How to prevent Scottish independence being as big of a mess as Brexit

It is not chance, but a persistent bias in government policy, which has ensured that London and the South East of England are by far the wealthiest regions of the UK. The UK taxation system is mildly progressive, and so the higher earners, concentrated in those regions, pay a large proportion of the taxes which the government collects.

Inevitably, government spending is distributed across the country, and with some expenditure being designed to stabilise the economy spending is naturally redistributive and directed towards areas with lower incomes. In the language of the GERS reports, the UK Government is presumed to undertake a substantial portion of its expenditure for the benefit of the whole country, even where some of those benefits are hard to discern in Scotland.

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This structuring of the UK economy, so that Scotland is permanently in a fiscal deficit, provides us with a simple economic argument for independence. Able to manage its own performance, Scotland should be able to improve its economic performance after independence.

There is a problem with the argument. It is very likely that the first years of independence will be disruptive. That, of course, is grist to the mill of the opponents of independence. Rather than calling Scotland too wee, too poor and too stupid, they can just point to the mess of Brexit and say that separation, or secession, will have similar effects in Scotland.

Suppose that the impact of Scotland becoming independent is to reduce national income by 5% over two years: a shock comparable in size to that of the 2008 financial crisis, or indeed the impact of Brexit. It could easily take a decade, or more, for Scotland to seem to be as well off as if it had stayed in the UK. Choosing to remain part of the UK could easily be depicted as the pragmatic choice.

In addition, the effects of economic shocks tend to be concentrated in a few areas of the economy, while barely affecting others. Since 2008, many pensioners have seen the real value of their pensions fall. Always among the most cautious groups in society, they will be receptive to arguments that change will bring more uncertainty, making them worse off.

There will also be uncertainty about the nature of the border between Scotland and England. For example, it is quite possible that conduct regulation in England would make it difficult for Scottish companies to offer financial services to consumers. This would just be extending the application of regulation of organisations based outside the remaining UK to Scottish firms.

Just as we have seen with Brexit, a hard border is likely to have a disruptive effect on manufacturing supply chains. But it seems improbable that the UK would turn its back on Scottish energy supplies, and the Scotch whisky industry is not especially reliant on sales across the rest of the UK. Overall, we should expect the dislocation from leaving the UK to be noticeable everywhere, without being cataclysmic.

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The best solution to these problems is for Scotland to be resilient in the face of the shocks which come with change. In the current cost-of-living crisis, we are discovering the downside of systematically eliminating strategic redundancy. Many of the small energy suppliers had to pay the wholesale market price for their supplies. Their businesses could be profitable only so long as prices were low. The large strategic reserves which we maintained when British Gas was a nationalised industry have been systematically run down. In pursuing a narrowly defined form of efficiency, successive governments sacrificed energy security.

That is a simple example of the importance of managing the productive capacity of the economy. Production ultimately relies on the use of essential resources: people to do work, and capital to equip them for it. For an economy to be resilient, these essential resources should be able to flow to where they can be usefully employed.

This is often difficult. Think about what happened in the early 1980s, when the Government believed that a sharp dose of market discipline was what the UK needed. Millions of jobs vanished and manufacturing came close to collapse. The old skills of the heavily unionised aristocracy of labour had no place in the Thatcherite economy. Many places in Scotland lost their resilience at that time. Some have never fully regained it.

To some extent, this economic resilience will emerge from a culture, in which it is natural for new businesses to emerge and for them to address society’s needs in new ways. Within such a culture, we should expect to see government supporting the development of novel technologies as they emerge from university laboratories, go through market testing and gradually find their way into innovative products and services. We should expect to see people repeatedly going through periods of education and training, so that they are able to take on new challenges.

These ideas are at the heart of the Government’s strategy for economic transformation. Its objective is much more than increasing the birth rate of Scottish businesses. It will attempt to change Scotland fundamentally – and in doing so, prepare the country for independence.