Economics of Independence

Deputy First Minister Nicola Sturgeon

Economics of Independence Conference

4 June 2013

 

Given the line up of speakers today, I hope you will hear a healthy competition of ideas. And with some of Scotland’s most successful businesspeople taking part, I have no doubt you will hear much quality too.

And since Bill is a keen tweeter, who knows - you might see also see some innovation as he live-tweets the exchanges.

The fact is these opportunities are valuable for all of us involved in the independence debate.

As we move towards 18 September next year it is important that as many people as possible, from all walks of life, participate in the exciting democratic process that Scotland is engaged in.

Alistair Darling and I are on different sides of this debate. But, at the outset, I would ask you to bear this in mind. Each of us will argue our case passionately and from positions of sincerely held belief.

But, on 19 September next year, if Scotland has voted for independence, we will be on the same side, working together in Scotland's interests.

So when Alistair tells you today - as he will and as he is entitled to do - that this or that will never work, remember that the day after a vote for independence, he and his colleagues will be working alongside me and mine to make sure that it does work and that Scotland succeeds and prospers.

The case for independence is, in essence, very simple.

It is based on the fundamental belief that it will be better for all of us if decisions about Scotland's future are taken by the people who care most about Scotland: that is, by the people who live and work here.

The economic case has two key propositions at its heart. Firstly, that we have sound finances and a strong and diverse economy - in short, we have every reason to be confident about our economic prospects.

But, secondly, that as long as we remain locked into a one-size-fits-all economic policy, we will not do as well as we should.

Let me address, firstly, the issue of principle.

As a country we have already embraced the principle that decisions are best taken here and not in Westminster.

We’ve decided that it should be Scotland and not Westminster in charge of the our health service.

That it should be Scotland and not Westminster in charge of Scottish education.

And that it should be Scotland and not Westminster in charge of Scottish criminal justice policy.

At the time of the devolution referendum in 1997, there were those who said the establishment of the Scottish Parliament would be too difficult, too costly, too complicated and that it would be bad for business and the Scottish economy.

Indeed, many of the prophesies of doom that we hear today are eerily reminiscent of the dire warnings we heard in the run up to the devolution vote.

For example, when a young journalist called Michael Gove - just weeks before the 1997 referendum -  said that business leaders feared that devolution could 'encourage a brain drain, a flight of finance...add to the burden of business taxation...create a climate of continuing political uncertainty and damage the standing of Scottish financial products in English eyes', who would have thought that 15 years later he would be a member of a UK Cabinet that is making exactly the same arguments against independence.

Those arguments were completely without foundation then - and the same is true today.

What we have seen, instead, in vital areas of our society and economy, is that individuals, families, communities and businesses have enjoyed real gains from having decision-making power here in Scotland.

Young people have gained because they don’t have to pay £9,000 a year to go to university.

Our communities have gained because we have an extra 1,000 police officers on our streets.

Our elderly have gained from not having to pay for personal care.

Businessmen and women have gained from the Small Business Bonus which has either eliminated or substantially reduced business rates for nearly 90,000 commercial properties.

People, businesses and communities across Scotland have gained from having decision making here in Scotland.

So today I want to focus on the economic gains that can be won if we complete that journey.

The gains that we will enjoy if the remaining powers that still lie with Westminster are transferred here to Scotland.

And, conversely, the risks that we will be taking if we leave these powers with Westminster.

There is little doubt that emotion will play a part in the independence debate. For most of us this will be a decision that engages the head and the heart.

But I am going to talk to you today about the rational, reasonable and responsible case for independence.

And as I do so, it is worth remembering this fact - no-one any longer seriously questions that Scotland could be a successful independent country.

The Prime Minister himself has said that 'it would be wrong to suggest that Scotland could not be...(a) successful, independent country.”

The fact is that we have a strong national balance sheet.

For every one of the last 30 years we have generated more tax per head than the UK as a whole.

During that time oil prices have gone up and they have come down but Scotland has still generated more tax per head than the UK in every one of those years.

And taking both revenue and spending together, we know that over the last five years our public finances have been healthier than the UK’s to the tune of £12.6 billion.

With independence and access to our resources, that relative fiscal strength would have allowed us to make decisions currently denied to us.

With that £12.6 billion we could, for example, have reduced  borrowing. Or we could have invested more in capital projects to kick-start the economy. Or we could have resisted some of damaging austerity cuts that have depressed the economy.

Those would have been real gains from controlling Scotland’s finances. Without independence, we have been able to do none of these things.

So, we have a sound national balance sheet.

We also have a strong and diverse economy.

We enjoy an international reputation for producing goods of world-class quality.

We have a food and drink sector with a turnover of more than £12 billion.

A creative industries sector with turnover of nearly £5 billion.

A tourism industry that employs 200,000 people.

