Category Archives: economics

The Scottish export conundrum

It’s becoming abundantly clear that the Unionists’ main argument in the next independence referendum will be that if Scotland has to choose between being in the UK’s and the EU’s Internal Markets, the former wins hands down. Here’s for instance David Mundell’s take on it:

Our own domestic market in the UK is far and away the most important market for Scotland’s businesses.

The Scottish Government’s own figures show our trade with the rest of the UK is worth four times our exports to the EU.

Businesses in Scotland sold £37.5bn more in goods and services to their own market in the UK than they did to all 27 EU countries put together.

Today’s figures show the UK is the vital union for Scotland and highlight the importance of maintaining the UK market and preventing any new barriers to doing business across the UK as we leave the EU.

We must therefore find a convincing answer to this question. Wings over Scotland has provided one, but it’s making certain assumptions about the deal Westminster will achieve.

I therefore think it might be useful to examine the various scenarios systematically:

The (r-)UK remains with the EEA and the EU’s Customs Union

This scenario could happen either because Brexit never happens due to a second referendum, or because a new government decides to apply for continued membership of both the EEA and Customs Union (which basically would be membership without voting rights).

Would Scottish independence be good or bad for different types of businesses in this scenario?

  • Exporters to the rUK: Not a huge difference. Some companies might decide to set up a separate Scottish HQ if we are independent, which will increase employment and domestic demand, but that’s about it – the EU will ensure that the rUK doesn’t discriminate against Scottish businesses.
  • Exporters to the EU: Very little difference, but independence will be preferable, because there might still be small bits and pieces that Westminster will not take part in.
  • Exporters to the rest of the World: Very little difference, because participating in the Customs Union means that Westminster can’t make their own trade deals.
  • Other businesses: Very little difference — the main difference will be that independence will lead to a rise in the number of Scottish HQs and government agencies, which is likely to lead to a general rise in economic activity in Scotland.

Verdict: Under this scenario, independence is economically the best option, but the difference isn’t great.

The (r-)UK gets a really good trade with the EU

In this scenario, the (r-)UK does leave the EEA and the Customs Union, but manages to negotiate a really good trade deal. There will be some restrictions on the free movement of people, and there will be customs checks at the borders. The (r-)UK will make separate trade deals with the countries of the world (but because the EU is a much bigger trade block, these deals will typically the worse than the one they replace).

Would Scottish independence be good or bad for different types of businesses in this scenario?

  • Exporters to the rUK: Independence won’t make much of a difference with regard to trade, but the customs checks will make it a bit of a hassle, so some of these companies will relocate to the rUK.
  • Exporters to the EU: Independence is much better because of the lack of customs checks, and because companies can send key personal back and forwards between Scotland and the rest of the EU freely.
  • Exporters to the rest of the World: Independence is preferable, because the EU’s trade deals will be better.
  • Other businesses: My guess is that more companies will move from the rUK to Scotland to remain within the EU than the other way, so it’s likely the overall effect will be positive. It’s really an unknown at this stage, though.

Verdict: Mixed, with independence being better for some companies and worse for others. On average, I think independence will be somewhat better for the Scottish economy.

The (r-)UK gets a limited trade deal

This scenario is of course rather vague – a limited trade deal would necessarily prioritise some products or sectors over others, and there are infinite possibilities. What is certain, however, is that it will be somewhere between the preceding scenario and the following one. This scenario is likely to be accompanied by a recession (but a smaller one than in the next scenario).

Would Scottish independence be good or bad for different types of businesses in this scenario?

  • Exporters to the rUK: If Scotland is independent, some companies will not feel much of a difference, while others will struggle badly, depending on whether they’re included in the trade deal. If Scotland remains within the UK, things won’t change much at first for these companies, but any supply chains depending on EU links could break, and the general recession is likely to affect them.
  • Exporters to the EU: If Scotland is independent, nothing will change (and companies from the rUK will move to Scotland to remain within the EU). Without independence, some sectors will struggle while others are OK, but worse than they would have been.
  • Exporters to the rest of the World: Scottish independence is a lot better, because Scotland then keeps the EU’s great trade deals.
  • Other businesses: Independence is likely to be better, because of the increased economic activity caused by companies and people moving north; furthermore, the rUK recession can hopefully be avoided.

