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Sunday, 10 June 2012

Recent History of Scottish Economy And Why It Matters

When the SNP announced an independent Scotland would retain sterling as its currency, there was no discussion with other interested parties and it was accepted by everyone else, the opposition parties, the media and the Scottish people. When I have raised objections to that policy decision, I have been told we can decide on the currency after independence, that it was important to get a Yes vote first. That Scots were being told that even if they did not control their economy, they would still be independent, was either glossed over or simply ignored. When questioned more closely, the SNP leadership presented four main arguments which were meant to defuse the situation, to impress on us that we really had nothing to worry about.

The first was that in modern society, monetary policy was not all that important that, according to Alex Salmond, "fiscal policy has primacy". Even to the uniniated, that argument is seen as nonsense, in light of the part that monetary policy is playing in the debacle that currently afflicts the eurozone. The second was that there were 67 other currency unions in the world, like the one he was proposing for the UK, an argument he was forced to withdraw a few days later. The third was that the Bank of England is independent and that Scotland would have a seat on the Bank's Monetary Policy Committee (MPC). This would give Scotland a "measure of control" over monetary policy and place an independent Scotland in a stronger position that it is now. The Treasury has issued a statement to the effect that Scotland would not have a seat on the MPC and at least two previous Chancellors have said the same. My two most recent blogs have questioned just how independent the Bank of England is and put forward arguments that Scotland should have its own currency. I have asked SNP supporters to challenge the arguments and to say how having a single member on the MPC would give Scotland any control of monetary policy but to date, none has replied.

The fourth argument put foward by the SNP, to allay any fears that Scots have about continuing to use sterling, is perhaps the most questionable of all the arguments. We are told that the Bank of England, through the MPC, is unlikely to follow a monetary policy that would be greatly different from that which would be followed by an independent Scotland. It follows therefore, according to the SNP argument, that having the Bank of England control Scotland's monetary policy does not really matter. Anyone with any knowledge of the recent history of the Scottsih economy will know just how fatuous that argument is, particularly if they have been members of the SNP for any longer than the past few years. The party claimed with total justification for over 70 years, that the interest rates set by London were rarely if ever, set with Scotland's interests in mind. On Thursday night (June 7th) on BBC's Question Time programme, Michael Forsyth who was Secretary of State in John Major's government, between 1995 and 1997, admitted that when the SNP claimed that interest rates that were set by Westminster ignored Scotland, he had no answer because it was true.

This argument also ignores the point made repeatedly by the SNP, that independence will allow Scotland to apply economic policies that suit Scotland, will encourage Scottish business to flourish and improve the standard of living of our poorest people. The whole point of independence, according to the economic nationalists who currenctly hold sway in the SNP, is to improve the Scottish economy and realise the potential we have, with the natural resources we enjoy. That can only be done when the economic problems of Scotland are addressed, unless the SNP is now saying that the economic problems in Scoltand are exactly the same as they are in the rest of the UK and there is no need for Scottish control of the economy. It is increasingly difficult to have any faith in people who claim to know where they are going, when they would appear to have little knowledge about where they have been. The following is a very brief and superficial summary of the recent history of the Scottish economy.

It is generally recognised that Scotland has been over-reliant on the public sector since the end of the Second World War, in terms of employment and spending. The massive housing crisis faced by post-war Scotland was tackled quickly, to the extent that 86% of all housing being built in Scotland in that period, was public sector housing. In the 1950s rents in the public sector were one third the level of those in the private sector, something which greatly encouraged the reliance on public sector housing. Slum clearance in the Glasow area provided much needed employment and housing but gave rise to the peripheral schemes such as Easterhouse and Drumchapel, with all their associated problems. Easterhouse had a population the size of that of Perth, without a single pub or shop, causing Billy Connelly to coin the infamous "desert wi windies". At the same time as housing was seen as a priority, Scotland's heavy industry was being destroyed piecemeal, by succesive UK governments. As an indication of just how much Scotlanmd became dependent on the public sector, the number of civil servants employed by the Scottish Office rose from 2,500 in 1945 to 8,000 in 1970.

