Scotland’s position in the global economy and vision for capitalising on new opportunities in global markets
Finance Secretary John Swinney
David Hume Institute
February 2, 2012
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I welcome the opportunity provided by the David Hume Institute to speak with you this evening. I last spoke at the Institute nearly three years ago back in April 2009 and it is safe to say that a lot has happened since then!!
That evening – at close to the height of the financial crisis – I discussed ‘Scotland's Financial Future’ and the key challenges facing our country.
My remarks were dominated by the urgency of the situation at that time and the action being taken to protect the Scottish economy from the worst effects of the financial crisis. I also indicated that the global recovery was – in line with previous financial crises – likely to be fragile.
However, I have to admit that if I had been asked back then to preview possible remarks in 2012, I would not have predicted that the global economy would still be in such a fragile state.
The recovery across the UK and internationally has been slower than we would have imagined or wished and it is therefore against this backdrop that my remarks are set this evening.
Outline
Back in 2009, I discussed Scotland’s financial and constitutional future within a largely domestic context. My remarks concentrated on developments in the Scottish economy – including the onset of recession, the outlook for the public finances, and the challenges faced by two of our major financial institutions.
In my last lecture here I said: “At this time of greatest need we have one hand tied behind our back - and decisions, more often than not, wrong decisions, are being taken on our behalf”. These remarks have unfortunately been validated by events of the last 3 years and exemplify for me the importance of securing the powers of independence.
Tonight, I intend to set out my remarks within an international dimension, to discuss Scotland’s position as an open economy and the opportunities that independence brings to such nations.
As an open economy, Scotland cannot expect to be immune from the economic uncertainties or challenges faced by the global economy.
But just as importantly, it is the very fact that we are an open economy, with an enviable reputation as a dynamic country rich in economic potential and natural resources that opens up a key avenue through which we can deliver faster sustainable economic growth.
That is why we are placing so much emphasis on promoting internationalisation and boosting our competitive advantage in key sectors.
In a global market, and one where competitive advantage and resourcefulness are key to economic success, countries need a balance of flexibility and stability in economic policy.
Currently we are constrained in what we can achieve by a constitutional position which largely ties Scotland to economic decisions taken by the UK Government. With independence we could take a different approach.
That is why I believe independence is so important.
My ambition for Scotland is clear –
- Faster sustainable economic growth with opportunities for all of Scotland to flourish.
- A public sector and economy that reflects the unique character, skills, and values of the Scottish people.
- And a nation that takes its full place in the international community and global economy.
We therefore face a choice, to be debated between now and autumn 2014, over the future of our nation. In my view it is only with full access to job creating powers, the powers of independence, that we can we fully deliver these ambitions.
Developments in Scotland over past three years
So, let me first turn my attention to economic developments since we last met. In researching my remarks for this evening, I looked again at the April 2009 Budget published by the then Chancellor Alistair Darling.
It contained a forecast for growth in the years ahead.
In April 2009, the Treasury predicted growth in 2011 of 3½ percent. In reality, growth last year was just 0.9%.
Now I know that the Treasury don’t have the best track-record at economic forecasting… Indeed I believe its forecast record gave rise to the old economists’ joke that ‘the Treasury have accurately predicted 4 out of the last 3 recessions!!!’
But in all seriousness, this phenomenal gap serves to highlight how disappointing the recovery has been.
Developments in the Scottish economy
Two weeks ago, Scottish output figures for the third quarter of 2011 were published, alongside the latest labour market and export statistics.
GDP grew by 0.5% over the quarter – the same as in the UK – with an upturn in services and continued growth in manufacturing.
Overall, the figures confirm the economic fact that Scotland’s recession – while deeply damaging – was both shorter and shallower than for the UK as a whole.
Manufactured exports grew for the third consecutive quarter, while the Purchasing Managers Index for December indicated private sector growth for the 12th consecutive month.
Yesterday’s retail sales figures showed growth of 0.7% in the final quarter of 2011 and over the year as a whole despite challenging trading conditions.
Contrary to the headlines, there are positive developments out there.
The fact that we were able to mitigate the harshest effects of the recession, and to deliver an outcome that was better than the rest of the United Kingdom, demonstrates my central contention that deploying fiscal initiatives appropriate to Scotland is in our best interests and we should build on this in the future.
But the economic conditions, exacerbated by the reductions in public spending, are challenging
The most recent labour market statistics published last month show a further rise in unemployment.