Verdict: Independence is better on average, even though a few companies who focus solely on exporting to the rUK in sectors not covered by the trade deal will struggle.

WTO terms

In this scenario, the (r-)UK leaves the EU without any agreement and has to trade on WTO terms, which means there will be tariffs on lots of exports, and no free movement of people. There will also necessarily be a hard border in Ireland. In this case, there is broad agreement that the economy will take a severe hit, with many companies and people fleeing the country. Things might improve eventually, but the economy will first experience a severe recession for several years.

Would Scottish independence be good or bad for different types of businesses in this scenario?

  • Exporters to the rUK: If Scotland is independent, these businesses will suffer, but people will still want their whisky to forget their worries, and they’ll still need energy produced in Scotland, so the exports won’t collapse. If Scotland remain within the UK, these exporters will still suffer because of the UK recession.
  • Exporters to the EU: Scottish independence is a hundred times better for obvious reasons.
  • Exporters to the rest of the World: Scottish independence is a lot better, because Scotland then keeps the EU’s great trade deals.
  • Other businesses: If Scotland isn’t independent, they’ll suffer because of the recession. If Scotland is independent, it’s likely the rUK recession will be felt north of the border, so things will still be bad, but much better than it would have been without independence.

Verdict: Companies focused on exports to the rUK will struggle after independence, but they’d struggle anyway because of the severe recession. For other companies, independence is much better.

Conclusion

Interestingly, independence seems to be better in all scenarios, but in some of them, the difference is much bigger than in others.

The Unionists going on about the amount of Scottish exports to the rUK compared with the rest of the World seem to be overlooking two big issues: (1) The more the UK cuts itself off from the EU, the more the economy will suffer, and that will hurt also those companies exporting to the rest of the UK; (2) the UK is likely to get trade deals that are much worse than what the EU has already negotiated, and that will be bad for lots of companies if we remain within the UK.

It’s really misleading to look at the size of the exports without looking at what will happen to them in the future, especially if Theresa May manages to shoot the UK in the foot. The more the rUK cuts itself off from the EU, the more we’ll need Scottish independence.

People and companies are starting to leave the UK – we need Indyref2 soon!

BREXIT
BREXIT.
The UK government seems to be moving towards a hard Brexit, perhaps even a chaotic one. Of course it might well be that they'll change their minds after a few meetings in Brussels, but people and companies are already starting to act to protect themselves in case worst comes to worst. It's clear from the Facebook forum for EU citizens in the UK that a large number of people are already starting to leave the country, and in this article the Financial Times warns that companies will leave soon if there isn't a transitional deal to prevent Brexit from kicking in as soon as 2019:

The uncertainty over losing rights has made UK-based businesses call for early transition guarantees. Without those, big banks in London say they will take decisions assuming there will be no transition.

If there is no agreement by March 2018 — basically one year before Britain’s formal exit in 2019 — the value of the interim deal diminishes dramatically for the UK. Companies would already have taken action to protect their own interests. The Treasury is alive to the risk of a City exodus if transition terms are not clear at an early stage.

[...]

That leverage is strengthened by another cold calculation in Paris, Brussels and Berlin: the longer Britain waits for a transition deal to be discussed and agreed, the more likely businesses will decide to move or shift investment away from the UK. For the EU-27, late agreement on transition would maximise relocation while still avoiding a “cliff edge” — sudden and disruptive change for businesses stemming from a sudden exit.

So people have started leaving already, and companies will follow soon, and unfortunately they'll leave Scotland, too, unless it's clear that we're likely to remain within the EU. If we don't hold Indyref2 till Brexit is done and dusted, they will all have left and found permanent new homes elsewhere, and they'll be extremely difficult to tempt back to Scotland.

