Taxi Driver Online

The economics of home rule

The Scottish play

Scotland could probably go it alone now, but the economics of independence are steadily worsening

IN THE debate over whether Scotland should be independent, each side has for years lobbed economic grenades at the other. The pro-independence Scottish National Party (SNP) broke into mainstream politics in the 1970s with the slogan, “It’s Scotland’s Oil”. Alex Salmond, Scotland’s first minister and SNP leader, calls it “larceny” that revenues from oil and gas production, most of which comes from Scottish waters, have stuffed London’s coffers for the past 40 years. George Osborne, Britain’s chancellor, retorts that Scotland would be the poorer for secession.

So would an independent Scotland be an impoverished backwater or a land flowing with oil and money? A precise answer is impossible, since Whitehall does not count all of Britain’s revenue and spending streams by geography. Scotland gets a block grant from Westminster, but some things, such as welfare and defence, are paid for directly. But a close reading of the figures suggests an answer, which is less dramatic than either staunch nationalists or unionists might hope.

Scotland’s accounts of revenue and expenditure, based on Treasury data, show that it is not a ward of the state, grossly subsidised from Westminster. In fact it performs better than all regions outside the south-east of England, and has done particularly well in the past decade (see chart). In 2010-11 Scotland’s GDP was £145 billion ($225 billion) including a geographical share of North Sea oil and gas, around 10% of Britain’s, with 8.4% of the population.

Historically Scotland has received bigger grants per head from central government than Wales, for example—in part a tacit acknowledgment that it contributes handsomely to oil revenues, which in 2010-11 amounted to £8.8 billion. An independent Scotland would lose that subsidy, but gain the right to collect taxes on hydrocarbons locally. For the moment, Scotland’s day-to-day accounts would look little different to now. But the argument does not end there.

Not so long ago, North Sea oil and gas would have made Scotland rich, had the nation been able to seize it. Declassified documents show that, in the 1970s, Treasury officials reckoned Scotland could comfortably have paid its own way—a big reason the government was so alarmed by rising nationalism. The situation is now more finely balanced. And there are four big reasons to question Scotland’s longer-term prospects.

Oil and trouble (Salmond’s bubble)

The first problem is oil. An independent Scotland would rely heavily on oil and gas—in 2010-11 offshore activity accounted for 18% of GDP. The equivalent share for the whole of Britain was just 1.8%. Norway is even more reliant on hydrocarbons, but it has far more oil and has for over 20 years been setting funds aside for the day the stuff runs out. Britain has no such retirement fund on which an independent Scotland could draw.

The North Sea is gradually running dry. Many fields will stop producing in the 2020s; by the 2040s oil is likely to be dribbling rather than gushing forth. Tax revenues from oil and gas are highly volatile—they are soaring now because commodity prices are high. And if prices fall both production and receipts could plummet because the remaining North Sea oil is pricey to exploit, says Alex Kemp of Aberdeen University. He forecasts that, at $90 a barrel, 23 billion barrels of oil and gas could still be extracted; at $70, this falls to 16.5 billion barrels. Either scenario is possible. The average oil price was $62 a barrel in 2009; in 2011 it was $111.

There are also hidden liabilities in the North Sea. Decommissioning the installations there, most of which are in Scottish waters, will cost more than £30 billion by 2040, predicts Oil & Gas UK, a trade body. Westminster is currently on the hook for more than half that sum in tax relief, a bill it would happily hand over to Holyrood.

The second question over Scotland’s future is whether renewable energy could replace oil as a cash cow, as Mr Salmond hopes. Scotland is blustery, but wind power is heavily subsidised by consumers (many of them south of the border) through their bills. Marine energy is still not commercially viable. The anticipated fat profits from renewables could prove as elusive as the fabled Loch Ness monster.

When the battle’s lost and won

Scotland’s third long-term problem is the state of its financial-services industry. The country has done well out of banking, but in the past five years the problems of having an outsize banking sector have become apparent. In 2008 the British government bailed out Scotland’s two biggest banks, Royal Bank of Scotland (RBS) and HBOS, which was acquired by Lloyds Banking Group. These would probably be broken up as part of an independence settlement, not least because many of their assets are English.

