Thursday, 22 August 2013

On Scottish independence and our deficit

How many of these could it cost us?

Scotland is not a “subsidy junkie”: This is the argument of the more sneering type of English nationalist who believes himself to be millions out of pocket by funding free prescriptions and bus passes north of the border, and it is the attack of the fundamentalist Scottish Nationalist who accuses Unionists of being “anti-Scottish” and “putting Scotland down”. It is patently not true: While Scotland has historically received bigger grants per head from Westminster than the other constituent countries, this is only an acknowledgement that we contribute handsomely to oil revenues, which in 2010-11 amounted to £8.8 billion. According to The Economist, an independent Scotland would lose this grant, but gain the right to collect taxes on oil and gas locally. If Scotland were to become independent tomorrow, its first accounts would look little different to today's. In other words, an independent Scotland would currently gain roughly as much in taxes as it would lose in subsidies.

This assumes an optimistic scenario for Scotland, one where we receive the 90% of the North Sea oil John Swinney claims were are entitled to. There are, of course, issues with declining oil production and a fluctuating oil price, both of which would have an enormous impact on the Scottish budget, but we will not consider that here. Additionally, there would be savings from no longer having to send MPs to Westminster. However, Members of the Scottish Parliament would probably (and quite rightly) demand a pay rise to reflect their status as the representatives of an independent people. More politicians and civil servants will probably be needed to carry out tasks formerly reserved to Westminster. Therefore, any savings from no longer sending MPs south will probably be marginal.

Therefore, what we will consider is the cost of two things Scotland will desperately need: an armed force and a diplomatic service, both of which are vital for the operation of a sovereign state. We will also consider welfare policy, because the public demands a social security net, and because the SNP have made welfare one of the cornerstones of their crusade for independence. Finally, we will examine the costs of establishing a new tax office in Scotland, because you can’t do any of this without revenue to pay for it. We will do this in the hope of working out just what independence may cost Scotland.

Scottish nationalists may sneer at the idea of a military as “unnecessary” when Scotland will not be involved in “illegal wars”, but without an armed force, a country has no sovereignty. One has to wonder how an independent Scotland would react to a dispute with Norway over oil rights; a resurgence in the Cod Wars with Iceland; or NATO invoking Article 5 of the North Atlantic Treaty and forcing Scotland to commit to a foreign war.

We shall use Norway as a model for the Scottish Defence Force. Of course, Alex Salmond has revealed his own plans for a Scottish Defence Force, with a budget of £2.5 billion, but his plans for this have been resoundingly ridiculed by those with actual experience in the armed forces, so this can be dismissed as nonsense.

Norway currently operates an active force of about 26,200 personnel, including civilian employees. In a military emergency, it could theoretically mobilise 83,000 combatant personnel. Norway currently spends slightly over £4 billion on its armed forces, or around 2.49% of GDP in 2010. Incidentally, Norway also has the highest military expenditures per capita in Europe.

Now to consider foreign affairs: The Norwegian Ministry of Foreign Affairs had a budget in 2011 of £3.8 billion (Source: Norwegian Budget 2011, page 8). Scotland would have to spend all that and more in its first few years of independence, since it would have to build a foreign office, a diplomatic service, and embassies all over the world from scratch. Nationalists like to say that we are entitled to share British embassies, but no such confirmation has been received from the Foreign and Commonwealth Office. Furthermore, a country that is dependent on another to secure the safety of its citizens and the continuation of its foreign policy is not independent. Nor is the arrangement in any way dignified.

Let’s discuss foreign aid briefly as well. In January 2013, the SNP’s External Affairs Minister Humza Yousaf said Scotland would aim to spend 1% of national income on foreign aid. This equates to about £1.5 billion, based on an estimated gross national income of £150 billion. We could question the wisdom of this given Scotland’s own current domestic issues, but that would be a digression.

I want to discuss welfare and social security spending for a moment. The social security budget takes up the biggest proportion of budgets of most nations. Even the United States spends more on social security than on defence. “Social protection expenditure,” says the GERS Report. “Which includes social transfers through the benefit system, and health are the two largest categories of spending in Scotland.”

Spending on welfare and benefits in Scotland is split between Westminster and Holyrood, with London providing the lion’s share of funding and Edinburgh topping it up. In 2006-07, Scotland received £12.25 billion in identifiable welfare funding, with the Scottish government adding another £3.7 billion. It’s only increased since then: By 2008-09, Scotland was receiving £13.85 billion while contributing £4.47 billion. By 2010-11, Scotland was receiving £15.57 billion while adding £5.16 billion of its own. (Sources: GERS Report 2010-11, page 45) Thus, in four years, the Scottish Government’s contribution to welfare spending in Scotland had increased by 39.4%, or an average increase of £365 million each year. Assuming that Westminster’s contribution to the welfare budget is met by oil revenues, Holyrood will still have to be financing yearly increases. Now, Parliament has voted to enact a significant welfare cut, but given Yes Scotland’s rabid response (SCOTLAND OPPOSED IT WESTMINSTER IMPOSED IT!!!), we can expect that the SNP would want to restore benefits to their previous levels. In the years following independence, therefore, the Scottish government would find itself having to fund a social security budget which, given the statistics for the previous decade, is likely to become more and more expensive every year. Serious questions have already been raised about the SNP’s plans for pensions.

Naturally, none of this can take place without revenue to spend on it, and for this we need a tax office.  In 2009-10, the budget of HM Revenue and Customs was £4.09 billion. If we assume that out of this that HMRC has an annual fixed running cost of £3 billion, from this we can work out the running cost of a Scottish tax office. £3 billion comes down to £47.48 for every person in Britain. This, therefore, results in an annual fixed running cost of £252.2 million for the new Scottish Revenue and Customs.

Therefore, in the first year of independence, the Scottish budget, which in 2011-12 was already in deficit by £7.6 billion, even when a geographical share of North Sea revenue is included (Source: GERS 2011-12, executive summary), is going to have another £9.45 billion dumped on it, probably a great deal more depending on how the welfare budget increases. This figure is remarkably close to an analysis by the Centre for Public Policy and Regions in 2010, which said that Scotland would face a budget deficit of about £17 billion per year. However, this budget deficit does not even include establishing Scottish ministries to run matters formerly reserved to Westminster, such as trade, transport regulation, and of course, fiscal policy. This does not even take into account declining oil production and unstable oil prices.

This is not “scaremongering”. This is not being “anti-Scottish”. This is not Unionists “talking down Scotland”. No one has ever doubted that Scotland could go it alone if it chose to do so. The question has always been; “at what cost?” I have seen Nationalists claim that independence “would not solve all our problems, just most of them.” But it is clear that more problems would just appear. Either borrowing will have to increase at costs far greater than what Scotland currently faces as being part of the United Kingdom, or Scottish citizens will have to make do with healthcare and benefits considerably less generous than those they currently enjoy. So, either no AAA credit rating, or reduced NHS and welfare provision. Would you like the rock or the hard place?

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