Scotland’s unemployment rate at 8.6% is now slightly higher than the UK’s 8.4%, though we continue to have better employment and economic activity rates.
These figures – which have been better for most of the recession – demonstrate the need for fiscal flexibility. And they demonstrate why we must tackle the scourge of unemployment and its devastating impact on families and communities is an absolute priority for this Government.
That is why we are investing heavily in our young people. That makes sense not just for them as individuals but also our economy as a whole. We cannot afford to lose a generation of young people to unemployment and prevent them from fulfilling their potential.
If there is one thing we have learned from the mistakes of the 1980s, it is the urgent need to tackle unemployment, particularly amongst the young.
Plan B
These recent trends and the poor forecasts for the years ahead highlight the inherent weakness in the UK Government’s economic strategy.
You will all have heard me argue before that, while I accept the clear need to address the legacy of debt, this can only be achieved if there is sufficient growth in the economy.
This is not what we are seeing.
Uncertainty in the Eurozone is playing a part in the disappointing growth figures but it should not take all the blame.
Indeed the OECD expects Austria, Germany and Finland to all grow faster than the UK this year.
Much of the responsibility for the lack of economic growth must therefore be laid at 11 Downing Street. The Chancellor’s plans placed too much emphasis on austerity - and not enough on promoting growth.
Coupled with a lack of a coherent economic plan, front-loading the cuts at the very point when the recovery was most fragile was a significant error.
This has been compounded by the decision to shift the burden of adjustment onto capital investment.
George Osborne claimed that he has put “fuel into the tank of the British economy”. The reality however, is very different.
As many economists, such as Professors Paul Krugman and Joseph Stigilitz, have argued, removing public sector demand so rapidly, and before the private sector was sufficiently strong to step in, has not put fuel into the economy – but instead it has been running on empty.
Just last week, the ONS published figures showing that UK output fell by 0.2% in the final quarter of 2011, and the OBR forecast that the UK economy will flat-line in the first half of 2012.
All the more tragic as the Chancellor’s actions are self-defeating.
Because of the failure to secure growth, the OBR now forecast an extra £158 billion of borrowing over the next 5 years than initially planned.
As a result, further spending cuts are now planned for both 2015/16 and 2016/17.
If this comes to pass, it means that under the status quo, Scotland will face public spending cuts for 7 consecutive years - an outcome the Institute for Fiscal Studies describes as historically unprecedented.
There must be – and we believe there is - an alternative.
We have long argued for a distinct approach focussed upon 3 key initiatives –
- boosting public sector capital investment;
- improving access to finance and encouraging new private investment; and,
- enhancing economic security.
Let me take the opportunity to highlight why I think each of these areas is important along with the actions we are taking within our limited powers and what we would do if we had the powers of independence.
Capital Investment
Firstly, when private sector demand is fragile, public investment can provide a vital boost to economic activity. It further boosts growth by creating an asset with long-term growth potential.
Accelerating capital investment was a key part of our Recovery Plan, which overall helped support some 15,000 jobs. And now is a perfect time for such investment.
Not only is there little risk of crowding-out private demand, interest rates are close to record low levels.
Short of ‘spooking’ the markets as some have claimed, the very fact that we are investing in recovery and jobs would be welcomed.
But as highlighted earlier, instead of promoting investment, capital budgets are now bearing the brunt of the cuts – with a reduction of a third over four years.
While the Autumn Statement did contain some welcome additional resources, over 70% of these will not be available until April 2013 at the earliest.
In response, we are prioritising investment now to where it will have the greatest impact while seeking every opportunity for new investment.
We have delivered major new infrastructure such as the M74 and M80 completion projects and we are pressing ahead with the Forth Crossing – the largest engineering project in a generation.
Alongside this, our Budget Bill contains plans to–
- switch around £200m per year from resource to capital programmes; and,
- take forward a new pipeline of NPD investment worth £2.5 billion.
- As a result, by 2014/15 our overall capital investment in Scotland’s economy will be 25% higher than in this year.
Private Sector Investment and Access to Finance
The second aspect of our plan focuses on boosting private sector investment.
A key feature of the downturn has been a sharp fall in business investment with levels of investment in the UK still some 16% below pre-recession levels.
Ongoing uncertainty means that many large companies are putting off investment, while smaller companies continue to struggle to secure finance even if they are keen to invest.
It is vital therefore that we not only improve access to finance but also provide the environment to unlock new private investment.
