Mr Reid
SCOTTISH ECONOMIC PLANNING DEPARTMENT
New St Andrew’s House
St.James Centre, Edinburgh, EH13TA
Telephone 031-556 840. ext, 4017
J Garlick Esq
Cabinet Office
Great George Street
London SW1
23 April 1975
At the meeting which you held last week on various aspects of North
Sea oil and devolution I suggested that I might send in the attached
paper in the hope that it would serve as a starting point for any
assessment the Unit may wish to carry out on the economics of Scottish Independence.
The Paper was written over a year ago in the weeks immediately before the February 1974 Election. This will be particularly apparent of page 5 where, of course, the Ministerial pronouncements referred to relate to the Conservative
Government. I have not attempted to update any of the figures, since
although there would be differences these do not seem to me to be such
as to alter the argument.
As you will realise, the debate on Scottish nationalism has been
founded to a surprising extent on economic arguments ad the purpose of
this paper was to examine how far this was affected by North Sea Oil.
The first part goes through most of the usual arguments which have been
used against the Nationalists in the past with fairly convincing effect;
the second part sets out the sort of economic strategy which an SNP
Government might try to follow indicating both the dangers and the
possibilities. As I said at the meeting, one can reach almost any
conclusion depending upon the assumptions that are made about tariffs, a
common currency, a Scottish Government’s
spending priorities and its success in controlling inflation. My paper
may give an SNP Government the benefit of too many doubts, but I was
anxious to see whether a credible economic strategy could be put
together which would appear to be more convincing in terms of solving Scotland’s
traditional economic problems than the regional policies of the
Unionist Governments have been up until now. I think the conclusion is
that the most convincing way of taking the wind out of the SNP’s sails
is by demonstrating that we now have policies which can make major in-roads into these problems.
When my paper was written it was classified “secret” and given only a
most restricted circulation in the Scottish Office because of the
extreme sensitivity of the subject. I am copying it now to Leo Pliatzky,
Dick Ross, Jim Hamilton, John Liverman and Stuart Scott Whyte.
RGL McCrone
SECRET
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THE ECONOMICS OF NATIONALISM RE-EXAMINED
It is commonplace that the discovery of North Sea oil and entry to the
EEC are factors of major economic significance for Scotland.
Already both issues, especially the former, feature widely in the
SNP’s election material. The purpose of this paper is to reassess the
economic arguments for an independent Scotland in the light of these
developments, especially the discovery of oil. It will be shown that the
whole framework within which the economic implications of nationalism
were argued has indeed been altered. The importance of this is probably
greater than is recognised at present by the majority of the public and
it may well be, therefore, that the discovery of North Sea oil will come
to be seen as something of a watershed in Scotland’s economic and
political life.
The case for Scottish nationalism is, of course, very much more than
an economic issue. This paper makes no attempt to examine the wider
questions. Suffice it to say that Scottish nationalism has been much
more concerned with economic prosperity than nationalist movements in
other countries. Unlike Wales there is no great cultural movement
attaching to the preservation of a language.
The main cause of discontent is the country’s unsatisfactory economic
performance over the last half century, especially the persistent
unemployment and net emigration above all in the West of Scotland.
Poor social and environmental conditions, especially in and around the city of Glasgow, accompany this outdated economic framework and are as much a source discontent.
Despite regional policy and the efforts of planners, these problems
have not been overcome, nor do they look as if they will be in the
foreseeable future. The SNP have therefore based their campaign on the
assertion that Scotland would be economically better off independent;
and it is for this reason that budgetary estimates have always featured
so large in the controversy. Yet in spite of Scotland’s undoubtedly poor
economic performance the SNP case until recently lack credibility. Most
people regarded both their statistics and arguments suspect, and they
continued to believe that Scotland derived more economic advantage than
disadvantage from the Union.
The importance of North Sea oil is that it raises just this issue in a
more acute form than at any other time since the Act of Union was
passed.
The Case Against Nationalism
The traditional economic case against nationalism has always been that
a politically independent Scotland would be unable to gain sufficient
economic sovereignty to solve her problems successfully.
This is partly a question of the scale of the Scottish economy, but
more of the extent to which it has become integrated with that of the
rest of the UK over the last 270 years.
Scotland needs a faster rate of economic growth than either she or the
UK has had in recent years if she is to absorb her excess
labour resources and thereby cut down both unemployment and migration.
