Denial is a River in Scotland

Aye, the old ones are the best. You might think that George Osborne’s decision to  leave the Scottish block grant more-or-less untouched in yesterday’s spending review would be a cause for chuffedness north of the border. You’d think wrong. Osborne announced a 1.9% reduction in real-terms funds made available to the Scottish government. Alex Salmond’s ministry will have to make do with £25.7 billion. All hail the Barnett formula since Mr Osborne’s decision to protect health spending ensures that the funds available to Scotland are similarly guaranteed, minimising the ability to cut the block grant even if that were deemed economically – or, rather, politically – wise. Since many English departmental budgets – justice, local government, environment etc – must endure budget cuts of more than 10% it’s evident that Scotland is treated differently. As I say, that’s plainly a consequence of budget rules and political calculation. London has little wish to antagonise the Scots in advance of the independence referendum next year. English voters might look at this indulgence and wonder if we really are “all in it together”. Not that Osborne will receive any thanks from north of the border either. To listen to the SNP you’d think Osborne was starving Scotland. A modern-day rough wooing, if you will. Fiddlesticks on stilts, of course, but there you have it. The SNP often appear to believe in a fantasy world in which money flows as surely and serenely as, well, the river Nile. (This, incidentally, is one reason why fiscal autonomy is a good idea. It injects some reality into Scottish politics.) Joan McAlpine’s column in the Daily Record this week is a typical illustration of the SNP’s  topsy-turvy “thinking”:

In 2010, the UK Government predicted public sector borrowing of £322 billion between 2011 and 2015–2016. Now it is forecast at £539.4bn – a whopping 68 per cent more than predicted. With the Chancellor due to cut another £11.5bn from public spending this week, things can only get uglier.

And the answer to this? More borrowing, obviously. The SNP’s approach to fiscal discipline makes Ed Balls seem like Sweeney Todd.

How times have changed. Only three years ago Alex Salmond told The Times that:

It is really important, in my view, to be able to say to people how we can change the circumstances and increase revenue as well as decreasing expenditure. It is my job to come up with some answers, along with others. If you jump up and down nihilistically saying ‘dreadful, dreadful, dreadful, cuts, cuts, cuts’ then I would be failing in my duty to the people.

If that analysis still holds today – though perhaps Mr Salmond would say it does not – then by his own estimation the First Minister is failing in his duty to the people. In fact Osborne’s strategy appears to be to hold on tight and hope for economic recovery and growth. The cuts to many departmental budgets are real and, in some cases, severe but overall government spending is hardly being decimated. The pace of cuts is, if anything, slowing and much of the consolidation has been punted down the road in the hope that economic growth will have returned by then, ensuring that said consolidation will be easier to bear. This may prove optimistic. As for Caledonia, the notion that an independent Scotland could currently borrow-to-invest (as the SNP insists it could and would) is sufficiently fanciful it borders on the lunatic. Interest rates for government debt are low at present at least in part because finance ministers have convinced the markets that they are determined to keep borrowing as low as possible. This is, if you like, a game of chicken in which neither side has any great enthusiasm for testing the other. Besides, as Bill Jamieson observes in today’s Scotsman, the era of cheap money may be coming to an end. It is bold to suppose an independent Scotland would somehow be immune to the budgetary pressures afflicting almost every other country in europe. Look around: from France to Denmark to the Netherlands you find governments struggling to deal with straitened circumstances. Even Sweden has cut welfare spending (and taxes, of course). And most of these countries have lower deficits, and lower levels of government debt, than the UK. Even if you accept the nationalist argument that an independent Scotland’s finances might, relatively speaking, be better than the UK’s it scarcely follows they would be comfortable. (Not least since it is probable Scotland would, at least initially, be unable to borrow as cheaply as the UK currently can and does). The UK will make debt interest payments totalling £51bn this year. By 2017-18 that figure is projected to rise to a buttock-clenching £67.8bn. If you assume that an independent Scotland would inherit a per-capita share of UK debt, that would leave Scotland paying approximately £6bn in debt interest payments in the first years of independence. That would be close to 10% of total government spending. Or, to put it another way, debt interest payments would amount to at least 60%  – and possibly more some years – of the revenue from north sea oil. That doesn’t mean the finances of an independent Scotland cannot be made to work. Merely that they would be tighter than nationalist assumptions might have you believe. And that’s before you consider that the SNP promise increased spending and lower taxes. At the very least, it is difficult – and this is something that John Swinney has, I think, recognised – to see how there’d be much money left to set up the Scottish Oil Fund that’s such an important part of the long-term plan for Scotland. Again, I don’t believe an independent Scotland would have to be an economic basket-case. But we would not be starting from an ideal set of circumstances either and it seems more likely than not that at least the first few years of independent life would be exceedingly tricky and uncomfortable. Or, to put it in politician-speak, challenging. No wonder many nationalists prefer to believe in Tartan Tooth Fairies.