The essential flaw in Gavin McCrone's new book about Scottish independence

THIS book is a sign that a second referendum on Scottish independence could be on its way. Professor Gavin McCrone, formerly the chief economist to the Scottish Office, has updated his analysis of Scotland’s economic prospects. Thinking about the impact of Brexit has given him many more reasons to be gloomy about what would happen to Scotland were its people to choose independence.

While it is essential reading for anyone interested in the challenges which Scotland will face on becoming independent, it is a comprehensive listing of problems, with little confidence that they can be addressed. Aware of the complexity of many of the economic problems which Scotland faces, and concerned about weaknesses in government policy, Professor McCrone is bleakly pessimistic about independence.

Being far too wise to imagine that Scotland would be unable to achieve economic success, he looks to the history of Ireland, and suggests it would take many years for Scotland to make an economic success of independence. His concern is that the costs of success are too high.

He turns to Brexit to explain that independence would almost certainly create a hard border between Scotland and England, as Scotland would most likely choose to integrate more closely with the European Economic Area.

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He argues that such integration is desirable, but that it should fall short of membership of the EU, because the poor design of European Monetary Union makes him think that EU membership would come with many risks for a new state. McCrone therefore suggests that limited integration through Efta membership would be the best of the available choices, ameliorating the substantial damage which Scotland would suffer from the interruption of trading relations with the continuing UK, which he believes would almost certainly lead to a contraction in Scotland’s national income after independence, forcing Government to concentrate on damage limitation for many years.

That leads him to recommend a separate currency to give Scotland some chance being able to rebalance the economy, gradually reducing large trade and government deficits, and stemming an outflow of currency. In this version of independence, having a separate currency allows prices to flex – rather than adjustment requiring high unemployment and depressed wages.

Moving into sectoral analysis, Professor McCrone is very concerned that a hard border between Scotland and England would mean that the Scottish financial sector would lose access to markets in the continuing UK. While recognising the challenges for banking, he is more concerned about the risk of damage to the substantial asset management sector.

This concern is not new. It underscores many of the recommendations of the Sustainable Growth Commission, which sought to manage some of these challenges by postponing the introduction of a Scottish currency. Of course, the Growth Commission report was written before the UK completed its exit from the European Union, and seemed to presume that the UK would retain access through passporting to EU markets.

That was a reasonable assumption to make early in 2018, but the decision of the UK Government to pursue a very hard Brexit means that Scotland, after independence, may find it difficult to retain its financial sector, while gradually achieving closer integration with Europe.

THROUGHOUT the book, McCrone identifies serious challenges which Scotland will face after independence. There are chapters covering the need to secure energy supplies, the difficulties of managing long-term financial contracts, such as pension savings, and house purchase loans, as the currency changes, and the challenges of maintaining services such as education, health, and social care given the weakness of the economy.

There is also a substantial discussion of the failings of the Scottish Government’s industrial policy. This is slightly disappointing because it concentrates on specific interventions, which have not worked out well, specifically at BiFab, Prestwick Airport, Ferguson shipbuilding and the support for steel and aluminium production through guarantees given to Liberty Group.

Throughout the book, the tendency to see Scotland, and its government, as largely passive determines the pessimistic conclusions. This is an account of the economics of an independent Scotland, which does not really explore the political background, and so it gives little sense of the diversity of Scotland, and of the range of opportunities which might open up with independence.

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Independence will not only affect the productive capacity of the Scottish economy by breaking linkages to the rest of the UK. A more complete analysis would draw on ideas for the Scottish Government to follow a substantially different path of economic development from the UK.

It was good to see some mention of advice on Covid recovery which the Scottish Government commissioned in 2020 but the book does not engage at all with Scottish Government’s thinking on long-term growth, which should improve the country’s economic performance substantially.

That policy will build on recent insights into the role of government in successful economies, proposing that government is better placed than the private sector to undertake fundamental research and development. It will also incorporate insights into the importance of the tradable sector In generating secure well paid jobs, dispersed around the country.

Perhaps it is inevitable that McCrone should write a book which is essentially backward looking, With his enormous experience in public policy development, he can usefully tell us what has worked well in the past. But looking backward cannot not tell us much about the future.