There are three principal ways in which an independent Government
might seek to bring this about. First it could seek to foster and
protect Scottish industry by means of tariffs and import controls. But
such measures would risk retaliation from England which, given
Scotland’s close trade ties with England, could cause damage far in
excess of any benefit that may be hoped for. Such policies would also be
incompatible with continued membership of the EEC and withdrawal,
especially with England, Wales and Ireland remaining members, would
clearly have very damaging consequences.
Secondly, fiscal policies might be used to give especially large
benefits to new industrial investment or tax relief and subsidies to
existing industry. This might involve the imposition of a tax frontier
at the border, as still exists between most EEC countries, but this need
not to make it impractical. Such policies have been used with
considerable success by the Irish Republic since the mid-1950s. The main
disadvantage is that England would probably feel obliged to match the
Scottish measures with equivalent in grants or tax allowances for
industry in English and Welsh Development Areas. Up to now England has
always been in a position financially where, if she wished, she could
have more than matched any measures which a Scottish Government would be
able to afford.
It is here that the budgetary position of a Scottish Government
becomes important. Various studies, notably the Treasury’s Scottish
Budget of 1967/68 and the work of the Kilbrandon Commission have shown
that public expenditure per head in Scotland is generally above the UK
average, whereas public revenue is Scotland is slightly lower, largely
because Scottish incomes are below the UK average. The result is that
budgetary estimates for Scotland show a proportionately larger borrowing
requirement than for the UK as a whole. His position is confirmed in
the most recent estimate of Scotland’s budgetary position carried out by
the Economic and Statistics Unit of SEPD for 1971/72. This shows a
Scottish current account surplus of £24m. but a net borrowing
requirement of £447m. overall.
There are, of course, various ways in which this could be tackled. In
the first place it is not necessary to balance the budget. To finance
loans and various items of capital investment, particularly those which
yield a return by borrowing is quite reasonable; other items too may be
covered by borrowing from time to time particularly if an expansionary
budget is necessary to generate a higher level of economic activity in
the economy. For these various reasons the United Kingdom budget
normally involves a net borrowing requirement and whilst this will
normally be fairly small this is not always so; in the present year, for
example, the borrowing requirement reached the record figure of
£4,000m.
If allowance is made for the capital items that it would normally be
reasonable to finance by loan, this would still lave a Scottish deficit
of over £200m., a very similar figure in 1971/72 to what it was in
1967/68. Whilst such a figure could be covered if it arose only
exceptionally, it could not be tolerated as a regular feature of the
budget. It would involve a steadily increasing Scottish debt and it
would have serious implications both for interest rates and monetary
policy, unless a substantial part of it could be financed from abroad. A
Scottish Government would therefore have to take steps to reduce the
deficit either by raising taxes or cutting expenditure. Such measures
are perfectly possible, and on the scale necessary, need not provoke a
intolerable situation, especially if defence was one of the items cut;
but they would create a background of acute budgetary stringency against
which it is hard to see it being possible to provide a major fiscal
stimulus to encourage economic expansion.
The third possible course of action would be to devalue the Scottish
currency. This would stimulate economic activity by increasing the
demand for exports and making Scottish goods more competitive against
imports in their home market. In many respects devaluation would be the
obvious measure for an economy in Scotland’s condition with persistent
unemployment, a budgetary deficit and probably a serious adverse balance
on the balance of payments.
Indeed, if the later was persistent, it might be that devaluation would be inescapable.
Exchange rate adjustment is, of course, the ultimate and most
effective weapon by which an economically sovereign state maintains
approximately full employment while at the same time avoiding balance of
payments disequilibrium. Indeed, if Scotland could have devalued by a
good thumping 2 percent and made the adjustment effective in terms of
costs, this would be by far the best way of solving Scotland’s economic
problems of the last two decades. It has been argued that the ‘regional
problem’ only arises because exchange rate adjustment, the normal way of
dealing with disequilibria between countries, is not possible between
regions.
However, the economic case against Scottish nationalism has always at
bottom come down to the proposition that an independent Scotland would
not find it possible to carry out an effective devaluation.
To be effective, devaluation involves a country in making a cut in its
real living standards at least until such time as production is able to
catch up. But the Scottish labour market is so closely linked with that
of the rest of the UK that it is hard to see how real earnings could be
adjusted downwards without giving rise to the most serious
difficulties.
