Politics and Economics

The Scottish Referendum should not become a Scottish “Neverendum”.

Alex_Salmond

So Alex Salmond got nearly everything he wanted.

He got to choose the exact date of the Scottish referendum.

He chose it just after the 700th Anniversary of the Battle of Bannockburn.

He chose it just after the successful Commonwealth Games held in Glasgow.

He chose it in the middle of one of the worst economic recessions in the UK history.

He chose it during unparalleled economic austerity.

He chose it at a time when confidence in Westminster politicians is at an all-time low.

He chose the exact wording of the referendum question.

He chose who could vote by enfranchising idealistic 16 and 17 year olds.

But he still lost decisively.

He should keep his promise of no more referendums on Scottish Independence for at least a generation.

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Politics and Economics

Scotland will get more tax raising powers – prepare for a low tax, low spend UK.

Prepare for low tax, low spend economics in all 4 nations of the UK.

Scotland voted decisively to stay part of the UK and has been promised more powers to raise its own tax as well as to decide how it is spent. Consequently England has also been promised similar powers over its own fiscal policy. The case for English MPs with power to set English income tax, corporation tax and spend is now overwhelmingly compelling.

This would make the election of an Old Labour style tax and spend Government in England all but impossible.  In 2010 Labour won 41 Scottish seats to the Tories 1.  Wales returned 26 Labour MPs to the Tories 8.  Also the Scottish and Welsh Labour MPs tend to be more socialist Old Labour style politicians than we find in England.  Tony Blair would still have achieved overall majorities in the elections of 1997, 2001 and (possibly) 2005 even if all Scottish and Welsh votes had been declared invalid, but his politics were hardly the Socialist Nirvana dreamed of by the Old Labour and the SNP.  Tony Blair’s top rate of income tax was lower than that of the current Tory led coalition.

In England the Tories would have had an absolute majority of 63 in the 2010 General Election rather than having to share power with the Liberal Democrats.

This would suggest a long series of Conservative or Centrist English Governments committed to lower public spending, lower top rates of income tax and downward pressure on business rates.

Where would that leave the Scottish, Welsh and Northern Irish Governments with England making up 85% of the GDP of the four nations?

If taxes rise in the Socialist Scottish and Welsh territories in order to pay for higher benefits how will they stop their high earning, affluent citizens and businesses moving across the border to seek a more favourable tax regime?  How will the other nations stop English benefit seekers moving to their territory to maximise their income from the State?  There are few geographical, language and cultural barriers to abate a massive movement of people and capital.  With such a large economy on their doorstep the other nations ability to manage their own tax and spend would be much diminished unless they were prepared to put up a Berlin style wall to stop the affluent leaving and the poor arriving.  There would be a race to the bottom in terms of taxation to attract affluent capable citizens and business investment.

It would reproduce the scenario of the mass emigration we saw from the Republic of Ireland, a flight that did not abate until the Irish abandoned the worst of their country’s ultra-nationalist business cronyism and implemented some of the most attractive low-tax packages in the western world.

Currently the other nations’ MPs are able to influence the economic policy of the UK, which they would not be able to do if they were managed solely in their devolved parliaments.

So a vote for more independence would most likely result in a series of more right wing, low tax, low spend governments in England, which would then severely limit the other nation’s ability to mange their own tax and spend as they would wish.  They would have to fall in line to manage their Government finances and maintain their competitiveness.

Under a centralised UK Government the other nations had an opportunity to influence English economic policy, which is 85% of the UK GDP. Under a fully devolved Government they will not. Counter-intuitively Scotland and the other home nations would have more independence as part of a centralised UK Government than they would as devolved nations within the UK.

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Politics and Economics

How Independent Would an Independent Scotland be?

The Scottish Nationalist Party (SNP) dream of an independent Socialist Republic of Scotland where they believe they can better create a more equal, fairer society.   A sort of socially-just Xanadu where the wealth of the nation is more equally spread.  A society with generous housing and pension benefits, free childcare, free prescriptions, free health service, free tuition…..free everything.

