GROWTH COMMISSION RESPONSE: CONTEXT & RESPONSE

Context

In November 2013 the Scottish Government published a white paper entitled “Scotland’s Future: Your Guide to an Independent Scotland”.^{1Scotland’s Future: Your Guide to an Independent Scotland} This presented an economic case for independence that relied on retaining Sterling as part of a formal Sterling Area with the UK and depended on future oil revenues to deliver fiscal sustainability. During the 2014 independence referendum the UK Government rejected the idea of a formal currency union and North Sea revenues have since collapsed. The White Paper predicted oil revenues in 2016-17 of £6.8bn – £7.9bn pa^{2Scotland’s Future, p.75}, the actual figure turned out to be £0.2bn.^{3GERS 2016-17}

Faced with accusations that they had previously campaigned on a ‘false prospectus’, in September 2016 the SNP announced the formation of a Growth Commission, tasked with building a “sound, transparent and firm prospectus”^{4SNP unveils group to advise on independent Scotland’s currency for independence The i, 16th September 2016} for independence. Former SNP MSP Andrew Wilson was appointed as Chair and in March 2017 he declared the report was “due to be delivered to the First Minister in the coming weeks”.^{5Scottish independence: SNP's economic case 'should not include oil' BBC News, 6th March 2017}

Rebranded as the “Sustainable Growth Commission”, the report was finally published at the end of May 2018, a year later than originally planned. It is worth noting that despite the lack of any overt SNP branding, the Growth Commission is an SNP party funded document, not an official government White Paper.

These Islands was formed in recognition of the fact the case for maintaining the union must be about much more than narrow economic arguments, but also that if we are to have an informed and constructive debate about our future then any economic arguments must be fairly and honestly presented. It is in that spirit that this response is offered.
 

***

Response

At over 119,000 words the Commission’s report is undeniably a substantial piece of work. These Islands welcomes the report as a thoughtful and fact-based contribution to the wider constitutional debate.

The Commission has taken its time, consulted widely^{6Although we note with disappointment that Trade Unions were not included in the consultation} and as a result has given us much to digest. We too should take our time, so what follows is no more than an initial response. The topics of currency and debt settlement are two in particular we expect to address with separate papers in time.

It is a sad indictment of the state of economic debate in Scotland that we feel the need to applaud the Commission for accepting and building on the Scottish Government’s own Government Expenditure and Revenue Scotland (GERS) figures. We hope that those commentators and politicians who have sought to undermine this National Statistics publication will take note. The Growth Commission have rightly recognised that any serious discussion of Scotland’s economic position must start with the GERS figures.

We welcome the Commission’s efforts to advance the debate about how best to grow Scotland’s economy by looking internationally for examples of best practice. The report presents well-argued cases for the economic value of greater immigration, the potential for stronger export growth, the importance of improving productivity, the need for infrastructure investment and the opportunities that should arise from developing digital and technological skills, creating a more entrepreneurial culture and driving innovation. There are many ideas in the report that can be taken forward without any need for Scotland to become independent and we believe these should be the subject of ongoing, constructive and non-partisan debate.

The report suggests that “it is essential to stimulate an inclusive, national debate on Scotland’s economic future to find out whether a different, better path is possible.”^{73.38 (p.17)} These Islands shares this aspiration for an inclusive debate, but we also seek to ensure that any debate is well-informed and open-minded.

The Commission’s report presupposes that any future path must involve separation from the UK. The report does not argue the case for independence, it assumes independence as the answer and then tries to deal with the issues that assumption creates. In that regard this report is a political document, thinly disguised as an objective analysis.

An inclusive national debate must surely at least consider the views of the majority of Scots who rejected independence in 2014 (and who polls tell us continue to reject independence today).

There are paths other than independence which the Commission has ignored. No attempt has been made to learn from the many different regional, provincial and state models that exist.^{8Germany, Canada and the US being just three obvious examples} We recognise the difficulty in finding comparable data at a sub-national level, but don’t see why this should constrain our thinking. Failure to consider and seek to learn from alternative economic models that do not presuppose independence is a major shortcoming of the report.

When we study the detail of the report – particularly its quantitative claims – we find ourselves questioning whether the report’s authors’ desire to make a case for independence has compromised the quality of their analysis.