For such a small country heavily dependent of international trade,
devaluation would, of course, have serious inflationary consequences,
since all imports would rise in price. Trade Unions are to a large
extent on a Great Britain basis and it is hard to see them accepting a
deliberate attempt to cut real wages in Scotland compared with England
whatever the reason for it may be. Furthermore, even with independence,
freedom of labour movement between England and Scotland would be likely
to continue, a common language and two and a half centuries of free
movement make this easy. Changes in real wage levels would therefore be
likely to be reflected in migration figures and could lead to a shortage
of certain types of skilled labour in Scotland even while a surplus
among the less mobile unskilled persisted.
It is for these reasons that many economists have in the past
concluded that Scotland, if she were independent, would probably be
unable to devalue effectively against the rest of the United Kingdom.
Lacking this ultimate weapon of economic sovereignty and limited by
the budgetary situation in the use she could make of fiscal policy, it
did not seem that political independence would give Scotland sufficient
economic sovereignty to enable her to tackle her economic problems
successfully, At the same time, whatever the constitutional set-up, the
Scottish economy would remain closely integrated with that of the rest
of the UK and would be greatly affected by policy decisions taken in
London, though as an independent state her ability to influence those
decisions would be greatly reduced.
The Implications of North Sea Oil
The analysis in the last section is based on the situation as it
appeared before the discovery of North Sea oil. Even after its discovery
the full significance of North Sea oil was not immediately apparent and
it still remains in large measure disguised from the Scottish public by
the DTI’s failure to make provision for a proper Government return when
the fourth round of licences was issued.
So far all that Ministers have said is that they expect North Sea oil
to be yielding 70-100m. tons of oil per annum by 1980 and that on that
basis the Government revenue from rent and royalties from the whole of
the Continental Shelf including the gas fields in the southern sector
may be of the order of £100m. per annum at that time. It has been
explained that this estimate does not include the yield from ordinary
taxation on the oil companies and it has been stated that licensing
policy is currently under review but the significance of this has
probably not been fully appreciated by the public.
The SNP countered these figures by claiming that North Sea oil should
by 1980 be yielding a Government revenue of approximately £800m. and
have charged
the Government with giving Scottish oil away to the international
companies ridiculously cheap. Up to now much of the Scottish public may
have regarded the SNP figures as pretty wild and they have been publicly
condemned as such by Ministers.
But authoritative support for the charge that the Government has
failed to do a satisfactory bargain with the companies is provided in
the criticisms of the Public Accounts Committee which so far remain
unanswered. The example of Norwegian policy on Government revenue from
oil likewise shows up the failure of British.
The Government’s reveiw of licensing policy has been in progress since
the early summer of 1973. This has confirmed the total inadequacy of
arrangements to secure Government revenue and shows that some of the
most attractive measures to put this right would involve breaking the
terms on which the licences were given. It is partly for this reason
that the Government has so far failed to take a decision, the choice
lying between carried interest (ie state participation), which would
provide the biggest revenue and also give some power of control but
would go back on the terms of the licences, and excess revenue tax, from
which the return in 1980 would be some £200m. less but would be
defensible in international law.
The DTI estimates of last summer showed that total Government revenue
following adoption of these measures would have been between £800m. and
£1,200m. a year in 1980 depending on the system used and the prices
prevailing in 1980; today, following the huge increase in international
oil prices of recent months the corresponding figures are in the range
of £1,500m. to over £3,000m. Thus, all that is wrong now with the SNP
estimate is that it is far too low; there is a prospect of Government
oil revenues in 1980 which could greatly exceed the present Government
revenue in Scotland from all sources and could even be comparable in
size to the whole of the Scottish national income in 1970.
As well as the gain to the Government Revenue, North Sea oil will of
course make a massive contribution to the balance of payments; indeed
these two aspects are closely linked. At present world prices the
expected output of 100m. tons of oil in 1980 is worth approximately
£3,000m.; assuming price rises from the present £33 a ton to £51 a ton
as in the Government revenue calculations the value could be as high as
$5,000m. Part of this will, of course, be repatriated by the
international companies in the form of profits distributed to their
shareholders or reinvested in projects in other areas. The balance of
payments gain to Scotland would therefore depend critically on the
amount of Government revenue secured from the profits. Indeed, since
none of the major companies operating in the North Sea are predominantly
Scottish owned, the Government revenue would be the major element,
apart from the expenditure of the companies on goods and services
produced in Scotland, which would accrue from the value of oil produced
as a balance of payments gain. Thus assuming measures which would yield
Government revenue of the scale referred to in previous paragraphs, plus
some additional revenue to shareholders in Scotland and to suppliers of
equipment, then the net balance of payments gain might be expected to
lie very approximately in the range of £2,000m. to £3,500m. a year,
depending on prices and the share of the Government ‘take’.