The 1960s and 1970s is a period during which the UK was governed by both Labour and Tory governments, under the premiership of Harold Wilson, Ted Heath and Jim Callaghan, all of whom played their part in ignoring the particular problems of the Scottish economy, in order to deal with those of the "UK as a whole". Under Wilson, inflation reached figures in excess of 20%, the bulk of it generated by the South East of England and London. In 1964, when he was elected, unemployment in the UK stood at 400,000 but by 1967 it had reached 631,000, with Scottish unemployment at 50% higher than the UK average. The discovery of oil in the Scottish sector of the North Sea could have changed the economic propsects of Scotland out of all recognition but the policies of successive Labour and Tory governments ensured it would not happen. The true extent of the value of the oil was kept secret from the Scottish people until the publication of the McCrone Report in 2004, thirty years after Heath had instructed it.

The economic problems of Scotland were simply a reflection of the problems of the UK and, despite the discovery of oil, Scottish industry was either closed down, from Beeching to Scottish steel, to shipbuilding to mining or was undermined by the economic policies of the successive governments. Heath sacrifised the steel industry as part of the price of entry to the Common Market and considered the Scottish fishing industry to be expendable. Entire communities which relied on both industries, have since been destroyed as a consequence. That it could have been so different is emphasised by the McCrone Report which said that not only would Scotland, with control of the oil revenues, be economically viable and the 7th richest country in the world, it would have a currency worth 20% more than sterling within two years of becoming independent, with no downside to the Scottish economy. Perhaps more importantly, he also said that even without the oil Scotland would be economically viable with a small devaluation of the currency along with a substantial reduction in its defence budget.

The Thatcher years punished Scotland more than the previous governments and few Scots have many fond memories of her tenure of office. In the first two years of her being elected in 1979, Scotland had lost 20% of its workforce, as she pursued policies to ensure there would be no return of the inflation of previous governments. During her term of office unemployment in the UK reached 3 million, Scotland lost 15 of its 18 remaining pits and although she had been out of office for a couple of years, the closure of Ravenscraig was the final nail in the coffin of the Scottish steel industry. Far from benefiting from the oil off its coast, Scotland again suffered unemployment levels higher than the rest of the UK, while the oil revenues were used to pay for her economic reforms throughout the 1980s. Between 1960 and 1973, unemployment averaged 1.9% in the UK but over 2.5% in Scotland; between 1973 and 1979 it was 3.4% in the UK but 4.5% in Scotland and between 1979 and 1989 it was 9.1% in the UK but over 10% in Scotland. Despite this record Alex Salmond said that "Scotland didn't mind the economic side of Thatcher but disapproved of the social implications of her policies." It was a remark he came to regret very quickly.

Throughout all of the period in question, interest rates were set by the Chancellor of the Exchequer and frequently manipulated before elections in an attempt to influence the voters. A reduction in rates just before the election was meant as a bribe, and more often than not, seen as a bribe, having little or no effect on the voting intentions of the electorate. It was to avoid the risk of politicians making this kind of policy decision, that Gordon Brown decided to give the responsibility of setting interest rates to the Bank of England, in the belief that the reasons for setting the rates would have nothing to do with the electoral prospects of the party in office. If we are to follow the logic of the SNP's arguments about the "independence" of the Bank of England, it would be reasonable to note some change in the setting of the interest rates since 1997, when Brown came to office, in terms of the Bank taking greater account of the needs of Scotland. When politicians made the decisions, it was to be expected they would set rates according to what they thought would best suit their likely supporters but, freed from that kind of political pressure, it is equally to be expected the Bank would be more objective. Has that happened? Is there any evidence to suggest the Bank of England has set rates because it thought it would be to Scotland's benefit, rather than to the benefit "of the UK as a whole"?

