The finances of an Independent Scotland.

HAMISH_MCTAVISH

As we all know Scotland has a significant budget deficit problem that is currently an impediment to independence.

The purpose of this thread is to discuss in broad terms what that deficit looks like and what potential solutions may exist - and also to look at the currency options for an indy Scotland.

The deficit.

According to GERS, the current Scottish budget deficit is around £15bn per year, or roughly 10% of GDP.

The key figures are:

- £68 billion - The amount Scotland spends and the UK spends on Scotland's behalf every year (this figures includes for example circa £3bn for a population share of the UK debt interest and another £3bn as a population share of defence)

- £53 billion - Total taxation revenues attributable to Scottish economic activity under current conditions - includes oil and gas revenue on a geographic share - includes all taxes on whisky production, all taxes raised on Scottish economic activity no matter where the head office is based or reports, etc.

- £15 billion - the deficit between those two figures

- £9 billion - the Scottish 'black hole' - the amount we're subsidised by Westminster out of that £15bn, (the remaining £6bn is our population share of the current Uk deficit)

- £6 billion - the deficit that Scotland would need to get down to if we kept our deficit % to the same level as rUK.

- £4.5 billion - the deficit Scotland would need to get down to in order to meet the rules to join the Euro (3% of GDP)

Now - you can argue all day long that an iScotland would have different figures to a Scotland as part of the UK and you'd be right to do so... Quite obviously an iScotland would have different economic levers to pull and different challenges to face - but like it or not GERS is a pretty accurate starting point if Indy happened tomorrow and if Scottish independence is to happen a credible solution to the deficit and currency problems must be found.

And deficit denial is not a credible solution...

HAMISH_MCTAVISH

Currency

This is fairly straight forward as there are limited options.

1) Keep using the £ sterling within a formal currency union under a negotiated deal with rUK. BOE would remain as lender of last resort and regulator for Scottish monetary policy. Politically difficult - but probably not impossible - if for example a quid pro quo conversation were had around Trident basing rights.

2) Use the £ sterling anyway outwith a formal union - hugely undesirable and would lead to a mass exodus of banks and financial services companies

3) A new Scottish currency with our own central bank - fraught with difficulties - would be a weak currency highly vulnerable to speculative attack and without enough resources to back it up from a central bank perspective - not a great option but it is a possibility for a transitional arrangement.

4) Join the Euro - probably the best long term solution - but requires a transitional interim solution and large deficit reduction first to meet the joining criteria

The ideal solution for currency would be (1) as a negotiated transitional arrangement for a limited number of years followed by (4) as the long term solution.

HAMISH_MCTAVISH

Solutions

It's impossible to argue that an Indy Scotland would not experience a painful transitional period involving significant cuts to expenditure and increases in taxation.

The inevitable consequence of this would be a reduction in standards of living for Scottish people over the short to medium term - and very possibly over the long term as well.

However it's also equally impossible to argue that an Independent Scotland could not survive - and nobody credible has ever attempted to do so.

In the simplest of terms, what's required is pretty much as follows:

- A 15% reduction in government spending across the board - 15% cuts to benefits - 15% cuts to public sector salaries - 15% cuts to NHS budgets, and defence spending, and local authorities, etc.

OR

- A 15% increase in taxation revenue, so 20% income tax becomes 23% income tax, 40% income tax becomes 46% income tax, 20% VAT becomes 23% VAT, etc...

OR

- A combination of both to a smaller degree - half through tax increases and half through spending cuts, for example.

The scale of short term financial pain required would be significant - but probably not impossible to achieve so long as there were no exceptions, no protected areas, no ring-fenced political favourites.

Because as soon as you start doing that, exempting some groups from a moderate amount of financial pain, the level of financial pain required from the remaining groups becomes much larger and politically impossible to achieve.

There would of course also be some secondary effects that I've not discussed here - cuts to income/spending would result in a recession which would worsen the deficit in the short term, but you've converted a structural deficit to a cyclical deficit and it would go away again in due course as things recovered in the medium term.

There would also be a material opportunity to take economic activity away from a Brexiting England and move it to an iScotland that was a member of the EU or EEA - and this should not be understated in scope - but again I've left it out for now.

So.... discuss.

How should Scotland adjust it's finances to make independence possible?

What would you do?

michaels

What 'expert' rubbish is this? Just as the people of the UK let their hearts rule their finances with Brexit and the Americans did with Trump, the people of Scotland should rise up, throw off the shackles of Westminster and march under a charismatic leader to the high ground of nationalism (as a vaguely autonomous region within the EU superstate).

The rUK will be happy with the 9bn a year saved along with the extra tax revenue as high earners head south to avoid the crippling tax rises.

Freedom!

HAMISH_MCTAVISH

michaels wrote: »

What 'expert' rubbish is this? Just as the people of the UK let their hearts rule their finances with Brexit and the Americans did with Trump, the people of Scotland should rise up, throw of the shackles of Westminster and march under a charismatic leader to the high ground of nationalism.

Hmmm.

I think I'd prefer...

michaels wrote: »

Cool heads and compromise.

But of course we don't seem to be getting that at the moment from Westminster...

mrginge

HAMISH_MCTAVISH wrote: »

So.... discuss.

How should Scotland adjust it's finances to make independence possible?

What would you do?

It's a tough sell hamish.