This has to be paid for and Scottish North Sea oil reserves would be asked to cover much of the costs.  But can it?  Ignoring North Sea oil and gas, Scottish tax revenues per head are almost the same as the UK average but public spending per head is about £1,200 a year higher in Scotland than in the UK as a whole.  Oil revenue would have to cover the existing higher level of public spending as well as the SNP’s planned increases.

North Sea Oil_graphic_767622a

Scotland’s oil reserves are running out at a time when large shale oil reserves have been found in England.  Additionally the international norms for determining territorial waters would also mean Scotland will get a smaller share of North Sea oil than the SNP are claiming.  Some of these reserves will actually belong to England.  Also, most of Scotland’s oil belongs to the Orkney and Shetland Islands, who have clearly stated their reluctance to be subservient to Edinburgh and would prefer an allegiance to London.  They don’t feel particularly Scottish and their history proves it.  If you ask a Shetlander “who are you?” They will say “Shetlander”, not “Scottish”.  In the event of a Yes vote for independence expect Shetland to ask for their own referendum or at least more autonomy over “their” oil.  Scotland will need Shetland more than Shetland will need Scotland so their negotiating position will be strong.

In any case oil revenue is highly volatile.  North Sea oil and gas revenues would have accounted for over 15% of Scottish revenues in 2010-11 compared with 1.6% for the UK as a whole. They were more than 20% of Scottish revenue in 2008-09 but just 12% in 2009-10. Looking back further they accounted for nearly half of all revenue in the mid 1980s, falling to just 3% in 1991-92.

But the cost of running a socialist state is not volatile.  It is high, constant and addictive. The ups and downs of Scottish oil revenue would need supplementing with borrowing in order to pay the social bill every year.

Borrowing costs are likely to rise in an independent Scotland as the financial markets would worry about Scotland paying back the debt without the reassurance of the Bank of England as bank of last resort. Rating agencies have already indicated that Scotland would have a lower credit rating than the UK, requiring a higher yield and therefore higher interest rates. The assets of Scottish banks are an alarming 12 times the country’s GDP adding markedly to the perceived risk of Scottish debt.  This is much higher than the multiple in Iceland before their economic crash.  The equivalent multiple for the rest of Britain is below five and for Ireland on the eve of the financial crisis it was about seven. In another economic meltdown Scotland would struggle to rescue its banks.

Scotland would also have to take its fair share of UK debt after independence, which would amount to perhaps £100 billion ($161 billion)— a lot for a small country to issue at once.  Scotland’s likely high debt, fiscal deficit, weak economic growth, lack of institutional frameworks and low foreign exchange reserves suggest it would pay a higher interest rate than the British government.  Brokers estimate an extra 1-1.5 percentage points a year.

In any case this still leaves somewhere between 80% and 97% of Scottish Government income coming from sources other than North Sea oil. How easily can the SNP and Scottish Labour party raise taxes and benefit spending in an independent Scotland with an economy on their doorstep that is 10 times larger?

The rest of the UK (rUK) stripped of Scotland would be more likely to produce Conservative governments. The chance of an old Labour socialist style Government would be much diminished.  Labour has had the majority of seats in Scotland in all but two General Elections: 1951 and 1955.  The Conservative share of seats has been 2% or less since 1997.  Also the Scottish Labour MPs tend to be more socialist Old Labour style politicians than we find in England.  Tony Blair’s New Labour would still have achieved overall majorities in the elections of 1997, 2001 and 2005 even if all Scottish votes had been declared invalid, but his politics were hardly the Socialist Nirvana dreamed of by the SNP.  Tony Blair’s top rate of income tax was lower than that of the current Tory led coalition.

Without Labour’s 41 Scottish seats the Tories would have had an absolute majority in the current Westminster parliament rather than having to share power with the Liberal Democrats. This would suggest a long series of Conservative or Centrist rUK governments committed to lower public spending, no increases in the higher rates of income tax and downward pressure on business rates. Where would that leave the Scottish Government?

