John Ferry

The book that shatters the SNP’s economic myths

Review: After Brexit: The Economics of Scottish Independence

The book that shatters the SNP's economic myths
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There aren't many whose name becomes part of the mythology of a nation while they are still alive. Gavin McCrone, author of After Brexit: The Economics of Scottish Independence, has inadvertently achieved this status.

McCrone is an academic and a former chief economist to the Scottish Office. In 1974, he wrote an internal briefing paper for Scottish ministers outlining the economic potential of North Sea oil. McCrone thought ministers were underestimating the value of the resource and the positive impact it could have on the economy if extraction were managed successfully. His paper was designed to remedy that ignorance and was framed from a Scottish perspective and in the context of nationalist arguments for independence. As he states in After Brexit

'There have been suggestions in the press that my paper was suppressed or in some way hushed up. This was not so. It was a confidential briefing for Ministers and never intended for publication, just as other briefing papers for Ministers are confidential.'

When, in 2005, the Scottish National Party (SNP) used freedom of information laws to make the paper public, the myth of the 'McCrone Report' was cemented. This was no bland document designed to chivvy an incoming government into ensuring an impending oil boom was sufficiently taxed. No, this was the smoking gun proof that Scotland had been betrayed through subterfuge and conspiracy. 

'For decades Westminster have suppressed and oppressed Scotland in many ways. The McCrone report is just one example,' commented SNP MP Hannah Bardell in 2019, when Scottish independence supporting newspaper the National made a splash of the report.

This kind of preposterous myth-making must be kept in mind when reading McCrone's book. For today's Scotland is a land of many myths, where economic facts not helpful to the nationalist cause are regularly dismissed as either untrue or unimportant. After Brexit calmly and objectively takes readers through the key economic aspects of secession. In doing so, and in the matter-of-fact way it deals with economic reality, it almost feels like an act of subversion.

Written for the lay reader, McCrone presents a post-Brexit update on his 2013 book, Scottish Independence: Weighing Up the Economics. Currency, deficit, debt, pensions, mortgages, the border with England, and the European Union, are all dealt with. The book also provides a state-of-the-nation summary of Scotland's challenges across health and social care, education, and in stewardship of the broader economy. This is a useful summary irrespective of the constitutional question.

Perhaps the most often discussed independence topic is currency. It is now widely accepted that Alex Salmond and Nicola Sturgeon made a tactical error in 2014 by assuming an independent Scotland could be part of a formal monetary union with the remaining UK. When London rejected that proposal for sound economic reasons, the nationalists were snookered. Having learned that lesson, the SNP's current currency position is to unofficially continue to use sterling outside the formal sterling area, much in the same way Montenegro uses the euro without the agreement of the eurozone or the European Central Bank. It is envisaged this 'sterlingisation' arrangement will last a considerable period. The SNP would then plan to launch a new Scottish currency if the economic conditions merited it.

McCrone sees the danger in this. Figures show that an independent Scotland would start life with a classic twin deficits problem. The country would be importing more than it is exporting and spending more money than it is generating in tax. It would therefore have unsustainably large current account and budget deficits.

'In the short term, even if taxes were raised or public expenditure cut, Scotland would have to borrow to finance both of these deficits,' notes McCrone. But as a new borrower with no long record of credibility like the UK, Scotland would 'have to pay considerably more on its borrowing'.

'Interest rates would be in danger of constantly increasing in a vicious circle, resulting in eventual collapse,' he warns.

McCrone therefore believes an independent Scotland would need its own currency, which should float freely at first. The new currency would almost certainly devalue heavily against the pound sterling, thereby making the economy more competitive and alleviating the deficits problem. Once the new currency has established its own market rate reflective of the needs of the economy, McCrone recommends it is then pegged to either the pound or the euro for stability purposes.

This could create other difficulties, however. The higher interest rates that secession would lead to would, of course, be reflected in Scottish mortgage rates. Not only would that debt be more expensive, but if a new currency were introduced then hundreds of thousands of households with mortgages would suddenly have foreign exchange risk to deal with. And with the new currency most likely to fall substantially against the pound in response to the state's macroeconomic imbalances, the result would be people's monthly mortgage payments shooting up.

One criticism of the book is that it could provide more depth on some of these topics. For example, McCrone's advocacy of a currency peg leads naturally to thoughts of what level of reserves would be required to maintain that peg, and how those reserves would be built up, but that discussion is missing. That said, the punchy way in which McCrone skips across the key concerns makes for a lively read, which more than compensates for the lack of additional enquiry.

On the EU, McCrone is not a fan of an independent Scotland applying for membership, and makes the case instead for becoming part of the European Economic Area (EEA). Critically though, this would still require a hard border with England. With the vast majority of Scottish trade tied to the rest of the UK, this would be a repeat of Brexit's economic damage but on a larger scale.

There is a sense in reading McCrone's book that, in the aftermath of a Brexit he clearly disagrees with, he would like to warm to the idea of Scottish secession. His propensity for rational, evidence-based analysis however prevents him from going there. In his conclusion, he states: 

'The upheaval caused by leaving the UK would undoubtedly be major and costly — it might well result in a fall in living standards for several years and significant inflation. It is not clear that this is understood even by those who seek independence.'

Indeed. Scotland's economic myths are plainly not for McCrone. His book should be a must-read for those susceptible to the carefully contrived post-truth narratives of Scotland's current party of government. Instead, McCrone's non-partisan analysis will likely see him subject to personal attack and his valuable work disparaged. Such is the way in modern Scotland.

Written byJohn Ferry

John Ferry is a contributing editor for the think tank These Islands and a former financial journalist

Topics in this articleScotlandPolitics