It is in the spirit of seeking to ensure that any debate stimulated by the report is well-informed that in this paper we make the following 9 observations (each of which is expanded on in the chapters which follow):
 

1. Smaller isn’t Necessarily Better: The report does not make a case for small advanced economies being intrinsically superior to larger ones
 

• All the analyses offered around the performance of Small Advanced Economies (SAEs) compared to Large Advanced Economies (LAEs) are based on a sample of the most successful SAEs only.
   
• The report doesn’t seek to gain insight or learn lessons from the experiences of less successful SAEs (such as Greece or Portugal).
   
• This approach makes sense when seeking to identify those successful SAEs from whom we might seek to learn, but it offers only a partial perspective and prevents us drawing any conclusions about SAEs in general.
   

2. Stretching the Empirical Data: The ‘growth potential’ claims made are unrealistic
 

• The £4,100 figure used to scale the potential increase in GDP/Capita is based on no more than saying ‘if we had the same GDP/capita as the Netherlands we’d have £4,100 more GDP/capita’.
   
• The report concludes that Scotland should aspire to 0.7% pa higher GDP growth as a result of becoming an SAE – but the 0.7% figure relies on including in the benchmark group of SAEs countries like Hong Kong and Singapore whose low tax, high income-inequality models the Commission explicitly rejects.
   
• The report goes on to recommend that Scotland should set as a goal the aim of exceeding this SAE growth rate by a further 1.0% pa for fully 15 years. No empirical evidence is offered to suggest that this is a realistic aspiration.
   
• The report assumes that country size is the main explainer of observed differences in performance, but makes no attempt to prove this or to test alternative hypotheses.
   
• The growth potential claims made take no account of the specific policies and strategies the Commission actually recommends.
   
• The particular countries the Commission recommends we most seek to emulate have not demonstrated materially superior growth to LAEs (such as the UK).
   

3. Failing to Make a Case: The report does not make a case for independence
 

• The report implicitly attributes all of the speculative upside it identifies to the ‘case for independence’, despite observing that many of the recommendations could be implemented using existing or enhanced devolved powers.
   
• Failure to compare the projections made for independence with an alternative ‘use the powers we have’ scenario is a striking omission.
   
• The report completely fails to consider any of the potential downsides of independence such as trade-friction with the rest of the UK or broader economic shocks caused by separation.

4. A Reality Check: Far from being more realistic, the report is objectively more optimistic than the 2014 White Paper
 

• The report assumes ‘day 1’ net savings of £2.6bn whereas the 2014 White Paper assumed net savings of just £0.6bn.
   
• The assumptions behind this £2.6bn net saving are not just extremely optimistic, some of the calculations involved are simply wrong and lead to the figure being clearly and significantly over-stated.
   
• The 2014 White Paper assumed Scotland would inherit a “negotiated and agreed”^{9Scotland’s Future, p.21} apportionment of UK debt. The Commission makes the more optimistic assumption that – by negotiating a debt servicing cost and calling it part of a ‘solidarity payment’ – an independent Scotland would be considered as starting ‘debt free’ from a market (and EU) perspective.^{10They also say they “assume that credit markets will consider the impact of the Annual Solidarity Payment when assessing Scotland’s creditworthiness.” [B3.33] but ignore the implied debt figure when later calculating debt/GDP ratios} It is far from clear that this attempt to move the debt ‘off balance-sheet’ would work as the Commission hopes.
   
• The Commission suggest ‘total set-up costs’ would be £450m. The author of that claim has previously stated the ‘total transition costs’ would actually lie in a range of £0.6bn to £1.5bn.^{11Debating Scotland’s transition costs: A response to Iain McLean’s critique, Patrick Dunleavy, 26th June 2014} The set-up costs just for the limited welfare powers being devolved as a result of the Smith Commission proposals are already expected to be up to £660m.^{12Nicola Sturgeon's letter to the Prime Minister on the fiscal framework, 17th Feb 2016} A figure of £450m for the total set-up costs for an independent Scotland is patently unrealistic.
   
• The report claims that the 5.5% ‘legacy deficit’ they project has been arrived at using “very conservative assumptions”.^133.144 Based on the observations above, we do not see how that statement can possibly be justified.
   
• We note that the Commission assumes all of these speculative savings would have to be used to reduce the deficit, rather than for any increases in public spending in other areas.
   
