Scotsman Conference June 19, 2012
A Question of Independence - The Economics of Independence
John Swinney MSP
Cabinet Secretary for Finance, Employment and Sustainable Growth
I am delighted to have been invited to address this Conference this morning and to follow John Kay’s thoughtful contribution.
I am also pleased to take part in a debate around the real substance of the debate on Scotland’s future.
Some people question why the constitutional debate matters. For me it matters because it creates the means to address the economic and social challenges that face Scotland and to achieve more than has been possible under the Union.
That’s why, in 1979, I entered politics to argue for Scottish independence. And over the intervening years, it is a critical analysis to consider if we have achieved all that could have been achieved for Scotland.
PERFORMANCE OF THE UNION
The advent of devolution also allows us to compare and contrast what has been achieved by Government for Scotland in the UK and Government for Scotland in Scotland, to see which is more in tune with the aspirations of the Scottish people.
Between 1979 and now, our performance on economic growth has lagged behind that of our competitors – both large and small.
Over the past thirty years up to the financial crisis, growth in Scotland averaged 2.1% against 2.7% in other comparable small EU countries, and also across the G7 countries.
And the wealth we have achieved has not been shared.
Indeed, we now live in one of the most unequal societies in the world – with the top 10% of earners receiving about 27% of income in the UK and the bottom 10% just 3%.
Overall, the OECD estimates Great Britain to be among the top quartile of most unequal countries in the OECD. The Institute of Fiscal Studies report that inequality has increased by around a third in Great Britain since 1979.
And it is clear to see why. Back in 1979, there were 7.1 million people living in relative poverty in the UK – 13% of the population – a figure that was far, far too high.
But the most recent figures show that relative poverty in the UK now stands at 9.8 million, 16% of the population. And in Scotland, there are 780,000 individuals in relative poverty, or 15% of the population.
Although average life expectancy for males in Scotland has increased by over 5 years over the last thirty years, it is still lower than any country in Western Europe.
At the same time, the value of our assets as a nation has declined. For example, even just as recently as 2000, the net worth of the UK public sector - the difference between total public sector assets and liabilities – was plus £231 billion (or 24% of GDP). It is now ZERO!!
In contrast, over the past 17 years Norway used its natural resources to invest in an oil fund which is now worth almost £380 billion. Equivalent to almost £80,000 per person.
Such figures are all the more frustrating as despite a period of unprecedented growth in the global economy, the previous UK Government missed a once in a lifetime opportunity to deliver a step-change in prosperity and social equality.
Growth was squandered on an unsustainable boom that benefited the few rather than the many.
Debts of nearly £31 billion were piled up through PFI when there was the cash available for capital investment.
The unquestioning support for the city left us sharply exposed to the worst financial crisis in over a generation.
And the austerity that has since followed now endangers any progress we had made.
As Mervyn King spelt out in his speech in Brighton in January this year; “we have now experienced the longest period over which real wages have failed to rise since the 1920s.”
When it comes to capturing economic opportunity I believe that governance by the UK has failed to maximise Scotland’s potential over those 30 years.
THE CURRENT FRAMEWORK
So can we meet the aspirations of the many Scots who support a more prosperous, more socially democratic and a more equal society in the current framework?
For much of the post-war period, the people of Scotland embraced the great social reforms first implemented by Clement Atlee.
National insurance, housing for all and the establishment of the National Health Service commanded a consensus that crossed political boundaries and national borders.
Scotland subscribes particularly strongly to the essential values of the post-war consensus.
That consensus has been under threat for some time.
Individuals do not see the UK government as the guarantor of the values and vision of the post-war era, but instead, under a Tory/Liberal government, as the biggest threat to these values and that vision.
NHS and welfare reform exemplify the need for Scotland to have the powers to make our own policies to protect our own needs and values.
Here government for Scotland in Scotland can be judged by its impact.
We have the power to protect our NHS from the privatisation agenda that is driving health policy across the rest of the UK, though not from any impact that has on Scotland’s budget. While in welfare we have little scope to protect the disabled and most vulnerable households from the worst aspects of the Coalition’s Welfare Reform agenda.
Where we can act, our intention is clear.
Against an economic backdrop that hit ordinary households hard we struck a bargain with the public, that whilst there must be pay restraint, the lowest paid in the public sector will receive a living wage. We froze council tax bills, protected our elderly with free personal care and our health with the abolition of prescription charges.
And in doing so, we have not only provided a cushion for many against the worst effects of recession but we have kept money in the economy, put spending power into people’s pockets, invested in the opportunities for the future of apprenticeships, colleges and university education and I hope will have limited the impact of UK decisions on poverty and inequality in Scotland.
There is therefore a clear contrast between the opportunity, the values and the efforts to tackle inequality that have been delivered by government in Scotland for Scotland, and what is being removed and jeopardised by government in the UK.
The most relevant example is in the coalition’s approach to the economy.
