The debate about the Scottish economy centres largely on GERS which looks at public expenditure - the taxes raised in Scotland and the government spending. These suggest an independent Scotland would have a massive deficit.
This reflects the fact that Scotland has a shrunken private sector. Scotland has a very big public sector and those people are paid, of course, with money that has to be raised from taxation. So if Scotland were to have a sustainable future as an independent country, it would have to expand its private sector and create more profitable businesses.
How big is Scotland’s private sector? This number isn’t published but a friend who looked into this for business reasons said he reckons it is about 6% of the UK economy. (if anyone disputes this please get in touch). That is obviously small, given that Scotland has 9% of the UK population and a third of the landmass, creating potential in areas like renewable energy, agriculture and fishing.
Why is Scotland’s private sector so small?
1 A lack of middle-sized businesses.
Germany famously has the Mittelstand, the medium sized businesses which make up the backbone of its economy. London and the South East have a lot of them too. This is a really important sector. Scotland has a lot of start-ups which employ tiny numbers of people, and a few behemoths like RBS and Standard Life, though these are increasingly run from London. But it has a very weak middle tier.
Middle-sized business employ significant numbers of people. They would be more likely to have decision-makers based in Scotland. They are more likely to buy local and contribute to the supply chain. They often buy in a more agile way - they are more likely to try out the innovative technology that those start ups produce for instance.
The Scottish government should consider focussing more of its efforts on supporting companies with from 50 to 500 employees to grow, companies like Scottish and Southern Energy and Aggreko.
2 The shadow of London
London has been the capital of the UK for 300 years. It is the economic centre of the UK and government economic policy is designed with its needs in mind. Economic decision makers are hardly aware of the needs of Scotland. They rarely leave the south of England and don’t think of what’s required up here when they, for instance, set interest rates. They very much take the view that London is the engine of the UK economy and its needs must come first.
It is often said that Scottish public spending is too high per head. Obviously, it costs more to deliver public services and infrastructure per head - and Scotland has high social deprivation in many areas. But the English figure is often given as an average. But London many times as much per head in infrastructure spend as the North East.
London operates in the UK a bit like a vortex or a black hole. Small companies started in Scotland are often acquired by London based companies and the leadership vanishes down south; many talented and ambitious Scots gravitate to London also because there is too little scope for their talents in Scotland.
3 Mistakes of the past.
Scotland suffered from a very rapid and in some cases, unnecessary, collapse of its industrial and manufacturing sectors at the end of the 20th century. Huge numbers of people were put out of work as the big employers in steel, shipbuilding and other manufacturing areas closed. (This is well covered in Iain McWhirter’s book Road to Referendum, which may need an update soon!)
In an effort to create a lot of new jobs quickly, the UK government effectively bribed multinationals to come to Scotland and open factories. (Timex, IBM, Hewlett Packard, Compaq) But they didn’t stick around, as soon as the incentives stopped flowing they left. “Silicon Glen” as it was known, melted away.
For some reason, or perhaps for a number of reasons, home-grown entrepreneurship hasn’t been as evident in Scotland as in the Nordic countries that it likes to emulate. Sweden has done a spectacular job of turning its tech startups like MySQL, Spotify, iZettle and Mojang into global successes. Nordic countries are disproportionately represented among the winners of Red Herring awards for the most exciting start-ups, this analysis shows.
Some might argue that this is a result of Scotland’s dependence on the UK. Scotland arguably has a capital city outside its own borders, and has effectively become a bit of a business backwater.
4 Lack of an entrepreneurial culture
Boston in the USA where I currently spent a lot of time, is a global hub for hi-tech business particularly in biomedicine. Pierre Azoulay, an economist at MIT recently told Le Monde: “Boston is the world epicentre because of its unique ecosystem. In a few square kilometers, you can find top universities and hospitals, as well as financial and industrial companies."
Having an ecosystem where companies can raise venture capital and find mentors as well as smart people with bright ideas is vital. A recent report by the Royal Society of Edinburgh and others showed a gap for Scottish companies after they pass the initial stage.
Ireland has made mistakes - notably getting tied up in the sub-prime disaster - but it is dealing with that and in Dublin it has created an effective hub where people can start successful companies, grow them, sell them, and invest the money in something new. Dublin is home to Google’s European headquarters and is an international finance and hi-tech centre, the FT recently reporting on its strong potential for growth..
5 The Scottish Whinge
Scotland’s lack of an entrepreneurial culture may stem as well from its long dependency on being part of the UK. Arguably it has produced the Scottish whinge - it’s been easy to vote for parties which focus on the plight of the poor and increasing public spending. Scotland has not been put in the position of having to take care of its own problems.
There can be a disparaging view of profit - but a business that doesn’t make a profit is effectively a hoddy. And it’s the profit which creates the tax bill.
In this tough global economy, it takes a great deal of guts and determination to go out and win business, to increase exports, to build successful companies and to compete internationally. The Scottish business sector is underperforming in comparison to countries like Ireland and Norway.
Some argue that this will not change until independence forces Scotland to take its own destiny in its hands.
Scotland suffers from a stagnant population, and an ageing one. The immigration policy of the UK government is not right for Scotland. Many of the EU nationals who live here are a massive asset to the country and their future has been put in uncertainty by the Brexit vote. Every day, people who have lived here for years, contributing to the economy are being denied residency.
The financial requirements put on immigrants from the rest of the world don’t work either - people living and working in marginal rural economies like the Highlands don’t earn £35,000 a year. The Zielsdorf family, who invested £300,000 in Laggan stores are currently awaiting deportation by the Home Office.
A policy that the Scottish Universities adopted of offering a two year work visa to international students worked very well for the Universities and for the country - helping Scotland to lure some of the world’s best and brightest young people to come and live here. But it was ended by the Home Office. Now the university sector says it is losing out to international competitors.
In conclusion, could Scotland survive as an independent country? Only with a great deal of guts, determination and willingness to embrace the change that would be necessary.