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The SNP must rethink its economic model for an independent Scotland

When a recent poll found support for Scottish independence had reached a record high of 58%, a wave of panic swept through Westminster. Senior Conservatives, anxious about the UK falling apart on their watch, responded by ordering the creation of a new government unit to “to turn the tide of Scottish nationalism”.

The fact that the poll arrived as such a shock indicates just how detached London has become from Scottish politics. Support for independence has been steadily increasing for some time, and for many the COVID-19 pandemic has only reinforced their doubts about being tied to the British state.

For those of us living in Scotland, COVID-19 has been a contrast of two governments. While the Scottish Government’s handling of the pandemic has been far from perfect, polls consistently show that a majority of Scots think Nicola Sturgeon has dealt with the pandemic more effectively than Boris Johnson. According to a recent YouGov survey, the first minister is not only more popular than the prime minister in Scotland – she is now more popular in England as well.

Set against the backdrop of a looming no-deal Brexit and Johnson’s bumbling premiership – neither of which command public support in Scotland – the gap in legitimacy between the leadership in Edinburgh and London has never been starker.

As Joyce McMillan puts it: “It’s not so much that the case for Scottish independence is being won in Edinburgh, as that the case for the Union is being lost in London.”

For the SNP, the hard-fought battle to convince a majority of the population that Scotland should become independent appears to have been won – for the time being at least. The main challenge now is practical: can Nicola Sturgeon’s party devise a credible plan for transitioning out of the UK and starting life as an independent country? Here, the picture is far less rosy.

The Sustainable Growth Commission

In 2014, the SNP set out the economic case for independence in the white paper, ‘Scotland’s Future’. The paper set out a vision of a fairer, more progressive and more democratic Scotland – a vision which inspired many to join the Yes campaign and champion the cause of independence. However, among its shortcomings were overoptimistic forecasts of oil revenues, and an assumption of reciprocity on the part of the Bank of England regarding a currency union, neither of which materialised. These weaknesses were widely recognised as a key factor in the defeat of the Yes campaign.

In order to rectify these shortcomings, in 2016 Nicola Sturgeon established the Sustainable Growth Commission. Chaired by Andrew Wilson, a founding partner at influential public relations firm Charlotte Street Partners and former SNP MSP, the Commission was tasked with (among other things) making policy recommendations on “the range of transitional cost and benefits associated with independence”.

After long delays, the Commission published its final report in May 2018. At over 300 pages long, it was hailed by its authors as the most comprehensive and detailed plan for Scottish independence to date. But for those who actually read the report, it quickly became apparent that something had gone badly wrong.

A new country for whom?

The report begins by thanking the “wide range of interests” the Commission asked for ideas about how Scotland’s economic performance could be improved. Among those consulted, 17 out of 23 were business lobby groups, such as CBI Scotland, the Scottish Property Federation and the Institute of Directors. Notably absent from the list were trade unions, environmental groups, or any group representing workers or marginalised communities in Scotland.

Was this shunning of progressive voices a minor procedural glitch, or did it reveal the kind of economic model envisioned by the Commission? The proposals for putting Scotland’s public finances on a “sustainable and credible” path soon provided the answer.

Using the Scottish Government’s own figures as a starting point, the Commission recommended that Scotland should aim to reduce its fiscal deficit from a predicted 8.2% in 2021-22 to less than 3% of GDP within “five to ten years”. It also recommended Scotland’s national debt should be kept below 50% of GDP, and government borrowing should only be used to finance public investment.

In order to bring the deficit down, the Commission opted not for raising taxes – but suppressing government spending. It assumed that growth in public spending would be limited to 1% less than GDP growth for the first ten years.

Applying these rules retrospectively reveals why they are problematic. In 2019, GDP growth in Scotland was 0.7%. Under the Growth Commission rules, this would mean that public expenditure would have shrunk by 0.3%. In reality, public spending increased by 3% – under a fiscal framework overseen by a Tory treasury.

Applying the same assumptions going forward would see public spending as a proportion of GDP fall by around 4% over a decade. To put it another way: the Commission’s plan would see the size of the state in Scotland shrink at a faster pace than when George Osborne was chancellor. At a time when the world is turning its back on austerity, the Growth Commission seemed determined to bring it back to life.

Whether it was intentional or not, the underlying assumption of the Commission’s fiscal plan is clear: the transitional costs of becoming an independent country should be borne by those who rely most heavily on public services.

Back to the future

The narrow focus on fiscal discipline is not the only part of the Growth Commission’s report that feels like a discredited International Monetary Fund (IMF) document from the 1990s. Throughout the report there is a slavish adherence to a kind of economic orthodoxy that even institutions like the OECD and IMF have long since moved on from.

Rather than setting out a bold vision for Scotland’s economy by drawing on the latest economic thinking, the Commission attempts to identify “general themes that are observed consistently across high performing small advanced economies”. These themes are then used to identify an uninspiring list of key features that should underpin Scotland’s “next generation growth model”, such as being “innovation-focused”, “competitive”, “export-orientated” and having “flexible labour markets”.

To the extent that other modes of capitalism are explored, the analysis is rudimentary and superficial. The Nordic model is described as “attractive but challenging” because it “rests on a particular social model, a high and broadly-shared stock of human capital, and high levels of productivity”. It is ultimately ruled out as a viable option on the basis that “longer term improvements to Scotland’s productivity performance would be required to move towards such a model”. However, many of the key features of the Nordic model, such as high levels of taxation, widespread public ownership and strong collective bargaining, are glossed over or ignored – as is the fact that Scotland’s productivity today is far higher than it was in Sweden, Denmark, Finland and Norway when these countries first adopted the model.

Ireland’s tax haven model is also considered and ultimately ruled out, but only because “Ireland has strong first mover advantage, and Scotland has a challenging fiscal situation that would make it difficult to deliver aggressive tax cuts”. It isn’t difficult to detect where the authors’ ideological sympathies lie.

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