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Wednesday, April 18, 2012

Economist Article - Methinks Salmond Doth Protest Too Much

  Alex Salmond launched an amazing attack on the Economist magazine saying they would "rue the day" they dared to publish an article suggesting that the net effect of Scottish independence on us would be negative. It really was an over the top attack and suggests that our nationalist socialist Duce has little understanding of what free speech is about. Obviously he made no attempt to actually discuss any of the points they made.

    In fact the Economist was not as doom laden as one might thimk.
Nationalists argue that, mostly thanks to North Sea oil and gas, Scotland subsidises the union and would be better off alone. The more sneering sort of unionist argues the opposite, that Scotland is a parasitic subsidy junkie.
Both are wrong, in the short term at least. Assuming it keeps the oil and gas extracted from under Scottish waters, an independent Scotland would currently gain roughly as much in taxes as it would lose in subsidies
  Their argument amounts to  With My opinion in bold
In fact it performs better than all regions outside the south-east of England, and has done particularly well in the past decade (see chart). In 2010-11 Scotland’s GDP was £145 billion ($225 billion) including a geographical share of North Sea oil and gas, around 10% of Britain’s, with 8.4% of the population.

Historically Scotland has received bigger grants per head from central government than Wales, for example—in part a tacit acknowledgment that it contributes handsomely to oil revenues, which in 2010-11 amounted to £8.8 billion. An independent Scotland would lose that subsidy, but gain the right to collect taxes on hydrocarbons locally. For the moment, Scotland’s day-to-day accounts would look little different to now. But the argument does not end there.

in 2010-11 offshore activity accounted for 18% of GDP. The equivalent share for the whole of Britain was just 1.8%....
The North Sea is gradually running dry. Many fields will stop producing in the 2020s; by the 2040s oil is likely to be dribbling rather than gushing forth. Tax revenues from oil and gas are highly volatile—they are soaring now because commodity prices are high. And if prices fall both production and receipts could plummet.... Julian Simon, in the wager which, by them now refusing to accept it, proved no "environmentalist actually believes their "peak oil" scare stories. He showed that the long term price of resources is always down in real terms. Thus even were our oil to continue forever it would provide proportionately less of our national income.
It is quite possible that there is enough oil off the west coast to match what we are losing but that raises the question whether a Scottish government committed to Luddism will allow it to be exploited. The initial reaction of the UK government and current reaction of the Scottish government to shale gas suggests that if North Sea oil had first been discovered now it would be kept under wraps.

Another point about oil is that it is notorious that governments who depend on oil revenue are less concerned about having a healthy national economy than those who depend on that economy for their money "resource-rich countries are usually slightly more prosperous than resource-poor ones. The problem is that they are not as prosperous as they should be". This, on its own, may well explain why Scotland's government, which gets more money per capita than The UK average, is more parasitic and generally socialist than the UK's.
The second question over Scotland’s future is whether renewable energy could replace oil as a cash cow... OK I've been over this repeatedly and lets just say that Salmond's plan to create electricity at 3 times the competitive cost and get rich by selling it to england is clearly clinically insane.

third long-term problem is the state of its financial-services industry. The country has done well out of banking, but in the past five years the problems of having an outsize banking sector have become apparent. In 2008 the British government bailed out Scotland’s two biggest banks, Royal Bank of Scotland (RBS) and HBOS, which was acquired by Lloyds Banking Group. These would probably be broken up as part of an independence settlement, not least because many of their assets are English.
But Edinburgh’s fortunes as a banking centre would be hard to revive. A small, newly seceded economy would struggle to support a large financial sector, Clearly true

Fourth and most testing for Scotland’s future would be the question of its currency. Mr Salmond’s hopes of joining the euro have soured—for now he plans to stick with the pound. Yet the euro zone has amply demonstrated the dangers of entering a monetary union without fiscal union. Soothing niceties from Cheshire-cat politicians no longer reassure bond markets—Scotland would pay a premium for being part of a monetary union that could break. It would have no central bank, no monetary freedom and limited fiscal autonomy. Again true. England is a large country with relatively sane government. Scotland would be a small new one where both government and opposition are committed to borrowing more than in England. The only sort of person who would choose to lend money to Scotland at the same rate as England is the sort who would choose to lend it to Greece rather than Germany and such people have little spare money. The only way we could do it is by paying a significantly higher interest rate.
  Another point I have not seen discussed anywhere is our long term demographic future. Scotland's population is growing older faster than the UK average. The major reason is seen to be emigration from Scotland - particularly to the rest of the United Kingdom. If we are going to gave more pensioners per worker, even moreso than in England, it is impossible to see how pensions can be kept at current rates without increasingng taxes further.

   None of these are insoluble problems. Indeed Scotland could become far richer than the UK if only we had a competent government committed to economic growth. But then so could the UK. The discussion of whether we would lose or gain from separation is about no more than 5-10% of GNP - 1 year's growth in the rest of the world. Which shows how silly it is to concentrate on this as if it were a serious answer.

    What I suggest is that we need to detoxify the oil money we get. That can only be done if this money goes to the Exchequer. Rather than leaving it all there, which would indeed hurt us, it should then be handed over not according to the current "needs" based Barnett formula but as a proportionate bonus on the other taxes we pay. Perhaps by oil money all going to central funds and Scotland getting a higher proportion of our tax money back than England. This would provide the necessary incentive to government to promote a growing economy rather than just girning that they need more for their windmills and quangos.

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This is exactly the point I have been trying to make in various online discussions on Scottish Independence.

Scotland would be in pretty much the same position financially on day 1 of independence as it is now. It will however have swapped a guaranteed income (for Westminster) for a declining (and highly volatile) one in the form of revenues from the North Sea.

Scotland would need all of the current oil money to sustain its current level of expenditure. What happens if oil prices drop, or more likely, gas prices drop due to shale gas coming online? US gas prices have dropped significantly since shale gas started, and that could be just a few years away in England. What will Scotland do if the petro-revenue halves in a year, which it can do?

Instead of shouting invective at his critics, Alex Salmond should perhaps address the substantive points they raise.
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