about the prospect of a Yes vote.

Alex Salmond is, no doubt, glad that the SNP’s original plan to hold the referendum in 2010 did not come to pass. A vote so soon after the financial crisis would have been held in an atmosphere of gloom when people were less inclined to take risks. But things are looking better now, as economies around the world have started to grow again. The danger seems to have passed.

Look a bit more closely, though, and it hasn’t. We are still in the post-2008 crisis. It is becoming clear that this recovery is like no other post recession period we have ever seen. The usual rebound, with a couple of 4 percent growth years to make up for lost time, doesn’t look likely to happen. The OBR is forecasting real annual GDP growth rates of around 2.5 percent for the rest of this decade. We called that sort of growth a slowdown in 2002. Now we’re calling it a recovery.

Some may blame the Tories for this and say that it strengthens the case for independence. But putting all the blame for the slow recovery on the Coalition is as silly as putting all the blame for the rise in debt on Labour. To an extent, the same problem is facing most developed economies and certainly all of the major ones. We look with envy at America’s growth rate yet even this is weak by the standards of previous recoveries. US growth is slowing down and the Eurozone’s has stalled. Even the Swiss are in trouble.

Yesterday, the OECD cut its global growth forecasts. As the FT reported:

Fears of disruption following a Scottish vote for independence and intensifying conflicts in the Middle East and Ukraine have damaged prospects for the world economy, the Organisation for Economic Co-operation and Development said on Monday.

In an update to economic forecasts published in May, it said the outlook had darkened for 2014 and 2015 for almost all the world’s large economies, partly as a result of one-off hits to growth early this year and partly stemming from geopolitical risks.

This is not like the post-recession booms we had in the last half of the twentieth century. This century’s version is built on shakier foundations. Last week, Larry Summers repeated his secular stagnation warning (see previous post). America, he argued, is now in a period of much lower economic growth and radical government action will be needed, just to keep it at around 2 percent over the next decade.

If that’s true for the US, something similar is probably true in Europe, where what Summers called “the brutal demographics of an ageing population” are that much worse. As this chart from the Resolution Foundation shows, it looks unlikely that the UK will get back to trend growth, as we did in previous recessions. Or, to put it another way, trend growth is now well below the postwar 2.6 percent.

Screen Shot 2014-04-07 at 10.32.57

You could probably draw a similar chart for most developed economies. It is probable that most have experienced a permanent loss of GDP. All of us are now in a period of much lower economic growth than we have been used to. Quite how much lower is anybody’s guess, though hopefully it won’t be as low as some people think. What we are seeing now, though, may be as good as this recovery is going to get.

Since the Second World War, we have built a whole society on the assumption that growth would continue at somewhere between 2.5 – 3 percent. All our assumptions about living standards, what the state should provide and how much better off the next generation will be than the last may turn out to be wrong. Those of us who assumed the postwar world would go on forever are in for a shock.

It’s a sign of just how fragile the global recovery is that the OECD has cited the Scottish referendum as one of the factors behind the slowdown. Warning that it “would take many years to unlink ties between Scotland and the rest of the UK”, the OECD described Scottish independence as a “geopolitical risk”. This not just an issue for Scotland or the UK. A lot of other countries have skin in the game too.

All developed economies are facing at least a decade of weak growth, ageing populations and relatively high debt. Despite all the politicians’ bluster, most will have to run deficits at some point. As this paper from NIESR yesterday reiterated, the borrowing costs of both Scotland and the rest of the UK would almost certainly go up after independence, whichever way the existing national debt is allocated. That means all of us paying more taxes to fund debt repayments. I can’t see how that is good for anyone except the lenders.

I haven’t the space to go into the military implications or the impact on public services but both would be complex and damaging. From whatever angle you look at it, Scottish independence leaves the entire country worse off. We are all in the same leaky boat. The idea that some people can take their bit of the boat somewhere else and everything will be fine is a fantasy.

As they look back at the 21st century, historians will probably wonder why, when they should have been preparing for a period of slow growth, rapid ageing and debt hangover, the people of the UK decided instead to spend precious time and resources smashing up one of the most secure and propserous countries in the world. At a point when the global economic recovery is still so fragile, breaking up the Union is not good for Scotland, not good for the UK and not good for the rest of the world either. As the FT said last week, there must be a better way than this.

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5 Responses to Breaking up the UK – everyone’s a loser

  1. UKian says:

    Freedom isn’t free. There are obviously going to be some costs to Scotland, due to market uncertainty during the changeover and the cost of setting up new institutions.

    But as this article points out, Scotland isn’t unusual by European standards, it’s Britain that’s bizarre:

    “The context, usually, is political. Scotland has free education “because it’s different”. Scotland hasn’t privatised its NHS, “because it’s diff”erent”. It’s utter bunkum. The truth is that Scotland is, basically, a very normal Northern European country.

    Across Northern Europe, university education is either free (in Germany and the Nordic countries) or costs only a few hundred Euros (in the Netherlands and France, for example). Most of Europe has much lower levels of income inequality than the UK. Apart from the Benelux countries and Cyprus, all of Europe’s countries use more renewable energy than the UK, despite Britain having more potential than almost any of them.

    In most of Europe, in fact, in most of the world, the idea that significant portions of your economy would be publicly owned is quite standard. ”

    The position of Scotland is a bit like being shackled to a madman: worrying about the costs of a file to cut the manacles, the risk of cutting yourself, and whether he’s going to take a terrible revenge before you can get away. But all of those pale into insignificance beside the risks of spending your life chained to a maniac.

  2. “As they look back at the 21st century, historians will probably wonder why, when they should have been preparing for a period of slow growth, rapid ageing and debt hangover, the people of the UK decided instead to spend precious time and resources smashing up one of the most secure and prosperous countries in the world”

    Or historians will book back at the 21st century and look at the Scottish independence movement as prescient and far-sighted.

    The future has not occurred yet. By definition.. No one knows how it will turn out Even economists with the God-like insight and powers of foresight they abrogate to themselves.

  3. Correction: “arrogate”, not “abrogate”

  4. Adrian D says:

    “The UK, for all its faults, is one of the countries that helps to bring stability to the world. That’s why so many foreign governments are getting worried about the prospect of a Yes vote.”

    This is a huge and unsupported assertion that is immediately refuted by either of the interventions in Iraq or Libya – or our continued support for the beligerently theocratic Gulf regimes. I’d add to that the hosting of the bulk of the worlds tax-avoidance activities through London via the Crown Dependencies equally nullifies this (I’m afraid quite preposterous) statement.

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