A world-leading life sciences sector that employs more than 30,000 people.

We have some of the world’s best universities.

25 per cent of Europe’s offshore wind and tidal potential.

And, yes, we have oil and gas.

We know that oil and gas companies are planning to invest nearly £100 billion in the North Sea.

So, forget the claims and counter-claims of politicians about the future of Scotland’s oil industry. We need only observe the investment decisions of companies with their eyes firmly on future returns, to know everything we need to about the prospects for the North Sea.

Let me say one more thing about the gains to be had from our oil resources.

To listen to the opponents of Scottish independence, you would be forgiven for thinking that this fantastic resource is a problem, a handicap for our economy. Scotland is too dependent on oil to be independent as a country, according to some.

Well, let’s just look at that a bit more closely.

Oil and gas revenues are important to Scotland - they account for around 15% of Scottish tax revenues.

But for Norway over the last five years oil has accounted for  31% of total revenues.

Have you ever heard anyone say that Norway is too dependent on oil? That its oil reserves are so great that they are a danger to its economy? Of course, you haven't.

In fact, Norway - with a population roughly the same size as Scotland's - has an economy twice the size of ours.

It also has a sovereign wealth fund worth nearly £450 billion. 

Scotland has a sovereign wealth fund of zero.

The IMF estimates that UK government net debt now stands at around 75 per cent of GDP. By contrast, Norway has accumulated public sector net assets equal to 168 per cent of GDP.

The Scottish Government has calculated that if we had had the powers to establish an oil fund then - based on a real return of 3% per annum - it would now be worth 84% of GDP.

But instead of that massive national wealth, we have a share of Westminster's £1 trillion debt burden.

Faced with those facts, how can anyone seriously contend that leaving Westminster in charge of our economy and resources has made good sense?

Of course, you might be sitting there thinking that all of this is well and good but we can't undo past mistakes. And that is true. But we can avoid repeating those mistakes in future.

There are up to 24 billion barrels of oil still to be extracted from the North Sea. So there are still significant gains to be enjoyed if we give ourselves the powers to steward our oil revenues for the benefit not just of this, but of future generations.

So people in Scotland have every reason to be confident about independence, based on our fiscal strength and on our onshore and offshore economic strengths.

But this is not just a debate about whether we could be independent. It is about whether we should be. Will our economy do better with power remaining at Westminster or with decision-making here in Scotland?

The choice on September 18 next year is one between two futures. Both these decisions have consequences.

A vote for independence means control of our own resources and the ability to take decisions that will grow our economy faster. While a vote against independence means endorsing the current system. It means supporting the idea that Westminster will do a better job of running Scotland and the Scottish economy than the people who live here.

I've already spoken about the lost opportunities of not controlling our own resources.

But we also know that, despite all of our advantages, the Scottish economy has grown more slowly, over the long term, than both the UK as a whole and other countries of a similar size.

We know too that the UK is the 4th most unequal economy in the developed world.

Since 1975, income inequality among working-age people has risen faster in the UK than in any other OECD country.

So this is not just about the economic policies of one government - it is a long-term trend that shows no sign of slowing down.

What is true is that the policies of the current Westminster government are only going to increase the gap between the richest and the poorest.

Based on estimates from the Institute for Fiscal Studies, we can predict that an additional 50,000 children in Scotland will be living in poverty by 2020.

This matters. Not just because of the costs to individuals and society. The economic consequences are also disastrous.

Christine Lagarde of the IMF noted earlier this year that:  “Excessive inequality is corrosive to growth; it is corrosive to society," and that “a more equal distribution of income allows for more economic stability, more sustained economic growth, and healthier societies with stronger bonds of cohesion and trust.”

The evidence is telling us, therefore, that the already appalling level of inequality that seems set to accelerate because of Westminster decisions, is damaging to growth and job creation.

And there is another damaging trend that seems entrenched under the current Westminster system.

That is the extent to which economic activity is being concentrated in London.

The gap between London and other areas of the UK is startling.

This gap between the best and the rest is far higher than in other comparable countries.

Indeed when the current Prime Minister came to office he drew attention to what he said was the UK's 'fundamentally unstable' economic reliance on  London and the South East. 

But just like the inequality gap, this geographic gap is widening.

The economics editor of the FT recently pointed  to an interesting measure of economic activity.

Figures showed that London had more tower cranes – used in major building projects – than the rest of the UK put together.

He said:  “The confidence in London’s economy is underpinned by government policies which will concentrate incomes in London and the southeast.”

Cuts to welfare payments, he said, will hit the spending power of areas away far from London up to five times as hard as they will hit London's.

Now, with the limited economic powers that we have, we do as much as we can to swim against this tide.

And our inherent strengths and the smart use of the powers we have do deliver some successes - our relatively encouraging employment figures, for example. We also do very well compared to many parts of the UK outside London on, for example, FDI.