If Scottish taxes rise to pay for more benefits how will the SNP stop high earning, affluent Scots and Scottish businesses moving across the border to seek a more favourable tax regime?  How will the SNP stop English benefit seekers moving north to maximize their income from the State?  There are few geographical, language and cultural barriers to quell a massive movement of people and capital.  With such a large economy on their doorstep the Scots’ ability to manage their own tax and spend would be much diminished unless they were prepared to put up a Berlin style wall to stop the affluent leaving and the poor arriving. It would reproduce the mass emigration we saw from the Republic of Ireland, a flight that did not abate until the Irish abandoned the worst of their country’s ultra-nationalist business cronyism and implemented some of the most attractive low tax packages in the western world.

Currently SNP and Scottish Labour MPs are able to influence the economic policy of the UK, which they would not be able to do if they were independent. Despite the Tories being wiped out in Scotland in terms of Westminster Government seats their style of politics is not as unpopular there as many pre-suppose.  They still accumulated 413,000 votes in the 2010 general election — hardly a different order-of-magniude from the 491,000 votes won by the SNP.  An independent Scotland voting for its Government using proportional representation would have to take these political views into account.

So a vote for independence would most likely result in a series of more right wing, low tax, low spend governments in England, which would then severely limit an independent Scotland’s ability to mange its own tax and spend as it would wish.  They would have to fall in line to manage their government finances and maintain their competitiveness.

This mirage of independence would also be further diminished if they entered a currency union with the rUK. Counter-intuitively Scotland will have more independence as part of the UK than they would as an independent nation. England is likely to do well despite a breakaway from Scotland. It would be free to have a more friendly tax policy to attract businesses and talented, motivated individuals.  As North Sea oil dwindles the English taxpayer will not have to fund the higher public spending and faster aging population of Scotland.

The main Scottish banks and pension funds are likely to relocate much of their assets and many of their jobs to England, boosting English GDP and creating more high value employment.

English depositors will be unhappy to hold their money in a foreign bank (the Icelandic banking meltdown is a sobering example).  They will worry about the future of their pension and life-assurance policies held with the likes of Standard Life, Scottish Widows (owned by Lloyds) and Aegon (formerly Scottish Equitable). All are Edinburgh-based and among the largest pension funds in Britain. English investors will want to know whether they would still be paid in pounds and will also worry that they would no longer have any influence through the ballot box over the tax regime governing their pensions.

If Scotland votes to leave the UK the flow of pension money into the Scottish-based insurance companies from outside Scotland may well dry up and there would be transfers out, to English-based companies.  The main Scottish financial institutions have already announced they will move much of their business to England in the event of independence to reassure their depositors and prevent this from happening.  Edinburgh’s financial sector will be weaker and London’s stronger after a split. This is significant because finance is a highly lucrative business and already pays 12% of all UK taxes.

Quebec_investment_graphic_767622a

In fact, business investment and employment in general will probably increase in England at the expense of Scotland. Look at what happened in Quebec after it tried to break away from Canada in 1995. Investment as a share of GDP before the referendum roughly matched the rest of Canada. Afterwards, even though Quebec voted against independence, a big gap opened up as investors decided the political risk was too great. They took their money elsewhere in Canada.

Many companies serving Scottish markets may be tempted to base themselves in Newcastle or York, boosting jobs and investment in the North of England. This will be in addition to the expected migration of talent from north of the border to seek better opportunities and lower taxes in England.

The loss of British influence in the United Nations, NATO, G7, Security Council and European Union will be a major blow to both Scotland and the rUK, but England will suffer less.  It will cope well without Scotland and may well flourish at Scotland’s expense.

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Politics and Economics

Answer these 5 questions before voting on Scottish Independence

First let’s look at some numbers to get this debate in perspective:

UK GDP – £2,435 Billion

Scottish GDP – £216 billion (8.87% of UK GDP)

London GDP – £452 billion (18.5% of UK GDP)

Edinburgh GDP – £12 billion (0.49% of UK GDP)

UK Debt – £1,377 Billion

Consider these 5 questions before voting in the Scottish referendum:

