An independent Scotland? RBS and Iceland suggest not

An independent Scotland? RBS and Iceland suggest not  

Alex Salmond today published Scotland’s independence White Paper. He offered his countrymen the chance to keep the status quo, take more powers to Edinburgh, take a lot more powers to Edinburgh, or leave the United Kingdom all together. Sadly for him that last option is pie in the sky.

The last year or two have been unkind to the cause of Scottish independence. The SNP won its first Scottish election victory, but only won well enough to form a minority administration. Because of that, independence has gone no further than renaming the ‘Executive’ the ‘Scottish Government’.

But while the other parties would vote down independence anyway, the SNP have made the strongest case for staying within the UK.

It seems an age ago that Scottish Nationalists could barely open their mouths without repeating the examples of Iceland and Ireland. Those were two fast growing, prosperous and independent nations that Mr Salmond and his colleagues promised Scotland would mimic. Once it was free of the imperial city’s rule of course.   

Then the world economy wobbled.

You can barely get SNP members of the Scottish Parliament to even admit Iceland exists nowadays. And that is hardly surprising. It was a small independent nation with a fast growing economy thanks to, among other things, a thriving banking sector.

Then the banks collapsed. By early 2009 Forbes was reporting foreign held national debt levels of up to 200%. Its banking assets in the UK were frozen. Its unemployment rate jumped from effectively zero to over ten percent in mere months. Eventually Iceland had to be bailed out and saved from possible national bankruptcy by a clutch of European nations and the IMF.

Contrast that with Scotland and the case for the union becomes clear. The banks collapsed and by early 2009 they were operating under effective state ownership. The UK, or London as the SNP tends to call it, was able to underwrite vast liabilities that totalled far more than Scottish national income. The banks remain in bad shape, but no one imagines Scottish unemployment will hit ten percent any time soon. Recovery, though likely to be slow, is now widely predicted and probably underway.

Then there was Ireland.

The same politicians have gone quiet about the Republic, though they are less willing to give up that example as they have little else to offer. It helps that most people know little of Ireland ’s problems as it just isn’t big news in Britain.  

But Ireland ’s example is more worrying. Iceland could be written off as one bad example where banking was too big a part of the economy, and where new cash was overspent on expensive foreign assets. That Scotland’s banking sector did the same doesn’t negate that Ireland was everything an independent Scotland was meant to be. It was fast growing, global in outlook, and even developed modern companies of world acclaim.

So, with globaleconomiccrisis.com reporting eleven percent unemployment earlier this year, and an economy still shrinking having already shrunk by nearly double digit percentages, the SNP case for freedom was in tatters.

Ireland’s case was also alarming for another reason. The public spending deficit there rose to around 14 percent of GDP without the large stimulus measures seen in the UK. The rise was primarily a result of falling revenues and higher benefit costs. Indeed the price of servicing Irish debt has also risen recently, along with many other small European countries, as the risk of default is emphasised by Dubai World’s turmoil.

In the UK meanwhile, we have similar deficits, but with a great deal of that allocated to initiatives to keep the economy moving, keep people in jobs, and to keep a rather large Scottish bank afloat.  

And that leaves the long term problem of public spending north of the border.

According to the IFS, annual per capita public spending is £9,162 in Scotland. In the UK it is £8,219. So Scotland spends 11 percent more per head than the UK average.

The trouble for an independent Scotland is that Tax in the UK is raised universally, not at different levels in different regions. So to make up the difference Scotland would have to hike up taxes, or cut spending by eleven percent. That would get the deficit down to the UK’s present 14 percent. And that would only be enough if the Scottish tax take matches the average for the UK as a whole. Given our London centric economy even that assumption seems generous.

Likewise, with ongoing trouble in the world economy, and the high prices of debt for small countries, Scotland may face higher servicing costs on it’s share of the UK ’s £800billion accumulated debt.  Its population is eight percent of the UK ’s so it might be expected to take on around £70billion of that debt for itself.  

At least it seems unlikely the British would be quite so cruel as to give Scotland its share of the banking liabilities as well, or worse still all those losses associated with RBS.

So should Scotland go independent? No, clearly it should not. There might be a time when it is in fine shape and has a fair wind behind it. But that seems further away now than at any point in my lifetime, or Alex Salmond’s.  And the Nationalists probably know it.

Hence the three other options in the White Paper.

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