Wings Over Scotland’s Wee Blue Book has been distributed to voters from Yes Scotland stalls around the country. It’s also available online for people to read.
My friend Toby Fenwick, a bit of a geek on the numbers front, has written a line by line commentary of the WBB’s claims.
He has given me permission to publish it here. It is essential reading. Don’t cast your vote without checking it out.
Here are the first two chapters. Enjoy:
- Before I start, I want to make an important point: the Referendum is not about whether Scotland could be an independent country – it is clear that it could. Rather, the question Scots are being asked to answer is whether Scotland is better in the UK or alone. My views on the “Scotland’s Future” White Paper are here: http://centreforum.org/assets/pubs/scottish-independence.pdf but can be summed up Scotland will do better in a federal UK, and the UK will do better with Scotland in it.
- Finally, the WBB couches much of the argument in terms of economics and process. This is important but it is also sadly reductionist. The UK is about shared bonds, history and experiences, and this stuff matters, too.
Scotland in the UK. (Pages 1, 6-8)
- Starting at beginning. Pg 1 of Wee Blue Book would have you believe that Scotland is powerless in the UK. In actual fact, Scotland last decided the shape of the UK government in 2010. Without Scotland’s 59 MPs, David Cameron would have had a majority Conservative government. Because of Scotland and its 11 LibDems, there is a Coalition. And not only does the current government have 12 MPs from Scotland 36% of Scots voted for it.
- Back to WWII, Scotland determined the UK’s government in 1964 and in both 1974 elections. In fact, Scotland tends to vote for the winning party, handing a majority of votes to the eventual UK winner in 1945, 1950, 1951, 1955, 1959 (Tories got most votes, Labour got most seats in Scotland) 1964, 1966, 1974a, 1974b, 1997, 2001 and 2005.
- And whilst England is 85% of the UK’s population, we know that parties operate across the UK – there isn’t a “Scottish MPs Caucus” anymore than there is an English one. And on the few occasions when votes do take place on “national” lines, the results aren’t great: the SNP are keen for people to forget that it was their vote of no confidence in 1979 that brought down the Callaghan Labour Government and ushered in Thatcherism.
- Beyond this, Scotland has always played a disproportionate part in the Union’s politics which is evident in elections but goes well beyond. The last 20 years have seen all of the major offices of State held by Scots, and British political history without Gordon Brown, Tony Blair, Robin Cook, Malcolm Rifkind Donald Dewar, John Smith and David Steel would’ve been radically different – and much poorer.
- By contrast, the SNP’s record in the unicameral Scottish Parliament has been one which has stymied attempts to hold the Executive to account, and has turned the Select Committees – at Westminster often headed by an opposition MP – into a cheer-squad for the Executive. It is noteworthy that neither the “Scotland’s Future” White Paper or the WBB outlines how this is to be addressed in an independent Scotland.
- Devolution is popular and has demonstrably worked. Indeed, most Scots probably didn’t realise before the campaign started how much power the Scottish Government (SG) already has: education, the whole of the NHS, transport, culture are all devolved already. Yet the SNP-led YES campaign’s scaremongering over English NHS privatisation (a complete nonsense at three levels: first, NHS has always been a mixed economy, eg GPs have always been private businesses; second, the issue is not how care is delivered but the funding levels which continue to rise; third, the SG could have used its tax powers to deliver more NHS care and did not) suggests that most Scots didn’t know that the very thing the SNP were complaining about was actually within their control.
- Moreover, devolution already is actually at least as powerful as Canadian provinces or Australian states. The next stage – of federalism – is also promised. Naturally the WBB doesn’t cover any of this.
- Q1 We’ve already seen Scottish MPs have been decisive, so this is demonstrably wrong, and the WBB seems to have forgotten that it was the SNP that brought down Callaghan in 1979 ushering in Thatcherism. Folk who hate Thatcher would do well to remember this.
- Moreover, the WBB also seems to have missed how close GE2015 is likely to be, with the 59 Scottish MPs likely to decide the election – Scotland, will again be pivotal, as it was in so many elections since 1945.
Ch2 Economy (pp 10 – 16)
- The economy chapter is odd, as it doesn’t consider the question of currency at all, which is in fact central to Scotland’s economic future. Currency is in the next chapter, but because it is so important I’ll cover it here.
- The first thing that is glossed over on Pg 10 para 2 is that iScot’s budget is substantially weaker than either the UK as a whole or the rest of the UK from 2016 to 2020. In 2016, iScot will have a 5-5.5% deficit vs 2.3% projected deficit for the UK as a whole. This means that iScot will have tax rises or deeper spending cuts from 2016 – 2020 than if it stayed in the UK. Yet I could read WBB and not know any of this. It is this sort of misrepresentation that undermines the WBB from the outset.
- Over the medium term, iScot faces problems as oil revenues fall after 2025, and as the population ages faster than in the rest of the UK. This means that social costs will be rising as a major source of government revenue falls; without oil, Scotland currently has a significant fiscal deficit. With it, oil Scotland roughly breaks even, though it didn’t last year, this year or next year.