In December 2010 we established the Scottish Investment Bank which is now open and investing in Scottish companies.
And, we are committed to maintaining the most supportive tax environment anywhere in the UK, retaining the small business bonus scheme which has either eliminated or substantially reduced business rates for 2 out of every 5 properties in Scotland.
We are also using our own investments – such as investing in Scotland’s transport network – to help unlock new private investment.
And we are supporting our development agencies in attracting major new international investment to Scotland including Amazon, Mitsubishi, Michelin, Gamesa, and Avaloq.
We are doing everything in our power to make Scotland the most competitive and attractive location for business in the United Kingdom.
Promoting Economic Security
The final strand of our approach is promoting economic security. You only need to switch on the radio or television or read a newspaper article to see a headline highlighting further economic gloom.
In working to boost security and confidence, our Budget contains a range of measures including –
- Extending our no compulsory redundancy policy and maintaining a freeze in pay for all in the public sector except the lowest paid; and
- Delivering on our commitment to a ‘social wage’ through freezing the council tax for a 4th year, freezing water rates and fulfilling our commitments on personal care, concessionary travel and tuition fees.
Such actions are helping to protect households at a time of rising prices and rising UK taxes.
- Our Opportunities for All programme guarantees an education or training place for every young person who is not in work, education or a modern apprenticeship.
- And this is supported by our commitment to create a record 25,000 modern apprenticeships in each year of this Parliament – 60% more than when we first entered office – and continuing to fund the Educational Maintenance Allowance – something which has been abolished in England.
- One of the many reasons international investors choose Scotland now and will in the future is because of the skills of our people. It is our intention to maintain that competitive edge.
Scotland in a global context
Let me now move on to talk about developments in the global economy, and the implications and opportunities for Scotland.
Without question, the most significant development in recent months has been the escalation of the euro crisis.
It is this issue – above all others – that is likely to shape the recovery in 2012.
Yet while we recognise what happens in the Eurozone is important, we must also recognise and identify the global opportunities for Scotland to grasp.
Euro Crisis
The situation in Greece remains of utmost concern. While progress has been made in recent weeks to ensure that the Greek public finances return to a more sustainable footing, risks still remain particularly if contagion was to lead to speculation over the strength of other countries within Europe.
Moreover, even if the current discussions are successful in negotiating a deal with investors and securing a further bailout, the long-term challenges facing Greece and re-invigorating their economy are significant.
The positions of Italy, Spain and Portugal are also of concern. In Spain for example, unemployment has crossed the 5 million barrier and now stands at nearly 23%.
A swift and positive resolution to the crisis is important for Scotland for a number of reasons.
Around 45% of Scottish international exports are destined for Europe – a trade worth almost £10 billion to our economy.
As one of the largest economic blocs in the world, developments in Europe have a significant bearing on global demand and sentiment. Indeed much of the volatility and global uncertainty over the past year has stemmed from the Eurozone crisis.
And in an increasingly interdependent world, what may appear at first glance to be a Sovereign Debt crisis is in fact a new chapter in the 2007-2008 global financial crisis. Continuing to ensure a properly functioning financial sector is key to the health of the wider economy.
However, on the upside it appears that there is a growing and genuine will to resolve the crisis. If successful, the restoration of confidence could provide a significant boost to the global economy by unleashing new demand and confidence that Scotland must be ready to grasp.
Global Export Opportunities
International markets offer Scotland a vital source of opportunity for growth and jobs in the years ahead.
International trade is now growing at a faster rate than global GDP. In 2010, Global trade was estimated at almost $19 trillion US dollars.
New markets and the growing emergence of new players in the global economy are driving growth. In 2012, the IMF predict growth of over 8% in China, over 7% in India, 3.0% in Brazil and over 3% in the Middle East and North Africa. And this provides enormous potential.
Exports to South America make up under 4% of Scottish exports, while exports to Asia account for just under 9%. It is vital therefore that we boost efforts to tap in to these markets.
At the same time, there seems to be growing evidence that the recovery in the world’s largest economy and Scotland’s biggest export market – the US is gaining momentum.
These trends – in both traditional ‘core’ markets and in new emerging markets provides enormous opportunities for Scotland.
These opportunities are all the more lucrative at a time when domestic markets and markets closest to home will remain weak.
Growing our international presence, boosting exports and attracting international investment has a major part to play in building our economic success.