It is not possible to compare these figures with an accurate estimate
of Scotland’s present balance of payments position. From the state of
Scotland’s economy one would expect a balance of payments deficit on
current account and a rough comparison of income and expenditure
estimates for GDP suggest that this could be of the order of £300m. a
year in 1970/71.
Plainly this is a most unreliable figure and it will vary from year to
year, but it is probably sufficient to suggest the orders of magnitude.
What is quite clear is that the balance of payments gain from North
Sea oil would easily swamp the existing deficit whatever its size and
transform Scotland into a country with a substantial and chronic
surplus.
All the above figures are, of course, based on the estimated output of
100m. tons of oil in 1980. This was the DTI’s revised estimate in the
early summer of 1973.
Already it is beginning to look as if these estimates may be too
conservative. Recent finds and the plans of companies appear to indicate
that the Shetland basin may prove very productive indeed. Zetland
County Council’s consultants worked on the assumption that 70m. tons a
year might actually be piped ashore in the county. It is now known that
Shell expect to land 50m. tons a year through their own pipe alone and
pipelines may also be expected from Total’s Alwyn field, Conoco’s Hutton
and the recent BP and Burmah finds. In addition to this there are, of
course, substantial finds further south, particularly BP’s Forties field
and Occidental’s Piner. Whether or not this, plus any new finds that
are made, result in the 1980 estimate of 100m. tons being exceeded
largely depends on how quickly newly discovered fields are brought into
production, but it does now seem extremely likely that production during
the 1980s will use well above 100m. tons a year with consequent
increases in revenue and gain to the balance of payments.
Can one be certain that the oil is without doubt a Scottish asset or,
even if it is, that these substantial revenues and balance of payments
advantages would indeed accrue to an independent Scotland? Clearly these
questions raise complicated issues in international law which could, if
allowed, occupy the legal profession for many years. Two possible lines
of argument may be expected: either that Scotland should pay England
some compensation for appropriating the most productive part of the
Continental Shelf, or that the whole shelf should be regarded as the
common property of the nations of the former United Kingdom with revenue
distributed in accordance with some population based formula
irrespective of where oil is discovered. As regards the first of the
arguments, the prospective return from oil revenue would at the very
least be one of the factors taken into account in determining the
financial settlement between the two countries when they become
independent. To argue the second would be directly counter to the line
that the UK Government has taken with the EEC, that the resources of the
Continental Shelf are as much a national asset as are those on land,
like coal mines, and that there is therefore no question of the
Europeanisation of North Sea oil.
Disputes on these matters might well occasion much bitterness between
the two countries, but it is hard to see any conclusion other than to
allow Scotland to have that part of the Continental Shelf which would
have been hers if she had been independent all along.
There might be some argument about where the boundary between English
and Scottish waters would lie. At present this is considered to be along
the line of latitude which lies just north of Berwick on Tweed, and it
might perhaps be held that it should run NE/SW as an extension of the
Border. This could have the effect of transferring the small oilfields
in the south, Auk and Argyll, to the English sector, but would not
affect the main finds.
It must be concluded therefore that large revenues and balance of
payments gains would indeed accrue to a Scottish Government in the event
of independence provided that steps were taken either by carried
interest or by taxation to secure the Government ‘take’. Undoubtedly
this would banish any anxieties the Government might have had about its
budgetary position or its balance of payments. The country would tend to
be in chronic surplus to a quite embarrassing degree and its currency
would become the hardest in Europe, with the exception perhaps of the
Norwegian kroner. Just as deposed monarchs and African leaders have in
the past used the Swiss franc as a haven of security, so now would the
Scottish pound be seen as a good hedge against inflation and devaluation
and the Scottish banks could expect to find themselves inundated with a
speculative inflow of foreign funds.
II A Policy for Development
The situation described in the first part of this paper is indeed an
astounding reversal of the problems which are usually considered in a
Scottish or British context. But it could nonetheless give rise to some
serious difficulties and would require careful handling if Scotland was
really to derive maximum benefit from it. It is, of course, perfectly
possible that these difficulties would not be overcome and that an
independent Scotland despite its wealth would continue to have an
unsatisfactory economic performance. It takes more than money to
eliminate the traditional problems of the Scottish economy and
nationalist movements, dependent as they are on strong emotional
pressures, have not always been notable for their economic realism. In
this respect the example of Ireland’s poor economic performance between
1922 and 1956 comes immediately to mind and the SNP is already showing
signs of making promises which could be an embarrassment to its economic
management.