But Edinburgh’s fortunes as a banking centre would be hard to revive. A small, newly seceded economy would struggle to support a large financial sector, particularly following the financial crisis. Just think of Iceland, whose banks also collapsed in 2008, crippling the economy. Mr Salmond rebuffs the possibility of taking a share of RBS’s £187 billion of toxic assets.

Edinburgh’s fund management industry, which includes companies such as Scottish Widows and Standard Life, still makes it a financial centre. Yet that bloom is fading too. Since 2007 Edinburgh has slipped from 15th to 37th on the closely-watched Z/Yen ranking of global financial centres, behind Guernsey, Stockholm and Wellington, in New Zealand.

A better bet for continued growth is oil services. There is already a thriving hub of technical firms around Aberdeen. Yet even some of these are being lured south. Petrofac, an American oil services outfit whose British operations are almost wholly oriented towards the North Sea, listed on the London Stock Exchange in 2005 and has its headquarters in London. Several Scottish firms are considering similar moves.

Fourth and most testing for Scotland’s future would be the question of its currency. Mr Salmond’s hopes of joining the euro have soured—for now he plans to stick with the pound. Yet the euro zone has amply demonstrated the dangers of entering a monetary union without fiscal union. Soothing niceties from Cheshire-cat politicians no longer reassure bond markets—Scotland would pay a premium for being part of a monetary union that could break. It would have no central bank, no monetary freedom and limited fiscal autonomy.

Other bills would rack up even from an amicable divorce (of which there is no assurance). Scotland would take a per capita share of the national debt, reckons Mr Salmond. The tab for decommissioning its nuclear power stations is £4 billion. Other practical questions abound, such as who would pay out pensions agreed under Westminster’s auspices—as those of Scotland’s teachers and NHS staff currently are.

Such arithmetic calls into question not just Scotland’s economic future but its political one. Spending per head is currently 13% more than in Britain as a whole, supplying free university tuition, for example, which is not available south of the border. Welfare spending, which consumes a third of public funds, is 11% higher than in England and is rising faster as a share of public expenditure than any other category. The SNP hopes to extend state paternalism further, promising free universal childcare and more generous state pensions. Public sector employment, already 24% in Scotland compared with Britain’s 20%, would presumably increase. Mr Salmond hopes to fund all this by adopting low corporation taxes to pull in investment.

It remains a matter of judgment whether Scotland could go it alone. But after the banking and euro-zone crises, Scotland would be far more vulnerable to shocks as a nation of 5m people than as part of a diversified economy of 62m. There is an irony here: to preserve a distinctively open-handed Scottish social model, staying in the union might be the safest choice.

Source: The Economist, 14 April 2012

Scottish independence

It’ll cost you

Scottish independence would come at a high price



IN 1698 the nobles and landowners of the Kingdom of Scotland tried to elevate their country to a world trading nation by colonising the isthmus of Panama. The Darien scheme failed and nearly bankrupted the country. Within a decade Scotland had signed an Act of Union with England to create the United Kingdom of Great Britain. Scots found it tough in the 18th century to be a small nation in a globalising world. But nationalists are an optimistic bunch, and they would dearly like to have another go.

In two years’ time the people of Scotland will be asked whether they want to become an independent sovereign state. It is not often that a 300-year-old union is broken, so the vote will have ramifications far beyond a land of 5m people. Scottish independence could lead to a break-up of the United Kingdom. The Catalans, among other disaffected European groups, see Scottish independence as a harbinger of their own bid for nationhood. Other diverse nation-states watch, and worry.

Some of the arguments for and against Scottish independence are aimed at the heart. Alex Salmond’s pro-independence Scottish National Party (SNP) says Scotland has its own “society and nation” that could thrive with autonomy. It has also played on local resentment at being bossed around by posh Westminster politicians—so successfully that no politician with an English accent, let alone a plummy one, is likely to play a large part in the pro-union campaign. As for the unionists, they argue that Britain would be diminished on the world stage if Scotland were to go its own way. Petty resentments and centuries-ago battles notwithstanding, the nations have rubbed along pretty well over the years and have a glorious common history, they say. Why dissolve the marriage now?