And in this regard we have a fantastic product to sell – Scotland is a brand known around the world and initiatives like Global Scot help us to sell that brand.
This is why – central to our refreshed Government Economic Strategy – is an ambitious target to increase our exports by 50% by 2017.
We will widen our export support to encourage more Growth Companies to become active exporters.
Scottish Development International is working with partners to support 8,000-10,000 more businesses in Scotland to develop the skills and the knowledge base to go ‘international’ by 2015.
And the Scottish Investment Bank is prioritising lending to support SMEs with international ambitions.
We are targeting Growth Markets – countries where there are significant opportunities for growth in the years ahead.
The First Minister’s recent visits to Qatar and the UAE have provided an excellent opportunity to build economic links in the Middle East and to promote Scotland as a world leader in innovation and research.
Just the other week I spent a day at the Embassy of the Russian Federation in London meeting business leaders. As a result, future trade events and discussions are in the pipeline focussing on food and drink and renewable energy.
We are also seeing the fruits of our efforts in boosting links with China. Exports of Scottish salmon to China increased from zero at the start of 2011, to 2,600 tonnes by August.
Whisky exports to China increased by 30% in the first half of 2011.
Indeed overall, as a key Growth Sector, Scotch Whisky exports continue to be a success story, worth nearly £3.5 billion in 2010, with 2011 on course to break the £4 billion barrier for the first time.
And it is not just in ‘traditional’ Growth Sectors where success is being achieved.
When in China, the First Minister announced that the European Marine Energy centre based in Orkney would help develop a wave energy test centre at the Ocean University of China in Shandong province with the aim of securing future investment.
And we are now actively targeting sectors and subsectors where Scotland has an international competitive advantage.
One of these ‘exports’ is our University sector.
In 2009-10, there were over 42,000 overseas students enrolled in higher education courses at Scottish Higher Education Institutes and Colleges – an increase of 7.8% over the year with the majority of these students from outwith Europe.
These linkages are critical to strengthening our links with new markets in the years ahead.
Global Investment Opportunities
Scotland’s place in the global economy is not just restricted to our export markets. We are also taking great effort to attract international investment. Scotland continues to punch above its weight as a location for Foreign Direct Investment.
The 2011 Ernst & Young UK Attractiveness Survey report concluded that Scotland was the leading location for FDI in the UK in terms of employment generation.
A result that even made its way on to Channel 4’s ‘Fact-Check Blog’!! We are determined to build on these recent successes.
We know that to succeed, we have to focus on where we can offer a competitive advantage based on the strengths of our workforce, our intellectual base and our technology – and we are working hard to continue to reap more successes.
Therefore, whilst the outlook for 2012 is difficult and challenging, the future will be all the brighter if we position ourselves to secure global opportunities.
This Government has made making Scotland a world leader in the low carbon economy a key priority.
It is central to our plans for recovery – and it offers an unrivalled opportunity to attract investment and to create skilled jobs.
It also offers an ideal opportunity to rebalance our economy, reindustrialise the nation, grow exports and develop new skills.
It is an investment in the future. With our massive natural resources potential and legacy of industrial excellence, innovation in our university sector and expertise in industries such as oil and gas, Scotland is clearly in an advantageous position, to lead the global development of the industries of the future.
Scotland’s low carbon market is forecast to be worth around £12 billion by 2015-16. And we know that with the right incentives the sector could support 130,000 jobs by 2020.
New opportunities are emerging in building technologies, energy management, environmental consultancy and management with benefits for communities across Scotland.
One of the greatest opportunities over the next few years will undoubtedly be in renewable energy.
Scotland, after all, has 25% of Europe’s tidal power potential, 25% of its offshore wind potential, and an estimated 10% of its wave power potential.
In our Budget we have allocated more than £300m for investment in energy over the next 3 years, including more than £200m on supporting renewables.
As part of this, a new £60m capital budget will support the development of offshore wind and marine technologies, and our £70m National Renewables Infrastructure Fund aims to encourage further private sector investment to develop the necessary infrastructure.
And all of this investment will be boosted further by Scotland finally securing access to some £100m from the fossil fuel levy. Money which will now directly help renewable energy development, particularly marine energy.
The remaining £100m of Scotland’s fossil fuel levy contributions will help establish the Green investment Bank which we hope to see located in Edinburgh.
The transformation of our economy is already happening and it shows just what we can achieve with the right policy levers.
Major international players are now investing in Scotland and establishing our country as a base for global expansion.
