Bill Jamieson: Get real about our debt problems

The independence argument relies heavily on North Sea oil revenues, but they are in long-term decline. Picture: Hamish Campbell
The independence argument relies heavily on North Sea oil revenues, but they are in long-term decline. Picture: Hamish Campbell
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The independence debate has avoided the subject of our economy – but it must be confronted, writes Bill Jamieson

Over the past few days I have had a strange and discomforting sense of living in a parallel universe. There is this Scottish world, its contours and landscape so familiar to us, the world of the claims and counter-claims of the independence referendum campaign.

This world is very real. One day we are warned about the consequences of independence. The next we are presented with uplifting visions of low corporation tax, restored capital spending projects, maintained welfare entitlements – and an oil fund

And then there is this other universe. It is no less real. It is altogether darker and more troubling. It is the chief concern of young people joining the labour market and starting out on their lives. Jobs are scarce. We are soaked in debt. We seem locked in low growth and low expectations as far ahead as we can see. Little wonder that in this other world a sense of disillusion and lassitude prevails.

Both these worlds seem quite disengaged from each other. There is neither understanding nor dialogue between them. Rather, we switch between the two as the news of the day dictates.

How long can this persist? High aspiration and positivity have been the central drivers of the independence campaign. It trades, not on its engagement with the other world, but on its difference. And, as a result of that, it may have a fair prospect of doing better than current poll readings suggest. Who would not wish to see a Scotland of lower business taxes, higher capital spending, a North Sea oil fund and all the welfare frills? What can possibly stand in the way?

Unfortunately, the wider world is not as the independence campaign would like – and it’s not much favoured by the other side either. It is a world overshadowed by some very troubling issues. From where is our economic recovery to come? After the initial phase we are currently experiencing of an escape from recession and evidence of mild growth, what is likely to follow? Can we reasonably expect a return to “normal” growth, on which we are all critically dependent?

Yesterday it was the turn of that other universe to take centre stage. On the BBC Radio 4 Today programme the economist Stephen King was interviewed about his new book. Its contents are about as troubling as its title: When the Money Runs Out.

His central warning is that we may have entered a long era of low growth – well below the 3 per cent plus annual improvement before the financial crisis. He argues that we are becoming ever more dependent on injections of central bank monetary stimulus to keep the economic show on the road. Stimulus junkies now rule the roost, with little by way of underlying improvement. Far from catalysing a “normal” “U”-shaped cyclical recovery that was widely predicted, economic forecasts have proved to be markedly over-optimistic. This recovery is more like an elongated “L”, as for the past three years we have bumbled along what some describe as “a corrugated bottom”.

Far tougher action, he says, is going to be needed to reform our economies and bear down on a government debt total spiralling to £1.6 trillion. The problem with the merchants of stimulus and the merchants of austerity, he says, “is that the majority have the same underlying belief that the economy is going to rebound rather quickly. My concern is that both these sets of beliefs are a bit too optimistic about the nature and speed of the recovery.”

This is a problem by no means unique to the UK. It is evident across the western world, with the eurozone succumbing to a further quarter of recession.

King is sceptical that economies will be able to grow at a pace that will allow them to afford the commitments made to voters. “What if our financial wealth has been accumulated on the back of a delusion?” he asks. “What if political promises, even those made in good faith, can no longer be met?”

We are heading, he warns, for an era of weak growth with less prosperity to go round. People will be stripped of their “entitlements”. He is equally concerned over growing inequalities of wealth. These, he argues – strikingly for a liberal economist – will not only stymie a recovery but also lead to higher taxes on wealth.

And he is by no means alone in his view that the long-term trend rate of growth has shifted: from around 2.25-2.5 per cent before the financial crash to around 1.25 per cent now. If true, that is a huge adjustment with which we have barely begun to contend.

It is a sobering warning on the consequences for societies which experience economic stagnation. As Ryan Bourne, reviewing King’s book, observed, the great Scots economist and philosopher Adam Smith wrote that periods of stagnation lead to a loss of trust between different groups. And without trust, it is much more difficult for the business cycle to turn. Stagnation becomes self-reinforcing as the lack of trust erodes entrepreneurialism and initiative.

If inflation does not erode the real value of this massive overhang of public debt, then debt restructuring, particularly in Europe, will become necessary. King also highlights how today’s young will be saddled with having to pay twice for pensions: first to sustain the pension benefits promised to our parents, and second for their own private provision, requiring ever larger contributions into their own pension schemes where returns have been repressed by ultra-low interest rates.

I cannot say that I go along with King to the far end of his analysis: many economies have historically faced such periods and have been able to survive and prosper. Those powerful human impulses for innovation, adaptation, improvement and enterprise, so well identified by Smith and later Schumpeter, work to drive forward the business cycle. So it may prove in this case – so long as there is an entrepreneurial environment that enables these forces to work effectively.

But I set out the book’s arguments at some length because sooner or later Scotland’s policy thinkers and political class will need to engage with these issues. It is by no means certain that the economics of renewables will stack up without ever greater government subsidy. At the same time, North Sea oil revenues, upon which so much reliance is being placed, are subject to considerable volatility and uncertainty and are in long-term decline.

I also sense that, for a growing number of young people in Scotland, they are increasingly concerned about this global picture and the impact of these broader problems facing western economies and their own futures and livelihoods than they are with Scottish independence per se. It is the bigger picture that concerns them.

At some time – and hopefully soon – this debate in Scotland needs to engage with this broader world-view and the greater difficulties that face us in this new era. Independence is one thing. It should not be a mandate for a divorce from reality.