Peter Jones: Big questions that must be covered

Jings! What a stushie the front cover of the current issue of the Economist has kicked up. Its joke map of Skintland, featuring places such as Edinborrow, Glasgone and Inamess, has caused much offence north of the border. It would be a great pity, however, if the reasoned evidence-based argument the cover was promoting was ignored because of the injury to pride caused.

A few readers of The Scotsman will be aware that I also contribute to the Economist, as indeed I did to this particular story about Scotland.

I had, however, no input to, or idea of, the cover illustration until it was published. I thought it was quite funny actually, but in a rather juvenile way. The screams of outrage were also a little over-loud; can’t we take a joke?

While it may have been a great advertising success, creating enormous interest in this particular issue, I did think it was an editorial error. The editorial content did not say that Scotland is a subsidy junkie. It definitively refuted that prejudice, common in right-wing southern circles.

Neither did it say that an independent Scotland necessarily would be an impoverished bankrupt. It did argue that some supposed advantages of separation are not as great as contended and that independent Scotland would face various economic vulnerabilities which create a greater risk that the country would do worse than if it stayed in the union.

The cover illustration, however, put the Economist firmly in the camp of those who think independence would be an automatic economic disaster.

It was also at odds with the editorial tone, allowing itself to be depicted in Scotland as the posh, plummy English accent which, it noted, is unacceptable in Scottish political debate. In short, the cover was the “sneering sort of unionist” comment which the editorial, by implication, condemned. Nonetheless, the arguments deserve serious attention. They should be certainly discussed as part of proper democratic debate. And if the Scottish government is serious about winning independence and making a success of it, it should also be thinking about dealing with the issues raised.

First, the article pointed out that Scotland, with 8.4 per cent of Britain’s population, and, with the share of Britain’s oil that lies in Scottish waters, produces 10 per cent of the UK’s GDP. It added that if you subtract from Scottish public spending the additional (measured on a per capita basis) spending that Scotland receives compared to the rest of the UK, and then add back in oil revenues, the balance of spending versus taxes stays roughly the same. So no subsidy junkie argument there.

But then the article pointed out some inconvenient (for nationalists) truths. The oil is a finite resource and will be a dribble by the 2040s.

Citing Alex Kemp, professor of petroleum economics at Aberdeen University, it pointed out that at a crude oil price of $90/barrel, 23 billion barrels should be extracted, but at $70/barrel, only 16.5 billion barrels may be extracted.

If you doubt that $70/barrel is likely, considering that the current price is about $125/barrel, it pointed at that as recently as 2009, it averaged £62/barrel. Added to that, the article added a point often overlooked – that something more than $15bn in taxes already paid by oil companies will have to be paid back to them to cover the cost of decommissioning dried-up oilfields.

Who will pay that? Westminster or Holyrood? It will be the subject of any independence negotiations but it will be certain, if Scotland claims the assets of the North Sea, so it will have to take at least a share of the liabilities, cutting the value of future oil revenues.

Second, renewable energy, of which Scotland could have a lot, is dependent on a subsidy which is paid by consumers, most of whom are south of the Border. What has not been explained by the Scottish Government is why these southern consumers will be happy to pay a subsidy to a foreign country, especially, as seems likely, their government can meet climate change targets without importing foreign renewable electricity.

Third, the article pointed out that the future of financial services in Scotland is questionable under independence. The risks of a small country with an outsize banking sector have been amply demonstrated by Ireland and Iceland. To deal with failed banks, Ireland needed a bailout from the EU; Iceland from the IMF plus a whipround from Scandinavian countries.

To avoid Scotland facing that risk, the article suggested that the two big Scottish banks – RBS and Lloyds (which has its legal HQ in Edinburgh) – would be broken up. An alternative, and I think more likely possibility, is that those banks, to avoid any uncertainty caused by perceptions that the Scottish government is not big enough to guarantee the bank’s assets, affecting their share price, would shift their HQs to London. Similar considerations may also apply to the big insurers – Standard Life, Scottish Widows, and Aegon UK.

Again, the Scottish Government has yet to explain what it will put in place to prevent that uncertainty and ensure continued growth of financial services. Pointing to recent inward investors, such as the Bank of New York Mellon, is not an adequate response. It is Scottish headquarters of Scottish firms, not branches of foreign firms, that we need to worry about.

Fourth, there is the currency problem. Staying with the pound sterling will require negotiating a fiscal management agreement with the rest of Britain’s government and the Bank of England. Unilateral adoption of sterling without such an agreement can work, but it is unlikely to give the assurance of economic stability that either inward investors or buyers of Scottish bonds will want.

Such an agreement will constrain the freedom of the Scottish Government to set tax rates which will meet the SNP’s proclaimed goal of tax competitiveness. The worth of this freedom, in any case, is diminishing because the UK government is already aiming to reduce corporation tax to the lowest level of any of the G7 countries, who are the main competitors that Scotland has to worry about.

These are significant questions which demand serious answers. They cannot be dismissed as worthless because of an ill-judged cover illustration. If Scotland votes for independence without having these answers, then Skintland might well become a dreadful reality.