This week Samsung brought 500 jobs in renewable energy to Fife.
In September the First Minister opened Gamesa’s new research and design centre of excellence in Bellshill.
While in March, we gave consent for the world’s largest tidal energy array in Islay a project that will generate enough electricity for 5,000 homes - double the number of homes on Islay.
But we need good transmission networks to achieve all of our ambitions.
That is why I have been delighted to see the ISLES project published at the end of last year. The project that will be delivered by the governments of Scotland, Ireland and Northern Ireland and is an excellent example of governments working together to deliver a better outcome in an interconnected world.
Constitutional Issues
In the final part of my remarks this evening I want to develop this theme of Scotland’s role in the global economy to highlight the opportunities that will arise following independence.
Central to this is my firm belief that independence is necessary for one important reason; that the people who are best placed to decide how to make Scotland a more successful country are the people who choose to live and work here in Scotland. That aspiration captures my motivation to pursue and present the argument to achieve independence.
Arising from that motivation, I wish to share our vision for the economy of an independent Scotland, the structure we propose, the monetary union that would remain and the benefits to both economies that would come from these arrangements.
The Parliament’s return in 1999 marked a step change in our ability to deliver for the Scottish people.
Since then, and despite some challenges along the way, we have made a strong start.
Our Parliament has witnessed the introduction of groundbreaking reform, including the smoking ban and world-leading climate change legislation alongside policies that reflect the values we hold dear in Scotland such as fair treatment for our elderly without prejudice to their wealth.
These policy choices are a clear and very real expression of Scottish principles and Scottish ideals.
On the economy, too, our limited existing powers have allowed change for the better with initiatives such as the Small Business Bonus Scheme, the council tax freeze and our commitments on renewable energy.
These measures are making a real difference.
But make no mistake – with greater responsibility, our Scottish Parliament could achieve so much more.
Our lack of autonomy over the key job creating powers limits our flexibility to respond to the key challenges of our times, or to take advantage of strengths or new opportunities within our economy.
As I have set out, we would like to see a different approach to the current economic policies of the UK Government – yet we do not have the powers to take that approach.
Scotland is tied to decisions taken by Westminster either directly as a result of decisions on reserved policy areas or indirectly by determining the size of the settlement for Scotland through the Barnett Formula.
Just as importantly, we are unable to use the proceeds of our successes to re-invest in public services or to protect the most vulnerable in our society.
With opinion polls consistently pointing towards a majority in favour of Scotland taking full responsibility for its own finances, it is clear that there is a public demand for Scotland to take on these responsibilities.
And over the next few years I will be arguing that it is not just these responsibilities but the powers of independence, the most natural state of affairs for a nation like Scotland, that are the best means of fulfilling our potential.
Scotland’s Economy Under Independence
In a global marketplace where competitive advantage and resourcefulness are key to economic success, countries need a balance of flexibility and stability in economic policy.
Independence would allow Scotland to choose the optimal balance of economic policy.
There are a number of instruments of economic policy – monetary policy and fiscal policy being the two most prominent, but regulation, competition and economic law are also important.
My vision of an independent Scottish economy is one in which monetary policy acts to underpin price and macroeconomic stability, supported by fiscal and economic flexibility to promote growth and create jobs.
Price stability and managing inflation expectations are widely recognised to be the key objectives of monetary policy.
Indeed price stability is the foundation for a stable and successful macroeconomy. It is key to creating an environment that is conducive to trade, investment and economic growth.
Indeed this is one reason why all major industrialised economies including – the UK, Europe, Japan, Australia, New Zealand, Canada and the USA – have established independent central banks with the core focus upon maintaining price stability.
But monetary policy is a blunt tool for tackling most other economic policy demands.
It cannot be used to directly tackle youth unemployment, build infrastructure, promote innovation, boost skills, target overseas investment or promote investment in key sectors.
This is why fiscal freedom is so important.
Opportunities
Independence would allow us to tailor policies to match the preferences of the Scottish people, to extend competitive advantages and address challenges in the Scottish economy.
One area where we have been consistently clear is on corporate taxation. We have reduced the business tax burden through the tax powers we do control, but such taxes are relatively small when compared to other corporate taxes, particularly within an international perspective.
Corporation tax is one of the chief levers that government can use to promote growth, investment and jobs. Governments across the world – including the UK Government – have placed corporation tax at the heart of their economic strategy.
