Hume Occasional Paper No. 57
ISBN 1-870482-48-5
In the final lecture of the series, David Simpson presented the results of a research study that had been commissioned from The David Hume Institute by McDonald Orr Ltd. to investigate the economic aspects of independence. This work was carried out by David Simpson, Brian Main, Sir Alan Peacock, and Fabian Zuleeg and is the subject of a separate Hume Occasional Paper (No. 56). The methodology adopted by the research team was to choose several countries of similar size and position to Scotland and to compare their performance with that of the Scottish economy. The countries chosen are Denmark, Finland, Ireland and Norway. From the comparative data available, the team suggested that there was no reason to doubt that as an politically independent economy Scotland would have, under the appropriate pro-business policies, every prospect of thriving and achieving growth rates that have eluded it in the past.
In this comparative work, the case of Ireland received particular attention, given its proximity to the UK and its recent high degree of involvement with that economy. Of course, recent years point to a remarkable success story reflecting successful pro-business policies adopted by the Irish government and the beneficial side effects of membership of the European Union. The benefits of EU membership in terms of inward investment of structural funds would not be a likely prospect for an independent Scotland as with the imminent enlargement of the EU Scotland would almost certainly lie above any measure of poverty or underdevelopment that would be used as a criterion for qualification for such funds in an enlarged EU. In addition, it was pointed out that for much of the period of the Republic of Ireland’s independence the economic policies pursued had been anything but helpful and the growth rates attained anything but impressive.
The research study also examined the thorny issue of transition and here its conclusions were less sanguine. With the heavy reliance on its financial sector, the Scottish economy is particularly exposed to business confidence. While membership of EMU would offer confidence, such membership would depend on UK membership of EMU, given the current exposure of Scottish trade with the rest of the UK. Absent UK membership then Scotland would, of necessity, continue to use sterling. Even with the prospect of EMU membership, however, the prospect of meeting the required Growth and Stability Pact conditions is a daunting one for the Scottish economy. It is daunting because of the large structural deficit that the Scottish economy currently runs with the rest of the UK. While the study drew back for any attempt to forecast future trends in such figure and while recent movements in the deficit have been in the direction of an improved balance, the figures presented in the study do suggest that transition to independence would not be without its difficulties and that this would probably be the area where more research attention is merited. One irony that was pointed out in the study is that under the constitutional settlement in the Scotland Act 1998, the operation of the Barnett Formula as a mechanism for deciding the finds available to the Scottish Parliament is set to produce a squeeze on public spending (labelled by some commentators as ‘the Barnett Squeeze’) that is likely to frustrate the Scottish Parliament, cause some tensions between it and Westminster and, at the end of the day, move the economy away from its current fiscal deficit with the rest of the UK. This last effect would, of course, lessen the transition problems alluded to above.
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