Nevertheless it is obvious that the surpluses from North Sea oil would
open up new opportunities for a nationalist Government. The purpose of
this second part of the paper is therefore to consider in very brief
outline some of the policies a nationalist Government could follow to
try to bring about the development and prosperity of the country as a
whole.
Scotland’s central economic problem is to secure a faster rate of
economic growth so that she can raise income levels and absorb the
excess labour which presently appears as high unemployment and
emigration. As has been explained, this is a situation which would
normally point to devaluation as a possible remedy. North Sea oil,
however, by giving the country a chronic balance of payments surplus,
would rule out any possibility of devaluation. Indeed, it is hard to see
how an upward valuation of the currency could be avoided. Obviously
this pressure should be resisted as far as possible; but unless there
was a remarkable change in the strength of sterling, it must be expected
that the Scots pound would rise in relation to it fairly soon after
independence, especially if the latter continues its downward slide. A
revaluation would give rise to none of the difficulties which were
argued earlier to apply to a Scottish devaluation.
Since the effect would be to reduce prices and raise incomes there
would not be the same resistance to making it effective in Scotland. An
exchange rate of £1 Scots to 120p sterling within two years of
independence therefore seems quite probable.
This exchange rate movement would improve Scottish real incomes;
imports would all become cheaper, and GDP per head in Scotland, which
would include the value of the oil produced, would rise smartly. The gap
between Scottish income per head and English would probably soon be
eliminated and might well be reversed. The danger is that with a rising
currency Scotland’s traditional economy would find it more and more
difficult to compete; manufactured exports would be priced out of
foreign markets and imports would become highly competitive at home;
tourists would find that the rate of exchange made Scotland a very
expensive country for holidays; and Scottish farmers would find that the
EEC’s Common Agricultural Policy gave them a much less satisfactory
level of support than expected. Thus there would be grave risk that the
economy would be driven more and more to depend on the oil industry and
other activities would tend to wither.
But while oil would give Scotland a good income, it could never be an
adequate source of employment with the rest of the economy in decline.
Scotland, therefore, could face the danger of prosperity coupled with
continuing or even worsening unemployment and emigration.
To counteract this situation it would be essential to try to keep the
surpluses on the balance of payments down and thereby reduce the upward
pressure on the exchange rate. This could involve extensive lending
abroad, whether to England, the EEC or under-developed countries. Such
lending could well be in Scotland’s interest rather than face the
prospect of an intolerably high exchange rate; it might also do much to
help cement relations with other EEC countries and, coupled with the
supplies of oil for export, would make Scotland a highly desirable
member of EEC with a strong bargaining position.
The first priority, however, would be to spend the surpluses as far as
possible in developing Scotland’s domestic economy and providing a
modern infrastructure. The following paragraphs suggest how this might
be done.
a. Manufacturing Industry
Output per head in most sectors of Scottish industry is well below
European levels. This is largely because the British economy has
invested much less than other European countries over the last 25 years.
A substantial increase in manufacturing investment is therefore
necessary if this is to be put right. Only then will Scottish industry
be able to compete effectively with other members of EEC at anything
other than low exchange rates.
Part of the reason for the low investment in Scotland in the past has
been the persistence of ‘stop-go’ in the UK economy. Every time
investment has begun to rise satisfactorily, as it was doing in 1973,
the emergence of a balance of payments deficit has forced the Government
to take strong deflationary measures with the result that the
investment boom has petered out again. Scotland made good progress in
1973, but ideally from her point of view the 5 per cent growth rate
needed to go on for another couple of years. As an independent state,
Scotland’s balance of payments position would enable her to break out of
the ‘stop-go’ cycle and a sustained rate of growth could be planned on
the basis that it could be carried on for at least a decade.
The strength of the currency coupled with the budgetary surplus would
help to keep interest rates down and there would be no need for sudden
increases in taxation or massive cuts in public expenditure.
Admittedly, since Scotland is so closely tied to the English market,
her economy would continue to be affected by measures taken in London,
but this effect would diminish the more Scotland expands trade with
other EEC countries. Furthermore, it would be quite proper for a
Scottish Government to take countervailing measures to stimulate the
Scottish economy at times when England was going through a recession.
Such measures would help to keep Scottish output up and would help the
English economy by reducing the Scottish balance of payments surplus.