Currency option 1 doesn't look anywhere near 'independence' to me. Being run by the BoE - who won't actually give a monkeys about the state of the wider Scottish economy ?

If it's a transitional option before going to the Euro, then how long? What's the plan after that if the euro isn't an option?

Deficit reduction options look horrendous. You can't even write it off as osbourne-esque spin, because the facts of the Scottish economy are plain to see. Only a long-term restructure of the economy away from oil is going to make a dent in those numbers. Can't be done in the SNP's Indy timescale.

Then you look at options to extend the Scottish economy through transferring business. But how?
The only way that works is if Scotland has SM access and rUK doesn't.
The real outcomes are either that the opposite will be the case, or both Scotland and rUK will have access, at least in the short/medium term
We already know that the SNP aren't getting involved in a race to a tax haven, so what's the alternative?

It all looks heavily reliant on other parties to me. Lets call it non-independence.

Everyone, you included knows that there was no economic case in 2014 and there's even less now.

TrickyTree83

Appreciate you've been open and honest, kudos for that.

But I'd just like to point out it's not a 15% cut across the board that will achieve the deficit reduction.

Scotland's spending will increase as a result of independence. The 92% of assets that'll need to be purchased will not likely be offset by the 8% of what you own across the rest of the UK, plus setting up new governmental departments and attributing them budgets, then the border effect which is calculated at -5.5% of Scottish GDP and then the loss of jobs and a high tax economy forcing talent, business and people away. There is no easy answer to the £15bn deficit short of being the next Greece.

In effect advocates of independence for Scotland should be under no illusion that they are advocates for a Greek fiscal flogging. Consigning themselves and future generations to a similar fate. I don't think anyone believes there are magic levers that will correct such a situation. Which is why having a 2nd (and probably final for a generation) bite at the cherry now is a mistake, and one that's most likely to fail.

ProDave

Well done Hamish, a very good description of the situation.

I await independence supporters now offering a credible solution to the challenges that would be faced. Post #4 is more typical of the usual response which is along the lines of "how dare you tell us we can't do it" unfortunately.

GreatApe

Needs an independent currency so it can devalue some 33% wrt the pound.

That way oil and its other exports will be worth 50% more in Scottish pounds and the budget will balance.

It will also lock in those pesky traitor Scots that might be thinking of moving south. With their assets and savings worth 2/3rds if what they were the idea of selling up to head south will be that much harder.

Assuming some sort if free trade deal with the English the weaker scot pound should mean more businesses vase in Scotland and existing Ines export more south and import less from the south.

Basically the Scots will need to work more abd produce more and perhaps consume less. I don't think they will mind too much people generally don't complain about workog too much

But this needs an independent currency to devalue without it if they stick with the English pound or the euro its trying to do the above with Greece style deflation which would be horrific

Shakethedisease

Yes it's likely to be a new currency. There's been lots of kite flying lately and SNP MP's etc openly tweeting articles like this one a few days ago. Until the Growth Commission publishes it's report in a few months time though, it's impossible to say what their overall recommendations.. and therefore the likely options the SNP will put forward... will be re a second vote.

Plan for a new Scottish pound 'likely' to be recommended by SNP Growth Commission, insider says

AN in-depth plan is being drawn up for an independent Scotland to have its own currency after a recognition the case for continuing to use sterling was a flaw in the Yes argument in 2014.
Detailed work on a new monetary policy is being carried out by specialist experts within a commission established by Nicola Sturgeon to look at economic issues ahead of the prospect of a second referendum.
Professor Andrew Hughes Hallett, a former consultant to the World Bank and International Monetary Fund, is in charge of the policy work which will be presented later this year to the SNP leader.

“It includes not just looking at the issue narrowly in terms of a currency but at the whole architecture required to make sure that whatever the circumstances are an independent Scotland is properly placed to be in much stronger control.”

He added: “The idea is to get way beyond where the debate was before – do we still use the pound or adopt our own currency – and come up with detailed analysis and proposals.
“So not only do we have a strong case for whatever option is put forward but it is backed by the proper infrastructure so the case is entirely secure and that the Scottish Government can put it forward.”

http://www.thenational.scot/politics/15054500.Plan_for_a_new_Scottish_pound__likely__to_be_recommended_by_SNP_Growth_Commission__insider_says/?ref=ar

TrickyTree83

GreatApe wrote: »

Needs an independent currency so it can devalue some 33% wrt the pound.

That way oil and its other exports will be worth 50% more in Scottish pounds and the budget will balance.

It will also lock in those pesky traitor Scots that might be thinking of moving south. With their assets and savings worth 2/3rds if what they were the idea of selling up to head south will be that much harder.

Assuming some sort if free trade deal with the English the weaker scot pound should mean more businesses vase in Scotland and existing Ines export more south and import less from the south.

Basically the Scots will need to work more abd produce more and perhaps consume less. I don't think they will mind too much people generally don't complain about workog too much

But this needs an independent currency to devalue without it if they stick with the English pound or the euro its trying to do the above with Greece style deflation which would be horrific

In other words lower standards of living and lower quality/breadth of services.

Anything Scotland doesn't produce itself will go up in cost.

I keep saying there's no magic lever/easy answer. There isn't.

Independence is quite simply not the answer, and I don't know why some people keep trying to tell everyone that it is.