But the decision we are facing next year is about what is best for Scotland in the long-term.

Is it really best for Scotland to remain part of a Westminster system that has created such a wide and growing gap between rich and poor?

A system that concentrates so much job creation and growth in one part of the UK and deprives us of the powers to level the playing field.

We know that Westminster governments have made some disastrous mistakes which have damaged Scotland’s economy.

Both the previous government and the current government decided to cut capital spending hard in a recession - the one thing you should not do in the face of a down-turn.

And the current government is continuing its austerity policy - an approach that Alistair Darling has said is causing “immeasurable damage” to the economy.

So the costs and the losses to people in Scotland and to the Scottish economy of a Westminster system that isn’t working are clear.

But these costs are not just the result of individual government mistakes (although there have been plenty of those) but of a political system that is entrenching these trends of inequality and regional economic  divergence.  

The issue for those of us who support independence is then to demonstrate how an independent Scotland can be a fairer and more prosperous country.

What will be the gains of independence?

Most obviously we would gain the ability to have an economic policy that is aimed at boosting growth, fairness and jobs in Scotland.

We would be able to target areas of comparative advantage and those where we need to improve.

The decisions on what to do with those new powers will of course be taken by whatever government people in Scotland vote for.

But the range of powers independence will give us is extensive. 

It will give us fiscal power over oil and gas taxation, excise duty, VAT, capital borrowing, welfare and social security, corporation tax and air passenger duty; and non-fiscal levers like consumer protection, employment policy, economic regulation and competition policy.

The Scottish Government believes those powers are best used within a sterling currency zone.

The extent of trade, our integrated financial services market, and the contribution that oil and gas and other Scottish exports make to the UK’s balance of payments all demonstrate that it will be in the interests of Scotland and the UK to share the pound.

That was the clear conclusion of the Fiscal Commission Working Group which looked in detail at the arrangements necessary to support a currency union, including a fiscal sustainability agreement, covering debt and borrowing limits, but - crucially. within a framework which ensures the fiscal flexibility that Scotland needs to combat the damaging trends I have spoken about.

And, therefore, based on what we know works in other successful small countries the Scottish Government could use those powers to build a more inclusive and cohesive society; to give ourselves a competitive edge; to encourage innovation and a higher wage economy; and to strengthen our international engagement.

We are already doing what we can to promote cohesion by defending the principle of universal benefits - because we believe that to maintain support for the public spending that pays for our welfare system, those who pay into the national pot should also benefit from it.

But with independence we could address policies that are taking money from those on low-incomes, which we know is harmful to growth.

Building a more cohesive society also means addressing the gender employment gap.

In Scotland today the employment rate for men is 76.1 per cent; but just 67.7 per cent for women.

We know that boosting female participation in the labour market can be a major driver of economic growth.

That is why we have asked the Council of Economic Advisers to  analyse the economic and social impact of Scotland moving to the levels of childcare commonplace across European countries.

Now, you might say the Scottish Parliament could already do this. Which leads me to an important point about joined-up powers.

As things stand, when we improve childcare we bear all of the costs but we get none of the financial benefits of supporting more women into work - all of the additional income tax revenues and the revenues from extra spending by families with more money, flow straight to the Treasury in London.

With full tax powers we could also give ourselves competitive  advantages that would better enable us to resist the gravitational pull towards London.

We have already spoken about a competitive rate of corporation tax - although it is worth pointing out that independence would also give us the power to make sure that corporations actually pay the tax they owe, something Westminster governments have failed to do.

Interestingly, Denmark, renowned for its commitment to social democracy, has recently announced it is to cut its corporation tax by three percentage points.

And because we know we need to engage internationally we could also cut the level of Air Passenger Duty which is, right now, damaging business in Scotland.

We would also, I have no doubt, continue to be an enthusiastic member of the European Union. The risk to our EU membership and the benefits of the single market, does not come from independence - it comes from the growing Euro-scepticism of the Westminster establishment and the Tory commitment to an in-out referendum. And that risk is very real.

For all these reasons and more, I believe that staying as we are is not the right decision. It will, in future as in the past, limit the potential of our massive human and natural resources.

Conversely, I believe that an independent Scotland will thrive. Not because we have a divine right to success but because we have strong foundations and, with independence, we will have our hands on the levers of power that will allow us to work for and earn success.

Our prosperity will depend on our abilities and our talent.

It will depend on our determination to innovate, to boost productivity and to produce high value goods and services.

There is no reason whatsoever why the close trading and other links between Scotland and the rest of the United Kingdom cannot continue and be enhanced. 

But an independent Scotland will mean real gains for the people and for the economy of Scotland.

And that is why I believe it is time to put Scotland’s future in Scotland’s hands.