It can be expected therefore that the prospect of sustained expansion
and an end to ‘stop-go’ would do more than anything else could both to
raise investment in domestic industry and to encourage foreign
investment to come to Scotland.
However, this expansionary macroeconomic policy would need to be
backed up by firm regional policy measures. The position in West Central
Scotland has deteriorated vis-a-vis the rest of Scotland over the last
decade and this is likely to be even more accentuated by North Sea oil
developments.
Furthermore, as an independent state, it would seem to be quite
inappropriate for Scotland to regard the whole of the territory as
subject for regional policy. Something along the lines of the following
package of measures therefore seems to be most appropriate:
i. For Scotland as a whole the Regional Development
Grant would be abolished, but to stimulate investment Corporation Tax
would either be abolished or reduced to a purely nominal rate. This
would have the effect of more or less removing the tax from industry’s
retained profits while leaving distributed profits taxed roughly as they
are at present. As a national fiscal policy measure it would not come
within the control of the EEC’s ceilings on regional aids. The cost of
abolishing Corporation Tax would be £120m.
ii. West Central Scotland would be scheduled as
Scotland’s Development Area and the definition could be extended to
certain smaller areas in the Highlands and Islands if necessary. Within
this area there would be a 20 per cent Regional Development Grant paid
as at present in addition to (i) above.
iii. There would be a Scottish Development Authority
covering the whole of Scotland but with instructions to give particular
priority to West Central Scotland.
Its budget would at least be on a scale equivalent to the funds which
previously went into REP and SIDO. It would be empowered to give
discretionary grants and loans and would be equipped to provide advice
to companies. It would be responsible for working out a strategy for
developing Scotland’s domestic industry as well as promoting foreign
investment. The HIDB would continue to operate with its own much wider
remit in the Highlands.
iv. Steps would be taken to strengthen the
shipbuilding industry by adopting a scheme for insurance against
inflationary risk as operated in France and approved by EEC. The new SDA
would be especially charged with the preparation of proposals for the
modernisation of the industry.
b. Construction
The construction industry employs a substantial part of the labour
force and its fluctuations have been a major factor in unemployment. In
1971 no less than 25,000 of the 100,000 unemployed were registered as
construction workers.
In times of boom the shortage of skilled labour in the industry
becomes a serious bottleneck in the economy although coupled with
continuing large numbers of unskilled unemployment.
The industry does not play as large a part in the British economy as
in most other European countries and this coupled with the manifest need
for urban rebuilding and house replacement suggest that, with the
proper policy, the industry could play a much larger part in providing
steady employment for the Scottish labour force. Indeed, if the Scottish
construction industry employed 10 per cent of the labour force, the EEC
average, this would mean employment for an additional 40 thousand.
With North Sea oil revenues, public expenditure on construction
projects could be greatly stepped up and a major operation should be
mounted to carry on the rebuilding of Glasgow and do much more than has
been done in the past for environmental recovery. This would probably
require a special Environmental Recovery Agency to assist the local
authorities rather in the way that SSHA operates.
Housing policy has been bedevilled in the past by the subsidisation of
certain types of housing. This has led to the colossal public housing
sector in Scotland with the emphasis on quantity rather than quality. It
seems desirable to subsidise housing for many years to come both to
improve the living conditions of the Scottish people and to keep up the
demand on the construction industry. Instead of subsidising rents at one
extreme and at the other giving tax relief on mortgages which is
greater the larger the mortgage, it would seem much more appropriate to
give the assistance to individuals regardless of the type of house they
occupy or whether they are tenants or owners.
This could probably be done under the new tax credit system and it
would have the effect of providing a housing subsidy or negative tax to
those with low incomes and a housing tax allowance to others. In this
way demand for housing as a whole could be encouraged while avoiding the
distortion between different types of housing which has been such a
feature of the past. It would be likely that local authority housing
would then gradually decline in importance and housing associations
would assume greater prominence. As competition between different forms
of housing increased, so the quality of housing would improve.
c. Service Industry
In the past service industry has received much less assistance from regional policy than manufacturing.
In part this is right because many service activities, such as medical
services, education, accountants, distribution, are governed simply by
local demand. But there are service activities, notably major offices,
which have a choice of location and every effort should be made to
attract them to areas where labour is available.
Following independence the increased Government activity would largely
wipe out any spare labour resources in Edinburgh, but major efforts
would be needed to promote commercial and office development in Glasgow.