But the current system for corporation tax means that a company based in Glasgow or Dundee pays the same corporation tax rate as a company based in London.
Given the commercial advantages of London as one of the world’s largest financial and business hubs, Scotland needs the lever of corporate tax to attract investment and jobs.
Our modelling results show that the outcomes can be significant. For example, lowering the corporation tax rate by 3% is expected to help support 27,000 jobs after 20 years, with the vast majority of these jobs created within the first 10 years.
And it is not just the Scottish Government which has recognised the benefits. The UK Government agrees, but apparently only in the context of Northern Ireland!!
One area the government is particularly interested in is using the tax system to better support sectors facing specific challenges.
To many, using taxation to promote competitiveness is just about the headline rate of corporation tax. It is not, and as the global economy becomes more integrated we have to be smarter and more flexible in the way we use tax powers.
For example, in the past the UK Government has specifically provided support to the film industry, through eligibility for Film Tax Relief (FTR).
We want to see the same relief system applied to one of our growth industries – computer games. Indeed the previous UK Government eventually agreed to consider such a tax break only for the current UK Government to abandon it.
Developers in Scotland are at a distinct disadvantage.
In Quebec, the government pays a third of salary costs of development staff and offers tax holidays for investors. The incentives have prompted publishers to set up studios in Montreal, often downscaling investment here. Australia, South Korea and the US offer similar incentives.
The long campaign and lack of action from the UK over tax relief for the Games industry represents a perfect example of unique Scottish interests not being captured at the UK level.
And it is not just business taxation where we would have an opportunity to pursue a distinct angle, but across the full spectrum of fiscal policy.
One very practical example within the context of Scotland’s international ambitions is in relation to Air Passenger Duty – a power deemed suitable to be devolved to Northern Ireland but not to Scotland.
I regularly hear feedback about the air links from Scotland and the importance of this for economic growth.
This is a key priority and progress is being made:
- Emirates has recently announced a second daily flight between Glasgow and the Middle East; and
- The First Minister has secured the agreement of China's Aviation Authority to send a senior industry delegation to Scotland to examine direct air routes early next year.
But much more could be done with responsibility for Air Passenger Duty. Air Passenger Duty was recommended to be devolved by Calman and successive Scotland Bill Committees, but the UK Government stands in our way.
And with control of the tax and benefits system, our Parliament could create a fairer regime for workers which encouraged participation and removed poverty traps.
In contrast to the approach being currently adopted in Westminster, independence would enable us to put forward changes to welfare that protected the most vulnerable in society and that were consistent with the social objectives of the people of Scotland.
Independence would allow expenditure and tax policy to work together in harmony.
For example, under the current system the Scottish Government is responsible for providing training opportunities for people seeking employment.
This year we are delivering 25,000 Modern Apprenticeships. And in doing so, we are securing a training opportunity for people who otherwise may be out of work and claiming benefits.
By creating training and employment opportunities we save the welfare state many millions of pounds in unpaid benefits. Under independence these savings could be re-invested in additional training and employment opportunities and measures to boost economic activity.
With independence we could seek opportunities to simplify the tax system and make it more transparent, reducing compliance and administration costs for business and government.
While with borrowing powers for capital investment, independence would give us greater flexibility over the timing and management of key infrastructure projects.
Scotland’s Fiscal Position
The current challenges facing the public finances in the UK and beyond are serious but let there be no doubt that Scotland can hold her own in a global economy.
The current economic challenges will not disappear with independence but as I will set out Scotland is well placed – indeed better placed – to meet these challenges head on.
Scotland’s fiscal position is stronger that that of the UK.
According to the official GERS figures Scotland has run a current budget surplus in four out of the last five years. In contrast, the UK has been in deficit in each year.
Even when North Sea revenues fell by 50% in 2009-10 Scotland’s fiscal position remained stronger than the UK.
As a result of the financial crisis and the management of the public finances by successive UK Governments, the UK has a considerable national debt. Debt that Scotland will have to repay independent or not.
You will have no doubt have heard some rather wild and unfounded claims over the scale of the national debt Scotland would therefore inherit.
The reality is that the proportion of the UK’s national debt assigned to Scotland under independence would be subject to negotiation as part of a revised constitutional settlement.
But as an illustration, if UK debt was allocated on a per capita basis, then for 2009-10 - the last year in which figures are fully available - Scotland’s net debt would be 46.3% of GDP compared to 52.9% of GDP for the UK.