I'm not saying that we need to hold Indyref2 very soon – but just announcing that it definitely will be held in 2018 will make people and companies delay a move away from Scotland, and it might make companies in the rUK explore whether a move to Scotland would be cheaper and easier than relocating to Dubling, Paris, Amsterdam or Berlin.

Indeed, just announcing Indyref2 is likely to have a beneficial effect on the Scottish economy, so I reckon Kenny MacAskill is worrying needlessly when he thinks the economy is doing too badly to allow us to win a new independence referendum now.

If companies are leaving the rUK (but not Scotland) in great numbers during the Indyref2 campaign, surely that will be a great reason for many people to vote Yes.

However, we can't afford to wait till they've all left before we call the referendum. Nicola Sturgeon has been saying exactly the right things recently, reassuring people and companies in Scotland that we won't be leaving the Internal Market because she'll call the referendum if the Brexit isn't soft.

I expect the exodus away from the UK will speed up drastically once Article 50 gets triggered, so that would probably be the best time to announce the date for Indyref2 to ensure that Scotland doesn't get completely flattened by the Brexit train crash.

Brexit shock therapy

Child Labour Photo Contest 2012_Third Prize
Child Labour Photo Contest 2012_Third Prize.
Ever since the Brexit referendum, I've kept thinking that the hard Brexit plans surely must be due to a lack of understanding of the consequences, that the Tories would eventually opt for a much softer outcome (such as the Norwegian solution) or at least apply for a decade-long transitional deal to give them time to negotiate new trade deals and all that.

I simply couldn't see any benefit in causing utter devastation to so many people and businesses across the UK, so I kept believing the people opting for a hard Brexit must be ignorant or deluded.

Then two things happened. Firstly, the leaked memo showed that people in government do seem to realise what they doing and what the consequences will be. Secondly, I started reading Naomi Klein's “The Shock Doctrine”.

Parts of this book are now a bit dated (it's from 2007, so from before the crash), but the bits where she explains why it's only possible to implement radical neoliberal reforms after some sort of societal crisis are just as relevant today:

It was in 1982 that Milton Friedman wrote the highly influential passage that best summarizes the shock doctrine: "Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable." [...]

What [Friedman] understood was that in normal circumstances, economic decisions are made based on the push and pull of competing interests – workers want jobs and raises, owners want low taxes and relaxed regulation, and politicians have to strike a balance between these competing forces. However, if an economic crisis hits and is severe enough – a currency meltdown, a market crash, a major recession – it blows everything else out of the water, and leaders are liberated to do whatever is necessary (or said to be necessary) in the name of responding to a national emergency. Crises are, in a way, democracy-free zones [...]. [p.140]

If this is true – which I fear it is – a hard and chaotic Brexit will be a huge opportunity for the Tories to completely abolish the welfare state. They'll be able to get rid of the NHS, free education, unemployment benefits and whatever else they don't like. They'll be able to do this while looking immensely sad, saying that it's all the EU's fault for denying them the package they wanted (but quietly always knew wouldn't be acceptable to the other EU member states). They'll blame everybody else for the economic collapse, but use it to create a neoliberal wonderland where only the strong survive. Eventually people will realise what has happened, but by then it'll be too late to reverse.

In Ian Dunt's new book (“Brexit: What The Hell Happens Now?”), the conclusion is similar:

Britain is about to experience a toxic mix of weak law and strong lobbying. It is tantamount to switching a country off and on again. Except that it will not revert to its original state. It will revert, in all likelihood, to a low-tax, low-regulation laissez faire economy, more akin to that of Singapore or Hong Kong than the countries on the Continent. [p.161]

More than three years ago, I warned that many people in England wanted to go down that Singapore-style route:

In their book Going South: Why Britain will have a Third World Economy by 2014, Larry Elliott and Dan Atkinson claim the UK needs to make a fundamental choice: Should it move in the direction of a Scandinavian welfare state (similar to the Common Weal ideas currently being discussed in Scotland), or should it become a low-tax state based on free trade (called "Freeport Ho!" and "Freeport Britain" in their book)?

