Would independence hit the Scottish economy harder than Brexit?

“Economists blow apart Nicola Sturgeon's push for second indyref and warn rejoining the EU later won't repair damage” – Daily Mail, 3 February 2021

DOORSTEP ANSWER
This report by two London-based PhD students uses wonky methodology and claims to forecast 30 years in the future. Independence is the only way for Scotland to control its own economic destiny.

BACKGROUND
“Disunited Kingdom? Brexit, Trade and Scottish Independence” is a paper published by the Centre for Economic Performance (an adjunct of the London School of Economics) in February 2021. The authors are two LSE PhD students, Hanwei Huang and Patrick Schneider, together with Thomas Sampson, an LSE associate professor. The report is very short – a mere 23 pages including references.

READ MORE: Scottish Government rejects claim Yes vote would hit economy harder than Brexit

The paper argues that Scottish independence would inevitably lead to higher trade costs – meaning more expensive imports due to tariffs and paperwork. These are estimated at between 15-30%, which suggests a rather large degree of uncertainty in the researchers’ calculations.

In the small print at the end of the paper, the authors thank a Jim Gallagher for “useful discussions about the Scottish economy and Scottish data”. Mr Gallagher was the main economic advisor to the Better Together Campaign in 2014 and a noted opponent of independence.

IS THE CENTRE FOR ECONOMIC PERFORMANCE IMPARTIAL?
The Centre for Economic Performance is a pro-market, global research body funded by a mixture of government and private grants. Its work is overseen by a Policy Committee headed by Sir Nicholas Macpherson, former boss of the UK Treasury during the 2014 independence referendum.

Infamously, Macpherson declared that normal rules of civil service neutrality did not apply during the referendum as the SNP was seeking “to destroy the fabric of the state”. He used the Treasury to produce a stream of “official” reports attacking the case for independence and publicly urged both the Conservative government and the Labour opposition to block an indy Scotland keeping the pound sterling.

The Centre for Economic Performance was also active during the 2014 referendum producing a stream of reports seeking to undermine the case for independence. For instance, the then director of the Centre, Professor John Van Reenen, published a paper (still available on the LSE website) claiming that “the rise of nationalism in Scotland… is a scourge”. He went on: “the Scottish people will be poorer as divorcees… there will be financial instability… a long struggle to re-enter the EU… Scotland risks becoming like the depressed ‘Spain without the sunshine’.

After this academic analysis, Professor Van Reenen ended by saying an that independent Scotland outside the EU (with rUK still inside) would be “a much more volatile and risky place”. Some might argue that it is post-Brexit Britain which has ended up a volatile and risky country.

POOR METHODOLOGY
The Centre’s paper on Scotland has been challenged on its methodological shortcomings. First, it attempts to forecast Scottish trade over a generation. Even in “normal” circumstances, no economic forecast is credible or valid over that length of time into the future – say 15-30 years. But in a period when the pandemic has wrecked the global economy, no reputable major forecasting agency believes normal service will be resumed till at least the end of this decade.

Second, the authors admit they have ignored many important factors in order to manufacture their conclusions: “we restrict our analysis to trade effects and do not consider other potentially important economic effects of Scottish independence, such as changes in investment flows into and out of Scotland, whether Scotland continues to use sterling as its currency and the fiscal implications of independence”. In other words, the researchers ignore any tax changes designed to boost exports or any investment in new export industries after independence. This is virtually to rig the calculations to reach a predetermined outcome.

(Note: under the Union, Scottish economic growth is roughly half that of comparable small economies in Europe. One cardinal argument for independence is to secure the economic levers to raise growth.) Third, the basic assumption of the paper is that introducing a political border between Scotland and England will automatically create long-term diversions in each country’s regulations and tariffs. This would necessarily raise costs in Scotland. However, the Conservative government has spent the five years since the Brexit vote trumpeting that it wants free trade with everyone. So why does the LSE paper assume that only Scotland will be exempt from such a free trade deal – especially, as the paper keeps repeating, England provides 67 per cent of Scottish imports?

READ MORE: Only Scot on Boris Johnson's Union Unit is sacked over indyref2 dispute

Fourth, the paper makes the unwarranted assumption that trade costs are still incurred if Scotland rejoins the EU and will actually be worse. The authors say that lowering trade barriers with the EU would be offset by new costs from putting the EU’s external border between Scotland and England. That is a possibility though the author’s belief that increased Scot-EU trade would not offset these costs is weak. However, the paper deliberately ignores other possibilities.

Why, for instance, would an independent Scotland inside the EU not have the same, free trade arrangements with England as Northern Ireland shares as a result of the Brexit agreement? Or why could Scotland not be outside the EU but inside the Single Market, yet enjoy independent (and free) trade relations with the rest of the world, like Norway? Failing to examine all the trade options suggests the Centre’s researchers had a conclusion in mind before they started.

Finally, the paper claims that the combination of Brexit and independence will reduce Scotland’s income per capita, meaning a loss of £2,000 to £2,800 “per person”. These numbers were widely quoted in the pro-Union media. The report’s authors are remiss in not explaining the reality of these calculations. They refer not to physical declines in income but to different rates of growth. The paper is claiming (with all its disputable logic) that an independent Scotland will grow less quickly over a generation than if it stays in the UK. In other words, indy Scotland would get richer but not as fast as if it stayed inside the UK. Also, the figures quoted do not accrue to individuals but refer to national GDP expressed per capita.

CONCLUSION
Overall, the Centre for Economic Performance lacks credibility as an impartial witness.

FACKCHECK RATING:

Choose a Scottish university to do your economics PhD.