The economic vision for Scottish independence

Stability. This is the economic vision for Scottish independence emanating from the current SNP administration. Is this the rallying call for a movement that wants a different type of economy? 

During our Festival of Economics in March 2023, we interviewed SNP MP Stewart Hosie, who was, at the time, shadow spokesperson for the economy at Westminster. It was a fascinating conversation. Stewart highlighted the importance of ‘economic stability’ and ‘fiscal responsibility’ as Scotland migrates to an independent economy.  Reporting on the conversation, The National wrote:

Stewart Hosie, the party’s economic spokesperson, said he wanted to sound like a “boring banker” to calm the nerves of voters sympathetic to independence but concerned about the economic questions.

During our interview, I said I understood his point of view but suggested this was not ‘inspiring’ enough for the independence movement. You can watch the short 90-second exchange here:

Despite its brevity, this conversation is very revealing. Stewart’s views are those echoed in Westminster and Holyrood by elected SNP members and as laid out in Scottish Government papers over the last decade.  I will try to summarise:

PLEASE NOTE: As the timing is uncertain, when exactly will Scotland become independent? I have excluded the immediate and pressing economic impact of NetZero. And then a more rushed economic panic to the unfolding ecological crisis. I have only looked at the assumptions within the growth paradigm, that is, don’t worry, all will be fine; we can grow our way out of this problem. We will return to some what-if scenarios in later posts to see how this plan reacts to those external shocks.

Early independence:

• We must pay significant attention to how we (as a government) are perceived ‘by the market’ when we become independent. We must be seen as ‘good stewards’.
• We must take our place alongside other similar centrist governments in Europe. Using Sterling (the preferred option), we will run a very tight ship and will not spend beyond our means. The boat will not be rocked by us as we try to establish ourselves as a ‘fiscally responsible’ nation.
• International financial markets and foreign governments will charge us a fair interest rate for borrowing from them because we will make sure we can pay them back.
• We will only borrow to spend when we have confidence that we can pay back the money we have borrowed.
• We will have made attempts to pay off ‘our share’ of the UK Government’s national debt. This is a very positive message from us that we are like the Lannisters in Game of Thrones: we will always pay our debts!
• We will pursue economic growth (an increase in GDP), and this will allow us to invest the foreign currency we have in our economy
• We will start from a position where we ‘grandfather’ regulations from the UK in financial services, corporate governance etc., so we can transition gradually from where we are now to a new, nicer type of market economy.
• We will have a debt in foreign currency, but it will be well managed. (An important reminder: Scotland will not have its own currency, so it MUST borrow foreign currency to be able to finance the government above what it collects in taxes.)

After 5 to 10 years:

• We will have proved that we can manage our own economy by keeping to the debt and deficit ratios set by the European Union: the fiscal deficit will be less than 3% above GDP each year, and the debt-to-GDP ratio will be less than 60%. We will achieve this by aiming to run a government surplus: taking more in taxes than we inject back into the economy.
• We will have progressed our vision of a wellbeing economy by prioritising the areas of our economy, more support for carers, a circular economy, more progressive taxation, etc., that lead to wellbeing.
• A lot of focus will be on building our exports, especially with rUK, as we seek to reverse the trade imbalance with our biggest market. We may be closer to a trade balance by this point.
• All the while, we will be gradually moving our regulatory system to mirror the EU.
• We are still unlikely to have our own currency as we have several tests that must be passed. However, we may be ready to launch our currency very soon after this period and possibly before.

After 10 years:

• Scotland will have its own currency for a while before we have the Euro.
• Our stewardship of the economy will be complete as we are accepted as a good bet by the European Union.
• We will have paid off much/most of our foreign currency debt.
• A decade of acting fiscally responsible and tweaking our economy will have delivered our Just Transition and our wellbeing economy, and we will be ready to enter the EU as a full member with a strong external trading relationship with rUK.

We can confidently state that this is the vision that Stewart Hosie painted for us in March 2023.

Please, if anyone within the SNP administration would like to state if I have missed anything or made any mistake, please let me know. Also, a right or reply is open to this post.

I would imagine that most people would read through this economic plan and understand its appeal. Many people could look at this and say, “Surely you have no issues with this sensible approach?” This is how a sensible government MUST act (please let us know your thoughts in the comments.)

I do not share the view that this is a ‘sensible’ approach that must be taken by an independent Scotland. There is an alternative. There are two detailed aspects that I want to cover in this post. Is this the economic message that inspires a movement? And to look at the economic case for this plan.

Is this the economic message that inspires a movement?

A decade after a No vote. After Brexit. After 13 years of, without a doubt, the worst UK administration in living memory. Huge levels of corruption. Growing inequality. Declining improvements in health and mental health indicators. Stagnant wages. Increasing environmental transgressions. Is this the speed and the destination that you want? An economy that can be safely classed as independent of the UK but resembling the UK. A kind of UK-lite, if you will. Are you not inspired?