Despite the challenges and the sharp deterioration in the outlook since the Coalition first came to power, our capital budgets are still being slashed by a third.
Where we have the opportunity to invest in the economy we are doing so.
Since coming to office in 2007 we have taken forward a range of measures to help unlock Scotland’s economic potential including modernising the planning system, creating the most favourable business rates environment in the British Isles and introducing measures such as the Small Business Bonus scheme to support small businesses.
But while we have made progress - we are hampered by the fact that the vast majority of economic levers remain controlled by Westminster.
A sustained recovery is vital to underpin the goals of equality and fairness. Instead growth in the UK since the recession began has been weaker than all other countries of the G20 except Italy. This is why Scotland needs the tools to be able to fully achieve the ambitions of the Scottish people.
We need to invest in our infrastructure, skills and education; knock down barriers to growth where they arise; and use our tax and economic powers wisely to attract and reward business growth.
But the frustration is that while we – today – have some scope to act, our ambitions are thwarted by a UK Government agenda that we believe to be profoundly damaging for Scotland.
IS SCOTLAND EQUIPPED TO DELIVER OUR AMBITIONS?
So it is clear to me that I have a greater chance of seeing my aspirations for Scotland of opportunity, fairness and equality being met delivered by a government in Scotland than being met by a Union that when tested has wasted chances and walked away from many of the values that Scotland cherishes.
Economic challenges will not disappear when we become independent but as I will set out, Scotland is well placed to meet these challenges head on and to deliver a stronger economy and a fairer society.
According to the official GERS figures, Scotland has had a smaller fiscal deficit than the UK as a whole over the last five year period. Even when North Sea revenues fell by 50% in 2009-10 Scotland’s fiscal position remained stronger than for the UK as a whole.
In the most recent figures for 2010/11, Scotland accounted for 9.3% of UK public spending, but 9.6% of UK tax revenue.
And our 9.6% of UK tax was generated with just 8.4 per cent of the population – the equivalent of £1,300 extra for every man, woman and child in Scotland.
However, despite the relative strength of our public finances, as a result of the financial crisis and the fiscal mismanagement of successive UK Governments, the UK now has a legacy of debt. Debt that Scotland will have to repay independent or not.
But if UK public debt was allocated on a per capita basis, then for 2010-11 - the last year in which figures are available - Scotland’s net debt would be 51% of GDP compared to 60% of GDP for the UK.
Scotland’s fiscal position is therefore stronger than the UK, and it will remain so if we remain committed to utilising Scotland’s strong economic foundations and asset base to ensure fiscal responsibility.
Estimates from Oil & Gas UK predict up to 24 billion barrels of oil remaining in the North Sea with activity expected to continue for decades to come. Based on future price expectations, these reserves have a potential wholesale value of £1 trillion in real terms.
Even without oil and gas, Scotland has a strong economy and asset base.
Recent figures published by the ONS showed that in 2010, and excluding oil and gas output Scotland was the third richest part of the UK – behind London and the South East – with a GVA per head 99% of the UK average.
If Scotland’s geographical share of oil and gas is added – the internationally recognised way to allocate such a resource - Scotland’s GVA per head rises to 115% of the UK average or approximately the 6th highest in the OECD.
And just as oil and gas mature, so the new technologies of renewable energy and carbon capture will be reaching their peak.
We have 10% of Europe’s wave energy, 25% of its tidal energy, and 25% of its offshore wind resources.
We have a strong intellectual base with many of our Universities appearing in assessments of the top global places of learning.
In the area of science, engineering and technology, Scotland, relative to our GDP, is currently number one in the world in terms of research.
We also have real international competitive advantages and excellence in key sectors such as food and drink and tourism.
Elsewhere, we are also taking real steps to capitalise on Scotland’s world-wide reputation for excellence in medicine through the success of our life sciences industry, with the attraction of several multinational businesses to Scotland as well as a growing number of successful indigenous spin-off companies.
And while we have faced turbulence in the banking sector, we have a strong and broadly based financial services industry - demonstrated by the significant announcements of jobs and investment by major players such as Virgin Money, Barclays, State Street, BNY Mellon and Avaloq.
So I firmly believe we have the foundations and the ability to succeed.
WHY BE INDEPENDENT
We have the assets, the fiscal balances– and as an independent nation we would have the tools.
Retaining the pound is something that I believe is in the interests of Scotland, the rest of the UK and Sterling itself.
As I set out to the David Hume Institute, our economies share broadly the same structures with a free-flow of goods, services, labour and capital across the border which is in contrast to many in the Euro Area.
A Sterling zone will provide businesses both in Scotland and the rest of the UK with the certainty and stability for trade, investment and growth.
Away from the heat of the constitutional debate it is not in the interests of any party or part of the UK to oppose a sterling zone and we are fortunate to have a number of experts to help us design the detail behind this proposal under the auspices of our Fiscal Commission Working Group which includes two Nobel Lauriat Professors – Joseph Stiglitz and Jim Mirrlees.
