Scotland’s future still in doubt

On Sept. 18, Scottish citizens made a historic decision by voting against becoming an independent nation. In the run-up to the referendum, a lot of the press coverage focused on cultural issues. Many English people felt that the Scots who were campaigning to become independent were mainly redheaded kilted nationalists looking to repudiate their ties to the Crown. But this was not the predominant concern of many independence campaigners. Rather, they were deeply concerned about the economic future of Scotland and sick of the Tweedledum-versus-Tweedledee politics that dominates in Westminster.

In the 1950s and 1960s, when the British economy experienced low unemployment, high economic growth and a reasonably equitable distribution of income, the Scottish people were basically split down the middle in their politics. But by the 1970s, when economic order began to break down, Scots began fleeing the Conservative Party and embracing the Scottish Nationalist Party (SNP). While the English swung to right with the rise of Margaret Thatcher’s controversial neoliberal politics in the late 1970s, the Scottish moved to the left, driven by a desire to return to the economic stability of the 1950s and ’60s.

Much of this history cannot be understood without also taking into account the discovery of North Sea oil in the 1960s and 1970s. This oil became a particularly contentious issue during the Thatcher years, when the government was seen to have squandered the oil windfall on tax cuts and dubious domestic spending. The Scottish were particularly annoyed by this because many felt that the oil, discovered in Scottish waters, was Scottish property. Under Thatcher the Scottish economy lost one-fifth of its workforce to unemployment as the government’s economic policies rapidly deindustrialized the country. It is not surprising that many Scottish people thought that the North Sea oil revenues would be better spent fixing their economy than on tax cuts for the rich.

Today many SNP supporters see the entire political system in the United Kingdom as compromised by Thatcherite free-market neoliberalism. They campaign for independence because they believe they might be able to construct a new type of politics in their country. Scottish nationalists want to model their economy instead on the social-democratic states of Scandinavia. They want greater access to public services, and they want to ensure that oil revenue is spent on projects that benefit Scotland’s future.

What happens to the oil revenue is particularly important for Scotland’s economic prospects. In a recent report I wrote for the Levy Institute on the Scottish currency question, I found that the Scottish economy is far too reliant on it.

How so? I analyzed the sectoral balances of the Scottish economy — that is, account balances from trade, the government and the private sector. I then examined these balances both with and without oil and gas revenue. With oil and gas revenue, the Scottish economy looked very healthy. Outside of the serious recession of 2008 and ’09, it tended to run government surpluses, and private savings were robust. This was because, thanks to oil and gas revenue, it ran substantial trade surpluses. This money flowed into the bank accounts of the government and the private sector. But when we took away oil and gas revenue, the Scottish economy looked very unhealthy. The government ran enormous deficits, the private sector also ran deficits (which means it accumulated debt), and all this money flooded out of the country in the form of large trade deficits.

If Scottish oil and gas revenue were to falter, then, it might well lead to serious instability in the Scottish economy. Such a shortfall might happen in several ways. First, there is only a limited amount of oil left in the Scottish fields. When this oil and gas start to run out, the Scottish economy could take a hit. Second, oil and gas prices are notoriously unstable. A substantial fall in prices in the coming years could prove disastrous for the Scottish economy.

One of the key programs that the SNP promised the Scottish people was that if they voted for independence, the government would use oil and gas revenue to invest in projects that wean Scotland off its hazardous dependence on fossil fuels. One of the key strategies in this regard was to invest large amounts in making Scotland a global leader in renewable energy production.

Even though Scots voted against independence, these dreams may still be realized. During the run-up to the referendum, British politicians promised Scots far more power over their spending and taxation if they chose to remain in the union. The Scottish government should try to use these new powers to pursue its long-term goals of Scottish economic stability from within the union.

The dream of a new Scotland with a fairer and more stable economy did not die on Sept. 18. The Scots may have said no to independence, but they would be sorely misguided if they continued to pursue the policies that led them to question the viability of the union in the first place.