According to analysis based on GERS and produced by the Scotland Office in October of last year, between 1980-81 and 2009-10, Scotland ran a cumulative deficit worth £41 billion. A significant figure yes and often the basis for the claim that Scotland cannot afford independence.
The difficulty with this calculation is that it fails to consider the comparable UK position - a deficit of around £715 billion. In other words, a per capita share of this UK figure allocated to Scotland would be £60 billion – nearly £20 billion or one third higher – than the figure estimated by the Scotland Office!
As we consider Scotland’s financial position, the debate would be helped if we were spared all phoney analysis.
One of the characteristics of financial management is the question of the credit rating of an independent Scotland.
In the credit markets nearly two thirds of the countries deemed to have triple A status by Standard & Poor’s have a population of less than 10 million.
While Norway, with a population of just under 5 million, has managed to amass an oil fund worth approximately £340bn – over £70,000 per person.
And there is a more fundamental point to this discussion. Public spending in Scotland is already being cut as a direct consequence of the management of the public finances by the UK Government.
We will all have to live with these consequences in the coming years whether Scotland is independent or not.
My own view is simple.
Under independence we would not escape from efforts to rebalance the public finances. However, it would be up to us to decide how best this could be achieved; and to do so in a manner which complemented, rather than endangered, Scottish economic recovery.
By taking control of the levers of growth – and using the proceeds of our successes – will we be able to offer a genuine alternative to years of austerity.
The Strength and Diversity of the Scottish Economy
Scotland’s fiscal position is stronger than the UK, and it will remain so as we remain committed to utilising Scotland’s strong economic foundations and asset base to ensure fiscal responsibility.
And we have strong economic foundations to build on.
Scotland has significant natural resources. Estimates from Oil & Gas UK predict up to 24 billion barrels of oil remaining in the North Sea with activity expected to continue for at least another 40 years.
Based on future price expectations, the North Sea reserves have a potential wholesale value of £1 trillion in real terms.
Even without oil and gas, Scotland has a strong economy and asset base.
Recent figures published by the ONS showed that in 2010, and excluding oil and gas output Scotland was the third richest part of the UK – behind London and the South East – with a GVA per head 99% of the UK average.
If Scotland’s geographical share – the normal internationally recognised way to count such resources - of oil and gas is added, Scotland’s GVA per head rises to 115% of the UK average or approximately the 6th highest in the OECD.
And just as oil and gas mature, so the new technologies such as renewable energy and carbon capture will be reaching their peak ensuring our natural resources have a permanent role in our future.
Elsewhere we have a strong intellectual base with many of our Universities regularly appearing in assessments of the Top 100 global places of learning.
In the area of science, engineering and technology, Scotland, relative to our GDP, is currently number one in the world in terms of research.
And while we have faced turbulence in the banking sector, we have a strong and broadly based financial services industry and real strengths are present in all key areas - demonstrated by the recent announcements of jobs and investment by Tesco Bank, Virgin Money, Barclays, State Street, BNY Mellon and Avaloq.
Scottish Financial Enterprise estimates that its members manage some £750 billion of funds from Scotland. And in life and pensions, Scotland accounts for 24% of all employment in the sector across the UK.
So I firmly believe we have the foundations and the ability to be successful.
Currency
This strength means it makes sense for an independent Scotland to maintain a currency union with sterling, and it makes sense for the UK as a whole.
I am not going to run through all the interesting assertions and veiled threats of recent weeks regarding the currency that an independent Scotland might use.
But it is a simple fact that the government of the UK could not prevent an independent Scotland from using the pound.
It would be in the economic interests of the UK Government to maintain a currency union with Scotland. An independent Scotland would make a substantial contribution to a Sterling Zone.
Our onshore economy is approximately 8.3% of the UK – broadly equivalent to the size of the entire UK financial sector. The sector that the Prime Minister was so anxious to defend by using his veto in December.
Oil and Gas UK estimate that oil and gas production boosted the UK’s balance of payments by £32 billion in 2010, almost halving the UK's deficit.
And whisky exports are expected to bring in close to £4bn in 2011.
As I outlined above, even excluding oil and gas, Scotland is currently the third richest part of the UK and would provide a key trading partner for the UK in an ongoing Single Market. Around two-thirds of Scottish exports – worth some £45 billion – are destined for the rest of the UK, while in 2009-10 around 50% of migration to Scotland came from the rest of the UK.
The cross-border flows of goods, services, capital and people would continue post-independence in exactly the same way as it does today.