The Scottish Development Authority should be empowered to offer
assistance, comparable in scale to that available to manufacturing
industry, to encourage such development in the Glasgow conurbation and
the system of property rating should be revised, if not abolished, to
prevent high rates being a brake on commercial development as they have
been in the past.
Tourist development would obviously assume major importance for any
independent Scotland and the financial resources available to the
Tourist Board could be increased.
d. The Pace of North Sea Oil Development
On the face of it the pace of development of North Sea oil appropriate
for Scotland would be very different from that now being demanded by
the UK.
Apart from the need to avoid piling up excessive surpluses, Scotland
would wish to extend her North Sea oil revenue over a much longer period
than the 30 or so years which seems likely at presently planned rates
of extraction. It is also desirable to avoid the frenzied peaks of
activity which seem likely in Shetland, the Moray Firth and Loch Carron
on present plans.
These will impose immense infrastructure demands, lead to a
substantial inflow of population and leave in their wake problems of
readjustment and unemployment which it may take years of regional policy
to overcome. In addition the contribution of Scottish Industry to oil
developments, which is so far disappointing, might be increased
substantially if the whole programme is not required to go at the
maximum possible speed.
From a purely Scottish point of view this suggests that a production flow of, say, 50m. tons a year might be ideal.
Even this would be five times Scotland’s present consumption and yield and annual revenue of between £700m and £1,500m.
However one cannot look at the Scottish position in isolation.
If, because of action in the Middle East, there is a serious energy
shortage in Europe, Scotland would undoubtedly suffer severely from the
resulting slump. It would therefore be in Scotland’s interests to
increase her oil production well beyond what would otherwise seem
desirable. If however there is no serious shortage in physical terms,
merely a crisis of price, then action by Scotland is not going to affect
the international price of oil, nor will it matter to the other
countries what the source of their oil is.
e. Inflation, Income Policy and Training
The strength of the Scottish exchange rate and the low interest rates
which would result from the budgetary and balance of payments position
would do much to reduce inflationary pressure. A major part of the
British inflation has resulted from the downward drift of the currency
and the consequent rise in import prices. The absence of this,
relaxations in taxation and subsidies for housing would no doubt help to
reduce the pressure of wage increases.
Nevertheless as Scotland moved nearer full employment serious
shortages of certain types of skilled labour would occur and this would
tend to produce acute inflationary pressure.
Some form of incomes policy is clearly going to be a continuing
feature of advanced economies and would be essential in Scotland if the
economy was not to price itself out of international markets. It is
important to recognise, however, that the labour shortages which give
rise to the pressure could be avoided to a considerable degree if
training schemes were more flexible and if a substantial increased
effort was put into retraining. A full-scale examination of training is
clearly an early priority.
The European Community Membership of the EEC affects the economics of
Scottish independence in several important respects. It guarantees
access to English and Continental markets in a way which would not be
possible otherwise. Without EEC Scotland would always run the risk that
England might find it expedient to impose an import surcharge, a
quantitative control or even a tariff on goods coming from Scotland. It
was largely to eliminate this that Scotland accepted the Union of 1707.
New EEC rules would have the same effect and for all nine member states.
In the unlikely event of England leaving the EEC, Scottish access to
the other countries could in time largely compensate for any
restrictions that might arise on English trade.
Access to EEC should also help to provide a major stimulus to Scottish
industrial investment. The EEC is not only a bigger market than the UK
but its economy has been much more buoyant than that of Britain. There
is no doubt that the exclusion of the United Kingdom had a damaging
effect on investment and that foreign firms in particular preferred
development within EEC. To gain the full advantage of this stimulus from
membership it will, of course, be necessary to have a stable domestic
economy.
High rates of inflation and a declining currency such as the UK has
had recently would do much to discourage foreign companies from coming
to Scotland.
North Sea oil could have far-reaching consequences for Scottish
membership of EEC because of the tremendously increased political power
it would confer. Without oil other members might pay little enough
regard to Scotland; her voting power would not be large and it might
indeed be argued that she could exert more leverage on the Community as
part of the United Kingdom. As the major producer of oil in Western
Europe, however, Scotland would be in a key position and other countries
would be extremely foolish if they did not seek to do all they could to
accommodate Scottish interests. For Scotland the net cost of Common
Agricultural Policy, which features so large in British discussions
would be at most some £40m. a year, a small sum compared with the
balance of payments gain from North Sea oil. The more common policies
come to be decided in Brussels in the years ahead, the more Scotland
would benefit from having her own Commissioner in the EEC as of right
and her own voice in the Council of Ministers instead of relying on the
indirect, and so far hardly satisfactory, form of vicarious
representation through UK departments.
