Independence in the modern world. Wealthier, happier, fairer: why not Scotland?

Economic and social context

There have been significant changes in the global environment in the period since the independence referendum in 2014, so the context in which Scotland's future must now be debated has changed markedly as a result. Of most obvious and direct impact, Brexit – as well as being imposed on Scotland against our democratic choice – has set the UK on an economic path that imposes higher barriers to trade with Europe,^[15] and is likely to lead to slower growth compared to European Union (EU) membership^[16] and increasing remoteness from our previously close economic partners and fellow Europeans in the EU.^[17] The COVID-19 pandemic has also had major economic and social impacts. Most recently, war in Ukraine has created instability. Energy and commodity prices are soaring, adding to inflationary pressures and exacerbating the squeeze on low income households,^[18] and there is a risk of global recession. In the longer term, the conflict also has the potential to provoke a fundamental re-ordering of global energy supply chains.^[19] The pandemic has also exposed the UK economy's long-term structural weaknesses, including the prevalence of work that is vital, but low-wage and insecure.^[20]

The past decade has also served to clarify the nature and extent of the great challenges – demographic, technological, distributional and, most pressingly, environmental – that will characterise the 21st century economy. The analysis in this paper indicates that the UK is not well placed to meet these challenges. Compared to the comparator group of nations, the UK has low productivity and business investment (including in research and development) (see Section 1B Economic dynamism), high poverty and inequality (Section 1C Social solidarity), and a relatively weak record in sustaining effective approaches to economic development (Section 2 Observations on the UK model). In these regards, the UK is not well placed to meet the great challenges of the 21st century listed above, and other countries – wealthier, more productive and less unequal – are better prepared to meet those challenges.^[21]

This first Building a New Scotland paper is part of a series that will form a fully updated prospectus for an independent Scotland. Further economy-themed papers will set out how the powers of independence could be used to improve economic and social outcomes.

In this paper, we present evidence to show that across a range of key economic and social measures, the UK is out-performed by a comparator group of European countries.

This strongly suggests that Scotland's performance suffers from being tied to an increasingly outmoded economic and social model and would benefit from applying lessons from the different models discussed in this paper. The full powers of independence would extend the opportunities for applying these lessons.

Four points should be emphasised at the outset:

i The status quo no longer offers stability and continuity

Given Brexit, and with the economic effects of COVID-19 still emerging, now is an appropriate time to consider fundamental improvements to a prevailing economic and social model that is not allowing Scotland to fulfil her potential. Independence – and the economic powers it entails – can help facilitate and hasten this and will better equip us to build an economy in the interests of all people in Scotland.^[22] Indeed, the weakness of the UK's social and economic outcomes compared to those of the other nations discussed in this paper reflects a relatively poor record in the design and implementation of the effective economic and social policies that are needed to meet current and looming challenges.^[23] For Scotland, these weaknesses should not be an argument for maintaining the system of governance that has produced them – instead, these weaknesses, and the need to address them to better address the challenges we face, are a powerful argument for change.

ii Relative to its European peers, the UK model is increasingly outmoded

A range of publications have assessed Scotland's economic performance. Most recently, through our National Strategy for Economic Transformation (NSET), the Scottish Government set out measures to boost the economy with the limited powers available in a devolved context. In that publication, as well as outlining Scotland's progress and potential, there was a frank assessment of what more needed to be done and how Scotland compared in some key respects with other countries:

"Despite our wealth, too many households continue to live in poverty as a result of structural inequalities. Healthy life expectancy is too low in the most deprived areas of our country. Tackling the underlying causes of inequality in our society and providing economic opportunity is vital in order to improve life chances. Scotland's productivity lags behind that of many other advanced economies and whilst we continue to innovate too few of our ideas are turned into businesses and too few of our new businesses are scaling up successfully."^[24]

This paper is designed to contribute to the debate over Scotland's future by focussing on the UK's performance relative to some of its nearest neighbours as a means of demonstrating long-run relative underperformance under the current constitutional arrangements and, therefore, the potential for independence to raise the bar.

The fact is that Scotland's policy options remain constrained by the current devolution settlement and embedded features of the prevailing UK economic model, as illustrated in Section 2 of this paper. The policy decisions taken by successive UK Governments have to a significant extent determined the pace and shape of Scotland's economic development.

Box 1, below, summarises the economic powers retained by the UK Parliament and Government at Westminster. The Scottish Government has some powers that it can and does use to improve Scotland's economy, but most key economic powers (monetary and fiscal policy, trade, employment and industrial relations, competition and company law) are reserved.