But what independence would do, is make Scotland fully responsible for its own finances and economic development.
Sterling would provide the monetary stability to underpin price stability and to facilitate trade, while fiscal independence would allow Scotland to set the economic conditions for growth.
While there are always trade-offs between flexibility and stability, a Sterling zone promoting monetary stability coupled with full fiscal responsibility offers the best opportunity for Scotland to fulfil its potential.
People have leapt upon recent developments in the Euro Area and have drawn the wrong conclusion that this proves that independent countries cannot be part of a successful monetary union.
Currency unions can be successful. Belgium and Luxembourg for example were part of a successful currency union for over 80 years, despite running different fiscal policies. For example, prior to joining the Eurozone, VAT in Belgium was 21% compared to 15% in Luxembourg.
On the contrary the crisis in Europe simply highlights the dangers of fiscal mismanagement not just in a monetary union but more generally.
The UK government has demonstrated that fiscal mismanagement can happen out with a monetary union with very serious consequences. It is not fiscal powers or monetary union that is the UK’s problem, it is an irresponsible government pursuing the wrong fiscal policies.
An independent Scotland would establish a credible fiscal framework that would ensure Scotland’s public finances were put on a sustainable footing.
An independent Scotland will be in charge of its own resources and its own finances. Scotland would have the same relationship with the central bank that the UK currently has. The current UK Government does not set interest rates – neither do countless other governments across the world. But we would be able to exercise fiscal flexibility.
The Scottish Government has already demonstrated its fiscal competence and ability to live within its means.
Under independence we would set up a framework which ensured that fiscal competence remained at the heart of the Scottish Budget process.
It may not be known to many people but we accepted a recommendation by the Council of Economic Advisers back in 2009 to establish a Fiscal Commission with responsibility for monitoring tax and spending and to ensure fiscal sustainability. This was before the establishment of the OBR after the May 2010 UK election.
In discussions with the Financial Times this week I was asked if we would have a Scottish Office of Budget Responsibility. With a creative approach to the acronym, one FT journalist said we could describe it as SOBeR!!
Summary
In setting out our vision tonight I have addressed many of the immediate issues that have been raised in recent weeks – the old stories – that we hear too often.
I have also set out to you the opportunities I believe independence will bring and the areas of common interest and mutual benefit which will endure after independence.
It would provide us with the key levers of economic growth, to promote jobs and attract new investment.
It would maximise accountability by ensuring that policy makers were fully responsible for outcomes in Scotland.
It would guarantee fiscal responsibility by making policy makers fully responsible for the financial decisions (and their implications) taken in Scotland. Both sides of Scotland’s balance sheet would be Scotland’s responsibility.
It would give us an opportunity to create a distinctively Scottish social settlement.
Policies tailored to build on Scotland’s natural advantages would lead to a faster, and more sustainable rate of economic growth. The proceeds from which would bring opportunities for all in our society.
But on day 1 of independence, the most obvious development would be that many things would be the same.
If Scotland becomes independent, it will continue to share close ties with its neighbouring countries.
Some of those will be institutional, some of them will be social and some of them will be economic.
We will continue to trade freely within the European Union, and people will still move jobs between Edinburgh and London, or Cardiff and Aberdeen.
And there will continue to be opportunities for us to work together with other governments as equal partners.
The British Irish Council already provides a model of how all of the people of these islands can work together on issues of shared interest.
In January, in Dublin, we discussed youth unemployment and we are taking forward shared interests in this area. Cooperation and coordination would continue to be a key part of our relationship with other countries.
Independence would also give us a full voice in global economic affairs, a seat at international economic decision making forums and an opportunity to shape EU policy.
Therefore far from having little control over economic policy under independence, in a Sterling Zone, Scotland would determine the overall fiscal position for Scotland and have much greater access to key economic levers for enhancing economic performance.
It is how we utilise these levers which will ultimately determine how successful an independent Scotland will be.
That is at the heart of our case for independence – and our belief that Scotland should have the opportunity to shape its own future.
Independence is the means, rather than an end – the means by which the Scottish economy can grow more strongly and sustainably; by which the Scottish people can best fulfil their potential; and by which Scotland can take its rightful place as a responsible member of the international community.
Conclusion
Over the next couple of years, we will debate and discuss how best we can deliver on these ambitions for Scotland.
I look forward to that debate and I’m happy to begin this evening by taking any questions!