August 25, 2016
The costs of Brexit
What about Scotland? Was Scotland not supposed to boycott Brexit, either by vetoing any Brexit legislation, or by holding a referendum to exit the UK? For the moment, there is no need for any action until the UK government decides on its Brexit strategy. But there is now a good chance that Brexit will happen, and that Scotland will stay in the UK. George Eaton notes in the New Statesman that the latest public spending figures show that Scotland really cannot go it alone. Scotland's deficit has risen to 9.5% of GDP, even if one were to include Scotland's geographical share of North Sea oil revenue. The UK's deficit, meanwhile, has fallen from 5% to 4% last year.
One factor that has changed since the 2014 referendum is that the oil bonus has virtually disappeared. North Sea revenue was down from £1.8bn to a mere £60m. Public sector revenues per person were £400 lower than in the UK as a whole, while expenditures were £1,200 higher. Eaton makes the point that the costs of Scottish independence would become prohibitive. If Scotland decided to go it alone, it would immediately have to impose Greek-style austerity. Eaton also notes that only 15% of Scotland's exports go to the EU-ex-UK, while two thirds go to the rest of the UK. The Scottish government will only ask for another independence referendum if it can win it, and that is far from certain - especially now the polls have turned and favour a No vote.
We also noted a comment by Rupert Pennant-Rea on the costs of Brexit for the UK as a whole. He makes the argument that the permanent fall in sterling is the real metric by which the costs should be judged. The costs come in the form of lower real wages. In theory this should help the UK rebalance. In practice this never happened in the past.
It is interesting to see how the many irremovable obstacles to Brexit seem to be disappearing fast: Scotland is no longer a problem. Northern Ireland still is. And, once the British establishment finally weans itself from the illusion that it can have immigration controls and single market membership, much of the fog surrounding Brexit will have lifted. It is a gargantuan technocratic task to separate the UK from the EU. But it is feasible.
We disagree fundamentally with the argument by Pennant-Rea, which we think of as inverse mercantilism - an asset holders' version. The strong value of the pound before the referendum reflected hot money inflows that funded an increasingly unsustainable current account deficit. The argument is not that the fall in the pound would miraculously restore balance, but that it is unsurprising for a currency to fall in the presence of such a high deficit. We believe that this would have invariably happened in any case - and that Brexit was merely a trigger, not the cause. And the lower pound will facilitate a new industrial strategy by the government.
On a broader point, those who supported Remain still seem to us in campaign mode. They would further their interests if they engaged in the debate on how to make Brexit work, rather relying on the hope that the Brexiteers in the British government will mess it up.