- For the public finances, the amount of oil left is less important than the revenue it can bring in. Revenue is driven by the profit the oil companies make after dealing with the costs of getting the oil out of the ground. So whilst the Clair Ridge field west of Shetland has been known about since the 1970s, it is both geologically hard to get at and lies beneath some of the world’s roughest waters, consequently extraction costs are very high. The same is true in other undeveloped oil fields around Scotland; it was natural for the oil companies to go after the easiest oil first in the 1970s, meaning that government revenue per barrel is going to be considerably lower than in previous fields. None of this is made clear in the WBB.
- Given the background of his supposedly suppressed report (in fact, it was confidential ministerial briefing) Professor Gavin McCrone is a key voice on oil and the Scottish economy. What WBB doesn’t mention is McCrone’s 2014 book “Scottish Independence: Weighing Up the Economics” shows that the oil revenues are uncertain and McCrone comes out against independence on economic grounds.
- On pg 11, WBB discusses the failure to create a sovereign wealth fund (SWF). It is true that oil revenues along with the other taxes from Scotland exceeded spending in the 1980s and 1990s. But where WBB runs into trouble is that it asserts that this is permanent (it wasn’t true before the 1980s, and isn’t true now and going forwards) and that if Scotland had been independent in 1980 it would now have a Norway-style oil fund worth more than £100bn and WBB asserts that Scotland is up to £250bn worse off as a result.
- This claim is essentially nonsense. The only way this could’ve worked is if an independent Scotland had been as ruthless with public spending as Margaret Thatcher’s government was, especially in closing down loss making nationalised industries. In the alternative universe of WBB, independent Scotland would have had a much more generous welfare state, and wouldn’t have had Thatcherism. Unfortunately for WBB, this also means that there is no likelihood that even if an oil fund had been set up, that it would be worth anything like £100 – 250bn – the money would’ve been spent by the Government.
- The most that could be fairly said is that a fund could’ve been created, and if Scotland had been independent in 1980, and the government had been as hard on spending as Margaret Thatcher, and had created a fund, it may today be large. But WBB doesn’t point out that no-one was thinking about oil funds in the 1980s – not even the Norwegians, who didn’t create theirs until 1990. Essentially, WBB takes two highly speculative – and therefore probably wrong – numbers and concludes on the basis of this that the UK has stolen £100bn from Scotland. As with many other WBB claims, this simply doesn’t stand scrutiny.
- It is also important that though this phantom “lost £100bn” feeds a great narrative of injustice towards Scotland, this money is gone. There is no credible expectation of a similar surge in oil revenues, so not even the SNP expect an oil fund to be created before 2020, and it plays no part in future economic planning.
- Under most reasonable scenarios, Scotland will have to borrow money from the markets. The National Institute for Economic & Social Research estimated that all other things being equal, the cost of this borrowing will be 0.72-1.65% higher than UK interest rates, largely due to the smaller size of the Scottish debt market, which reduces liquidity. If Scotland refused to pay a share of the UK’s debt, the markets would treat this as a default, and the cost would be 10-15% higher. Since such a refusal would almost certainly result in losing the cooperation of the rUK, it would be reasonable to expect this to be higher if, e.g. the rUK delayed iScot’s EU membership application.
- All of this though is predicated on the currency. Alex Salmond has said that whether or not the rUK wants to enter a currency union (CU), iScot will keep the pound. This is possible, but it is a very expensive option. But what do these terms mean?
- On p 18 para 2 WBB launches into why there will be a formal Currency Union is like the Eurozone with rUK. A CU would mean that like now, the Bank of England set a common interest rate for the two countries and that if a bank ran out of money, it would provide funds through the so-called Lender of Last Resort (LOLR). This is what happened in the 2007/8 banking crisis. LOLR for an iScot / rUK currency union would mean that rUK taxpayers would be on the hook for 91.6% of the cost of a future iScot bank bailout. No rUK politician could sell this subsidy for a foreign competitor’s financial sector, which is what George Osborne, Danny Alexander and Ed Balls meant and why they ruled this option out in February. Simply put, a CU is not in the rUK interests because of the risk of having to fund an iScot bank bailout.
- This is the major problem for WBB (and the SNP/Yes campaign): it isn’t that the Westminster parties are “bluffing” it is that CU is simply not in rUK interest. Getting ahead of ourselves slightly, all of the theoretical benefits that come from a CU – like no exchange rate – also come from a peg. The difference for rUK is that under a peg, iScot takes all the LOLR risk. As a result, Salmond’s insistence that the alternative to a CU is a peg actually ensures that a CU won’t happen – because a peg gives rUK all of the benefits of CU with none of the risk.
