Scotland: Time to say goodbye?

Allan Little introduces our special report on Scotland with a look back at history, empire and Thatc

I once attended a service at St Andrew's Scots Memorial Church just outside the old city walls in Jerusalem. The sermon was given by a Palestinian Christian who'd been ordained in the Presbyterian tradition. Even now when I think of it, years later, it astonishes me. Its subject was St Andrew himself and why both the Scots and the Palestinians felt such an affinity with him. Andrew was the brother of Peter, the minister reminded us, and there were no doubts about the apostolic pecking order: Peter was the senior partner. Peter fished by net, winning whole shoals of humanity into the early Church; Andrew was a line fisherman, content to save souls one by one. Andrew, he said (I'm not making this up), was like the Scots, content to live in the shadow of a more significant partner, the Patron Saint of Second-Best.

Jerusalem is a long way to go for a lecture on your nation's inadequacies. But the preacher had a point. Scots of my age remember the failed devolution referendum of 1979: I was 19, voting for the first time. The next day the Herald newspaper ran a cartoon of the lion of Scotland, no longer rampant but cringing in a corner, above a caption that read: "I'm feart."

Are we still feart? I don't think Scotland is any more nationalistic than it was in the Seventies; it is certainly far less inward-looking than it was. It is not the rise of a new, self-confident Scottish identity that is the threat to the Union. It is the steady decline, in Scotland, of a convincing Britishness; a slow falling away of a consensus on what being British really means.

"It's ridiculous," an English colleague said the other day, on his return from a trip to Scotland. "The SNP don't even want real independence! They want to keep the pound! They want to keep the Queen!" True. They want an independent Scotland to stick with sterling until the country is ready to join the eurozone. They also want Scotland to be a constitutional monarchy. The SNP is a different beast from the one that Alex Salmond was expelled from in the early Eighties.

I grew up in Galloway, the remote south-west corner that juts into the Irish Sea. Surrounded by water and separated from the rest of the country by a stretch of unfarmable rocky moorland, it felt like an island. Galloway was Covenanting country. As children, we were taken to see the tomb of the 17th-century martyrs Margaret McLachlan and Margaret Wilson. They were sentenced to death by drowning for refusing to renounce their Presbyterian faith, at a time when the king was trying to impose, from London, a detested High Church Episcopalianism. They were tied to stakes on the sands of the Solway Firth, where the tide comes in at the speed of a galloping horse. McLachlan, who was in her sixties, was placed further out so that Wilson, a teenager, would have to watch her being overwhelmed by the sea, to encourage her to recant. Both women drowned - martyrs, we were taught, against the imposition of alien philosophies from down south.

In 1974, Galloway returned a Scottish Nationalist MP to Westminster. I remember the shock. Every public space was plastered with the slogan: "It's Scotland's Oil." My parents, who'd lived in England and liked it, hated the xenophobic tone. We never cheered for England's opponents in football. When my father went to work in England in the Sixties he found it more diverse and tolerant, certainly more confident and meritocratic than the society he'd grown up in. I would experience the same thing 25 years later when I moved to England.

Wounded disbelief

The SNP in the Seventies seemed to me blinded by a romantic delusion: backward-looking, heritage-based, fixated on an unpleasantly ethnic sense of what Scotland was. It was as hostile to the European Community as it was to the British Union. This really was a separatist party in the full-blooded sense of the term. Years later, Salmond and the other "modernisers" finally got control of the SNP and turned it into a more modern, European social-democratic party, purging it of the anti-English sentiment that so many Scots detested and feared. Salmond is a hard man to like, but he redefined Scottish nationalism. My colleague Andrew Marr calls it "internationalist nationalism". When "Independence in Europe" became the party's prevailing appeal, it seemed, suddenly, hardly "separatist" at all. This is a very odd kind of nationalist party. The independence it wants doesn't really amount to "separation" at all, at least not in the Seventies sense. That, to those who love the Union, makes it all the more dangerous.