• The Commission’s +0.7% pa higher real GDP growth rate ambition seems more optimistic than the 2014 White Paper’s +0.12% pa higher GDP per capita growth observation.^{14It’s impossible to draw a direct comparison because the Commission make no attempt to project population figures and therefore offer us no projections for GDP per capita – but Scotland’s population growth rate over the last 25 years has averaged just 0.25%, over the last decade 0.50%}
   
• Exclusion of oil revenues from the calculations is an explicitly conservative assumption but, given Scotland’s oil revenues have cumulatively totalled less than £0.3bn over the last 2 years^{15According to GERS, Scotland’s share of N Sea revenues was £56m in 2015-16, £208m in 2016-17}, not enough to off-set the optimism we’ve seen above.
   
• By avoiding discussion of North Sea oil^{16Apart from the surprising insinuation that the UK Government was at fault when it reduced the tax burden on this ailing sector (something the SNP actively called for): “However, the UK’s oil and gas tax receipts have also fallen due to policy decisions taken by the UK Government on the taxation of the sector, for example on tax rates (including setting the rate of petroleum revenue tax at zero in March 2016) and tax allowances associated with investment.” [B4.15]}, the Commission avoids consideration of future oil and gas decommissioning liabilities, which are estimated at £40bn – £80bn.^{17North Sea Decommissioning Costs Likely to Double from £39 billion target to more than £80 billion, Intergenerational Foundation Press Release, 30th April 2018}
   
• Ignoring North Sea oil seems like a convenient symbolic gesture aimed at distancing the Growth Commission from the 2014 White Paper (which forecast £6.8bn – £7.9bn pa of offshore receipts^{18Scotland's Future, p.75}).
   

5. The Truth about Austerity: Claims that the economic model proposed is ‘anti-austerity’ do not stand up to scrutiny
 

• Ensuring the deficit is reduced to below 3% within 10 years is the Commission’s first Fiscal Rule.^{19B12.2 and repeated in various forms more than 10 times within the report}
   
• The model suggested for achieving this is for growth in spending to be sufficiently lower than growth in GDP so as to reduce the deficit to less than 3% within 10 years.
   
• Based on their optimistic starting assumptions (see point 4 above), the Commission illustrates that spending growth of 1% less than GDP growth would deliver a deficit of below 3% after 9 years.^{20Assuming constant revenue/GDP and a starting deficit of 5.9%} This can only lead to real increases in spending if real GDP growth is greater than 1%.
   
• Over the last 10 years Scotland’s real onshore GDP growth has averaged 0.8% pa.^{21Using 2016-17 GERS figures and applying the HMT GDP deflator} The Scottish Fiscal Commission’s latest forecasts^{22The forecast runs to 2023, at which point 0.9% real GDP growth is forecast Scotland’s Economic and Fiscal Forecasts, May 2018} are for real GDP growth to not exceed 0.9% pa in the foreseeable future.
   
• Whether looking back at the last 10 years or forwards based on realistic growth rate forecasts, the combination of the Growth Commission’s first Fiscal Rule and their proposed model for reducing the deficit implies real spending reductions.
   
• The Commission states within the body of the report “we recommend modest real terms increases in public sector expenditure”^{23B12.16 being the only time this ‘recommendation’ is mentioned, although Part B, recommendation 42, does state “at trend rates of growth and inflation this would allow annual average cash increase of above inflation”}, but this can only be achieved (while holding to their first Fiscal Rule) if real GDP growth is greater than 1% pa.^{24And if we accept the optimistic ‘legacy deficit’ starting position}
   
• The Commission’s model implies significantly greater austerity than the current ‘UK austerity model’ they claim to reject. If applied over the last 10 years, we conservatively^{25Our calculation is conservative as it doesn’t assume any reduction in revenue generation despite reduced expenditure (the fiscal multiplier effect) – the Commission itself recognise this risk when it observes that when budgets are cut “there is a risk that a counter-productive impact on growth can result” [B1.8]} calculate that the Growth Commission’s recommendations would have led to roughly £60bn less public spending in Scotland over that period, and a 12% reduction to spending in 2016-17.^{26This is not a surprising finding given that the Commission’s first Fiscal Rule means the spending reduction over the decade would have to be enough to get the deficit below 3% by the end of that period}
   
• By not seeking to reverse recent austerity cuts on independence^{27In fact the Commission explicitly states “Scotland’s replication of UK budget spend currently allocated to Scotland in a number of areas is assumed to be unchanged for our analysis including welfare, pensions, economic development and scientific and university research funding.” [Part B, p.17]}, the Commission tacitly accepts that the austerity Scotland is currently enduring is a necessary (but not sufficient) condition to make the Scottish economy fiscally sustainable on a stand-alone basis.
   