Box 1: Reserved economic powers

• Foreign affairs and international trade
• Fiscal, economic and monetary system, including most aspects of taxation
• Most social security benefits including universal credit, child benefit, state pension and pension credit
• Tax credits
• Minimum wage
• Financial regulation
• Immigration
• Key aspects of energy policy, including North Sea revenues, generation and supply of electricity, offshore exploration and extraction
• Trade and industry, including company law, competition and consumer protection some aspects of transport, including
• international air connectivity
• Employment legislation and industrial relations
• Broadcasting and media
• Telecommunications regulation

Since the Scottish Parliament was established in 1999 there has been some extension of devolved powers. However, that trend has been reversed in recent years with the UK Government imposing new constraints on devolved decision-making, most notably through the UK Internal Market Act 2020 (IMA) which was passed by the UK Parliament despite the Scottish Parliament refusing consent. By introducing measures that will in effect enforce UK-wide uniformity, the Act has, for example, limited the Scottish Parliament's options to address public health matters, such as food content standards or alcohol-related harm.^[25]

Alongside the IMA, there is also a risk of further dilution of devolved powers if the UK Government decides to accept reduced standards to secure a Free Trade Agreement with another country. The United States, for example, has previously been clear that agriculture, food standards and drug prices will be on the table in any future trade deal with the UK.^[26] As things stand, the Scottish Parliament does not have the power to resist any future UK Government imposing lower standards in Scotland, should it choose to do so.^[27] This poses significant risks to the economy. For instance, the food and drink sector is proportionately more important economically to Scotland than it is for the UK as a whole. The industry's success is predicated on the quality guarantee that comes with Scottish provenance and therefore any change in regulatory approach that prioritised volume over standards could have a severe impact.

Despite a majority of people in Scotland voting to remain within the European Union – and within a Single Market which, by population, is seven times the size of the UK – the Scottish Parliament was powerless to prevent Brexit. Indeed, the particularly damaging form of Brexit chosen by the UK Government has increased barriers both to freedom of movement and to trade with Europe.^[28]

The prevailing UK economic and social model – the result of policy choices taken over decades and long distinct from its European peers – has generated relatively poor outcomes. A relatively high employment rate has been accompanied by weak productivity, low investment and high inequality of incomes. In the words of the UK Government's own Levelling Up White Paper, geographical inequality remains a "striking feature of the UK" with "economic growth and the higher productivity which drives it…over-concentrated in specific areas, particularly the South East of England".^[29] This latter point is particularly instructive because of its persistence. UK Governments have often made the same point and expressed determination to tackle this 'striking feature' without success. For example in 2010 David Cameron, then Prime Minister, stated: "Our economy has become more and more unbalanced, with our fortunes hitched to a few industries in one corner of the country".^[30] And yet it is clear from the Levelling Up White Paper how little progress has been achieved. Levelling up is unlikely to be achieved by the current – and increasing – UK centralisation of economic policy and powers away from the governments of Scotland, Wales and Northern Ireland.

Brexit will almost certainly exacerbate at least some of the UK's longstanding structural problems^[31] by, for example, further reducing the scope for productivity growth by establishing barriers to trade.^[32]

In this respect, the assessment and arguments presented by Professor Kevin O'Rourke discussing Ireland's economic development as an independent country is of interest. Professor O'Rourke argues that "a plausible candidate" for Ireland's economic underperformance in the period between 1954 and 1973 (when Ireland joined the then EEC) was "excessive reliance on the sluggish British economy". Ireland's improved economic performance after 1973, even before the creation of the Single Market, coincided with its rapidly decreasing dependence on the UK for trade. "EEC membership led to a far more diversified Irish economy, less dependent on its immediate neighbour, and healthier as a result."^[33] If, as many economists predict,^[34] economic growth in the UK is again to become relatively sluggish because of the decision to leave the EU, questions must be raised for Scotland about whether it too will suffer from excessive reliance on such an economy.

This paper sets out evidence of relative economic performance and begins to discuss the issues that might arise for Scotland in pursuing a new development model as an independent country. These issues will be addressed in further papers to be published as part of the Building a New Scotland series. The prevailing UK model, its distinguishing characteristics and performance, is considered in more detail below.

iii Countries of Scotland's size have consistently out-performed the UK across a range of economic and social indicators

Many of Scotland's near neighbours in Europe have thrived in the globalised economy of the 21st century, reconciling economic dynamism with strong social safety nets and outperforming the UK on a range of metrics. The high performance of these relatively small, more agile nations confirms their ability and propensity to make policy choices that are better suited to their needs and circumstances.

