How much more of a pounding can the SNPs economic plans take? A recent book from the Scottish Economic Society dissects them in detail. Of course currency tops the list. The independent experts who write here arent buying Mr Salmonds currency plan. But what is more striking is the analysis of Scotlands fiscal position–tax and spending–and how that is connected to currency questions. Tax-and-spend in a separate Scotland The independent experts in this book make all the same calculations as previous studies. The facts speak for themselves. Mainly because of our higher levels of public spending, an independent Scotland would start out in a weaker fiscal position than the UK as a whole. The deficit today is nearly £500 a head more for each member of the population. As oil revenues gradually decline, and the pressures of population ageing increase, that gap is likely to get bigger, not smaller. Pensions are an obvious spending pressure, and the numbers are carefully set out. Just to be able to afford the additional state old-age pensions needed because Scotlands population ages more than the UK’s, each working age Scot would have to pay over £100 more in tax. And thats before we get on to the health costs. Of course, as the economists acknowledge, you can choose to believe that independence would somehow make Scotland richer, and increase tax income. But, as they say, thats a ‘fairly optimistic assumption’. So an inevitable result of independence is what the economists tactfully call a ‘fiscal adjustment’, big increases in tax or big cuts to public spending. Estimates differ in detail, but it means tax cuts or spending increases of something like £1000 per head to get us to the same level as the UK as a whole. Within the UK, that adjustment doesnt have to be made because tax revenues are shared across the whole country. One thing is clear from this detailed work, independence doesnt end austerity. Quite the opposite: it means more austerity, and for longer. Taxing, spending, and running a currency One of the interesting things in the book is how the currency options for a small country relate to its debt and its deficit. In the absence of a Sterling currency union, Scotland might try to use the pound without one, or might have its own currency. The analysis of using the pound but not being in a currency union is sobering. Scotland would have to build up large cash reserves, simply to have enough money in the economy to keep the wheels turning. We could only do that if our government ran a consistent surplus year after year, rather than a deficit. The same applies if we have our own currency and try to match it to the pound, to make trade easier. We would have to build up huge reserves so that if there was ever any challenge to the exchange rate the government, or its currency board, can stabilise the markets. So here again Scotland would have to be increasing taxes and cutting spending so as to have money in the bank. Does this mean independence is economically impossible? The lesson you can take is from other small independent countries. To be economically successful they all run what these economists would call tight fiscal policies, that is to say the government cuts spending and increases taxes to have a surplus. Possible maybe, but certainly not whats on offer from the SNP. Getting from here to there would be very painful indeed, and inevitably its the less well-off who would bear the brunt of a change that could take decades. Read more here: bettertogether.net/blog/entry/how-much-more-of-a-pounding-can-the-snps-economic-plans-take
Posted on: Sun, 17 Aug 2014 18:25:00 +0000
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