Conclusion This paper has shown that the advent of North Sea oil has
completely overturned the traditional economic arguments used against
Scottish nationalism. An independent Scotland could now expect to have
massive surpluses both on its budget and on its balance of payments and
with the proper husbanding of resources this situation could last for a
very long time into the future.
Wealth does not automatically mean full employment and the end of net
emigration. But provided sensible policies are pursued, it is possible
to see how this situation could be used to re-equip Scottish industry
and renew outworn social capital thereby providing the expansion
necessary to absorb Scotland’s excess labour and the increase in
productivity required to raise incomes. Thus, for the first time since
the Act of Union was passed, it can now be credibly argued that
Scotland’s economic advantage lies in its repeal. When this situation
comes to be fully appreciated in the years ahead, it is likely to have a
major impact on Scottish politics, since it is on social and political
grounds alone that the case for retention of the union will in future
have to be based.
Nationalist policy as outlined in this paper can, of course, be regarded as extremely selfish.
Undoubtedly it is, but it can be argued in reply that so long as
Scottish GDP per head is only 70 per cent of the European average, the
unemployment and emigration rates among the highest and the country
regarded by the EEC as one of its worst problem regions, then Scotland
is justified in using her own resources to rectify these problems rather
than relying on the generosity of others at least until she has managed
to catch up.
Yet undoubtedly the greatest weakness in the nationalist economic case
is that Scotland, even with its oil, cannot expect to prosper in
isolation.
Economic conditions in Europe and above all in England, with whom
Scotland will remain closely tied in trade, are of particular
importance. Even with greater diversification of Scottish trade to
Europe and to North America, an impoverished England or one perpetually
suffering the rigours of demand restraint would have most serious
consequences for the Scottish economy. Britain is now counting so
heavily on North Sea oil to redress its balance of payments that it is
easy to imagine England in dire straits without it. The oil prices since
the Yom Kippur war make this a much more serious matter than could have
been imagined before; and it is now likely that transfer of North Sea
oil to Scottish ownership would occasion much bitterness in England if
not an attempt to forcibly prevent it. England would, of course, be no
worse off than most of the Continental EEC countries in this respect;
indeed, probably there are better chances of finding oil in the Celtic
Sea or the English Channel than are open to most of them. If therefore
the other countries can adjust to the new energy situation, England
should be able as well.
Nevertheless it is now clear, as perhaps never before, that Europe
could bring about its economic ruin by disunity. If supplies of oil
become seriously restricted or the burden on the balance of payments of
importing countries proves more than the international monetary system
can cope with, a serious breakdown in the economic system of Western
Europe could well result.
This danger imposes serious international responsibilities on those
European countries which are likely to be exporters of energy, Norway,
Scotland if independent, and Ireland where oil is likely to be
discovered. A spirit of European co-operation is not very evident yet
either in discussions or plans for the development of energy and the
rather nationalistic attitude so far followed by Britain would hardly be
a good example to an independent Scotland. Yet the situation offers the
energy producers a real opportunity to contribute to the economic
strength of Europe and in so doing to ensure their own prosperity; if
instead they retreat into narrow nationalism, developing their energy
resources with regard to their own interests alone, they could undermine
the whole European economy and seal their own fate in the process.
Perhaps the most important conclusion is that time is now extremely
limited. British regional policy has been in operation for forty years
and the annual cost of the measures applied to Scotland is now about
£100m. a year. But, although there have been undoubtedly been notable
achievements and the Scottish economy would have been in a much worse
state without such a policy, there is still little prospect that it will
solve the problems of West Central Scotland in the foreseeable future.
High hopes have been held out for European regional policy but any
impact from this is likely to be very small for a long time to come. In
much the same way agitation for a workable form of political devolution
has persisted amongst a substantial part of the Scottish electorate for a
considerable time but without any practical result so far and it is
still far from clear whether anything will stem from the consideration
of the Kilbrandon Report.
If, in five years’ time North Sea oil is contributing massively to the
UK budget, while the economic and social condition of West Central
Scotland continues in the poor state that it is today, it would be hard
to imagine conditions more favourable to the growth of support for the
nationalist movement.
Very determined steps to urgently transform economic conditions in
Scotland will therefore be necessary and the Scottish people will have
to be persuaded that their problems really have received the attention
and expenditure they deserve if this outcome is to be avoided.