This paper looks specifically at the economic and social models which are both relevant to Scotland's circumstances (can Scotland learn from their policy choices?) and consistent with the current Scottish Government's aims and objectives (achieving greater equality alongside productivity growth).

Although it is possible to learn something from all national models, those pursued in, for instance, the city-state ports of Hong Kong and Singapore have very limited applicability to Scotland's circumstances or ambitions. There is much to learn from New Zealand's recent development – and it has made some interesting policy choices^[35] – but its high agricultural share in output and relative geographic remoteness limits its relevance as a comparator country for this analysis. Luxembourg performs well but its tax structure^[36] and prevalence of cross-border workers^[37] renders it an unsuitable comparator.

This analysis therefore focuses on Norway, Sweden, Denmark, Finland, Iceland, Ireland,^[38] Belgium, Austria, the Netherlands and Switzerland – referred to as 'the comparator countries'. These are relatively small nations in close geographic proximity to Scotland and they provide relevant examples for an independent Scotland to learn from and possibly emulate.

The evidence presented here shows that these countries frequently outperform the UK across a range of measures and that the best performing nations in this cohort are countries of Scotland's size. As the evidence presented below indicates, the comparator countries outperform the UK across a wide range of economic and social metrics by:

• exploiting the intrinsic advantages ("effective, responsive governments, with a well-developed sense of strategic capacity, high levels of trust and social cohesion, and the ability to adapt to changing international circumstance"^[39]) enjoyed by countries of this size; and,
• making better policy choices that are consistently tailored to their own specific circumstances and challenges.

Of course, nothing in the analysis presented in this paper is meant to suggest that the comparator countries are immune to global shocks or that their governments do not sometimes take poor policy decisions. The negative impact of the global financial crisis on Ireland and Iceland reflected issues with domestic banking regulation and the serious imbalances that had been allowed to develop in those economies. Rather, the intention of this paper is to highlight the continuing success of the comparator nations relative to the UK across a range of key economic and social indicators, and invite an informed discussion of the reasons for it.

iv Scotland is well positioned to learn from the experience of other nations and use the powers accruing through independence to improve economic, social and environmental outcomes significantly

Scotland possesses similar – or greater – natural resource endowments and intrinsic advantages to the comparator nations in many regards. Indeed, Scotland has a range of assets, specialisms and capabilities that stand it in good stead to maximise the opportunities of independence quickly. In addition to our vast natural and renewable energy resources, these include (but are not limited to):

• A strong and globally recognised track record of invention, innovation and learning, stretching from the Enlightenment to the present day, and our universities' place at the global frontier of research in areas such as life sciences and data analytics.^[40]
• Strong business sectors – through longstanding comparative advantages in food and drink, financial services, energy and advanced engineering to emerging competitive edges in low carbon, sensors, advanced therapies, sub-sea technologies and data analytics.^[41]
• Our natural heritage and capital^[42] – providing exceptional opportunities for tourism and underpinning a unique and recognised brand.
• World class universities – in the latest Times Higher Education World University Rankings 2022, Scotland has three universities in the top 200 (the University of Edinburgh, the University of Glasgow and the University of Aberdeen). Scotland has more universities per million people in the top 200 when compared to the rest of the UK and ranks third globally on this metric, behind Switzerland and the Netherlands.^[43]
• An outward looking culture which resonates around the world through a huge, enthusiastic and influential diaspora.^[44]
• A welcoming business environment including a highly skilled workforce, an asset routinely identified by inward investors as a key attraction. Scotland continues to perform well in attracting foreign direct investment^[45] reflecting the success of an experienced and effective international support network led by Scottish Development International.
• A strong commitment to building a wellbeing economy and a world-leading approach to Net Zero^[46] – no longer seen as barriers to sustainable economic growth, these are increasingly regarded as markers of any nation serious about long-term economic development.
• A global outlook, pro-EU and supportive of international institutions.^[47]
• A reputation for quality – provenance continues to be a key selling point for many of our goods, particularly in food and drink.^[48]

Using the limited devolution of the current constitutional settlement, and as reflected in the new National Strategy for Economic Transformation, Scotland has already started to depart from aspects of the economic model pursued by successive UK Governments. For example, through its Fair Work agenda, the Scottish Government has established new institutions (the Fair Work Convention) and developed creative policies (e.g. Fair Work First) to ensure that every possible mechanism is used to improve the range and quality of employment in Scotland.

The success of an independent Scotland would depend on the decisions taken by the governments and parliaments elected by the people of Scotland, but the full powers of independence would allow us to go further and achieve better outcomes in these and other areas. For example, full control over tax and benefits could help accelerate progress towards the ambitious targets that have been set by the Scottish Parliament for reducing child poverty.^[49]