The economic case

We must always start a section like this with this qualification. The UK government does not have any vision at all for Scotland. It is happy to sit and watch it; in fact, encourage it to rot. It has no interest in the three most important economic frameworks that occupy the Scottish Government: a wellbeing economy, a Just Transition and Community Wealth Building.

To remain within the UK is to sit on the sidelines, seeing an administration deliberately trying to wreck the idea of an economy for fit for all to create one that benefits only a few. The Scottish Government is totally different. It wants to see Scotland succeed. And it wants to see a fairer society.

However, here is the rub: it runs the risk of wrecking the economy by accident or, more correctly, by following the vision outlined above.

We have covered the self-harm of choosing to continue using Sterling in the early stages of independence, so I will avoid going over this ground (when I can), but I have to state this:

The decision on what currency to use is the most important economic decision Scotland will make in the first years of independence.

To show the significant problems with the current approach above, I will lay it out again. But this time, I will respond to each point.

The economic vision for Scottish independence

Early independence:

We must pay significant attention to how we (as a government) are perceived ‘by the market’ when we become independent. We must be seen as ‘good stewards’. This is indeed the situation we face. Every decision we make must be deeply conscious of the market, because they set the rate of interest at which the government, individuals and businesses must borrow. This will mean that the focus is on the external view of the economy rather than the internal view. In other words, how does it look to them, not to us? What Scots think of our economy is less important than what rating agencies, international finance houses and other governments think. This is to volunteer for a role as a ‘developing nation’. Organisations only like to lend to countries who can pay them back! That much is obvious. Payback in the short term is more likely by increasing privatisation, removing regulations and opening up fully to international finance. Scotland will have an outward-facing economic framework, similar to a small developing nation in the global south.

We must take our place alongside other similar centrist governments in Europe. Using Sterling (the preferred option), we will run a very tight ship and will not spend beyond our means. The boat will not be rocked by us as we try to establish ourselves as a ‘fiscally responsible’ nation. Fiscal responsibility is exceptionally important for a nation that uses another nation’s currency. It must be able to pay off its foreign currency debt. It does this by running a trade surplus (virtually impossible in the initial period of independence) or by running a fiscal surplus. In the early stages of independence, in order to pay back interest on loans, the Scottish government must spend less than it taxes. It must run a fiscal surplus. This means that the private sector, you and me, must run a deficit. We must spend more than we earn. In other words, it will be our credit cards that are funding the economy, not the government. As Hyman Minsky concluded, private debt is much more likely to lead to financial instability than public debt. 

International financial markets and foreign governments can charge us a fair interest rate for borrowing from them because we will make sure we can pay them back! We don’t have our own currency, so to provision itself, the government must earn currency from exports or tax Sterling from us. We all think that Scotland will want to borrow for infrastructure projects. It will be able to exclude these from the ‘fiscal deficit’ calculations, so billions will be borrowed. We will have to pay whatever the rate is that is offered. We either borrow at that rate, or we do not invest in infrastructure. If Scotland borrowed from the Bank of England today, it would have to pay north of 6% interest, more from a commercial bank. 

We will only borrow to spend when we have confidence that we can pay back the money we have borrowed. We have seen how quickly interest rates can rise. The Bank of England raised rates 14 times in a row since December 2021. Over the next decade, we are likely to have to get used to interest rates bouncing anywhere between 3% and 10%. How much would you borrow if you were not sure what rate you had to pay back? The answer is a lot less than you probably could borrow.

We will have made attempts to pay off ‘our share’ of the UK Government’s national debt. This is a very positive message from us that we are like the Lannisters in Game of Thrones: we will always pay our debts! We will address this point separately in another post. However, to pay back the debt in Sterling, we will have to earn that currency and then pay it back to the UK Treasury. It will be all hands to the pump selling things to rUK, which will obviously have an impact on both how much we have available for Scots and how well-lubricated our new trade routes are with Europe. 

We will pursue economic growth (an increase in GDP), and this will allow us to invest the foreign currency we have in our economy. Very simply, with all other things being equal, if we borrow at 6%, we must have GDP growth of over 6% to be able to pay it back. The average growth rate for Scotland over the last decade has been around 1.5%. We have built growth into our economic model. If we are not an outlier by some considerable margin, our economic plan fails, and we are left with an ever-expanding pile of foreign currency debt. The absolute worst thing that can happen to a new state. 

We will start from a position where we ‘grandfather’ regulations from the UK in financial services, corporate governance etc., so we can transition gradually from where we are now to a new, nicer type of market economy. This approach will mean that we resemble the UK economy for at least a decade. Every move away will be seen as a ‘risk’ for business and the markets. We have already covered why our external appearance is more important than how we view our own economy. Rather than highlighting the difference in Scotland, for example, tighter financial regulations for credit, more worker involvement in businesses, more generous worker protection etc., we will be promoting the idea of ‘business as usual’ in Scotland. 