It is not only Scotland that has changed, but Britain. In the Eighties, I often found an unpleasant pattern emerging when I argued about Scotland with English friends. A typical reaction came in two phases. The first was wounded disbelief: how could you treat us this way after all we've done for you? That would be followed by a petulant defiance: go then - we don't care (subtext: you'll soon come crying back). Now, English friends no longer seem hurt; they're more likely to be bored or irritated by the endless indecision. In the Eighties, too, Scots complained of the "democratic deficit". Opinion polls showed that the English sympathised with this, and support for Scottish devolution was sometimes higher in England than it was in Scotland. The English could see no harm in it if that was what the Scots wanted.

But they see harm in it now. Dilettante fellow Scots beware: one of the stereotypes of the English character is that they really do care about fair play. And there is a growing sense that the current settlement is not fair. It's not just the West Lothian question. Why, when the UK Treasury pays the bill north as well as south of the border, should nurses in Scotland get their pay rise immediately while their counterparts in England and Wales have to wait till November? Whatever the rights and wrongs, a sense of unfairness is taking hold in England. It seems that the risk for the Union has shifted: the Scots may not be any more ready to vote for independence, but if they're not careful they might be "pit oot". Increasingly, the rest of the UK wants us to put up or shut up.

A trip the other day to my local independent bookshop in south London was revealing. The bookseller is a cultivated man. I told him I was making a radio programme about 1707. "1707?" he said. "War with France?" The Union, I said. Treaty of Union. "Sorry, still not with you." It has genuinely surprised me how little hold this date has on the popular consciousness in England. Is there another country in Europe whose people don't know the date when their state was created? If dates were celebrities in Scotland, this one would be top of the bill, a bigger star by far than 1066. By the end of primary school, we had learned that it was the year our country had decided to abolish itself.

My wife and I have a home in a part of Edinburgh where the Union is celebrated in the elegant architectural proportions of the Enlightenment. Every street is a hymn to the twin virtues of liberty and commerce that the Union bestowed on Scotland: Rose and Thistle Streets symbolically adjacent; George Street intersecting with Hanover and Frederick, in celebration of the dynasty whose future the Union was designed to secure (although there is a seditious nod at Scotland's dark past, too: Great Stuart Street lurks just down the hill). There was even an early plan to lay out the streets of Edinburgh New Town in the shape of the Union Flag (it was abandoned because it made some of the drawing rooms in the centre blocks triangular). It is 18th-century Edinburgh's magnificent gesture of gratitude.

And Scotland had a lot to be grateful for. When England and Scotland ceased to exist and became Great Britain on 1 May 1707, the Scots gained access to what was becoming the world's greatest trading empire. Glasgow grew rich on tob acco and sugar. Industry would soon follow trade in the crashing turmoil of the Clyde shipyards and steel mills. Within a generation, Scots knew that they had traded sovereignty for something much more valuable: prosperity.

Pride of empire

When I was a child, our family home was a solid brick-built Edwardian house that had a name, rather than a street number. It was called Rhodesia. The house next door was Transvaal. They'd been built by a man who had come home after a life lived in the service of empire. We learned to identify parts of the world where we had cousins we never expected to meet: Pietermaritzburg, Nova Scotia, Dunedin, Melbourne. My mother, whose maiden name is Clive, told us we were descended from Robert Clive of India. Thus was our country, Scotland, even our tiny remote corner of it, plugged into the entire world through the blessing of the British empire, which we Scots almost alone had built, not through our money (we'd had none of that), but through our genius and good Protestant discipline.

Except it wasn't. Empire was long gone by the time I was a child. The Commonwealth was what people meant when they said Empire, but even this was losing its potency. Britain had thrown its lot in with the Europeans under Edward Heath. Generation by generation during the 20th century, the Union was valued for something different. For my grandparents, it was the empire. For my parents' generation, it was the war against the Nazis.

My generation were children of a different, but equally coherent, Britain: the postwar welfare state and the NHS. The British state promised to look after you from cradle to grave. The strategic industries belonged to the British nation: the National Coal Board, British Steel, British Rail. The Post Office installed your phone. The British state sent you the gas you cooked with and the electricity that lit your home. And Scottish Nationalists wanted to disentangle all that!

