Jim Gallagher: Referendum comes down to money

Scotland exports to the world, but access to the English market remains a major economic objective. Picture: Getty Images

I am a bit fed up hearing that those who favour Scotland staying in the UK don’t make positive arguments. Even The Scotsman’s leader of last week made this point. So what is the positive case?

The union to which Scotland belongs has economic, social, and political aspects. They are interconnected. Political union provides the opportunity for economic integration. Economic integration both enables and requires social solidarity. The justification for each aspect of the union is partly instrumental – what’s good for Scotland? But it’s also principled – what’s right for Scotland? The important thing is to understand what union as a whole means for Scotland in the 21st century, not least because that tells us how devolution can develop.

This article deals with the economics, perhaps inevitably at the top of the agenda in a time of economic uncertainty when people are worried about their children’s future. The essence of the case for economic union is not only does it bring opportunity for individual Scots and Scottish businesses, but also it’s a way of providing stability and security.

Scotland has been part of a deep economic union for so long we take it for granted. At its heart economic union is about free trade – the movement of goods and services, people and capital, without hindrance, to all parts of the country. It’s hard to imagine a world in which Scots cannot move with complete freedom to take up jobs anywhere in the UK, or in which Scottish businesses cannot trade across the Border without the slightest obstacle. But it wasn’t always so. Securing access to English markets was a Scottish objective as long ago as 1700. And it isn’t so everywhere. Even the European Single Market is still rife with trade barriers – ask any Scottish insurance company.

Economists since Adam Smith have understood the benefits of free trade. Scottish businesses have a domestic market ten times our population. Young Scots have ten times the job opportunities. Scotland’s biggest export market by far is the rest of the UK, and our exports to it have grown much more swiftly than to Europe or the rest of the world. As Adam Smith knew, free trade allows us to specialise in what we are better at: and Scotland has specialised in serving UK markets in everything from financial services to warships, and university education.

Free trade within the union enabled Scotland’s breakneck 19th-century industrial development. But those of us who spent the 1970s and 80s worried about Scotland’s subsequent industrial decline need to adjust our specs. Within the UK, Scotland is now one of the richest regions. Measured by gross value added (GVA) or by household income Scotland is the UK’s third richest region (see table, left). Our economic output per head is very close to the south-east of England’s, and our cities come surprisingly close to London levels of output. In recent decades Scotland’s economic growth per head has matched or exceeded the UK’s. So don’t let’s talk Scotland’s economic achievements down.

Perhaps Scotland could do as well as an independent country. But it would have to follow a different strategy. It couldn’t, in the long run, remain as integrated with the UK economy. International borders do matter for trade, as we see in the EU, because laws and regulations differ. Estimates differ as to how big this effect is, but the example of the US and Canada is interesting. Despite being in a free trade area, it has been estimated that Canadian provinces are more than 20 times as likely to trade with each other than with equally distant US states.

More important, perhaps, is how a small country manages risk and instability. As part of a larger economy, within a political union, Scotland can expect the rest of the UK to absorb fluctuations, uncertainties and economic shocks. The collapse of the two big Scottish banks was an extraordinary example of this. Scotland’s dependence on financial services is proportionately greater than Iceland’s or Ireland’s but because the shock was absorbed by the whole UK, the effects on the Scottish economy were less than in those countries.

Being in a union with an integrated economy also means fiscal sharing: pooling tax income, so that public spending in one part of the country doesn’t depend solely on the taxes raised there. So if there is an economic downturn in one place, public services there don’t bear all its effects. Economically successful regions contribute to the common pot. At different times, Scotland has done both: in the 1980s oil revenues supported the whole UK economy; in the 1970s, we benefited from regional economic policy. These days we more or less wash our own fiscal face. In future, if oil revenues decline, we might have to rely on the UK to support present levels of public spending.

Of course, small countries can manage too – some well, some badly. The most successful strategy is to be very open to trade, anchor your currency to a bigger one, and carry large reserves to cope with unexpected shocks. Typically that means running a very conservative fiscal policy, and having money in the bank. Maybe an independent Scotland could do all those things, after a period of transition, but what it couldn’t do is run the same tax-and-spend policies as we have inside the UK. And I would worry about the cost and length of transition.

The real sign of economic union is sharing a currency. It’s clear what makes a successful currency union. First, a genuinely integrated economy. Secondly, one in which, when necessary, fiscal flows – tax and public spending – offset other economic imbalances. We have that in the UK, and it’s the big lesson of the euro crisis. The plain fact is that currency union, to be successful, must involve fiscal union. Otherwise you have the problems that are plaguing countries like Greece today. And fiscal union without political union to oversee it is unworkable and undemocratic.

You don’t need to be an economist to see this. Most people have an instinctive sense that one country and one currency go together. Indeed Scots want to keep the pound– only 15 per cent want the euro or a separate Scottish currency. So nationalists advocate continued currency union, while rejecting the political and fiscal unions that go with it. It’s not surprising that UK ministers give strong hints that sort of currency union is unlikely.

Economic unions, however, have social consequences. Free movement of people creates economic, social and family ties across the whole country. A total of 450,000 people living in Scotland today were born elsewhere in the UK. More striking, 830,000 Scots live south of the Border. Hugely more people have professional, family and other ties all across the United Kingdom.

The dismal science of economics tells us that the union matters for wealth and economic stability, but there is more to it than that. There is a principled as well as an instrumental side to the union. Economic integration connects with social solidarity. Sharing of resources requires and reinforces a sense of belonging and common social citizenship. But that’s an argument for another day.

• Jim Gallagher was director-general for devolution in the UK government, senior adviser to the Prime Minister on devolution strategy (2007-2010) and secretary of the Calman Commission