- Without a CU, iScot will lose the major banks based here, as it is too small to credibly be able to backstop the major banks. RBS in 2008 required £45bn of public investment – this was a major hit for the UK, but it would have been about 76% of Scotland’s total It couldn’t have been afforded, which is why RBS, Lloyds and Clydesdale have said they would leave, taking jobs and taxes with them. Since Financial Services provides 15% of Scotland’s notional tax base, this means that all of the budget figures – and the associated promises – in the White Paper and the Yes campaign are meaningless.
- There are two other alternatives which equate to “keeping the £”. The first is known as a peg, in which a Scottish Pound is created and the Scottish Government promises to exchange any Scottish Pound for £ at one-for-one. This would have a mini-central bank, though it would not set interest rates – the Bank of England will continue to set Scottish interest rates (though it won’t consider Scotland). Moreover, iScot government’s first economic objective is to protect the peg, because if confidence was lost, people would move convert their Scottish Pounds into Sterling causing even greater pressure on the peg.
- This matters – the reserves required have to be large enough to make it clear that the Scottish Government will always defeat the market. This is where Britain crashed out of the Exchange Rate Mechanism in September 1992 – the peg became too expensive to maintain, and the reserves were under threat. In Scotland’s case, this means a need for Scotland to build a large reserve, probably by running a fiscal surplus. This requires a combination of tax rises and spending cuts from Year 1 of independence of £6-9bn, or up to 20% of government spending. This is not a one-off cost; it is at least a decade long cut in spending in order to build up the reserves.
- The second, more radical approach, is called sterlingization in which there is no central bank but the Government buys in the currency (£ in this case) that it needs. This requires a trade surplus (otherwise the there is a net outflow of cash) and preferably a government budget surplus to build up reserves. Scotland has neither, and would require very large cuts in government spending or much higher taxes to achieve a fiscal surplus.
- Pg 18 paragraph 3 of WBB cites the support of “Many” thinktanks in London for these plans. Actually, this case means two, the Institute for Economic Affairs (IEA) and the Adam Smith Institute, which are the two most economically neoliberal thinktanks in London. In other words to achieve the social democratic state WBB claims to want, it can only cite the most Thatcherite London thinktanks as supporters – who are trying to build a smaller state and much less social spending. WBB doesn’t tell its readers that the centre left thinktanks would never recommend sterlingization.
- Finally, as the sterlingization option (sometimes known as the Panama option as Panama is the largest and richest country to try this – and look how it compares to Scotland!) lacks a Central Bank, iScot could not join the EU, as a Central Bank is a precondition for membership. Again WBB doesn’t tell its readers any of this.
- Debt matters, too. The cost of government borrowing usually feeds through to mortgage rates and WBB implies that Scotland would have a higher credit rating (and therefore a lower interest rate) than the rUK. The opposite is true; the consensus is that iScot will have a 2-3 notch lower credit rating than UK providing it takes on a population share of the UK debt. This means more expensive state borrowing (0.72-1.65% according the National Institute for Economic and Social Research, NIESR) which both consumes more of the governmental budget in interest, but also raises the cost of mortgages and other bank lending.
- Q1 Pg 12/13: The Scottish Government’s own data (called GERS) in 2013 shows Scotland taking 9.3% of UK spending for 8.4% of the population but providing 9.1% of UK revenues. So, not only did Scots have much higher spending per head, there was a “subsidy” from the rest of the UK. None of this is included in WBB.
- Q2 Pg 13: We covered tax in Q1. On spending, investment is across the UK. So people in Bath (like Stu Campbell of Wings over Scotland) don’t normally benefit from projects to rebuild the railway to Tweedbank in the Borders, but their taxes contribute to them. Similarly HS2 will start saving time for Glasgow – London trains from phase 1, with much bigger timesavings in Phase 2 and Phase 3. Moreover, the increased capacity of phase 1 (which is the real point on phase 1) means that journeys will be more reliable as the West Coast Mainline (WCML) is very congested.
- Q3 p 14/15: WBB is wrong on bank bailout mechanism. See Angus Armstrong from NIESR for a detailed analysis of the LOLR issues. But the general rule is that a Government is liable for banks headquarted on their soil. As iScotland can’t provide a credible LOLR for large financial institutions, we’ve seen RBS, Lloyds, Clydesdale, Tesco Bank and Standard Life all make clear that they would leave Scotland for the rUK. Such a move will cost jobs and tax revenues just when iScot needs both.
- Q4 Pg 15: Strangely, this is the first mention of the EU, which is critical to iScot economy. What is really strange is that the WBB mentions the European Economic Area, which is a free trade zone larger than the EU, including Norway. But iScot will presumably join EU? Odd.
- Q5 Pg 15/16: There are a number of estimates of the amount of oil left, and the SG has consistently taken the most optimistic view at each stage. This is why the SG has over estimated oil revenues by a factor of two – that is, the SG estimates were twice as high as the actual revenue turned out to be – which gives little confidence in any of their other projections.
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Toby has written his own paper on the ins and outs of independence. You can read it here.