They don't really discuss Scottish independence in their book, and they seem to think that the UK must make the choice as a whole.

However, it appears to me that Scotland and London have already chosen. Scotland wants to go down the Common Weal path (and what we're really discussing in the independence referendum campaign is whether we can convince the rUK to go down that road with us, or whether we should do so alone), and Greater London has practically decided to become a global free port (which is why so many people in the South-East want to leave the EU, dismantle the NHS, and all that).

What I didn't foresee back then was that the Tories would be able to use the chaos created by their hard Brexit to implement this vision, which is so utterly different from the vision of an egalitarian society based of solidarity and fairness that the vast majority of people in Scotland share.

If we can't stop the Tories from administering their neoliberal shock therapy, we need to get out before it's too late. We're about to witness something that'll make Thatcher look like a cuddly socialist in comparison.

I wish I had a time machine

Großmutter und Großvater
Großmutter und Großvater.
I'm half Danish, half German. I grew up in Denmark (before flitting to Scotland when I was 30), but of course I still identify as German, too.

My German grandparents were born in 1899 and 1900, so of course they remembered both World Wars equally well, and they obviously had vivid memories of raising their kids between and during the wars (they had thirteen weans, born between 1927 and 1944, and ten survived till adulthood).

They weren't Nazis. They voted against Hitler at every opportunity, but given the number of kids they had, there was a limit to what they could do. Nevertheless, I believe they always felt guilty not to have done more.

While they were still alive, their memories of the interwar period seemed somewhat irrelevant to me, like it was ancient history without relevance to the modern world.

And yet, today I'm sitting here wishing for a time machine so that I could speak to them. The Tories' hideous conference is making me want to discuss Hitler's ascent to power with somebody who lived through those years. How certain have you got to be that what you're seeing is beyond the pale before you act? What should you be looking out for? What would they have done differently with hindsight?

My great-grandparents lost their entire fortune during the German hyperinflation. My great-grandfather was a lad-o-pairts who had moved to Stuttgart as a teenager, got an apprenticeship as a baker and ended up owning one of Stuttgart's largest and most central bakeries with lots of employees, but he and and my great-grandmother lost everything during the 1920s, and they had to move in with my grandparents. My dad remembers them as grumpy and disillusioned.

Given the way the pound is falling like a stone, I wouldn't mind using my time machine to have a wee chat with them too about what to do when you live in an economic basket-case country.

Sadly, however, there are no time machines, and we have to use history books and our gut feelings to navigate these troubled waters. I guess that's why history keeps repeating itself.

Abandon ship!

Sunrise Orient wreck
Sunrise Orient wreck.
Do you remember when the Coalition government got into power in 2010 and introduced austerity because the UK's finances apparently were so dire that foreign investors would pull out their money if nothing was done? There was some truth in that, but of course the Tories only made things worse by taking money away from poor people (who would have spent it) and giving it to the rich (who didn't do much with it), so the deficit has continued to rise.

I'm mentioning this because the Chancellor of the Exchequer, Philip Hammond, has now abandoned Osborne's fiscal rules because Brexit is forcing him to do so. This means that the deficit is likely to rise dramatically soon, but without seeing the improvements that borrowing to invest could have led to without Brexit.

The pound is already falling like a stone, but once the financial markets fully realise that the UK is heading for a hard Brexit (and Theresa May was very clear about this on Sunday, as I've discussed before), and once they've factored it this ballooning deficit, it's likely to fall even faster.

I'm also very concerned that the Treasury seems to be contemplating to pay compensation to companies for losses caused by Brexit if they remain here. On the one hand they have to do so to prevent all exporting companies from leaving before March 2019, but on the other hand the money for doing so can only come from printing even more money, which isn't going to be good for the exchange rate.

Of course the pound will stabilise at some point, but it can fall a lot before that happens, and there won't be many well-paid jobs left at the end of it.

GDP of ArgentinaPerhaps things won't be that bad, but I'm starting to think the UK could go the way of Argentina, which over a hundred years fell from being on the same level as Germany or France, to a point where their GDP per capita is less than 30% of the USA's (see the adjacent graph).

