The SNP’s economic case for independence is incoherent. So why won’t anyone say so?

The SNP’s Growth Commission was praised by the media. But it doesn’t produce an economic case at all.

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In The Emperor's New Clothes, the Hans Christian Andersen fairytale, it takes an innocent child to say: “But he hasn’t got anything on!” before the crowd realises the emperor is proudly striding through the town naked.

There is something akin to this fabled crowd’s supine acceptance of what they’ve been told to see in the way the Scottish press has responded to the SNP’s latest attempt to create an economic case for independence. Perhaps it’s time for someone to point out what’s staring us all in the face: “But they haven’t produced an economic case at all!"

The SNP’s new blueprint comes in the form of a report from the Sustainable Growth Commission, a body chaired by former SNP MSP Andrew Wilson. Wilson was a founder of “strategic communications” firm Charlotte Street Partners where he works with, among others, former SNP spin-doctor Kevin Pringle. It’s perhaps not surprising therefore that the Growth Commission’s reception by a largely compliant Scottish press has been a triumph of spin over substance.

The report itself is so long-winded, repetitive and lacking in clear summary messages that few will have actually ploughed through its 354 pages in full, so the way it’s spun in the press is important.

Unfortunately, normally trenchant commentators have had their blades dulled for fear of jeopardising a personal friendship. When writing about the Growth Commission, they have felt the need to explain “I have known and liked Wilson for 20 years”, that he is “a good friend of mine”, that “Wilson is a friend” or that they “admire the way he operates”.

This is the context within which These Islands, the pro-UK think tank I chair, has published a response paper which objectively and rigorously critiques the Growth Commission’s report. We recognise that the case for maintaining the union must be about much more than narrow economic arguments, but also know that if we are to have an informed and constructive debate about our future then any economic arguments must be fairly and honestly presented.

Wilson's report does not do that. When faced with criticism, he has tended to either dismiss those who offer challenge as not being “serious” or simply ignored them. Our response, however, is a serious piece of work that cannot be ignored by anybody who's serious about informed debate. 

As context: in 2013 the Scottish government’s Independence White Paper assumed an independent Scotland would be able to retain sterling as part of a formal currency union and could rely on future oil revenues to deliver fiscal sustainability. During the 2014 referendum, the UK government rejected the idea of a currency union and we now know that in 2016-17, when the White Paper forecast oil revenues of £6.8-7.9bn, the actual figure was just £0.2bn.

Closing the fiscal gap created by that lost oil revenue and finding another answer to the currency question were the challenges set for the Growth Commission. It has not met them.

The Commission indulges in some statistical gerrymandering to enable it to make claims that suggest “Small Advanced Economies” (SAEs) are intrinsically superior to larger ones. It does this by creating an SAE cohort which arbitrarily excludes any of the poorer performers while including countries like Hong Kong and Singapore whose low tax, high income-inequality models the Commission explicitly rejects.

In fact, the growth rates of the countries whose economic policies they suggest Scotland should most seek to emulate – like Denmark, Finland and New Zealand – are not materially higher than the UK’s.

The Commission goes on to not only assert that Scotland should aspire to match the superior GDP growth rate of their biased cohort, but that it should hope to exceed their growth by one per cent per year for 15 years. Where Alex Salmond's independence White Paper tried to close the economic gap with recklessly optimistic oil revenue forecasts, Wilson attempts to close with fantastical growth aspirations.

To resolve the currency question, the Commission simply assumes continuing to use sterling for a “possibly extended transition period” until, amongst other criteria, “sufficient” foreign exchange and financial reserves exist to allow the creation of an independent currency.

The scale of these reserves is not quantified. Quite how an independent Scotland would generate the surpluses required to build them is not addressed and the implications of this “sterlingisation” strategy for an independent Scotland’s ability to join the EU are ignored.

Where the 2014 White Paper assumed £0.6bn of net savings on separation from the UK, the Commission is more optimistic and assumes day-one savings of £2.6bn. The analysis used to arrive at this figure is flawed not just because of rose-tinted optimism, but because there’s an error in the Commission’s interpretation of the underlying figures – and their assumptions simply don’t add up.

The Commission talks of the importance of maintaining frictionless borders and the economic downsides of Brexit but, even though Scotland trades nearly four times more with the rest of the UK than with the EU, it ignores the equivalent economic downsides of Scotland separating from the UK.

The Commission also assumes that the transition costs for creating an independent nation would be less than the estimated costs of taking on a handful of welfare powers devolved from Westminster.

So the economic starting point used by the Growth Commission is most definitely not based on “very conservative assumptions” as it claims. It states its aspiration as being to paint a picture of hope that is “grounded in a clear-sighted reality and a rigorous plan”  – but that very plan makes transparently optimistic assumptions and simply ignores the downsides of its proposals cannot be considered to be either clear-sighted or rigorous.

Recognising the need to demonstrate fiscal credibility, the Commission goes on to recommend that an independent Scotland’s first Fiscal Rule should be to deliver a deficit of less than 3 per cent of GDP within 10 years, and that this should be achieved through spending restraint.

However, even this fiscal rule is not sufficiently aggressive. If Scotland were to meet the Commission’s aspirations to launch its own independent currency, reaching a fiscal surplus would be a more credible aim. But the Commission fails to show how this could be achieved.

Despite making unrealistic starting assumptions, ignoring any of the downsides of separation from the UK and suggesting a relatively modest first Fiscal Rule, the Commission is unable to avoid concluding that Scotland outside the UK would face a decade of further spending restraint in the hope of maybe getting the deficit down to 2.6 per cent. That figure is still worse than the UK’s deficit which Scotland shares today.

In a recent appearance at First Minister's Questions, Nicola Sturgeon claimed: “If the spending recommendations of the Growth Commission had been applied over the past ten years…it would have eradicated austerity in Scotland. That is the reality”

We refute that assertion. If the Commission’s model for deficit reduction had been applied over the last decade, Scotland would have had to reduce spending on public services by £60bn.

Whilst the Commission and its sponsors may claim to reject austerity, the reality is that the report recognises the need not just to inherit spending levels that result from “Westminster Austerity”, but to rely on further spending restraint to build fiscal credibility – while waiting for hoped-for exceptional economic growth to come to the rescue.

The harsh truth is that, whilst it may have proven unpalatable to some independence supporters, the Growth Commission in fact presents a sugar-coated version of the harsher economic reality an independent Scotland would face.

The Commission itself notes that Scotland as part of the United Kingdom is “without question a rich and successful nation”, with “economic performance…amongst the best performing decile in the world”, and that “Scotland’s economic output per head is the best of the UK nations and regions, outside of London and the South East”.

It implicitly highlights how being in the UK allows Scotland to enjoy the advantages of a shared currency and large domestic market whilst avoiding the fiscal constraints that would inevitably apply were Scotland a stand-alone economy. But it fails to consider which of its recommendations for growth could be pursued while remaining within the UK, because it assumes independence as the answer and works back, trying to deal with the issues that assumption creates.

Instead, using the devolved powers Scotland already has – or could have – to pursue the Commission's growth ideas would be a more logical approach – and would not cause the needless disruption, uncertainty and further austerity that separation from the UK would entail. 

Kevin Hague is Chairman of These Islands. Its full response paper can be found here.