A Unionist tries to help out the Nationalists - Part 1 (GERS)

Strange as may seem to many I'm not ideologically against independence, indeed I would have very little issue with it were the UK to ever become a full part of the EU, join the Euro and the fiscal compact. 

However I'm the first to admit that the UK is highly unlikely to rejoin the EU (let's now take Brexit as a given) and certainly won't sign up to the Euro. I'm also quite sure that the most Scottish nationalists would, quite logically, be opposed to full European integration. You can't very well argue for full democratic control for Scotland whilst simultaneously arguing to cede control over fiscal or monetary policy. 

So let's assume that "my" route to independence is out of the window, for now, and focus on the current case for independence, in particular with respect to GERS and currency. These are the two main impediments to many unionists switching to independence. So rather denial, avoidance or the use of "talking Scotland down" lets try to find some answers. 

I'll deal with currency (the soft belly of the nationalists case) in a separate post later for now let's look at GERS.

The fiscal transfer

Right now the UK provides Scotland with a fiscal transfer, we can see this in GERS and it represents a figure of around £7bn (probably £9bn when the latest figures are presented). 

Absolutely GERS is based on our current spending decisions within the UK. That is not a point of debate, but it shows us where we are now within the Union and what we would lose overnight if we left. The loss of the fiscal transfer would force us to change our spending, borrowing and taxes in some way so GERS cannot represent what an independent Scotland would look like, it would have to be different from our current fiscal pattern. 

Therefore the question is really simple: What would you change?

Now clearly there are some obviously simplistic answers here and I thought I'd get them out of the way right at the start:

- We'll borrow it - that just kicks the can down the road. It's a sudden drop in income so borrowing does not solve the problem, it just makes it worse medium and long term and passes the problem on to our kids. Furthermore its highly questionable whether an independent Scotland would have the confidence of the markets to fund the loss of a fiscal transfer through borrowing. International capital investors would be looking for the Government to show a willingness to tackle the problem directly and that means cuts or tax rises. Finally as I'll show in my currency options post, the ability for an independent Scotland to borrow significantly beyond the current UK level would likely be severely restricted.

- We'll cut Trident - fair enough, but as a NATO member we are supposed to spend 2% of our GDP on defence (although many nations fall short of that target), we tend in GERS to be below that so it's at best questionable. Furthermore the annual cost of Trident for the Scottish population is about £200M (8.5% of £2bn). But, no question, you can start to make a case for eating into the fiscal transfer by cutting defence. That's probably not going to be popular, it may put our position to join NATO in question and will have job implications, but it's a start. However it's only a start, even if you cut defence to zero you still have a very, very long way to go. 

- We'll tax the rich - Taxing the rich sounds good but it doesn't actually work in practice, according to the SNP. Increasing taxes on the rich in an open and free economy just means that wealth morphs and moves to avoid the higher taxes. Similarly corporation tax increases tend not to bring in more money as they are competitively cut by other nations. 

-We'll not have UK debt - Not true, debt isn't optional and the population share allocation in GERS is entirely reasonable, if not favourable, to Scotland.

The hard facts are taxes would have to rise (VAT, basic rate income tax), spending would have to be cut (defence, universal benefits, pension tax relief, rural public service levels) and borrowing would have to increase short term (such that this is possible).  

Finally it's worth noting that none of this takes account of the valid unionist critique of GERS which argues that it actually lowballs the size of the fiscal transfer to Scotland. 

I'll deal with that another day, but briefly the main critique would be that the cost of debt is lower than would occur in reality. An Independent Scotland would face higher debt servicing costs due to its lower credit rating than the UK. Similarly the figures take no real account of the capital flight from Scotland in the event of independence something we know from the Bank of England's minutes (referring to work and events that happened during the last days of the referendum) was all too real - and that was before the collapse in oil revenues. 

But for the purposes of debate the GERS figures are the place you have to start if you are a nationalist seeking to persuade a unionist. I'll therefore simply repeat the question. What would you change? 

Anyone wanting to make the case for independence needs to start answering rather than avoiding this question.