  1. The main driver of the UK economy is London and its knock on effect in the surrounding South East of England.  This is one of the few parts of UK that earns more income than it spends.   The current and future world income generators are the big international cities – London, New York, Shanghai, Hong Kong, Singapore etc. etc. They are clusters of high value added service industries supporting the regional management of large multinationals with such things as financial services, legal services, management consulting, marketing, advertising and recruitment.   They attract massive international investment and provide talented and educated people with highly paid jobs. This creates wealth which trickles down to workers in the supporting industries and services.  Edinburgh is not a major international city, nor a major European city. Neither is Glasgow.  There can only be one regional hub and currently that crown belongs to London, making the creation of a second hub nearby very difficult.  Do the Scottish Nationalists have a detailed plan as to how they will elevate Edinburgh or Glasgow to the status of other major international cities?
  2. A currency union between an Independent Scotland and the UK could be a bad idea for both parties.  The UK wouldn’t want an independent Scotland to mismanage its economy to the detriment of the English, Welsh and N. Irish.  The three main UK political parties have said they would not allow an independent Scotland to use the pound.  Mark Carney, The Governor of the Bank of England, has said that “a durable currency union requires some ceding of national sovereignty” which would negate the notion of Scottish independence if it used the pound.  Also, the reasons that Scotland doesn’t want to join the Euro should also apply to a currency union with the UK.  The recent catastrophic economic collapse of Greece trying to operate within a currency zone shared with Germany is a sobering and relevant example as to why an independent Scotland should not share the Pound.   Do the Scottish Nationalists have detailed contingency plan as to how an independent Scotland could operate without the pound?
  3. Scotland’s two biggest banks, Royal Bank of Scotland (RBS) and Lloyds have bank assets twelve times the size of its GDP. The equivalent multiple for the rest of Britain is below five; for Ireland on the eve of the financial crisis it was about seven. In another economic meltdown Scotland would struggle to rescue its banks. Do the Scottish Nationalists have detailed plan as to how they will manage their new banking system to avoid the recent problems of other small countries such as Iceland, Cyprus and Ireland?
  4. Scotland would find it difficult to get all 27 of the other member countries to agree admit them into the European Union.  Spain for one would not want to admit Scotland, as it would set a precedent for Catalan independence.  Spain has already blocked Kosovo’s membership bid because it broke away from Serbia.  There are other separatist movements within Europe which could cause some other countries to veto Scottish membership.  Do the Scottish Nationalists have a plan B for the possibility of independence outside the European Union?
  5. Scotland is seeking independence at the time their North Sea oil reserves are running out and at a time when large shale oil reserves are being discovered in England.  Do the Scottish Nationalists have a detailed plan as to how they will manage their future economy without North Sea oil?
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Politics and Economics

Why an independent Scotland should not share the Pound

Should an independent Scotland use the pound?  To see if this is a good idea for Scotland let’s take the recent real life example of Greece:

  1. Greek Government spending went out of control and they borrowed so much money they could not afford to pay the interest on the debt.
  2. Unions and left-of-centre politicians had pushed up salaries and labour costs to a point where its industries and businesses were becoming too expensive and were losing sales to cheaper more efficient competitors in international markets.
  3.  Unemployment was rising due to the failure of these businesses, which further pushed up Government costs with the increased welfare and unemployment benefits.