Every nation has its price

The political and cultural issues around independence are hotly debated. Yet fittingly, in the birthplace of Adam Smith economic arguments seem to weigh heaviest. Opinion polls suggest that they will determine whether or not Scots go for independence. One poll found that just 21% of Scots would favour independence if it would leave them £500 ($795) a year worse off, and only 24% would vote to stay in the union even if they would be less well off sticking with Britain. Almost everyone else would vote for independence if it brought in roughly enough money to buy a new iPad, and against it if not.

Opinions on the economics of independence are starkly divided. Nationalists argue that, mostly thanks to North Sea oil and gas, Scotland subsidises the union and would be better off alone. The more sneering sort of unionist argues the opposite, that Scotland is a parasitic subsidy junkie.

Both are wrong, in the short term at least. Assuming it keeps the oil and gas extracted from under Scottish waters, an independent Scotland would currently gain roughly as much in taxes as it would lose in subsidies (see article).

The future, however, looks much dicier. This is a stormy economic world, and an independent Scotland would be a small, vulnerable barque. It would depend on oil for some 18% of its GDP, making it subject to shifts in global commodity prices. Though high oil and gas prices have pushed up tax revenues, if they drop production as well as receipts would plummet. The richest reserves have already been exploited, leaving inaccessible oil that becomes uneconomic when prices fall. North Sea production has been falling by about 6% a year for the past decade. Eventually the oil will run out entirely.

A small country is more vulnerable to other shocks. In 2008 the British government had to bail out Royal Bank of Scotland (RBS) and HBOS, Scotland’s two biggest banks. At its peak, RBS’s balance sheet was 13 times Scottish GDP. Edinburgh has faltered as a financial centre since, and would be hard to revive. There is a limit to how large a financial sector an independent Scotland—a new, small economy—could support. Mr Salmond has already rebuffed suggestions that he should take a share of RBS’s £187 billion of toxic assets.

The sexy Swedish model

By virtue of its size, an independent Scotland’s borrowing costs would almost certainly be higher: its bond market would be small and illiquid. But Scotland’s biggest problem could be its currency. The SNP’s enthusiasm for the euro has faded: it wants Scotland to stick with the pound for the moment. That would mean entering a monetary union without fiscal union, a set-up that has proved disastrous in Europe. Though Mr Salmond claims Scotland would enjoy automatic EU membership, European Commission lawyers are doubtful. A candidate Scotland would have to negotiate entry terms—and commit to join the euro one day.

Subtly, the nationalist argument has shifted. Some years ago the SNP envisaged Scotland joining an “arc of prosperity” of small, thriving countries such as Iceland and Ireland. After the banking and euro-zone crises, advocates for independence have pointed instead to the Nordic countries. The SNP implies that Scotland can combine a Scandinavian-style nurturing state—with free university tuition, free elderly care, free universal child care and more generous pensions—with a thriving business sector. An independent Scotland would hope to lure businesses through low corporation taxes, hucksterism and a dose of industrial policy—something the SNP says cannot be safely left to a government in far-off London.

Small countries can indeed pull in foreign investment: just look at Ireland. But Scotland would struggle to attract enough to pay for such a generous state. The country would not be the only one bidding for footloose global capital: one competitor would be Britain, which is cutting corporation taxes swiftly.

If Scots really want independence for political or cultural reasons, they should go for it. National pride is impossible to price. But if they vote for independence they should do so in the knowledge that their country could end up as one of Europe’s vulnerable, marginal economies. In the 18th century, Edinburgh’s fine architecture and its Enlightenment role earned it the nickname “Athens of the North”. It would be a shame if that name became apt again for less positive reasons.



Source: The Economist, 14 April 2012

PMSL......its a sad state of affairs when the english dont know the Scots even at this stage.

CC

_________________
Think of how stupid the average person is, and realize half of them are stupider than that.
George Carlin

Dont you think the Scots will take offence at the english telling them they cant afford independence.....when there's independent countries like Malta....Cyprus and even smaller countries in the world with less assets?

Dont you think the Scots will take offence about the ill fated Darien scheme, which they might argue was undermined by the English?

Dont you think the Scots will take offence at the English (and other free-marketeers) merely taking a few words of Adam Smiths when he actually wrote numerous essays?

The article actually states Scotland outside of the South East is a successful area.

If I was a Scot, I think I'd vote for independence TBH.

