The Scottish Government has no levers – just knobs

The Scottish Government has no levers – just knobs

by Eben Wilson
article from Tuesday 1, September, 2020

THE ANNUAL PANTOMIME over the GERS report has produced its usual storm of conflicting statistical commentary. I won’t add to that fruitless numbers game, but right-minded folk do need to question the claims that more “control over fiscal powers” and the “economic levers” of the Scottish economy would allow the SNP to create a sustainable Scotland. 

Political economists are taught that when someone puts an active verb against a policy proposal as in “Scotland would have the power to make different choices” we should question the interests and incentives of the proposers. Countries do not make choices, people do – and among those people, politicians who buy votes through public spending.  

At the root of my disquiet is the presumption across everything the SNP offers that it is those politicians and not ordinary people who will use any new powers. Their entire focus for the use of government power is to extend the reach of a giant Department of Public Sector Spending; on the basis that it is the central state that creates Scottish wealth and progress by pulling levers, and that the same central state will dispose of any GERS deficit using those levers.  

Let me explain why this is arrant nonsense. 

For me, the strength and character of an economy is to be found in its Gross Value Added statistics (a good review is here) but the figures therein are largely taken from the UK ONS data and adjusted. 

These reports offer a breakdown of where the added value of all our efforts as a people arises, pulling us out of subsistence and allowing our modern lifestyles. We should be more interested in the separate productive and public sector and income-generating activity trends than any overall figure which always has to combine improvements and deteriorations and so becomes, in my view, false.   

Do these tell us anything unusual about Scotland? Does our nation have any particular value-adding talent that would bolster any claim of Scottish exceptionalism?   

Actually, no. 

Scotland has specific talents in manufacturing engineering and life sciences, and we are blessed with an Edinburgh-based financial and insurance community, but the reality is that like every other Western democracy our manufacturing has declined, services have increased and a lot of our economic activity is in housing and retail. In this, we are remarkably like the UK as a whole, although our growth has lagged since 2014, probably because we do not have London to boost our figures; the North of England is the laggard within the UK. None of this is surprising if you consider the depth of integration within the UK in its internal trading market. 

What effect then could control of Scotland’s economic levers have that would improve the general wealth of the Scottish people?  

Generally; manufacturing cannot be subsidised under present EU rules; life sciences are growing as a sector with innovation emerging at an unknowable rate through public funded global initiatives in our universities; Edinburgh’s financiers are, again, globally, not locally, focussed and will grow in Asia rather than Scotland for now; housing, retail and hospitality are cyclical, affected by the success of the other capital intensive sectors in creating incomes and at the mercy of tax policy on rates, personal incomes and VAT.  

As the Fraser of Allander Institute has pointed out, it is very difficult to move growth rates upwards. That outcome arises because of the very large number of small scale decisions made across the economy that adjust productivity and prices. Followers of the economist F A Hayek call this a discovery process within the extended order that creates spontaneous change. It cannot be anticipated. This is Adam Smith’s unanticipated benefit of self-interest put in a wider more modern context.  It also has an important impact on the outcomes of good or bad policy choices.  

If we take the secessionists’ claim that an independent Scotland could start with near zero debt, full fiscal autonomy and a separate currency; what should our expectation be of policy choices made by Kate Forbes? Where are her levers?  

The reality is that she is severely constrained; once you remove or replace the state pension scheme, health and other annually managed expenditures such as social protection there really is very little room for manoeuvre. For example, if innovation is thought to be a useful “lever” to obtain growth, we are talking about less than 1% of the budget, a spend that is largely absorbed into our universities, has no measurable output data – and is dwarfed by inward investment by private companies from outside Scotland.  

Attach to that the historic record of the SNP in being unable to control spending well, in raising taxes (that more often than not result in lower revenues than predicted) and the incentive to buy votes across diverse constituencies of Scottish interests to stay in power – and there is a recipe for severe financial failure. I doubt Scottish Government bonds would be easy to place in financial markets, especially if there is any claim to have discovered some new form of unique Scottish socialism offering free lunches using modern monetary theory that creates a lot of new debt.   

We should therefore beware the charade that “control over economic levers” can plausibly offer a path to higher growth in Scotland. As the late Tam Dalyell put it, “this is about power, not for any particular purpose, but simply to have that power and retain it for as long as possible”. 

We know that for 25 per cent of Scotland’s populace that behaviour would be enough, the economics do not matter to them; nativism and Scottish exceptionalism rules OK in their small world. However, if the likelihood that productive policy choices would emerge from independence under the SNP is small, there is then, it seems, a need to persuade the next 25 per cent and more to retain the Union.  

Many say that any second Yes/No will not be decided on economics. I am not so sure; Unionists can grind on about the societal value of a united Britain, but Britishness is a diffuse idea that would in my view sustain independence, albeit with a change of emphasis in social allegiances.  

Perhaps there is a crack here in a blind obeisance to the emotional appeal to Scottishness and autonomy offered by the Nationalists. And this is about our incomes and wealth.  

Brexit has happened, we are no longer in the EU. If Scotland were to re-enter the EU polity, are we really saying that people would accept a hard border – with customs checks for goods and people –  between Berwick and Gretna? Would they reject the effect on jobs, trade, travel and national presence that such a colossal event would have?  The status quo of the UK union could be its most powerful argument; if claims about the need for “economic levers” can be seen to be the chimera that they are.  

An honours graduate in economics from the University of St Andrews, Eben Wilson has had three careers; initially in journalism and broadcasting (including Milton Friedman’s TV series “Free to Choose”), economics (as an associate Scholar of the ASI) and now business (founding various companies). 

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