Building a New Scotland: A stronger economy with independence

This paper sets out the Scottish Government’s proposals for the economy of an independent Scotland. It explains what these proposals would mean for you, for businesses, and for Scotland as a whole. It is the third in the 'Building a New Scotland' series, focusing on independence.


Introduction

The choice offered to the people of Scotland in the 2014 independence referendum was often framed by those opposed to independence as the stability of the UK on the one hand, and the risks and uncertainty of independence on the other.

In the years since, however, the UK has proved to be anything but stable.

Far from shielding Scotland from risk and uncertainty, being subject to decision-making by Westminster has taken Scotland out of the EU, and subjected us to prolonged political and economic instability. [1]

People in Scotland voted overwhelmingly to remain within the EU, but have been powerless to prevent Brexit or to escape its consequences.

Scotland has now been taken out of the EU, the European Single Market and the Customs Union. The implications for the UK and Scottish economies, for trade, for our living standards, and for our wellbeing will be long-lasting and negative.[2] The UK economic model is increasingly characterised by low growth and low productivity, stagnant wages, and high inequality.[3]

All of this has resulted in a UK unprepared for, and less resilient to, cost of living pressures. These pressures, while partly driven by global energy and commodity price rises that affect all countries, are to date having a greater impact, especially on lower-income households, here than in many other countries.[4] The policies of the current UK Government (as reflected in their commitment to discredited trickle-down economics as discussed in Box 1) are currently exacerbating major economic challenges such as inflation, inequality and the cost of living crisis. Instability and uncertainty are increasing as markets express a lack of confidence in the Government’s economic management and competency.

Box 1: Trickle-down economics

‘Trickle-down economics’ is the name given to the doctrine[5] – developed in the US in the late 70s and popularised by the Reagan administration – that cutting taxes for wealthy people and corporations will boost growth and that the benefits of this growth will be shared widely beyond those who directly benefit from the tax cuts. The doctrine also asserts that the incentive effects of such tax cuts will be sufficient to ensure that lower tax rates actually lead to higher revenues.

The Nobel Prize winning economist Paul Krugman has argued that “any ideology whose main policy prescription is lower taxes on the rich is likely to have extra staying power: those who preach it are not going to have trouble putting bread on the table.”[6]

Yet, despite its enduring popularity with particular interests, the benefits of such trickle-down policy measures have proven elusive while the downsides – in the form of lower revenues to support public services and higher inequality – are tangible and very well evidenced. Only a small minority of professional economists are now prepared to lend support to trickle-down policies.

There is a wealth of evidence to show that:

  • tax cuts generally don’t boost revenues
  • there is no correlation between the top rate of income tax (and the thresholds at which it is levelled) or total tax revenues and the rate of growth in high income countries.

A recent paper found that “tax cuts for the rich lead to higher income inequality in both the short and medium-term. In contrast, such reforms do not have any significant effect on economic growth or unemployment. Our results therefore provide strong evidence against the influential political – economic idea that tax cuts for the rich ‘trickle down’ to boost the wider economy.”[7]

Another Nobel prize winning economist, Joe Stiglitz, has argued that the ‘rising-tide hypothesis’ evolved into a much more specific idea, according to which regressive economic policies – policies that favour the richer classes – would end up benefiting everyone. Resources given to the rich would inevitably ‘trickle down’ to the rest. It is important to clarify that this version of old-fashioned ‘trickle-down economics’ did not follow from the postwar evidence. The ‘rising-tide hypothesis’ was equally consistent with a ‘trickle-up’ theory – give more money to those at the bottom and everyone will benefit; or with a ‘build-out from the middle’ theory – help those at the centre, and both those above and below will benefit.[8]

International Monetary Fund (IMF) researchers have also found that as “the income share of the top 20 percent (the rich) increases, then gross domestic product (GDP) growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth”.[9]

These trends and this instability look likely to continue. The Westminster Government’s approach to international trade deals and the UK Internal Market Act 2020 risk lower standards and diminished workers’ rights, which the Scottish Parliament has been rendered powerless to prevent. This is even the case in devolved areas, such as environmental protection and healthcare services.[10]

In contrast, although in a vibrant democracy there will never be complete agreement, recent voting patterns indicate that there is a broad consensus in Scotland that our economy should:

  • be more like comparable successful independent European countries, combining economic dynamism with social solidarity
  • benefit from, and contribute to, the European Union and the Single Market
  • provide well-paid and secure jobs, improve living standards and reduce inequalities and pay gaps that have a particularly negative impact on women, disabled people and minority ethnic communities
  • provide reliable low-cost energy from our abundant natural resources, and decarbonise to protect this and future generations from the damage of climate change
  • be outward-looking, embracing, contributing to and making the most of international partnerships, both bilateral and multilateral.

This broad economic consensus can, as it has in other successful comparable countries, provide the basis for greater certainty in political decision-making, which in turn can help drive investment decisions and prosperity.

The choice facing Scotland, therefore, is not one of stability versus risk.

The period ahead, for all countries, will involve risk and uncertainty because the world is going through a period of challenge and change.

The only question for Scotland is what form of governance – continued Westminster control, or independence – will best equip us to navigate the future and build a country that is wealthier, happier and fairer.

The Building a New Scotland series argues that becoming independent and self-governing within an interdependent world offers the best future for Scotland. It would allow us to align economic policy with our circumstances and values. It would let us finally close the democratic deficit that sees Scotland too often subjected to governments and policies that that do not command support in Scotland and do not meet our needs and aspirations.[11]

This publication provides an overview of the economic benefits and opportunities of independence.

It sets out Scotland’s significant economic strengths and considers how, with the powers of independence, we could harness these strengths to deliver better economic and social outcomes, as comparable countries do.

It also sets out how the transition to a stronger, independent economy can be made, and describes the macroeconomic framework, and supporting institutions, that an independent Scotland would have in place.

This publication presents answers to the key questions the people, businesses and communities of Scotland have about the economy of an independent Scotland.

  • can we do it? Does Scotland have what it takes to be a successful independent country, and match the economic performance of comparable European countries?
  • do we know how to do it? Is there a credible plan for Scotland going from being part of a low-growth Brexit-based UK economy to becoming an independent country with full economic powers?
  • and would it be worth it? Could we, with the powers of independence, build a better and more equal economy that works for the people who live here?

We believe the answer to all three questions is ‘yes’.

This publication sets out how and why.

Contact

Email: ConstitutionalFutures@gov.scot

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