The Diseconomies of Scale

It is no surprise to seasoned nationalists that the Hootsmon is gradually ratcheting up the intensity of its doom and gloom forecasts as to how Scotland will land in the poorhouse if it has the gall to actually try to be independent of England. This week alone, Malcolm Rifkind was banging on about Scotland having ‘only’ 5,000 front-line combat troops available, the in-house hacks were puffing up the prospect of both HBOS and RBS having to leave the country and even well respected commentator Peter Jones was sucking his teeth over the prospect of pensions in an indy Scotland.

Now, having been defence secretary, Big Malky knows a thing or two about armed forces. What he didn’t say is that ‘only’ 5,000 troops make up eight battalions, or four times what the UK currently has uncommitted in its present global overstretch. That’s also almost twice the active infantry currently in the Scottish Division of the British Army. The problem with the unionist view is they see us as a mini-UK, throwing our weight around à la Falklands, Kosovo, Iraq, Afghanistan, etc; Scotland, while wanting to do its bit for UN peacekeeping, would have no such ambitions—and would spend half on defence per capita than we do now in the UK (roughly a £2bn annual savings).

Less easy to dismiss are the doom-and-gloom arguments of fiscal catastrophe, especially when people believe it will affect them personally. The scare of major employers like RBS heading South is real, especially as Alastair Darling glued HBOS onto Lloyds in a panic in 2007, with little thought of long-term consequences. Lloyds will certainly remain headquartered in London. But, unless there are sound fiscal reasons, why would they shift their HBOS management elsewhere?

The answer—as with so much in banking—is money. Or, more specifically profitability. Banks have major operations in Jersey and Isle of Man; it saves them money. They have myriad subsidiaries in the Cayman Islands; it saves them even more money. On the Continent you can drive through Liechtenstein in minutes but it is a major banking centre. Need I go on? Scotland only has to pitch its corporation tax a notch below the City of London and all sorts of banking operations would show up in Edinburgh. That, plus the headquarters would stay put for similar reasons—especially if we stayed in the EU while a xenophobe UKIP-led England retreated to sulk in the wilderness.

But Mr Jones’ points about pensions are less easy to dismiss. Indeed, though they should be taken entirely seriously, the first key point is that your pension is under threat whether Scotland stays linked to England or not. Such was the transformation of pension fund fortunes over the last 6-7 years that few would have forecast anything but sunny future before the financial crisis hit. And—here beginneth the First Lesson—that crisis did hit…and scuppered pension values right across the UK. Not much protection being part of this larger UK union, was there?

Then there’s the issue of affluence. If Scotland alone had a lower GDP and its citizens heading for retirement were entitled to funds based on a higher GDP, then payouts would be less affordable pro rata and the Scots Treasury would be harder pressed to ensure all got paid what they were due to them. This is the point being made over the Pension Protection Fund—some 25,000 of its 360,000 members being Scots—how can a small country carry such guarantees spread over far fewer companies?

That’s the Second Lesson. Scots actually make stuff and have fewer unemployed and more exports per capita than the UK. Also its ratio of PPF members is 0.5% vs England’s 0.67%, which makes our burden one quarter less with more prosperity to pay for it. Much more alarming is the public sector pension commitment which has ballooned over the last couple of decades as successive governments and council have bowed to public sector workers’ demands.

In two decades, public spending on pensions has gone from zero (i.e. self-funding) to £118bn. That means that Scotland will have to find £10bn each year just to make up the shortfall in funding of its public sector workers. In or out of the Union, the problem will be just as big—except that Scots could choose to confront this elephant in the room once independent. Labour would never touch this with a bargepole (they largely created it under Irn Broon’s supposed ‘prudence’) and the Tories have simply shied away. But a determined Scottish government with a more robust economy to back it could do some renegotiation that at least prevented this from mushrooming further, such are the diseconomies of scale.

But the most thorny point raised about pensions is the EU law that requires any pension fund that crosses member boundaries to be fully funded. The Scottish Government argues that this cost can be spread over a transition period of several years. I tend to agree with it, that this and other cross-Border problems can be dealt with, and it would not be in the UK government’s interest to be petulant about it.

What no unionist seems to acknowledge is that ‘only’ 5m Scots would have a booming oil business that, relatively speaking would be ten times the present size, relative to the economy. That, the preponderance of export business, such as the £4bn in whisky, and the world-leading niche expertise in green energy and oilfield technology makes you wonder why shrewd investors are not betting on our advantage in diseconomy of scale already. With 2% of our population and 0.14% of our land area, how does Jersey survive?

There is no question a looming pension gap exists or that both England & Scotland must address it jointly or severally. But Scotland’s economy is better suited to finding its own solution than locked into the UK with its backward-looking governments and failed financial regulation systems.

An interesting prospect presents itself now that the Tories are running scared from their own backwoodsmen over Europe: what if Scottish independence and English withdrawal from the EU coincided? Then, not only would Scotland become the sterling bridgehead into the EU, but the pension funds crossing the border would no longer need to be self-funded as only one participant was an EU member.

Despite Farage’s obnoxiously small-minded politics, I’m sending him a tenner immediately; Scotland has bigger ambitions.

About davidsberry

Local ex-councillor, tour guide and database designer. Keen on wildlife, history, boats and music. Retired in 2017.
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