No, economics won’t tell you how to vote in the Scottish referendum
It’s tempting to believe that economics has all the answers. Unfortunately more often than not it has all of the questions and none of the answers.
A case in point is the Scottish independence saga. At almost every stage in the campaign, we’ve been told that what this really comes down to is not politics but economics.
Tonight David Cameron is giving a speech in Glasgow which will focus primarily on the economics. The UK is referred to less as a country than as a “single market”; rather than talking about national pride, he’ll talk about “transaction costs” and “trade restrictions”. The Yes campaign is just as guilty of couching their speeches in economic rather than subjective terms.
And for good reason. Both sides would like to give their supporters the impression that there is a right and a wrong answer come September 18 – and that the rightness and wrongness is borne out by the economics. This is, of course, balderdash. It’s perfectly possible to use economic tools to tell precisely the story you want, which is what both sides have done. The Yes campaign claims under independence Scots will be £1,000 a head better off; Better Together thinks they would be £1,400 a head worse off than if they were to remain in the union. Both numbers are economically valid – in that they are the product of economic calculations.
However, in order to secure such radically different numbers, both sides have inserted vastly different assumptions: about future growth rates, about probable public spending profiles, about North Sea tax receipts. These numbers – especially the oil revenues – are so difficult to forecast that guessing the outcome ten or 20 years from now is essentially futile. Even guessing next year’s tax revenues is a mug’s game (ask the OBR).
It’s true that when it comes to pure economic projections, the Yes campaign’s numbers look slightly more like wishful thinking, as I spelt out here. But to pin your decision on long-term economic projections that are 100% certain to be wrong is foolhardy in the extreme. Which is why it is irresponsible of politicians to create the impression that the referendum has a right and wrong economic answer. It doesn’t.
Nor is it particularly helpful for both sides to spend so much time trying to berate their opponent for refusing to answer questions about putative arrangements on currency and spending. As Alex Salmond has pointed out, neither Alistair Darling or Mr Cameron has explained which extra job-creating powers Scotland would have if it voted “no” – but that is because such powers will be the subject of lengthy negotiation following the vote (and partly based, most probably, on the result).
But nor are Better Together being entirely fair when they complain that Mr Salmond doesn’t have a definitive answer as to what currency an independent Scotland would use – or a decent plan B. After all, no-one knows.
The eventual choice between official currency union, unofficial union, Scots pound or euro will be the subject of many months of horse trading. In the wake of a yes vote everything (Naval bases, Trident, the national debt etc) would be part of the discussion – it’s disingenuous for anyone to claim otherwise. And in the end, it’s quite feasible an independent Scotland could try out a number of currency options.
Economics has no answers to the above questions. It can help map out some of the options, but there is no crystal ball which can explain whether an independent Scotland would be more or less wealthy than it is today.
What it can tell you are the following two points:
1. Unlike some regions of the UK, Scotland is remarkably close to the economic average for the country as a whole. On GDP and productivity growth, on unemployment rates, on budget deficits – in short, on many of the metrics that matter, an independent Scotland would, barring some (unlikely) catastrophic exodus of business and people, be fare rather similarly to how it does today in economic terms.
2. However, given how many imponderables and unanswered questions still remain about its currency, financial regulation and other arrangements, the transition to independence could be bumpy. Businesses thrive on stability – whether that’s stable taxes, regulations or trade arrangements – so many would be frightened by the prospect of such wholesale changes. Some would leave the country; others might reduce their activity, which could affect GDP.
In short, a vote for independence is a vote for the unknown. Not that the unknown will necessarily be any worse (or indeed better) than the status quo. But there is no framework – be it economic or political – which can, with any degree of confidence, predict what an independent Scotland.
Which might be what explains my favourite fact about the Scottish referendum. Together with some colleagues, David Bell of the University of Stirling looked into the behavioural traits of those who were polling most in favour of independence. It turns out that there was a correlation between risk-taking and support of independence. In other words – the more of a risk-taker you are, the more likely you are to vote yes in the referendum.
It makes a lot of sense, given how many unanswered questions there are. And the truth is, those questions will not be answered any time soon. If you were expecting for some last minute economic enlightenment before September 18, I hate to break the bad news, but it’s not coming.