_________________
Think of how stupid the average person is, and realize half of them are stupider than that.
George Carlin

Shhhhhhhhhhhh!!!..Gusmac might hear you

_________________
He's the slave of all slaves who serves none but himself.

Get your facts first, then you can distort them as you please.
Mark Twain

Alba Gu Bràth

Just been reading some of the comments under this laughable article.
Here's a couple of my favourites.




http://www.economist.com/node/21552564/ ... s#comments

_________________

http://wingsoverscotland.com/ http://www.newsnetscotland.com/

_________________

http://wingsoverscotland.com/ http://www.newsnetscotland.com/

http://www.bbc.co.uk/history/british/ci ... n_01.shtml

The idea proved hugely popular, and there was a great rush to subscribe to the Company of Scotland Trading to Africa and the Indies, founded in June 1695; but it was not just the Spanish who felt threatened by it. The English East India Company, fearing the loss of its monopoly on British trade to the Indies, successfully lobbied the English Parliament, which threatened the new company with impeachment, forcing its English investors to withdraw.

The English ambassador to Holland even threatened to embargo any merchants who traded with the new company.

To make matters worse, the ships sent out to trade for supplies returned with news that all English ships and colonies were forbidden to trade with the Scots by order of the King.

Many Scots believed that their chance of independence had been deliberately sabotaged by the English, and the resentment this fostered played no small part in the Jacobite rebellions which were to plague the Union.

CC

_________________
Think of how stupid the average person is, and realize half of them are stupider than that.
George Carlin

SCOTLAND desperately needs to grow its economy. Not just out of greed or political ambition. The impact of the 2009 recession means that most Western economies are back where they were at the start of the Millennium, a contraction not seen since the Great Depression of the Thirties.

This (avoidable) catastrophe has wiped out so much wealth and economic capacity in the UK that we are unlikely to recover fully until the 2020s. So the next generation could be faced with caring for a soaring population of aging, post-war baby boomers, funded by an economy on life-support. Unless we take corrective action now.

This week The Scotsman has been running a series of interviews on how Scotland can re-boot its economy. A lot of good ideas have emerged, but to my mind too many have been in the category of what I call “helpful hints”.

In other words, random suggestions – often interesting – but which lack an overall strategic framework. Also, some growth ideas are perennial, such as reducing planning red tape. But they lack grounding in the new global economic reality of Western contraction and successful emerging economies such as China.


From recent experience, there are three different growth strategies Scotland can follow. I call them the Global City Model, the State-sponsored Growth, and the Premium Brand Model.

The Global City Model relies on inward investment and mass immigration to provide the stimulus for high growth, and sells directly to the world market place. To achieve this you need to de-regulate and let the free market rip. King of the Global City Model is London, now semi-detached from the UK economy.

America is big enough to operate this model inside its own borders, with cities in the sunny South-west now draining workers and investment from the declining industrial north. China’s new coastal cities also play in this league.

I’m a fan of free markets but doubt that Scotland can use the freebooting Global City Model as its blueprint. Politically and culturally we are too communitarian and social democratic to accept extreme deregulation, unrestrained building (as in China), or the social inequalities inherent in this approach (witness the London riots). But there are bits of this approach we need to pinch. A small country like Scotland needs to attract inward investment and educated migrants.

So it would definitely help if Scotland controlled its own business taxes and emigration rules, even inside the UK. If London can compete with Shanghai, it shouldn’t be afraid to compete with Scotland. Under current migration rules, the Scottish Government could put up the cash to attract at least two-dozen Nobel Prize winners to Scottish universities.

Above all, this model understands that economies are focused on cities, not on abstract political borders. Scotland is fortunate in having four major urban centres to spark growth – most small countries have only one or two. Four allows us to experiment and take risks – which is why we need elected city mayors to promote Scottish cities globally.

Yet globally successful cities require population scale. For 25 years I’ve been attending worthy conferences extolling the virtues of a Glasgow-Edinburgh “city region” big enough to take on the world. But Glasburgh (or Edinglow) remains a fantasy because successive political administrations have failed to build the modern transport infrastructure to turn the Central Belt into a single economy.

