17 January 2017

Brexit, Scotland and Nicola’s Blind-spot

Economics is for everyone.

It is critical for everyone to be economically literate.

It is surprising how many people struggle with economics.

During my exceptionally brief period in the Scottish Parliament, a fellow MSP, who speaks highly of the First Minister noted, “Economics is Nicola’s blind-spot”.

This is becoming very clear.

Ms Sturgeon is under significant pressure from SNP members to hold a second Scottish independence referendum given Brexit.

Yet, she knows support has not increased.

It is unlikely to as the economic landscape for an independent Scotland is very grim but perhaps due to Ms Sturgeon’s economic illiteracy, she has missed this.

In 2014, the Yes campaign failed to secure enough support for its cause, even with the tales of great riches on the horizon.

One report suggested Scottish exports would increase by a third to £100 billion “fuelled by banking, whisky and oil” and this would put an independent Scotland “among the top 35 exporters in the world”.

Whilst many questioned the validity of the results at the time, the downturn in the oil market since then has substantially weakened this argument.

In addition, the recent report on Brexit and the Scottish financial sector notes “[t]he uncertainties for the sector following independence look even greater than those following a sharp Brexit” .

Currently, Scotland exports £75.3 billion of goods and services: 64% to the rest of the UK, 15% to the EU and 20% to the rest of the world.

Following the Brexit result, Ms Sturgeon was so concerned about coming out of the EU due to the impact on Scottish businesses; she has set up a £500 million as "exceptional response to an exceptional economic challenge".

But Scotland exports four times as much to the rest of the UK as it does to the EU.

Yet, Ms Sturgeon considers coming out of UK to be in Scotland’s interests.

There is a little logic and definitely no economic literacy.

Ignoring potential and likely barriers to joining, let’s assume a post-Brexit independent Scotland became a member of the EU, what currency would Scotland use?

It is hard to imagine the EU permitting a new member to use a currency with a central bank that is outwith the EU.

Therefore, it is likely Scotland would need to join the Euro.

Moreover, Scotland would need to adhere to the European Fiscal Compact, which states government deficits must not exceed 3% of GDP.

Latest figures show Scotland’s deficit for 2014/15 was 9.5% of GDP.

Thus, the independent government of Scotland would need to either reduce government spending by a third, which is equivalent to cutting the whole health budget, or, implement very large tax rises.

The country’s credit rating would likely fall too, which would increase the cost of borrowing.

Politically, people expect the First Minister to shout up for Scotland’s interests given Brexit.

However, given the economic landscape, it is not surprising that the majority of people have not changed their opinion on Scottish independence since 2014.

Greater economic literacy for everyone is needed now more than ever, and especially for the First Minister.