What did Gordon Brown's reforms of the financial services industry and the Bank of England, do to Scotland, given that Westminster still controlled the economy? GDP figures showed that Scotland fell into formal recession in the first 3 months of 2002, five years into Brown's tenure of office. The Scottish economy had been underperforming the UK economy for some years and in the 2nd Quarter of 2002, GDP growth was 0.3% as opposed to 0.6% for the UK. Scottish growth between 1995 and 2002 averaged 1.9% per annum, as opposed to 2.7% for the UK. Scotland was more reliant on manufacturing industry than the rest of the UK at that time and exports in engineering fell from £13 billion in 2001 to £10 billion in 2002. The climate at the time was not conducive to sustain the economic mix that Scotland had in electronic engineering and in the 18 months prior to to 2002, both America and Japan had stopped investing. Brown reacted by imposing an "energy tax" which was predicted to cost Scottish manufacturing £90 million in 2001 and actually cost the industry £143 million in the first year. He topped that off with a 10% hike in corporation tax on North Sea oil companies, placing in jeopardy the development of marginal fields. The then First Minister, Jack McConnell, was moved in September 2002, to ask the dismal Jimmies -and he was not referring to Nationalists - to stop talking Scotland down.

Alistair Darling held senior office from the time he was appointed by Blair in 1997, to the office of Chief Secretary to Treasury, a post he held until he took over as Secretary of State for Work and Pensions the following year, a post he held until 2003. He then combined the posts of Transport Secretary with that of Secretary of State for Scotland, until he was appointed Secretary for Trade and Industry in 2006, holding that post until being appointed Chancellor in 2007, the post he retained until Labour's defeat in 2010. In his first budget in March 2008, he allowed Brown's intention to abolish the 10p rate of income tax to stand thereby punishing 5 million of the lowest earners in the country. In reaction to the criticism this caused, he raised the tax threshold and borrowed another £2.7 billion to pay for it. So much for cutting back on debt. His announcement of £20 billion of new spending, earned him a warning from Mervyn King at the Bank of England about public spending. He increased NI by 1%, his department managed to lose the personal details of 25 million citizens, said to be worth £60 million on the black market and in his final budget, he was roundly criticised for what was termed a "pre-election con", when it was discovered that he had set aside money for only one year, to cover increases in benefits he had announced.

Darling recently called Alex Salmond a "complete fool" for endorsing the RBS takeover of ABN AMRO, the purchase of a Dutch bank loaded with toxic debt, which helped to destroy RBS. RBS was in competition with Barclays Bank, which was advised in its attempt to buy ABN AMRO by one, Naguib Kheraj, who was just as keen for the takeover as both Fred Goodwin and Alex Salmond. Barclay's bid failed and Kheraj was appointed as a special adviser to the FSA. Was he also a "complete fool" and when did Darling decide that Salmond and Goodwin and, by extension, Kheraj, were all fools? If his opinion of them was so low, why did he not stop the purchase, which he could have done as Chancellor? Why was Kheraj appointed as a special adviser to the FSA, fool that he was? He was at Barclay's when Barclay's tax avoidance schemes came to light in 2009 and it was learned the bank owed HMRC £500 million, which in itself should have disqualified him from any government position.

It is fifteen years since the Bank of England was given the responsibility of setting interest rates, ample time for it to have given some thought to Scotland's particular economic problems. If in fact, there was ever any possibility of it having done so, it is surely to be expected there would be some evidence of it. I know of none, nor have I ever spoken to anyone in the financial services industry who has ever suggested that it might be the case. It is perfectly reasonable to ask therefore, where the SNP gets the notion that the Bank of England will suddenly find a "Scottish conscience" and place concerns for Scotland's interests at the forefront of its general concerns for the "UK as a whole", when it sits down to discuss the next rate it will set. The party has never taken the trouble to explain where it gets the idea the Bank of England will consider Scottish interests and now might be a good time to do so, before the Scottish electorate begins to get the idea it is just havering.

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