Scotland can pay its own way

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Eric Garcia

Washington Bureau Chief

ST ANDREW'S Day, and Scotland chooses the English Queen to open the new Museum of Scotland in Edinburgh, the building that at last gives the country a single place where it can house the treasures that define its past national identity: from the Penicuik Jewels to an 1806 Newcomen beam engine.

It is coincidence, but the opening happens amidst a turmoil of questions about the definition of Scotland's future identity. Down in London the creation of the Scottish assembly is seen in party political terms: is whatever is happening good, bad or indifferent for the Labour party? But as anyone who has spent much time across the Border this autumn will know, in Scotland it is a time of wonder and worry: is something seismic starting to happen, something as important as the union of the two parliaments in 1707, that will lead to an independent Scotland on the model (more or less) of the Republic of Ireland?

Unsurprisingly, much of the current debate has been about money - as indeed was the debate in 1707 - but about money in a curiously static way. The viability of an independent Scotland has been dissected in terms of the amount of money that Scotland receives in public spending from the UK as a whole, and the amount it raises in tax. Thus Donald Dewar in a lecture a couple of weeks ago dwelt on the costs of a break-up of the union, of "reinventing in Scotland everything from Customs and Excise to the Intervention Board for Agricultural Produce, from the Benefits Agency to the Foreign Office, from National Insurance to the National Debt".

True, Mr Dewar went on to argue in favour of the union in political terms as well - "Is there really a crying need for a separate seat at the UN?" - but in so far as the debate is about economics, it is about dividing up the cake, rather than making a bigger one.

The reason for this, I think, is simply that there are good figures for tax revenues and public spending for Scotland, so you can have a good, meaty debate rather than an airy-fairy one. Just a couple of weeks ago the Scottish Office published "Government Expenditure and Revenue in Scotland 1996-1997" which did show that Scotland benefited from more spending per head than the UK as a whole: it has 8.7 per cent of the UK population and gets 10.1 per cent of spending.

That amounts to a gap of pounds 4bn, not allowing for North Sea oil. The calculations then depend a bit on the proportion of oil revenues ascribed to Scotland, but even if you were to give Scotland the lot, there would still be a gap. During the early Eighties Scotland was running a large fiscal surplus, but given the present price of oil, an Eighties-style bonanza looks decidedly unlikely.

That is the static argument. The dynamic one is surely more interesting, and more useful as a guide to the future. It falls into two parts. The first is whether, were Scotland to be fully independent, it could use independence to fine-tune its tax system and to use public spending more appropriately. For example, could it not use tax incentives to attract foreign investment in the way Ireland has done? The Scottish bodies that encourage inward investment have done a good job, but they have to operate within narrower boundaries than their counterparts in the Republic of Ireland.

Meanwhile on the spending side, surely a locally run civil service could extract a bigger bang for its bucks than a body that has to answer to the Treasury in London. Does Scotland need, in Donald Dewar's phrase, to "reinvent" its version of the Foreign Office? Well, yes - as Ireland has. But it would not necessarily feel the need, say, to maintain troops in Germany, or, for that matter, Northern Ireland. So there would be economies here, as well as some additional costs.

The second part of the dynamic argument is even more important. Let's assume that an independent Scotland would be a couple of billion worse off in purely fiscal terms. The country's GDP is roughly pounds 70bn. Assume 3 per cent growth and the country would be losing the equivalent of one year's growth - or rather, having to attribute all the growth of one year towards higher public spending. People would notice that, for they would feel a bit poorer as a result. But were Scotland to manage the growth rates of Ireland through the Eighties it would be equivalent to about four months' growth - in which case the loss would be hardly noticeable.

So the really interesting economic question - the one I find most intriguing - is whether Scotland might achieve the sort of "run for growth" that Ireland has achieved in recent years. I suppose I should at this stage disclose where I, as the Americans would say, am coming from: I am an Anglo-Scot, brought up mostly in the Republic of Ireland and educated in Edinburgh and Dublin. If you knew Ireland in the Fifties and Sixties, and know Scotland now, you can see many parallels. Might Scotland follow the experience of Ireland in the Fifties and Sixties and be an area of relative economic stagnation? Or might it become a European economic tiger, as Ireland is now?

Part of the answer must lie with the European Union, for it has been massive EU transfers that have jump-started Ireland's burst of growth. If you make transfers of up to 7 per cent of GDP into a country, year after year, it would be pretty odd were there not to be an economic boom. Those transfers will not go on for ever. But Ireland has other strengths: high levels of education, a strong, exportable culture, and a business- friendly tax environment for foreign business. Scotland already has the first two and could develop the third. It might also develop a more tax- friendly environment for indigenous business too: encouraging local businesses to expand, rather than new foreign ones to come in, has wisely become a new focus of policy in Scotland.

Scotland would not have the benefits of big EU transfers - at least not on Ireland's scale - nevertheless there is another reason to expect a modest economic improvement, or at least no underperformance, were it to be independent. This is that small countries are no longer at an economic disadvantage to bigger ones.

The big argument for having a large country is economies of scale: a large country means a large market. But as world trade increases, it becomes possible for small countries to reap economies of scale too. EU membership automatically gives a country a much larger market, but even without it, small countries can prosper. Look at Switzerland (7 million) or Norway (4.4 million). If Quebec votes to go it alone (as it may well do) it would be fielding a population of 7.5 million. Go down to the size of Iceland or Barbados, both at a quarter of a million, and you probably do carry some penalty for being so tiny. But at 5 million Scotland would be a normal smaller nation.

Should it therefore do the full Monty and go for complete independence? That surely is a decision for Scottish people, in Scotland, not for part- Scots living mostly in London. But what we can say is that there is no powerful economic argument against it, if that is indeed what the people want to do.