Economic case for Indy undermined by Laffer Curve economics

The Scottish Government’s economic case for independence is strong on historical analysis but light on how Scotland would address the challenges it highlights. It also falls into the same complacency as the Treasury paper, in not explaining why current devolved powers have not been fully used to tackle inequality.

The Scottish Government has published ‘Scotland’s Economy: the case for independence’.  It sets out their analysis of Scotland’s relative balance sheet in terms of public finance and the strengths of the Scottish economy. It then claims a better future is possible if Scotland had access to all the economic and policy levers.

The first section sets out Scotland’s relative financial strength with a balance sheet as an annex. I say relative because it still looks pretty challenging, but probably in the short term slightly better than the rest of the UK, if you include oil revenues. The debate is over the medium to long term because of the reliance on volatile oil prices.  Then we get a decent analysis of Scotland’s economic strengths sector by sector. So far so good.

Then the paper starts to go downhill a bit. A predictable section on how Scotland has been held back by Westminster in tune with the daily refrain from Scottish ministers. Now, there is much here that I would agree with, particularly the importance of tackling inequality. However, there is little explanation of how the Scottish Government has used their existing powers to address this issue. You should always judge politicians on what they have done – that’s the best evidence of what they promise for the future. Sadly, the Scottish Government’s balance sheet on this is decidedly mixed. On many of the issues they criticise successive UK governments for, there is little evidence that they would have done anything different at the time. Banking regulation is an obvious example.

Finally, we get to how they would use the powers that independence would bring. This is the lightest part of the paper. Of course there are good examples of successful small countries. However, the paper gives insufficient weight to the challenges facing small countries with a large neighbour as their dominant trading partner.

Then we have the currency union argument. I have covered this at length before, but the proposal is being taken to new lengths of absurdity. It is frankly ridiculous to assert that if we vote to leave the UK then we have some sort of entitlement to remain within the institutions of that union. We are entitled to our share of the assets and the liabilities. That might mean 10% of the desks in the Bank of England, but not to put our bums on any of the seats that remain. And even if we did agree a new Sterling union, there would be significant constraints on our fiscal and monetary polices. All the policy drivers that earlier sections of the paper complains about.

That leaves us with cutting Corporation Tax as one of the few concrete proposals in the paper. The FM confirmed that this remains the cornerstone of their policy. In the context of this paper there is a rich irony in the FM wanting to adopt Osborne economics as they are clearly both supporters of the Laffer Curve. The problem is that not even Osborne really believes that it will work as the Red Book shows anticipated revenues falling, even when they predict the economy picking up. There is simply no chance of a future UK government in a currency union agreeing to differential tax rates and even if they did, it would simply lead to a race to the bottom.

Overall, the paper makes a decent case for Scotland’s strengths as an economy and even for our relative position with regards public finances. The paper’s big weakness is on how Scotland would use the powers of independence and the consequences of separating from the UK.  Much more work is needed on these issues.

8 thoughts on “Economic case for Indy undermined by Laffer Curve economics

  1. I must say how unimpressed I am by Mr Watson’s indepth understanding of economics. He seems to have an opinion on everything regarding Scotland’s short term, mid term and long term economic future.
    He has such a command of his brief he can state with absolute confidence that parts of the Scottish Governments paper on the economy of an independent Scotland published this week is “frankly ridiculous to assert that if we vote to leave the UK then we have some sort of entitlement to remain within the institutions of that union.”
    We’ve been here in the past, way back in the 70s when trade union organisers thought their job description included telling politicians how to run the country. This was also the time when oil was found in the North Sea and the Labour government commissioned a report on the viability of an independent Scotland from an academic that was an expert in economics.
    The McCrone report concluded that not only could an independent Scotland survive, the surplus in taxation raised from the North Sea would be an ambarassment to the rest of the UK. Naturally the report was surpressed, as was confirmed by Dennis Healy this week.
    I suggest Mr Watson reads the McCrone Report before making wild statements that cannot be supported by evidence.
    There is a saying that is apt to the present debate ‘fool me once, shame on you; fool me twice shame on me’.
    With regard to the point Mr Watson finds ‘frankly ridiculous’, that we (Scotland) have some sort of entitlement to remain within the institutions of that union. I don’t find anything ridiculous in the statement. Sounds perfectly logical to me. If Scotland is expected to take on its proportion of the national debt then I think it is resonable to presume we have an entitlement to maintain access to certain institutions if we so require.
    Here is my take on the future of the economies of Scotland and rUK after Scotland votes Yes. As McCrone predicted Scotland will thrive and will become one of the wealthiest small countries in the world and as a conseqence the rUK will struggle long term with out the cushion of North Sea oil revenues.

  2. I hestitate to say that it is still part of my job description to tell politicians how to run the country. While I have to do it, in fact it is part of everyones role in a democracy to do the same!

  3. Mr.Watson, I’ve never read your job description and I suspect neither have you if you claim “………. it is still part of my job description to tell politicians how to run the country”. It is not.
    You are entitled to give your opinion as an individual on politics and politicians, as you say, as is everyone, but not as the Scottish Organiser of UNISON. This is especially relevent to the present debate on Scotland’s constitutional future because your personal stand point, as a supporter of the union is contradictory to the best interests of UNISON’s Scottish members. I have made this point in the past, and you choose to ignore it, UNISON has many members that work in local government, within an independent Scotland UNISON would see this branch of the organisation boom in numbers and promotion opportunities.
    By all means contribute to the on going debate but it is incumbent upon you to clearly state your opinion is your own and not that of the trade union that employs you to represent it.

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