Unless the majority of non-Brexiteers in the House of Commons get their act together and kick out this mad government before it's too late, Scotland has to get off this sinking ship fast or we'll get dragged down with it.

Reforming council tax

Tax
Tax.
I completely understand why the SNP's proposal for reforming council tax in the next parliament are so timid and unambitious. It's a political minefield to change it drastically during a recession (or during a very slow recovery for that matter), because no matter what you do, some people will have to pay more, and they might very well be in a position where they can ill afford to do so.

After all, you're not necessarily cash-rich just because you're living in a big house. For instance, just top of my head there must be many people that fall into one of the following groups:

  • They have negative equity, so they can't sell their house without making a loss.
  • They now earn (much) less than when they bought their property, but they have paid off enough of their mortgage to make it affordable to stay in.
  • They have inherited their large house.
  • They have climbed the property ladder by exploiting rising house prices, so their salary is tiny compared to the value of their house.

During a boom, most of these people could probably remortgage to release some money for paying the new council tax, but many people don't qualify these days, and if a tax change forces people to sell their house against their will, a lot of them will be very angry indeed.

That said, the current system is indefensible. It really should be replaced by a combination of land value taxes, property taxes and income taxes, and the value of land and property should be based on a recent valuation, not on 1991 figures that are now completely out of date.

I also find it odd that councils raise so little of their income through tax. The consequence is that if they need to increase their income by 5%, they'll need to put up council tax by about 20% if their block grant doesn't go up.

Of course, if councils had to raise all their income themselves, council tax would go up dramatically. Although it's hard to compare taxes across countries, it is interesting that in Denmark most people pay more income taxes to their council than to the state.

So all in all it is very difficult to reform council tax without creating major problems.

If I had been in charge, I think I would have guaranteed that nobody's council tax bill would go up by more than a small percentage year-on-year, but that the government would gradually introduce land value tax and a local income tax, as well as committing to a new property valuation within the next parliament. I don't think anybody would be terribly upset if it took more than a decade to move to a fairer council tax, so long as small and sensible steps in the right direction were taken each year.

Of course the SNP's proposal might be seen as such a small and sensible step, but it is much smaller than I would have liked.

What to do about oil prices

Oil rigs, North Sea oil, Scotland
Oil rigs, North Sea oil, Scotland, UK.
The drop in global oil prices has all sorts of annoying consequences (apart from the problems it causes an oil-producing country like Scotland). For instance, renewables are suddenly bad value for money (which is causing investment in them to drop), and recycling of plastics is now dearer than producing new stuff from oil (which again kills off recycling companies).

At the same time, it's not like we've suddenly found a lot of new oil in the ground or have discovered a way to use it without causing even more global warming. At some point in the future, oil will run out or get banned, and before either happens, prices are likely to skyrocket.

Oil prices might of course rise again well before then. The current drop is caused by a combination of factors, including a drop in Chinese demand, an increase in supply (caused to a large extent by the advent of marginal producers that are only in business because oil prices were so high for a while), and a plan by Saudi Arabia to get rid of the marginal producers by lowering prices to a very low level for a few years. We're not living in a world where prices have dropped to a new and permanently low level.

Anyway, the sensible course of action for Scotland (and the UK until we gain our independence) would be to subsidise renewables and recycling during the years of low oil prices. Unfortunately, income from oil production falls at the same time, which means there's less money to do this with.

So here's an idea: Why don't we create an inverse fuel duty, whereby the price at the pump is practically constant because the duty goes up when the price goes down, and vice versa? If a large part of this fuel duty was used to subsidise renewable energy, plastic recycling and similar projects, their subsidy would increase when oil is cheap, which is exactly what you want. At some point in the future, oil will get so expensive that the subsidy would drop to zero, which would again be perfect because at that point they wouldn't need it any more.

Sadly, we aren't independent, which means we'll have to convince the English Tories to introduce it, but they don't seem to care about renewables and such things. We really need independence more than ever!