• A corollary of the above is that the Commission makes no allowance for spending increases to reverse such inherited policies as the benefits cap, the 2-child tax credit cap or increases in the state pension age.
   
• We note that the alternative strategy of hoping that increased spending will act as a fiscal stimulus to drive growth is hardly mentioned in the report. It appears only as a rather equivocal and non-committal final recommendation^{28“Transitionary Fiscal Stimulus: a fiscal stimulus to growth should be considered and consulted on depending on the prevailing economic circumstances and the perspectives and price required by debt providers.” [B14.1 recommendation 43]} (and is not modelled at all).
   
• The commission has claimed to reject the existing ‘austerity model’ but has replaced it with one that is necessarily harsher. Necessarily so because – unlike the situation for Scotland remaining within the UK – the Commission suggests than an independent Scotland would have to get its deficit below 3% within a decade.^{29The report states “the imperative to do this is real” [B7.7] – but only the assumption of independence makes this so} 
   
• In summary: The anti-austerity rhetoric is completely disconnected from the detail of the report’s recommendations.  We are not alone in drawing this conclusion – commentators and analysts from across the political spectrum (many of whom are in favour of independence) share our view.
   

6. Aiming Too Low: The Commission’s first Fiscal Rule (to get below a 3% deficit within a decade) is not sufficiently aggressive
 

• The report notes that “Small advanced economies have made fiscal prudence a strategic priority”^30A3.32 and none of the Commission’s chosen SAEs runs a deficit as large as 3% – most in fact run a surplus.^{31Figure 7-1}
   
• The report notes^{32Figure 8-1} that for the three countries it suggests we most seek to emulate^{333.58 (p.19) “we are especially drawn to a hybrid of Denmark, Finland and New Zealand”}, Finland targets a deficit of 1.0% of GDP, Denmark a deficit of 0.5% and New Zealand seeks to maintain a surplus.
   
• The IFS, with customary understatement, have observed that “A deficit of almost 2.6% of GDP might be sustainable for a large country with good growth and a long track record of borrowing on international markets. For a new and relatively small country it may not.”^{34Weak public finance position implies more austerity for an independent Scotland, IFS, 15th June 2018}
   
• The European Fiscal Compact specifies a 0.5% deficit limit “as measured across the cycle”.^35B7.11
   
• The report itself observes that a sensible long term fiscal target should be "fiscal balance over the business cycle" or “if a 2% GDP growth rate can be sustained, then a deficit limit of around 1% of GDP may be appropriate in the longer term”.^36B8.67
   
• The Commission aspires for Scotland to achieve EU membership^37B8.63, for which having an independent currency is effectively a prerequisite^{38The formally stated economic accession criteria is “a functioning market economy and the capacity to cope with competition and market forces”}. Building the necessary reserves to support an independent currency would almost certainly require an independent Scotland to run a fiscal surplus.
   
• All of the report’s analysis assumes that, by calling the cost of servicing Scotland’s inherited share of the UK’s debt a ‘solidarity payment’, the markets will consider an independent Scotland to be starting ‘debt free’. This is unrealistic: we would expect the bond market to view the ‘solidarity payment’ as what it is: a debt servicing cost.
   
• We would therefore argue that, to show how an independent Scotland could be fiscally sustainable, the Growth Commission needs to demonstrate how it could move into surplus. In fact, using extremely optimistic assumptions and after fully 10 years of independence (and likely austerity), the Commission still projects a deficit of 2.6%.^{39 Figure 12-2}
   

7. The Missing Model: The report doesn’t attempt to model the likely impact of its recommendations
 

• The “Framework & Strategy” outlined in Part B of the report is less a strategy, more a laundry-list of possible ideas and process recommendations.^{40Which build on the process recommendations made in Part A}
   
• The report is long on process. It recommends seven separate Reviews^{41Universities Growth Strategy Review, Government Led Innovation Review, Comprehensive Review of Scottish Taxation System, Comprehensive Review of Inherited UK Spending Programmes, Standing Council on Scottish Public Sector Financial Performance, National Balance Sheet Review and a Comprehensive Review of policy relating to long-term risk bearing projects}, five new Agencies^{42Inward Investment Agency, Innovation Agency, Economic & Fiscal Forecasting Agency, Asset & Liability Management Office and an agency “tasked with creating a strategy for engagement and transitioning of the staff of international governments and multi-national organisations to Scotland”}, three further Commissions^{43Productivity Commission, Infrastructure Commission, Gender Pay Equality Commission}, two new Institutions^{44The Scottish Central Bank and a Scottish Financial Authority} and a National Brand Strategy.
   
