Professor Sir Donald Mackay: Time now to take stock of coming changes

Under the stewardship of respected economist Professor Sir Donald MacKay, some of Scotland’s leading voices on economics and political economy have been brought together to set out the key challenges facing the economy and how increased powers may be used to effect reform and improve our prospects.

Today, in the first of four extracts from the publicaction which will run here for the rest of this week, Prof MacKay sets the scene by outlining the challenges which the writers have sought to address.

THIS is a critical time for the Scottish people. Huge and potentially convulsive changes may lie ahead. The opportunities and possibilities that our own choices may open up compel this book and dictate its timing.

Twelve years into a unique exercise in devolution and our constitution is once more at the centre of a significant – and potentially profound – transformation. A new Scotland Bill enlarging the powers of the Scottish Government is already before the Scottish Parliament. And the 2010 parliamentary election has resulted, not only in a Scottish Government with an overall majority for the first time, but also one committed to holding a referendum on independence.

The direction of travel is clear, if not yet the final destination. New and enlarged powers look likely. More far-reaching ones may follow. But while there has been much argument about the desirability of constitutional change, on the details of implementation and our relationship with the rest of the UK, there has been little discussion of the condition in which Scotland now finds itself, the deep-seated problems that we face and how such additional powers may be used to help lift our circumstance and prospects. That is the mission of this book.

In the approach to an independence referendum, a wide and searching debate must now be launched. More powers: but powers for what, exactly? This is what these essays open up for exploration. What are the factors that have held back our economy and our people? What, in a troubled and highly uncertain global context, when the future of Europe is being rewritten before our eyes, are the constraints and the opportunities for an empowered Scottish Government? What is it that we may now be able to undertake, that opens a future that is different to, and better than, what we have had until now? What new institutions will we need to create, and how might they function? What is to be our reconfigured financial relationship with the UK and the outside world?

“More powers” has been the popular cry. But it is how we might use these powers, how we might create new opportunities that now needs to be explored. This is what will inspire the public imagination and lift our gaze above the troubles and fears that now press so immediately and heavily down upon us. That exploration has of necessity to be wide-ranging – to initiate discussion from a variety of different standpoints that is the central purpose of this book.

In 1977 I edited a publication, Scotland 1980: the Economics of Self Government, which included contributions by a number of economists. The publication was funded by BBC Scotland and The Scotsman. The format today is similar but not identical. Here, after the introductory chapter, each author has been asked a specific question in order to give greater focus to the discussion. The authors have responded admirably to the challenge.

All the authors are acknowledged as authorities in their chosen subject areas. For the avoidance of doubt, I would emphasise that no author was chosen on the grounds of party affiliation.

At the time of the 1977 publication it was not certain that devolution would occur (and it didn’t until 22 years later) and, as was stated in the publication, “in economic terms devolution was deliberately designed to maintain the status quo”.

So it was, and is, but that appears to have been a serious weakness which will be tested in a referendum. The economic arguments have changed very little over time but the political framework has. The referendum will not and should not be decided on economic grounds alone but, as against the 1979 and 1999 referendums, the option or options posed will have important implications for economic policy, and that forms the subject matter of this book. So this is an exercise in political economy as befits the country which gave birth to that concept.

Despite many changes in the composition of Scotland’s economy in recent decades, the underlying problem remains and it is structural in nature. The critical feature is a low business birth rate, compared with England and the Scandinavian economies.

This problem is longstanding and predominantly social and cultural in origin. As Professor David Bell sets out in his contribution, the business birth rate is particularly low in the more densely populated Central Belt, above all in the west. It is a problem in the political economy sense.

Scotland has a persistent and growing trade deficit with the rest of the UK – an inevitable concomitant of high levels of public expenditure supporting a relatively large and inefficient public sector. This has never convinced the political parties in Scotland, or the bulk of her population, that more public expenditure is a sticking plaster and not a solution to a poor economic performance, unless it is directed to encouraging a higher business birth rate and a more dynamic market sector, the chief driver of economic growth.

As of now, all the parties appear to believe that a higher proportion of Holyrood’s expenditure should be funded directly from Scottish taxpayers, but they are all struggling to articulate what greater devolution, home rule, independence lite or independence might mean – and some or all of these may have to be considered in the referendum which lies ahead.

We need to be aware that history moves on and that constitutional arrangements need to adapt accordingly. My own view is that in social, economic and cultural terms the Union has been a substantial success for most of our peoples and most of the time. Many Scots appear to wish for a continuation of the Union under the Crown and support the continuation of a “social union” with the free movement of people, capital and services within the UK.

Yet, it is also true that the UK has become an increasingly centralised economy, in terms of the increased share of national income accounted for by central taxation in a wide range of social and other activities. Hence the Scottish Parliament, funded by block grant and unable to borrow to finance major public infrastructure projects, does not have the policy instruments to make a major impact on economic performance.

It was always the intention of home rule that it “should set the people free” within a federal framework, so that they carried the main responsibility for their own social and economic welfare, subject to the constraint that they also had a duty to promote the welfare of the wider Union.

So let us take home rule as the construct, this going beyond “devolution max” but consistent with “independence lite”. My purpose is to set out what this implies for economic policy. Our historical experience is that the UK has been a Union that did promote growth and stability over much of its history.

The framework may, indeed, need major refurbishment, but it will only flourish if macroeconomic monetary and fiscal policy is applied in a manner which is transparent and reasonably consistent across the Union. It should be understood that “reasonably consistent” does not mean that all the microeconomic details should be the same. And, having regard to the fact that the word “economics” is derived from the Greek word oikonomikos, meaning household management, the successful resolution of microeconomic issues is the key to successful economic policy.

After all, it is because the Greeks forgot household management that they are in so much trouble now – neither Scotland nor the UK would be served if we followed their example!

• Professor Sir Donald Mackay, FRSE, FRSGS, is a former chairman of Scottish Enterprise and economic consultant to successive Secretaries of State. He was a co-founder of economic and planning consultancy Pieda. He is a member of the advisory board of Reform Scotland under whose auspices the work of the authors has been organised.