Gavin McCrone: No need to go it alone, Alex

THERE are options already available to boost Scotland’s economy – and independence may not offer the solutions the SNP claims

At a recent conference in Edinburgh on the future of Scotland, Professor Vernon Bogdanor, the distinguished constitutional expert, argued that countries do not normally become independent because of some calculation of economic advantage but because they simply do not want any longer to be part of some other state. In Scotland, however, the SNP have constantly argued that we would be better off economically if independent. George Osborne’s Budget yesterday does not affect this argument, but, unsurprisingly, the publication of the latest edition of Government Expenditure and Revenue in Scotland (GERS) by the Scottish Government has resulted in a renewal of this debate.

Alex Salmond has argued that over the past five years Scotland’s budgetary position was better than that of the UK by £8,000 million, or a subsidy to the UK exchequer of £500 per head by those living in Scotland. This is the opposite of the prevailing view in England, which is that Scotland receives a subsidy at their expense.

Salmond has also argued that Scotland is the sixth wealthiest country in the developed world – presumably he is including the output of the North Sea in GDP, despite the fact that many of the offshore workers and the majority of shareholders who receive income from the oil firms do not live in Scotland.

So what is one to make of this? In reality the position is quite straightforward. Public expenditure per head in Scotland has been above the UK average for many years, as it has been in London, Northern Ireland and Wales. This may reflect need, however, no proper assessment of Scotland’s relative need as compared with other parts of the UK has been done since the 1970s. Tax revenue excluding North Sea oil and gas, however, is not equally high but at 8.3 per cent of the UK total is fair, being equal to our population share. Hence the argument that Scotland receives a net transfer from the UK. In London, tax revenue per head exceeds the UK average by even more than public expenditure.

What changes this is the inclusion of revenues from the North Sea. These have varied greatly over the years, depending both on the output of oil and its price. GERS shows that if 90.5 per cent of revenue from the North Sea is taken as Scotland’s geographical share, Scotland’s deficit in the latest year at 7.4 per cent of GDP is less per head than that of the of the UK at 9.2 per cent. But it is still a deficit, amounting in money terms to more than £6 billion, and it varies greatly from year to year because revenue from the North Sea is so volatile, as the latest figures published in yesterday’s Budget show.

In the early 1980s, North Sea revenues were large, peaking at more than £12bn in 1984-5 in money of the day (roughly £30bn in today’s prices). Had a geographical share accrued to an independent Scotland then, its budget would have been in massive surplus. But the oil price fell sharply in the second half of the 1980s, and in the first half of the 1990s revenues averaged between £1bn and £2bn; a geographical share of that would still have left an independent Scotland with a proportionately worse deficit than the UK as a whole.

And how sure can we be that an independent Scotland would get a geographical share of North Sea revenues amounting to about 90 per cent of the total? The proportion could vary from year to year, depending on output and the price of oil. But there are clear rules for apportioning offshore waters between independent states, and the 90 per cent in present conditions appears to be reasonable. It is much less clear, however, that such a large share would be agreed with the rest of the UK under either devo-max or devo-plus, since Scotland would remain an integral part of the UK.

Salmond has argued that North Sea revenues should have been paid into a special fund, as Norway did. I agree. Had this been done, the financial position not just of Scotland but of the whole UK would have been quite different. But if it was wrong for the UK to use revenue from a diminishing a capital asset to balance the books, it would be equally wrong for Scotland to do so.

Furthermore, an independent Scotland would be ill advised to rely on revenue from the North Sea to balance its budget, because as a source of revenue it has proved so volatile and is expected to decline in future. Unfortunately, since the budget would at present still be in deficit even with these revenues, they could only be paid into a special fund if either taxes were raised or public expenditure cut even more than presently envisaged under Westminster’s austerity measures.

If the economy could grow faster, this would alleviate the problem and the credit easing for small business announced in the Budget, together with the National Loan Guarantee Scheme, are therefore welcome. It remains to be seen how effective these are, but it was to promote growth that finance secretary John Swinnney has said he needs to use levers only available with independence.

But what levers does he have in mind? It is only right that we should know what he would do that he cannot do now. The room for manoeuvre seems limited. If Scotland stays with sterling, that rules out an independent monetary policy and scope for an independent fiscal policy would also be severely constrained. Any increased borrowing would have an impact on the rest of the sterling monetary union – and would make no sense with a budget already in deficit.

The Scottish Government already has considerable economic powers. Although it cannot cut corporation tax, it could cut business rates. It is responsible for infrastructure in Scotland, for education and training, for selective grants to industry, for VisitScotland and for Scottish Enterprise and Highlands and Islands Enterprise. These are very substantial powers and it is not easy to see how the additional powers available with independence would transform the growth of the economy.

In the modern world, all countries, but especially small countries, are much more interdependent than in the past. England is Scotland’s largest export market and is likely to remain so, whatever the constitutional arrangements. Membership of the European Union, which Scotland would certainly want to retain, would also impose constraints. There would be some scope for differences in tax rates, but substantial differences would be limited by the ability of labour to move easily between Scotland and England.

Scotland has had considerable success in attracting foreign firms to locate here, but many leave again if circumstances change, as the electronics industry has shown very clearly. Scotland lost much of its traditional manufacturing and heavy industry, including steel and shipbuilding, especially in the 1980s and 1990s.

Despite considerable efforts, Scotland has been much less successful in promoting the growth of new indigenous industry, and that should be a major concern. What seems to me to be needed is a real focus on new business start-ups and on fostering the growth of small and medium enterprises. Coupled with this is the need to provide a training system second to none.

In both of these areas we might learn a lot from Germany, the most successful exporting and manufacturing economy in Europe, where what is known as the Mittelstand is a legion of thriving small and medium family firms. These are typically privately owned, often work closely with universities and benefit from Germany’s unique apprenticeship system. But these are things we should be doing now. They do not require political independence.

• Gavin McCrone was formerly the chief economist at the Scottish Office