• When it comes to actual policy recommendations, the report mainly talks in broad, unquantified terms. The costs associated with implementing policy suggestions are seldom if ever considered, the likely scale of any economic impact is rarely quantified.
   
• Some of the possible building blocks may have been discussed, but a strategy that would meet the report’s aspiration of “Bridging the gap between potential and performance”^452.8 has not been constructed.
   
• The report does not make growth assumptions, it merely asserts some “ambitious growth goals”^{463.98, recommendation 1} (which it does not then go on to model).^{47The exception to this is when the Commission does make growth assumptions when attempting to illustrate how deficit reduction through spending discipline could still lead to real spending growth:  “At Scotland’s long-term trend GDP growth rate of 1.5%, and inflation at 2%, this would mean that nominal increases in public spending of 2.5% would reduce the inherited deficit from 5.9% of GDP to less than 3.0% of GDP by year 9” [3.192]. The assumptions used in this example are not the same as the ‘growth goals’ later defined.}
   
• These ‘goals’ are unjustifiably ambitious. Not only do they assume that an independent Scotland would grow at rates defined by reference to ‘peer group’ countries that include high growth, low tax, high income-inequality models the Commission rejects, they actually suggest that an independent Scotland would outperform those countries by a further 1% pa (in GDP growth rate terms) for fully 15 years.
   
• These ‘ambitious growth goals’ appear to have been chosen because they would, by implication, roughly close the gap in GDP per capita between Scotland and the Netherlands over a 25 year period – but this is only true if there is no differential in rate of population growth.
   
• The Growth Commission recommends accelerating population growth as a “top priority”^{48“The attraction of economic migrants (from identified target groups) should be one of the top priorities of Scottish Government economic policy.”}, but offers no estimate of the increase in rate of population growth they either aspire to or expect. If incremental improvement in GDP is driven by incremental increase in population, the rate of improvement in GDP per Capita will necessarily be less than the rate of improvement in GDP.
   
• This is an extremely significant point. The report observes that “The overall level of GDP in a country is less important to individuals than the level of GDP per capita.”^49A1.41, but we are left unable to judge what even the Commission’s ‘aspirational’ goals would deliver in terms of GDP/Capita improvement.
   

8. Currency – an Unsolved Conundrum: The report’s currency recommendation is symptomatic of the weakness of the economic case for independence
 

• Even with all of its optimistic assumptions and despite recommending (implicitly at least) greater austerity than Scotland has experienced in recent years, the Commission fails to show how Scotland could get to the fiscal surplus that would almost certainly be required to create an independent currency.
   
• The Commission therefore has little choice but to recommend “that the currency of an independent Scotland should remain the pound sterling for a possibly extended transition period”.^50C1.7
   
• Whilst this strategy of ‘sterlingisation’ may be the most pragmatic solution to the currency problem that independence would create, it would necessarily constrain an independent Scotland’s economic freedom.
   
• The Growth Commission makes a point of singing the praises of Scotland’s Financial Services sector^{51“The financial services sector in Scotland has a long history and global reputation, particularly in high value areas such as insurance and asset management.” [A1.13]} – a sector which employs over 190,000 people in Scotland – but appears to accept that the inevitable loss of large parts of this sector in Scotland would be an acceptable (but unquantified) price to pay for independence.^{52“Financial support would not extend to holding companies of retail banks […] It is likely that the result would be that some companies would move their domicile to England in response, in expectation of broader support from the Bank of England. […] Indeed most, if not all, of the banks have already made clear in public statements that they would be headquartered in London for the purposes of regulation in the event of independence.” [C3.28]}
   
• The Growth Commission makes no attempt to quantify the reserves that would need to be accrued before being able to consider creating an independent currency.^{53The report simply suggests the following as one of its six tests for establishing an independent currency “Sufficiency of foreign exchange and financial reserves: Does Scotland have sufficient reserves to allow currency management?” [C2.6.4]}
   
• Not having a stable, independent currency would at the very least hamper an independent Scotland’s attempts to join the EU. The Commission does not address this issue.
   