As for planning red tape, business needs to stop exaggerating its importance. Certainly, we need to replace the present regime of planning by lengthy negotiation to one of planning by fixed rules (“meet them and you can build straight away”). However, planning bureaucracy impacts mainly on house construction, especially by raising the value of land to excessive levels. Personally, I favour low-density house building in the Green Belt, which would reduce land values and kick-start construction. And pigs might fly.

Next, the State-sponsored Growth Model: this is where the government itself ensures capital is available for manufacturing and infrastructure investment. China’s state banks have fuelled that country’s miraculous growth, not foreign inward investment. Ditto Brazil. Germany’s economic prowess is founded on family-owned engineering firms, which traditionally were funded by industrial banks owned by regional governments.

You don’t need to tell me the state can’t pick industrial winners. But Scotland now faces a relative capital famine. Our banks went bust because they played casino capitalism with financial derivatives, which yielded bigger paper profits than manufacturing. Private equity investors are currently risk-averse and are likely to stay that way.

If you want growth quickly, Scotland requires its own industrial bank(s). Creating that would be easier for an independent Scottish government, but it could still be done under devolution with a bit of enterprise. What about using public land holdings as collateral for a new bank, which then raised cash on the bond markets? Local authority fixed assets are worth around £36 billion. Using that as leverage, you could pump £100bn into manufacturing, energy and infrastructure over the next decade. Back in the 1990s, we had some big, locally-owned multinationals who generated their own investment cash. Then came the Gordon Brown years when industry was derided. Scottish Power and S&N are now foreign owned and do what head office tells them. Fortunately, we do have one large player left in local hands – Scottish Water, which is publicly owned. If we want to be ambitious, then transform Scottish Water into Scottish Global Utilities, a multinational renewables and water company with the clout to raise capital and bring forth a new generation of local subcontractors.

There are serious limits to the State-sponsored model. It works best when you are throwing up new manufacturing cities, as in China. Scotland’s economic problem is more subtle. With our banks humbled and our American computer assembly plants closed, Scotland needs to redefine what it is going to sell to the world, to earn a living.

Most successful small Western economies exploit the Premium Brand Model of economic growth. This relies on exporting high quality engineering or services at a premium, to cover relatively high wage and welfare costs. A country’s name is the badge of quality. Scotland is already doing this with food, whisky, university education, aerospace maintenance and oil industry support. We need to generalise the model, making Scottish globally synonymous with luxury and perfection.

Our weakness lies in developing the value chain thoroughly and ruthlessly. For instance, we make some of the world’s best luxury textiles – then sell them wholesale to foreign fashion houses who brand them and earn a fortune. Why don’t Scottish fashion houses dominate the catwalks? Your natural reaction is to scoff, but Milan was an industrial town with smelly canals until Giorgio Armani arrived in the 1970s. Again, there are fake Irish pubs everywhere. Where are the high-class Scottish restaurants in LA, Shanghai or Berlin?

One problem in promoting a quality brand agenda is that Scotland’s current self-image is a mixture of industrial grime, tartan cringe and lack of confidence (promoted by a traditional Labour political elite wedded to welfare dependency and London subsidy).

Which explains my long-time belief in Scottish independence as a prerequisite for responsibility and entrepreneurship. When Scotland has to stand on its own two feet, when Scotland starts to believe in itself, growth will follow.

http://www.scotsman.com/news/george-ker ... -1-2232230

If the UK breaks up You wont even see your little Scottish feet as a Big fat EU Belly will be shrouding them from sight, Cos all that's Keeping the EU from trampling all over your Tartan Slippers at the moment is that Britain as a whole has at least some say in Europe, where as an Independent Scotland will be a tiny wee new Nation that will get bossed about wholesale by unelected Eurocrats....We just Won't know what hit us afterwards...Independence my arse...Euro Puppets more like

Those nice English folks will look after us, they've done such a wonderful job so far.
You can't trust Johnny foreigner
Napoleons and Hitlers the lot of them
Yadda yadda yadda.

_________________

http://wingsoverscotland.com/ http://www.newsnetscotland.com/

Yes, the articles one sided p*sh......just like the article above.

If people think independence will change anything they're wrong - but at least it'll be scots nitwits ruining it?

CC

_________________
Think of how stupid the average person is, and realize half of them are stupider than that.
George Carlin

It has to be One Sided P*sh as Its a Yes or No question and if you vote it has to be for one side or the other...there ain't no in between on this one..