How does the Government get out of this seemingly intractable downward spiral? Before Greece joined the Euro, it had its own currency – the Greek Drachma.  What it would have done is devalued its currency.  This is how it works: Suppose on international money markets 100 Greek Drachmas is worth 1 Euro.  So a product which Greece was producing for 200 Drachmas costs 2 Euro in Germany. During the crisis the Drachma is revalued to 200 Greek Drachmas to 1 Euro. Now when Greece exports its products to Germany its prices are much lower.  A product which costs 200 Drachmas to make is now selling for only 1 Euro, whereas before it was 2 Euros.  This increases exports of Greek products to Germany which supports Greek businesses and creates employment.  The Greek government gets more tax from successful domestic businesses and has lower costs because there is less unemployment and associated welfare costs. Of course this also makes Greek imports more expensive.  Now if Greece wants to buy products and raw materials from Germany it has to pay twice as much.  To import a product from Germany which cost 1 Euro is now costing Greek businesses 200 Drachmas instead of 100 Drachmas.  This has the effect of causing Greek consumers and businesses to buy their products and raw materials from within Greece, which further boosts their economy.  It reduces imports and boosts domestic trade. Furthermore Greek workers are still on the same salaries, which have the same buying power within Greece.  They will not notice a difference to their living standards unless they go on holiday in Germany where they will find prices very high.  This will encourage them to holiday at home further boosting the Greek Economy.  Also Germans will find being on holiday in Greece very cheap, so they will come in larger numbers, further boosting the Greek tourist trade. So the ability to devalue a currency helps to smooth the problems of an economic crisis in poorly managed economies. Now let’s consider the options for the Greeks if they share the same currency as Germany. The Government cannot afford the interest payments on its loans and cannot borrow more so it must reduce Government spending and pay off some of the loans.  It must pay its workers less salary and reduce government spending.  Greek industries are uncompetitive so they must reduce their costs too.  They must also pay lower salaries and find further cost saving in its production.  This is not easy and lower salaries in Greece means lower spending by consumers causing the economy to slow further.  Germany has no incentive to buy Greek products or visit Greece on holiday, because it is just as expensive for them.  Unemployment stays high which increases the costs of the Greek Government in unemployment benefit.  This means less money for investing in Greek infrastructure and industry in order to make them more efficient. The situation is made worse for Greece if the German economy starts booming.  The value of the Euro will rise causing Greek exports to be even more expensive on international markets, which will cause their economy to slow even more.  This is because exchange rates are set at a level appropriate for the German Economy, not the Greek economy. Actually, the Eurozone crisis has helped German exports because it has made the Euro exchange rate lower than it would have been which makes German exports cheaper.  But the exchange rate is still too high to help Greek businesses.  Both economies have to be aligned otherwise the exchange rate will work in one country’s favour (Germany) and to the detriment of another country (Greece). To ensure that countries like Greece do not mismanage their economies to cause a crisis in the first place it is important that their taxation and spending policies are aligned with countries like Germany. This is what happens in the USA, which has a single currency and each state has broadly similar tax and spending policies (at least compared to Europe).  The exchange rate tends to be more appropriate for all states.  Also unemployed workers in a poor States like Michigan can easily move to a richer state like California.  This is good for Michigan because it reduces its unemployment levels and the associated welfare costs and provides much needed labour in California. However Greeks will find it harder to move to Germany because of language and cultural barriers. So what actually happened in Greece has been an economic disaster because they cannot devalue their currency.  They have had to cut costs, which means cutting salaries and axing jobs, which has increased unemployment benefits.  To prevent an economic meltdown the other Eurozone countries have had to give billions of Euros to Greece to prevent mass starvation and rioting.  Unless Greece was given this money it would have not been able to pay its massive debts which would have caused a major banking crisis.  Global banks would go bankrupt; savers, investors and businesses would lose all their money and the cost to the German economy would be much more than the cost of the bailout.  So they had no choice but to bail Greece out.  However, the Germans still resent having to give up their hard earned cash to make up for the economic mismanagement of another country.  To remedy this problem the Eurozone is now trying to align the tax and spend policies of its member states, which means individual countries are losing their independence.  i.e. their ability to set their own tax and spending levels. For this reason the UK would be very unwise to let an independent Scotland use its currency unless their economies were aligned in their tax and spend policies.  The UK would not want to have to bail out Scotland in order to save its own economy.  This effectively would mean that Scotland would need to have its budgets approved by the UK parliament, making a mockery of their notion of independence.  Likewise, Scotland would be unwise to use the pound because it wouldn’t be able to devalue in the event of a crisis.  Of course Scotland would have similar problems if it joined the Euro.  This is the very reason it doesn’t want to join the Euro!  Having its own new currency would also carry large risks as they would not have a large economy to protect it from wild fluctuations in the currency markets and it may have much higher borrowing costs. For a single currency to work there has to be similar tax and spend polices across the whole currency zone and there must be similar language and culture to allow workers to easily move to where the jobs are. Answer these 5 Questions before voting on Scottish Independence

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