We will have a debt in foreign currency, but it will be well managed. (An important reminder: Scotland will not have its own currency, so it MUST borrow foreign currency to be able to finance the government.) Two scenarios. We borrow very little foreign currency – so not much infrastructure investment – or we borrow a lot of foreign currency and hope that growth is larger than the rate we have to pay back (running a huge risk if the market changes). This affects the type of investment the government can make. Most climate mitigation strategies, for example, never make a financial return. But privatising water services does.  

After 5 to 10 years:

We will have proved that we can manage our own economy by keeping to the debt and deficit ratios set by the European Union which we have unilaterally agreed to mirror: the fiscal deficit will be less than 3% above GDP each year, and the debt-to-GDP ratio will be less than 60%. We will achieve this by aiming to run government surpluses: taking more in taxes than we inject back into the economy. This is 5 to 10 years of austerity, something that I don’t think any voter for Scottish independence would vote for. 

We will have progressed our vision of a wellbeing economy by prioritising the areas of our economy, more support for carers, a circular economy, more progressive taxation, etc., that lead to wellbeing. We have covered how economic transformation is impossible under the current devolved settlement, and we would extend this to say that any economic transformation without our own currency and under the above plan is impossible.

A lot of focus will be on building our exports, especially with rUK, as we seek to reverse the trade imbalance with our biggest market. We may be closer to a trade balance by this point. Every country on the planet tries to have a trade balance. This is, of course, impossible. For every surplus, there is a deficit. Globally trade must sum to zero. Scotland will start from a very poor position. It has a substantial deficit with rUK. It has very little infrastructure to support a booming export industry, and our competitors have a head start, as they have all had central governments at least trying to support and prioritise their export industries. All of our eggs are in a growth model based on trade at a time when many countries and trade blocks are pulling back on imports to focus on their own sectors. 

All the while, we will be gradually moving our regulatory system to mirror the EU. Here is perhaps the biggest contradiction in this whole plan: we move closer to the EU while remaining close to the UK. We will resemble the economy we have left so as not to spook the markets, grandfathering all UK regulations. At the same time, we must move our regulatory framework closer to the EU. We will try to export more to the EU at the same time, we have to earn a lot of our currency in Sterling. 

We are still unlikely to have our own currency as we have several tests that must be passed. However, we may be ready to launch our currency very soon after this period and possibly before. We won’t have our own currency, but we hope that our management of the economy has persuaded the EU that we don’t need one. 

After 10 years:

Scotland will have its own currency for a while before we have the Euro. My strong personal belief is that the Scottish Government has NO INTEREST in ever having a Scottish Currency. It hopes to leapfrog that to adopt the Euro.

Our stewardship of the economy will be complete as we are accepted as a good bet by the European Union. Scotland will probably be able to join the EU, but who knows what the EU will look like in a decade. 

We will have paid off much/most of our foreign currency debt. We run the very likely risk that we enter the EU with significant foreign debt. Maybe the EU will pay it off for us or cancel some of it. Or maybe we can only get in if we undertake some more austerity measures. It is too far to look ahead to this one.

A decade of acting fiscally responsible and tweaking our economy will have delivered our Just Transition and our wellbeing economy, and we will be ready to enter the EU as a full member with a strong external trading relationship with rUK. A decade following this plan will turn Scotland into a much poorer nation with a heavily indebted private and household sector. A nation unable to play any positive international role. An extended life with a government unable to provision itself with its own currency. A solidly neoliberal market economy so far removed from the aspirations of those who voted for independence. Probably fairer in some ways than rUK but in a very similar position.

The economic vision for Scottish independence turns into a horrible reality

Nothing is written in the stars. This is not a prediction. It is the basis of an argument. The current plan for the economy is fundamentally handicapped by:

1. The decision to keep Sterling
2. An economic framework based on export-led GDP Growth
3. An economic understanding based on and supportive of neoliberalism
4. A desire for a slow and steady transition to a UK-lite state
5. A heavy reliance on private capital and foreign investment (linked, of course, to the decision not to create our own currency from day one of independence)
6. A pre-determined endpoint of membership of the European Union

Considering the introspection that is going on at the moment within the SNP following the loss of the Rutherglen and Hamilton West by-election, we hope that this extends to questioning if, indeed, we want our bankers to be boring.

Nothing would excite us more than being able to debate and discuss the details of the SNP’s current economic plan and to offer an alternative.

If you would like SCOTONOMICS to present a virtual talk to your group or organisation on the difference between Scotland as a currency user or currency issuer or any related economic topic, please get in touch.