1. Money

    John Ferry

    When will Nicola Sturgeon see sense on Scotland’s mounting deficit?

    When will Nicola Sturgeon see sense on Scotland's mounting deficit?
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    UK borrowing in 2020-21 hit a record level of almost £300 billion, representing 14.2 per cent of British GDP, reported the Office for National Statistics in June. In the face of the biggest spending challenge since the Second World War, the Treasury, backed by one of the world's most established central banks, stepped up to supply all the funding needed to pay for furlough, business support and a highly successful vaccination programme.

    Now imagine a prime minister in receipt of those borrowing numbers announcing that the future path for the UK is clear: we must disband the Treasury and Debt Management Office; shut down our central bank; start again from scratch with brand new institutions undertaking all those crucial things like issuing government bonds – which will henceforth be denominated in a foreign currency as the new central bank will have no monetary power.

    Remarkably, that thought process mirrors the SNP Scottish government's response to this week's Government Expenditure and Revenue Scotland (Gers) numbers, which documents a record Scottish deficit financed by the institutional safety net of the UK.

    Gers gives an official annual account of Scotland's overall revenue raising versus government spending position. The new numbers show that Scotland's net fiscal balance for 2020-21 was a deficit of 22.4 per cent of Scottish GDP, or £36.3 billion. Spending in Scotland shot up by 21 per cent in response to the pandemic, with total public expenditure hitting almost £100 billion. Revenues generated in Scotland were around £11,500 for every resident, while state spending was over £18,000 a head.

    The numbers demonstrate clearly why Scotland is too big, too rich and too smart to venture down the road to secession. They show conclusively why Scotland's national interest is best served by remaining part of the UK's fiscal and monetary union.

    In a reasonable world Nicola Sturgeon and her colleagues would accept this. They would look at the Gers numbers and be no more inclined to sever Scotland from its financial support structures than the prime minister would the UK. They would trust there are good reasons why there are no historic or current examples of administrators in advanced economies carving their nation or region out of entrenched monetary and fiscal unions.

    True to form, what we get instead from the SNP is denial of reality and a religious-like commitment to the cause.

    Responding to the Gers data, the Scottish government's finance secretary, Kate Forbes, tweeted

    'The UK’s deficit is the highest in Europe. Nobody is suggesting the UK relinquish their independence, despite the fact that small, advanced European countries appear to have healthier public finances.'

    And Nicola Sturgeon brushed off concerns by stating, 'Having a deficit is not, self-evidently, a barrier to any country in the world being independent.'

    The key point both miss is that no country in the world running an historically large deficit plans to rip out the key foundational pillars of their economy that facilitate deficit funding. Scotland opting to do this would be unique; a world first.

    We need only think for a moment about the consequences of Scotland leaving the UK in 2016 (if the Nationalists had won their 2014 referendum) to understand the inadequacy of the SNP's arguments. The new state would have have been outside the sterling currency zone and cut off from UK fiscal transfers on independence day. It would be issuing debt in another country's currency and paying high interest rates because of the real risk it could default (not being a currency issuer). The idea that, when the pandemic hit, Scotland would have been fit to raise £36 billion worth of foreign currency-denominated debt in 2020-21, over a fifth of its GDP, is frankly ludicrous.

    The evidence has always been there to suggest Scotland dodged a bullet in 2014. The latest Gers numbers confirm this to be the case.

    In the run up to the 2014 referendum, Sturgeon and Salmond often cited Gers because the figures showed Scotland running a smaller deficit compared with the UK as a whole – thanks to what turned out to be unusually high oil prices producing billions in tax revenues. Oil fortune reversal and now pandemic costs have pushed the numbers the other way and then some. The nationalist response has ranged from trying to discredit Gers, to downplaying the numbers, to trying to reframe the economic argument to focus on regional inequality.

    The only constant has been the shield of belief in independence. Nothing can crack it. New evidence emerges that should change any rational mind? Neutralise the evidence; reframe the debate to avoid it; get on the front foot again and never ever give even a hint of doubt.

    There is a zealotry at play when it comes to the SNP's response to Gers. To see it in action, when you consider that the welfare of millions of people is on the line, is more than unsettling – it's terrifying.

    Welcome to the age of unreason.