Size doesn’t matter for Scottish economic success. But planning does

Strong institutions, the right mix of human and physical capital, and sound economic management are key

Last modified on Sun 2 May 2021 06.43 EDT

Scotland’s population is similar to that of Norway and Denmark, both countries in the International Monetary Fund’s list of the top 10 richest in the world. So when Nicola Sturgeon says there is no reason why an independent Scotland could not make it on its own after independence she is absolutely right.

All the evidence suggests that size really doesn’t matter when it comes to economic success. What does matter is having strong institutions, the right mix of human and physical capital, and sound management of the economy. In their different ways, Singapore, Switzerland and Sweden all have these, which is why they score highly on living standards, educational attainment and longevity.

If the polls are right, there are plenty of Scots who think that if the Danes and the Swedes can make a decent fist of running their own affairs then so can they. This makes Thursday’s election for the Scottish parliament fascinating. The mayoral elections in London and the West Midlands matter: the test of public opinion in Scotland really matters.

Sturgeon is a cautious politician and will be in no hurry to have a referendum any time soon even if the SNP has the votes in the Holyrood parliament to press for one. In Quebec, independence remained a live issue even though a referendum in 1980 delivered a 60-40 vote for the status quo. A second plebiscite in 1995 delivered a much smaller vote in favour of Quebec remaining part of Canada but settled the matter. There has been no third chance for the separatist movement subsequently: a fact that is not lost on Sturgeon.

The experience of Quebec is not the only reason Sturgeon needs to be careful. As things stand, the economic case for independence has not really been fleshed out in any more detail than it was in the paragraphs above, namely that Scotland has bags of potential (true), can surf the wave of renewable energy (true) and could be even more prosperous in the long term than it is know (also true).

These points – reasonable though they undoubtedly are – will run up against some powerful counter arguments in any referendum campaign. For a start, the arguments that the SNP used to oppose Brexit – the disruption and the trade barriers caused by leaving a big partner – would apply to separation from the UK with knobs on.

Britain’s departure from the EU involved long and often difficult negotiations but were helped by the fact that the UK has its own central bank and its own currency. Scotland has neither, and would need to set them up from scratch.

There are plenty of examples from newly formed countries to show that it is possible to establish new monetary regimes, and setting borrowing costs to suit Scotland’s own needs has much to commend it. That, though, is not the same thing as saying it would be trouble-free. On the contrary, it would have the potential to be hugely disruptive, with the risk of capital flight, higher interest rates and a run on the currency.

To get round this problem, the SNP says that it would continue to use sterling for the transitional period while Scotland’s own independent central bank was being set up. This is a fudge and would be quickly exposed as such. For an indeterminate period, Scotland would be independent in name only because its monetary policy would be run by a foreign country. Even worse, it would be at the mercy of movements in UK interest rates and in the value of the pound. At some point, there would be a cliff edge when the new central bank of Scotland took over running monetary policy from the Bank of England. Sturgeon will need to have a better answer to the question of why this would all be worth it than she appears to have at present.

The same applies to fiscal policy, the decisions affecting taxes and spending. As the Institute for Fiscal Studies noted last week, the UK ran a budget deficit of around 16% of national income in the last financial year but Scotland’s was even higher at 22% to 25% of gross domestic product. The reason is that Scotland has higher levels of public spending per head and slightly lower-than-average levels of tax revenues per capita than for the UK as a whole.

Even so, all the major parties – the Scottish Conservatives included – have been wooing the voters with big spending promises in the run-up to this week’s election. They are able to do so because the funding for public services is higher per head in Scotland due to the Barnett formula, and partly because Scotland doesn’t have to take responsibility for its own deficit.

“The fiscal transfers made to Scotland, Wales and Northern Ireland (and indeed the north and Midlands of England) are normal within a fiscal union – but would cease under independence,” the IFS says.

“To offset the end of these fiscal transfers, some combination of tax rises or spending cuts would be needed, unless faster economic growth could be quickly delivered in an independence or full fiscal autonomy scenario.”

The implications of the IFS analysis are obvious. To win this week’s election, all that Sturgeon has to do is convince Scottish voters that she is a better choice than Boris Johnson and spray spending promises around, safe in the knowledge that there is a security blanket provided by the Bank of England and the Treasury.

To win a referendum she has to convince voters that there is a plan to grow the economy that will avoid the need for the sort of eye-watering austerity that will make the early 2010s look like a walk in the park. That will be tougher.

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