9. Making the Case for Union: The Commission, by implication, makes a strong case for Scotland staying in the UK
 

• The report notes that smaller economies are more volatile and must be more fiscally conservative than large economies^{54“The greater volatility that small economies can experience also strengthens the case for fiscal Conservatism” [B8.33]} and recognises that an independent Scotland would not be able to sustain a deficit of greater than 3% for more than a decade.
   
• The report also makes the point that the UK – as a large advanced economy – has been able run relatively large deficits over the last decade.^{55The report states [B3.134] “[…] it is anticipated on the basis of OBR and other independent forecasts that the GERS estimate of Scotland’s deficit would be 7.1% of GDP by 2021-22. This would have to come down. However, it should be noted the UK has had a deficit at or above this level in six of the last ten years.” Using the GERS figures, that statement is in fact true for five of the last ten years (08/09 – 12/13), but the point stands}
   
• Not only are the fiscal constraints less onerous for large economies, but regions of a larger economy are able to benefit from the average performance of the whole. Not every part of the UK has to be fiscally sustainable on a stand-alone basis, only the whole of the UK does.
   
• By staying in the UK, Scotland would benefit from the spending freedom that having a deficit as low as 0.7%^{56As the IFS forecast for the UK in 2021/22} creates. The Growth Commission helpfully illustrates that Scotland outside the UK would face another decade of further spending restraint just to (hopefully) get the deficit down to 2.6% – a figure still worse than the UK’s deficit which Scotland shares today.^{572016-17 GERS deficit for total UK is 2.4%}
   
• That Scotland currently benefits from UK-wide pooling and sharing is beyond dispute. The GERS figures show Scotland currently receives an effective fiscal transfer from the rest of the UK of £9bn – 10bn pa.^{58See later chapters for a full discussion of these figures}
   
• It is surely no coincidence that the growth in GDP per capita the Commission aspires to would have a revenue impact of £9bn pa.^593.32 The Commission’s optimistic assumptions imply it would take 25 years to get there – so optimistically 25 years to maybe replace the fiscal transfer Scotland would be guaranteed to lose on day one.
   
• The Growth Commission attempts to suggest this fiscal transfer and Scotland’s greater deficit is evidence of ‘under-performance’ on Scotland’s part^{60“In political terms, we present a choice for making Scotland’s public finances sustainable, purposefully and by our own efforts. It is for others to then judge whether this is preferable to having them ordered in the same manner that got us to the current under-performing position in the first place.” [B1.15]}, an assertion they undermine with their own observation that “Scotland’s economic output per head is the best of the UK nations and regions, outside of London and the South East.”^61A1.64
   
• The reason for this apparent contradiction is that Scotland’s ‘performance’ in terms of onshore revenue generation per capita is broadly in line with the rest of the UK, the ‘under-performance’ the Commission refers to is based on the observed GERS deficit, which is explained primarily by Scotland’s higher public expenditure per capita.
   
• Given that higher per capita spending is the main reason for the ‘under-performance’, we find it odd that the Commission imply this is somehow the fault of the current constitutional settlement.
   
• The Commission makes no attempt to suggest that independence would change Scotland’s per capita spending in any of the areas where it’s higher than the rest of the UK, but they do allude to the fact that the causes may be structural.^{62“Given the nature of Scotland’s economy, society and geography there is no doubt that the challenges facing the country are distinct from many parts of the rest of the UK.” [B1.17]; “At the same time the delivery of public services can be more expensive than in smaller urbanised geographies.” [B1.18]}
   
• An important principle of pooling and sharing is that high ‘cost-to-serve’ areas are subsidised by lower ‘cost-to-serve’ areas. Scotland – with its low population density, remote and island communities and challenging demographics^{63The 2013-14 GERS report observed “lower population density in Scotland relative to the UK [..] increases the cost of providing the same level of public service activity, particularly in areas such as education, health and transport”} – benefits from this principle within the UK (via the Barnett Formula).
   
• It’s a simple statement of fact that separation from the UK would reduce the size of Scottish companies’ domestic market by 90%.^{64The Scottish population is 8.3% of the UK’s population, so 91.7% if we’re being picky} The downside of this is noted by the Commission when it observes “the domestic market in small advanced economies is too small to get the required levels of scale and specialisation.”^65A3.8
   
• So the report helps us understand how being in the UK allows Scotland to enjoy the benefits of a shared currency and large domestic market, how it allows Scotland to avoid the fiscal constraints that would inevitably apply were Scotland a stand-alone economy and how, by implication, Scotland within the UK benefits from levels of public spending that would otherwise be unsustainable.
   