But while monetary policy is important to underpin price and macro-economic stability it is a blunt tool for tackling most other economic policy needs in Scotland.
It cannot be used to directly tackle youth employment, build and invest in infrastructure, promote innovation, boost skills, target overseas investment and promote investment in key sectors. Nor can it integrate the tax, regulation, legal, health and education systems to maximise economic opportunity and tackle inequality.
That is why I believe we need to be independent. With those tools, the full levers of independence, we can properly capture economic opportunity to tackle the inequality and poverty that brought me into politics and with what is an increasingly distinct Scottish approach to governance; we can do so more efficiently and effectively than currently happens in the UK.
Last week in a speech to Glasgow Caledonian University and reported in the Scotsman newspaper I outlined a number of ways in which these levers of an independent nation could be harnessed to support business and economic performance and to create economic opportunity.
In an increasingly interconnected world, being independent offers an opportunity to put forward a distinct voice in the global economic community and to market Scotland’s strengths.
With control of both sides of the government’s balance sheet we can promote policies that create growth and therefore revenues and we can use those revenues to invest in skills and education.
I was struck by the comments of a member of the audience at my lecture last week about the need to do more to stop the flow of our top graduates from Scotland.
One of the challenges that we face as a country is that far too often many of our businesses or elements of a business – particularly headquarters and decision making functions - migrate to London and the South East.
Small countries, and regional economies, need a fiscal edge to encourage these core business centres to settle and prosper. My view on corporation tax is well known. A reduction as small as three percentage points could create 27,000 jobs and mark a first step to the fiscal edge required.
An opportunity to obtain a fiscal edge, coordinated with our investments in infrastructure, education and skills to ensure that such investments are sustainable and become embedded in our economy, would be a powerful new tool for Scotland.
Good use of economic and tax policy is not just about the headline rate of taxation but also the nuances within the system.
The powers of independence would enable us to target, flexibly and efficiently, the levers of growth – taxation, regulation and intellectual property – to address weaknesses in the Scottish economy and to take advantage of new opportunities.
As the world becomes more interconnected, innovation and its commercialisation will be key to boosting productivity and competitiveness.
Scotland is a country rich in opportunity and bursting with innovation but sadly we don’t translate this enough into greater commercial opportunities and growth.
In 2010, Scotland’s Higher Education R&D as a percentage of GDP was ranked top in the UK and third amongst OECD countries. But in contrast, the value of our Business and Enterprise R&D was just 4% of the UK total – less than half our share of the UK population.
With our current powers we’re taking steps to help address this such as streamlining the commercialisation and innovation support provided by our Enterprise Bodies. But being independent would provide us with new tools – tax credits and intellectual property for example – which could be used to help create a step change in R&D.
We could also use incentives to aid the development of new technologies such as in renewable energy and our low carbon sector alongside targeted policies to sectors – such as tourism, construction or small businesses - that have a particularly significant impact on our economy.
And it’s not just tax policy where we would have new opportunities. For example, many of you will have heard our frustration that we don’t have any influence over the Crown Estate which manage Scotland’s seabed out to 12 nautical miles, and almost half of our foreshore.
Control of Scotland’s seabed, in a way that would allow us to fully coordinate the efforts of manufacturers, the energy industry, regulation and planning, would help us deliver the full benefits of the marine renewable energy revolution for Scotland.
Being independent would also enable us to boost our international profile, contribute to key decision making on the European and global stage, and provide us with the tools to boost our connectivity and linkages with key trading partners.
With the powers of independence we can start afresh – in consultation with business – on how design a new tax, regulatory and competition system that works in Scotland’s interests.
With the ability to seize these opportunities comes the ability to really tackle inequality. This year we are delivering 25,000 Modern Apprenticeships. By creating training opportunities, bringing people into the workforce and retaining their skills we are saving the welfare state millions in unpaid benefits. Under a joined up system, in full control of both economic, education and welfare policy these savings could be reinvested in boosting economic activity.
As I mentioned earlier, we live in one of the most unequal societies in the world, and face a UK Government that is intent on pursuing a Welfare Reform agenda that places the poorest in our society at even greater risk.
But faced with this, we can do one of two things. We can sit and wait for it to happen. Or we can take responsibility ourselves, and use the levers of an independent nation to put in place a system that better reflects the values and ideals that we have in Scotland.
Being independent is about giving us the levers to nurture our talents, support creativity and innovation and reward our entrepreneurs.
But it also about taking full responsibility for all our actions as a nation, for the tough decisions, balancing the books and supporting those that need our help and compassion.
With that new responsibility will come ‘can do’ attitude - taking decisions in Scotland, in the interests of Scotland.
We have the necessary physical and administrative infrastructure and a talented and hard-working population to be a successful independent country.
Being independent would provide two essential ingredients for growth – a ‘can-do’ culture and the ability to design policies that suit our own circumstances.