New report on UK economy: Radical Independence Briefing
This is a briefing for Radical Independence supporters about an important new report published yesterday by the Jimmy Reid Foundation titled ‘The mismanagement of Britain: a record of the UK’s competitiveness and its implications’.
The report is written by the well respected statistician and economist Jim Cuthbert. You can read the full report here.
The report can equip us with the arguments to help change the terms of the debate in the independence referendum. The media’s obsessive focus on potential economic pitfalls of independence completely glosses over the current and future economic basketcase which is the British economy. Rather than a constant emphasis on ‘the economic dangers of independence’ we need to start talking about ‘the economic dangers of the union’.
Additionally, a re-focus in the debate upon what is wrong with the economic model being pursued by successive UK governments and where the UK economy is heading if we continue with the current constitutional settlement can be fruitful for developing an understanding of what kind of economy we want in an independent Scotland.
“This report examines the suggestion that the UK economy is strong and competitive. By looking at key indicators of competitiveness (real exchange rates, balance of payment statistics) it concludes that in fact:
• UK has experienced a long run decline in its general international competitiveness – not just against the emerging economies of the Far East, but also against other advanced economies.
• UK has experienced particularly marked short-term fluctuations in its competitiveness suggesting it is particularly exposed to external economic ‘shocks’
• There has been an increasing deficit in the UK trading account in general goods and services.
• This deficit has been funded from two main sources; North Sea oil revenue in the 1980s and reliance on the financial sector since the 1990s.
• In effect, the UK economy has become like a very large bank, with international assets and liabilities which are very large in relation to the size of the economy, at over 700 per cent of GDP.
The report then examines these findings to make an assessment of the real state of the UK economy. It finds:
• The performance of the UK reflects chronic, long-term mismanagement of the economy.
• The UK is far from having the characteristics of an optimal currency area.
• The present model of the UK economy is unsustainable, with a high likelihood of a potentially catastrophic crisis in the not too distant future.
This strongly implies major policy failures over much of the last 40 years:
• In three periods (the late 1970s, the late 1980s, and from about 2002 to 2008), the exchange rate was allowed to appreciate even though internal price levels were rising significantly. Policy-makers appeared blind to the resulting loss of competitiveness and its impact on the manufacturing base of the economy. This seems to be the result of misguided pride in having an apparently strong currency.
• Policy makers seem to have missed the point that the underlying balance of trade in goods and services, which had been flattered for a time by oil revenues, was deteriorating rapidly: and that the deficit was being covered by borrowing, and by current income, both largely dependent on the financial sector.
• Policy-makers appear not to have appreciated what risks the financial sector might pose to the economy, and how unstable the tax revenues derived from the financial sector might be.
• Decisions were regularly taken with the primary focus of benefiting or protecting the financial sector, but which were not in the interests of the wider economy
• Any economy which had, as the UK economy did in 2009, a public sector deficit equivalent to over 11 per cent of GDP can hardly be called well managed.
There are immediate risks for Britain resulting from this mismanagement:
• The general economy has been weakened by using the financial sector as a prop, so the general economy is likely to be too weak to be used as an effective support, if and when the financial sector hits trouble.
• This means the present model of the UK economy is at serious risk of not being able to cope with any further serious shock to the financial sector.
But there are strong reasons to assume another serious shock to the financial sector is likely. For example:
• To give an example of just how exposed the UK economy is to credit risk, almost a quarter of the UK economy’s external assets consist of financial derivatives: these financial derivatives themselves are of a magnitude equivalent to 240% per cent of UK GDP.
• The threat of a liquidity risk for Britain is no longer only theoretical; confidence among international investors in the UK economy is deteriorating, as we have seen by the credit downgrade.
• And since Britain is particularly sensitive to external shocks and since the unstable state of the world economy means such shocks are almost inevitable, the current model of the UK economy is unlikely to be sustainable.
• The assets and liabilities of the British economy double every nine years relative to GDP. This rate of growth cannot continue indefinitely. When this growth does stop the income of the City of London from managing this growth will drop rapidly.
The overall conclusion is that the present model of the UK economy is inherently unstable, and is at severe risk of imposing further substantial burdens on the long suffering UK taxpayer, and quite possibly of collapsing altogether. Had taxpayers been aware of how the economy was being developed, and had there been proper democratic accountability in the UK, it is extremely unlikely that the taxpayer would have signed up to underwriting this model.
In the light of this analysis, nationalist strategy on the 2014 referendum needs to be rethought, and current tactics reversed. The UK will always remain a primary trading partner for Scotland: so UK economic instability will always affect Scotland. But what nationalists should be pointing out is how independence could potentially insulate Scotland from the worst effects. It also strongly suggests that Scotland should not remain in a sub-optimal currency union which has sacrificed productive economy growth for conditions that suit financial speculation.
Finally, given that the next acute phase of the UK economic crisis may not occur until after the referendum in 2014, if Scotland remains in the union it should maintain the capacity to reconsider that decision.”