• Being in the UK offers fiscal strategy options that independence precludes. The UK (with its own stable currency and a deficit forecast of just 0.7% by 2021/22) has capacity for fiscal stimulus that the report shows us an independent Scotland simply would not have. The Commission’s findings demonstrate that those who oppose austerity cannot logically favour independence unless they are prepared to sacrifice fiscal credibility.
   
• Faced with this evidence of the benefits of Scotland remaining in the UK, we find ourselves asking what the economic benefits of independence are that makes the Commission so convinced that independence is ‘the answer’.
   
• The evidence that Scotland would somehow achieve greater economic growth just by dint of becoming a small advanced economy is tenuous at best – particularly as the necessity to reduce public spending would be likely to harm growth, not improve it.
   
• The report talks a great deal about the downsides of Brexit, but it is far from clear that an independent Scotland would be able to rejoin the EU (particularly given the currency issue) and the report does not test whether the ideas they suggest for economic growth would be possible as an EU member state.
   
• The report reluctantly concedes that “While this report considers the public finances of an independent Scotland, it is not inconceivable that many of the positive recommendations detailed here could be implemented in advance of such a move.”^66B1.22 The words ‘in advance of’ could easily be replaced with ‘instead of’, which strikes us as a rather enticing option.
   

In the spirit of seeking to contribute to a positive ongoing debate about how best to grow Scotland’s economy, we would suggest the following as broad questions worthy of further research and discussion:
 

• Which of the report’s recommendations can be taken forward with existing devolved powers?
   
• What changes to devolved powers would be required to progress other recommendations (migration being the obvious example)?
   
• Related to the above, if we don’t presume independence as the answer, what can we usefully learn from other international regional, provincial and state devolution models?
   

In addition to these broad questions, we suggest the following specific issues warrant further investigation:
 

• Is Scotland’s higher per capita spending (see Figure 8) fully justified by structural reasons, or are there opportunities to reduce spending in certain areas to free capacity for growth-driving investment elsewhere?
   
• One of the main contributors of research to the Commission has published some of the background research which the Commission were unable to find room for. This includes the observation that “Scotland’s PISA scores in maths, reading and science are towards the bottom of the advanced economy rankings”.^{67Policy insights for Scotland from small advanced economies, Reform Scotland, June 2018} Given the importance of education in driving long-term economic success, we would welcome more debate around why Scotland’s fully devolved education system appears to be lagging international benchmarks.^{68Including what practical steps could be taken to improve language skills, something the report highlights as an important factor in developing export growth: “An export-based growth strategy will therefore require that skills gaps in sales and languages are addressed.” [A6.85]}
   
• The report makes non-specific reference to the need for greater infrastructure investment – we would welcome the development of specific proposals with robustly evaluated business cases.
   
• We were disappointed not to see more specific industrial policy recommendations. The report states “One near-term priority should be to identify the existing strengths and capabilities in the Scottish economy and assess how to support their growth, across all policy areas. These could include the energy sector (including renewables), food and drink, tourism, financial services, science and innovation, digital industries, biotech, education and so on, which are already the focus of economic development policy in Scotland.”^69A3.50 We agree.
   

We see in the Growth Commission report the kernel of a more attractive strategy than assuming separation from the UK is necessary to improve Scotland’s economic growth.

The report in fact illustrates many of the downsides of independence while highlighting (albeit reluctantly) the economic benefits of our inevitably flawed but enduring 300 year-old union. An approach which seeks to grow Scotland’s economy by constructively building on the strengths of this union would seem to us favourable to one that seeks to destroy it.

Using the devolved powers Scotland already has (or may develop) to pursue the Commission’s growth ideas without creating the unnecessary disruption, uncertainty and further austerity that separation from the UK would entail would be a logical and constructive way of taking forward the Commission’s work.

<< Previous Chapter             >> Next Chapter

Quick-links to all Chapters

Executive Summary

Context & Response

1. Smaller isn’t Necessarily Better

2. Stretching the Empirical Data

3. Failing to Make a Case

4. A Reality Check

5. The Truth about Austerity

6. Aiming Too Low

7. The Missing Model

8. Currency – an Unsolved Conundrum

9. Making the Case for Union

Endorsements