It was in the Eighties that things started to get sticky, because someone did disentangle all that. Margaret Thatcher swept away the postwar consensus. She transformed the economic topography. The market is now open and global. The company that lights my home isn't even British. In rolling back the frontiers of the state, the Thatcher revolution had an unintended consequence: it also rolled back the frontiers of British sentiment in Scotland.

But Scotland never had an indigenous That cherite revolution. For a decade, England voted enthusiastically for the change that she offered; Scotland resisted it. Until the mid-Seventies, there was little difference between the ways people voted north and south of the border. After that, voting behaviour started to diverge until, by the Nine ties, the divergence was extreme. That was highly corrosive for the Union. Its place in the popular imagination shifted. It was no longer a beneficial partnership, but an in strument of English control, a means by which England imposed on Scotland changes that had been rejected at the ballot box.

Elephant in the room

It is time to acknowledge the elephant in the room. Scotland spends £11bn more a year in public money than it contributes in taxation. The unionist parties argue that that means an independent Scotland would have a huge hole in its budget. Although some high-profile entrepreneurs support independence, business leaders for the most part fear that an independent Scotland would have to raise taxes, causing a flight of industry and capital. The SNP says this £11bn figure doesn't include oil revenues (which the UK Treasury does not count in Scotland's total fiscal contribution) and argues that in the short term the North Sea would fill the hole. In the long term, the party also says, Scotland would have control of its own destiny and would be able to implement growth-promoting policies that aren't currently available to the devolved Scottish Executive.

More and more, this argument is taking place in a European, not a British, context. I went to Finland last year to make a film. The similarities were compelling: it is a nation of about four million people on the geographical periphery of Europe; it has a larger, more powerful neighbour with whom it was once joined in a union. But it doesn't have an £11bn hole in its budget. Unlike Scotland, Finland can pay its own bills. How?

In 1991, when the Soviet Union collapsed, the Finnish economy went into free fall, shrinking at a rate of 10 per cent a month. Finland's new government took drastic action to restructure the economy. Classically, things got worse before they got better. In little more than a decade, Finland found itself near the top of world league tables. Would this have been possible if it had not had control of its economic policy? A businessman who runs one of the world's biggest internet security firms told me: "When I started in the late Eighties, Nokia was still making rubber boots. Our economy was based on wood pulp. We rent ed a small office in New York so we could claim that as our head office, even though our workforce was in Helsinki. We thought no one would take a Finnish high-tech company seriously."

Of the 27 EU states, about half (including Finland) have populations smaller than Scotland's. So, if Finland can pay its own bills and if Ireland can pay its own bills, why can't we? The danger for the Union is this: if its defence rests on a fear of losing an £11bn subsidy, then it has turned Scotland into something anachronistic in a Europe that aspires to be the most competitive economic space in the world - one big national dependency culture. Perhaps the Palestinian preacher was right. The danger is the poverty of aspiration that lies at the heart of this argument.

Years spent reporting the war in the former Yugoslavia have left me with a distrust of national sentiment. I have seen its dark power. And there is nothing like a bit of distance to dull the senses. "Look I am looking at my sweet/Country enough to break my heart," wrote the Scots poet W S Graham. Fine - but he lived in Cornwall. I am emphatically a Scotsman, but I fear I am too sceptical to be seduced by poetical pat riotism. For those who want the Union to survive, there is a real long-term danger. If Britain is reduced to not much more than a community of sentiment and a big subsidy flowing south to north each year, it could wither on the vine. For most of its 300 years, until recently, it has meant something more inspiring than that.

Allan Little is the BBC's foreign affairs correspondent. "1707: the birth of Britain" will be broadcast on Radio 4 and Radio Scotland on Sunday 1 April at 5pm

This article first appeared in the 26 March 2007 issue of the New Statesman, Scotland: Time to break free?

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

***

The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

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In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt