I would like to finish with some observations on BREXIT’s implications for Scotland. Clearly, there are specific issues around agriculture, forestry and fisheries which I hope can be resolved satisfactorily.
Ideally, Scotland would be able to determine its own approach to migration since demographic pressures are very different from those in England, dominated as it is by the south east. But despite efforts by the Scottish Government to get a special deal for this country, it seems inevitable that Scotland will be leaving the EU on the same basis as England and Wales. On the plus side, Scotland has many of the tools at its disposal to improve the supply side which are available to Westminster. It too has the choice to invest more and consume less, to improve education and skills and so on.
I haven’t detected much enthusiasm of late for another referendum in Scotland. And I don’t feel qualified to opine about the merits of independence. Suffice it to say, if it does happen, Scotland will have to consider whether or not to rejoin the EU and on what terms. If it were to rejoin, I would expect the border between the Republic and Northern Ireland to provide a template for the Scotland-England border. I would be surprised if it were frictionless; against that, Scotland would be able to trade freely by sea with 27 EU member states.
It will also be necessary to consider what an optimal economic policy would be for an independent Scotland. This is, of course, all hypothetical. However, as I have said before, recent events provide a golden opportunity for proponents of independence to reappraise their economic prospectus. First, on the currency, I strongly believe that monetary union with the rest of the United Kingdom would not be in Scotland’s interests. And in any case I can’t see the UK government agreeing to it in the future having ruled it out so conclusively in 2014. And so I see no alternative at least in the early years of hypothetical independence to Scotland maintaining its own currency and allowing it to float freely against Sterling and the Euro. That way the Scottish pound could find the right level, which would be determined at least in part by where the world is in the oil price cycle.
Small countries can be very successful. Ireland is proof of that. But to realise those potential benefits, economic policy has to be credible. I would advise any Scottish government to aim broadly to balance the budget. At present, without support from Westminster, Scotland would be running a large deficit. If the proponents of independence want to increase their economic credibility, now is the time to start setting out how that deficit could be closed. And it will also be important to consider how best to establish a competitive and efficient corporate and personal tax regime, the better to attract capital and skills.
I am in no doubt that leaving the European Union will create challenges for all the countries of the UK. We need to face up to its inevitability. And we need to accept it will impact on trade and living standards. But if the government in London and indeed in Edinburgh can put in place the right economic policies and stick to them, not just for a year but for a decade or two, it should be possible to limit any permanent damage. Indeed, if BREXIT results in better economic polticymaking, there may yet be a silver lining.
Skills and productivity
(Earlier in the talk):
But alongside more investment (and lower public consumption), we need to see a step change in skills. This is partly about the education system: literacy and numeracy across the countries of the UK tends to lag our competitors. But it is also about technical education, and the support provided by government and employers to develop the skills of those who don’t go to university. This is going to be particularly important if the UK government succeeds in its objective of reducing migration from central and eastern Europe, which has been critical to Britain’s economic performance since the turn of the century.
Successive governments both in London and Edinburgh have announced “radical reforms” to the skills system. Sadly, over a hundred year period, these changes have made little difference. More than any other area, this is one which requires persistence and consensus building, rather than rearranging the deck chairs every few years. The skill system needs to be more demand led, with employers more actively involved as in continental Europe. Decisions need to be devolved to a local level rather than imposed from London or Edinburgh. Sadly, when it comes to skills, our political class don’t show much staying power. Nor does our media. As Tony Blair used to say, if you want to keep something secret, announce something in a debate on skills and training in the House of Commons.
But even if a sustained improvement in skills can be achieved, the lead times are likely to necessitate a relatively open approach to migration for some time to come. This is particularly true of the science and technology sectors where historically the UK has had a comparative advantage. Leaving the EU will result in a reduction in funding for science. It will be important that the British taxpayer not only makes up the difference but that the Government prioritises expenditure on science and innovation. This is not about backing winners. But it is about ensuring that British Universities maintain a cutting-edge research base the better to enable the commercial development of ideas.
Securing higher growth in productivity will also require a ruthless approach to competition. When I joined the Treasury in the early 1980s, Government was still wasting large sums of money on supporting low productivity champions like British Leyland; or unsuccessful inward investors like de Lorean. I don’t think anybody is proposing to return to the industrial intervention of those days. But government needs to ensure a complete level playing field between challengers and incumbents, not least to protect the interests of the consumer. As an official, I always found the EU state aid rules hugely helpful in seeing off wasteful ideas: I hope the Government will seek to embed some equivalent of the state aid rules in domestic legislation.
And if we are to raise the UK’s growth rate it will be important to ensure that the tax regime remains competitive. Leaving the European Union will mean that companies will no longer see the UK as a market friendly gateway to one of the biggest markets in the world. That means the tax regime for capital and labour will become more important in investment decisions. Governments have prioritised reductions in the main corporation tax rate which has fallen from 33 per cent in 1997 to 19 per cent this year and is set to fall to 17 per cent in 2020. It may be necessary to go further. Equally, it will be important to ensure that marginal income tax rates remain competitive. There are indications that the French are wanting to create a more competitive tax regime. If Edinburgh, Glasgow and London are going to remain competitive with Paris, our Governments cannot afford to increase the tax burden further; if anything the contrary. That does not mean Britain has to turn into Singapore. The revealed preference of the British people is that they want European levels of public services. But it does mean that we need political leadership on the trade offs and choices facing the electorate.
Edited extracts from a talk given at David Hume Institute on November 13
Ian says
Recursive revenue will make a very significant contribution toward closing “that deficit”. Even Fraser of Allander have acknowledged it will make a £3 billion dent in the deficit currently attributed to Scotland as a region of the UK. (I think the true is probably nearer £6 billion) In other words the lazy, nonsensical and convenient assumption that “that deficit” is relevant without a major adjustment to iScotland emerges yet again.
The deeper point is that the UK has become so centralised, that on independence Scotland’s fiscal position instantly improves simply through the geographical re-distribution of public spending within the UK. This recursive revenue also is why London and South-east are apparently the economic power-houses of the UK. These two regions benefit tangibly from the recursive revenue generated by a large part of UK public spending taking place in London, while the other regions get “charged” their population share for this same spending.
The sorry reality of the UK finances is that the regions are supposed to feel guilty for being poor and such a drain and on the wealthy centre; while in reality they are being impoverished to pay for the increasing wealth located in the capital city and its environs.