Sturgeonomics would have crashed an independent Scotland

23 December 2021

7:20 PM

23 December 2021

7:20 PM

The Omicron variant is upon us, which means the return of the Scottish First Minister’s news conferences. These can be testy affairs, as Michael Blackley, the Scottish Daily Mail‘s political editor, found out at a recent one.

Blackley had the temerity to politely question the Scottish government’s support for the hospitality sector, asking if Sturgeon had considered relaxing isolation rules for staff. ‘Yeah, that would really help,’ came the sarcastic response. Blackley was then asked if he had ‘listened to a single word I said?’ With the First Minister finishing off by complaining that she doesn’t have the borrowing powers the Treasury has to fund support schemes.

Who could have guessed Donald Trump would be the model for Sturgeon’s presidential-style news conferences?

The point she made about borrowing is being pushed repeatedly by the SNP. It’s the sort of thing that can come across as auto-pilot grievance, but in this case there is more to it than that. The Sturgeon administration wants to create leverage for their negotiations over Scotland’s fiscal framework (the rules on how devolved funding operates), which are currently up for review, while also not passing up the opportunity to plant the seeds of future arguments for another referendum.

The problem for Sturgeon is that her preferred alternative, of full fiscal autonomy under independence, would demonstrably lead to much tighter fiscal constraints for the Scottish government, at least in the early years after separation. Indeed, the evidence strongly suggests a Scotland that had seceded in 2016 would have entered the pandemic in dire financial straits had there been a yes vote.

Not only had North Sea oil revenues dried up by 2016, leaving a very large deficit for the country had it gone independent, but Scotland would also have automatically found itself outside the official sterling currency zone. The ‘sterlingisation’ model the new nation would have defaulted to would have made UK levels of Covid spending impossible for Scotland.

To see why, it is worth looking at countries that unilaterally use either the euro or the US dollar as their currency and look at how they have faired during the pandemic.

Take Montenegro, which is euroised, having adopted the euro without the agreement of the eurozone or the European Central Bank (ECB) in 2002. In June 2020 the International Monetary Fund (IMF) announced it had approved $83.7 million in emergency support to the country so it could fight the pandemic.

Euroisation has brought benefits to Montenegro in that it has removed exchange rate risks for businesses buying and selling into the EU and helped to control inflation. On the downside, the country has no monetary policy at its disposal, which means fiscal policy (tax and spend) is the main tool for stabilising the economy. Also, Montenegro’s central bank cannot engage in quantitative easing to reduce bond yields and debt servicing costs. And because its central bank cannot issue currency to provide liquidity support to commercial banks, it cannot act as lender of last resort. This latter function is effectively taken on by international institutions such as the IMF.

That comes at a cost. The statement from the IMF on its Montenegro bailout states: ‘Starting next year, the authorities need to restore fiscal space and steadily lower public debt by resuming their ambitious fiscal consolidation program started in 2017.’ In other words, austerity.

The timing of the IMF bailout is also worth noting. The money came through when Europe was well into the pandemic. In Scotland, furlough, various business support and other assistance schemes were in place by then. The many billions of pounds needed to fund Scotland’s bailout came automatically, when needed, thanks to Scotland’s place within the UK monetary and fiscal union.

If Scotland had left the UK after the 2014 vote, this money would not have been available. Instead, like Montenegro, Scotland would have been struggling to issue large amounts of sovereign debt denominated in a foreign currency, and it would have been paying a hefty premium relative to the remaining UK to do so. And Scotland, like Montenegro, would not have benefited from quantitative easing.

Even a cursory examination of an independent Scotland’s Covid plight should be enough to humble Nicola Sturgeon and her colleagues. A probable scenario would have been a country fighting day-to-day to raise enough capital to keep its public sector afloat while making payments on debt already outstanding. Then comes the first Covid wave and the newish state finds it has reached its limits on debt issuance, and so lines up alongside other dollarised and euroised countries to submit its application to participate in the IMF’s Rapid Financing Instrument emergency assistance programme.

But how many lives would have been lost in the interim, as the Scottish government waited for that bailout? How many businesses lost — how many households would have slipped into poverty? And then of course there would be the inevitable post-pandemic austerity imposed as part of the bailout agreements.

By contrast, with Scotland safely ensconced within the Union, the country’s ‘core’ (excluding Covid) day-to-day funding is set to grow 2.5 per cent in real terms over the course of the current UK parliament, and be higher in real terms than at any point since devolution. This increased spending is shown in the below chart from the Fraser of Allander Institute.

Outlook for the Scottish resource block grant

Picture1.pngSource: Fraser of Allander Institute, 27 October 2021

Montenegro is just one example of a euroised economy that has received Covid financial assistance and debt relief from the IMF. There are plenty of others (Panama, for instance, which is dollarised, received $2.7 billion and $515 million in two separate tranches of IMF assistance). The predicament of these economies shows how misguided the SNP plan to remove Scotland from the UK fiscal and monetary union is. By doing so they would automatically move the country to an economic system hard-wired to fail.

This puts Sturgeon’s performances at press conferences into perspective. When she presses her foot on the grievance pedal and tries to give the impression Scotland’s financing needs are constrained by being in the UK, it is worth keeping in mind that the country’s place in the Union has liberated it from the financial constraints the likes of Montenegro are subject to. To argue for a system that would inflict dollarisation-type constraints on Scotland is baffling.

That the dangers of sterlingisation are so clear, yet Sturgeon and her colleagues simply refuse to engage with the truth of it, points to a fanaticism that should be a major red flag for Scots.

Every single person in Scotland getting a vaccine in their arm, everybody who has seen furlough money or cash for their business going into their bank account, should feel grateful to live in a country that can provide these things. That gratitude should not be directed at either the Scottish or the UK governments, but instead at the fiscal and monetary union that everyone on this island shares and benefits from.

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