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Salmond dreams Scotland can become a Celtic Lion; but will it work?

SNP | Salmond dreams Scotland can become a Celtic Lion; but will it work? Ian Fraser

Alex Salmond, Scotland's first minister and leader of the Scottish National Party, has an undergraduate joint honours degree in economics from the University of St Andrews and was an economist at the Royal Bank of Scotland from 1980-87. But I am increasingly beginning to wonder what sort of economics he learnt there.

Salmond, who secured another five year term as Scotland's devolved administration on May 5, hopes to lead Scotland towards independence from the rest of the United Kingdom. In my previous blog (Salmond's silence on banking is "elephant in room" for Scottish independence) I explored whether or not an independent Scotland could have survived the collapse of its banking sector; in this one I want to examine some of the meatier economic and fiscal issues surrounding Scottish independence.

The SNP never tires from telling us that once it gets its hands on “new levers to manage the economy ... assuming full macro-economic powers”, widespread prosperity would be assured and, at the very least, Scotland's economic growth would outpace that of England.

However, in a recent article published in The Scotsman Professor Michael Keating of Aberdeen University questioned much of this. Keating pointed out that, given that under Salmond an independent Scotland would have no intention of creating a new Scottish currency (it would either adopt the euro or retain the pound), it would in fact have limited macro-economic powers. Monetary policy, including the setting of interest rates, would of course be controlled either by the European Central Bank in Frankfurt or the Bank of England in London's Threadneedle Street.

Keating also questioned the SNP’s “flagship” policy of cutting corporation tax from the current level of 26% to the Irish level of 12.5% in the hope of attracting inward investment and boosting business investment. He claims this neo-liberal policy, now also being advocated for Northern Ireland, would be disastrous for Scotland, and that comparisons with Ireland are in any case misleading. Keating wrote:

“Ireland in the 1970s was a largely pre-industrial country without much of an existing business tax base, so that incoming investment amounted to a large part of the yield. There was also a lot of footloose investment in the subsequent decade. In Scotland, such a cut would provide a windfall benefit for existing businesses without attracting much more. The argument that it would pay for itself depends on the implausible assumption that business activity would more or less double in a very short period.”

Keating warned that reducing corporate tax to the Irish level would cause Scottish government revenues to slump by 4%, which would make it impossisble for the Nationalist government to fund its more-generous-than-England welfare state -- which already includes free prescriptions, free university tuition fees and free personal care.

Instead, when combined with the SNP pledge not to increase other taxes, Keating argues that the SNP's proposed cut in corporate tax would require the Scottish government to introduce far more savage cutbacks in state provision than anything being contemplated by the coalition government in Westminster. The other option would be for Scotland to live beyond its means courtesy of the international capital markets à la Greece and Portugal.

However, international investors' appetite for lending to a fiscally dubious or untested nation have taken a battering thanks to the ongoing eurozone sovereign debt crisis. At least Salmond now has the chance to put fixed-income investors appetite for Scottish bonds to the test. In recent days the UK chancellor George Osborne granted Scotland's devolved administration the power to issue its own bonds. (George Kerevan has produced a more detailed analysis of the likely fiscal position of an independent Scotland in The Scotsman).

The SNP has of course long argued that it would be able to fill any holes in the national accounts with the circa £8bn and £11bn a year of North Sea oil and gas revenue that currently bypasses Holyrood and flows straight into the UK Treasury's coffers. This may well be the case but it is not guaranteed. Much will depend on the nature of any independence settlement, including how readily England hands over the rights to such revenues. As John Kay wrote in Prospect "the issue is not straightforward."

Keating concluded on a more hopeful note, saying:-

“If we follow the low-tax scenario, there is a real danger that competitive tax-cutting within Europe or across what we used to call the British Isles will provoke a 'race to the bottom', as everyone tries to stay ahead but the consequence is merely a general fall in public service standards to the detriment of all.

“A more attractive prospect is a race to the top, with nations competing on the basis of high-productivity, high-wage labour and good public services. Here Scotland could both teach and learn from other nations, but only if we put aside wishful thinking and take some hard decisions."

To me, Salmond's dream of transforming Scotland into a low-tax economy that also provides its inhabitants with a cradle to grave welfare state has always seemed idealistic. The danger is that this extremely talented politician leads his country sleepwalking into independence without having first properly crunched the numbers and worked out how his "Celtic Lion" might be sustained.

Further reading on Alex Salmond, Scottish Independence and economic idealism:

Tags: Aberdeen University , Alex Salmond , Bank of England , EU , European Central Bank , eurozone , Frankfurt , GDP growth , George Kerevan , George Osborne , Greece , Ireland , John Kay , Northern Ireland , Portugal , Professor Michael Keating , Prospect , RBS , Royal Bank of Scotland , Royal Bank of Scotland (RBS) , Scotland , Scottish National Party , SNP , sovereign debt , The Scotsman , Threadneedle Street , UK , University of St Andrews
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