How Do They Do It?
Posted on February 14th, 2022
By Rab Bruce’s Spider
Every so often, a comment on social media attracts a fair bit of attention. One of my recent Tweets about the re-awakening of the "You won’t get your pension if Scotland becomes independent" threat fell into this category. My question was why, even if this claim was true, did so many people believe that Scotland, uniquely among the advanced economies in the world, would be incapable of paying a Pension. My question was to ask how other countries manage it.
Needless to say, when a tweet gains some traction, it receives a lot of backlash from staunch Unionists. I usually don’t even bother replying to any of them because I learned a long time ago that it is a waste of time. I made an exception this time because, among all the usual comments about me being a knuckle-dragger, a fantasist, a cult member and yes, you guessed it, a Nazi, a few people did respond by asking how Scotland could possibly pay a Pension when there are only around 2.4 million taxpayers in the country. One of them did actually ask the question in a reasonable way, so I did reply, pointing out that other countries manage just fine because Income Tax is not the only source of revenue a Government has, and that normal countries usually borrow to fund their spending. I did point out that the UK has a National Debt of over £2.6 trillion, and nobody seems to worry about that.
Of course, twitter is not the ideal platform for any sort of in-depth discussion, especially when the chat is constantly interrupted by accusations of knuckle-dragging, cultism and Nazism, so I thought I’d better set out some thoughts in a blog post.
First of all, nobody is claiming that an independent Scotland would not run a deficit. Indeed, many economists have pointed out that, contrary to what Tories would have you believe, a Government surplus is actually bad for a country’s economy because if the Government is running a surplus, then the ordinary citizens and businesses must be running a deficit. Whether Scotland’s deficit would reach anywhere near the artistically created £8billion so beloved of the GERS Believers remains open to debate, but for the sake of this argument, I’ll go along with it for a change.
Of course, most of the respondents to my Tweet either didn’t have space or the understanding to differentiate between deficit and debt. But again, for the sake of a hypothetical argument, let’s say that Scotland ran a deficit of £8 bn in its first year as a normal country. That would give it a National Debt of £8bn. If that situation persisted, the Debt would grow by £8bn each year.
But wait! Let’s take a quick look at the UK National Debt. It stands at over £2.6 trillion, and is increasing at a rate of over £5,000 per second. Yes, you read that right, every second of every day, the UK’s National Debt is growing at a rate of £5,000. That’s equivalent to £432 million per day, or nearly £158 billion per year.
But, for the purposes of this argument, let’s stick with £2.6 trillion as the UK’s Debt. With a population of around 65 million, that is equivalent to roughly £40,000 per person.
So if we return to Scotland which has a population of around 5 million, a Debt of £8bn equates to roughly 1,600 per person. And yet Unionists are terrified of this, while apparently quite relaxed about the UK’s Debt per capita being 25 times greater. So Scotland’s deficit would need to remain at £8bn for 25 years to get close to the UK’s current per capita Debt level, and by that time, at the current rate of growth , we’d still be a long way behind because the UK’s debt would have reached nearly £7 trillion.
My interlocutor’s response to this was that the UK has the 5th largest economy in the world, a Central Bank and a stable currency, so there is no need to worry about the UK’s debt. All of that is fair enough as far as it goes. Whether the economy will remain that high in the league table post-Brexit is open to debate, though. As for a Central Bank, Scotland will undoubtedly need one, but every other independent country seems able to create or nominate a Central Bank, so I think it is reasonable to assume that Scotland would be capable of doing the same. As for a stable currency, that admittedly presents a potential problem because if Scotland wants to re-join the EU, we will need to adopt our own currency. To have any chance of becoming a reasonably strong currency in the short term, the international monetary community would need to know that the Scottish currency is backed by some strong assets such as oil, a major export resource such as whisky, or a major potential source of energy such as renewables. If only we had those things. Creating a sufficient reserve of foreign currencies would, I think, pose a greater short term problem, but again other countries seem to manage it. Finally, and I know this is a bit of a low punch, but when it comes to having a stable currency, it seems to have escaped the notice of most Unionists that sterling has dropped by nearly 15% in value against the US dollar since 2015. It seems the Brexit vote has resulted in a greater fall in sterling’s value than the calamitous 10% we were told Scottish independence would create if we had voted to become a normal country in 2014. Still, no worries, eh?
So much for all that mental arithmetic. But let’s get back to the main question which began all this. How do other countries manage to pay Pensions to retired workers without the beneficence of the UK to support them? Even such economic powerhouses as Malta manage to pay a Pension which, in terms of percentage of average working earnings, is better than the pittance the UK pays. How is this possible?
As outlined above, borrowing comes into it, but none of the people on my Twitter timeline were willing to explain how other countries can afford to pay pensions. All they were interested in was repeating the mantra that, because we have so few taxpayers, Scotland could not afford to do the same. Income Tax was very much the focus of their opinions.
Now, this is understandable because Income Tax is the most visible of all taxes. This is why the UK Government eventually devolved some Income Tax powers to the Scottish Government. It was a carefully laid trap because whatever the Scottish Government did, it would provide ammunition for Unionists. If they increased taxes, this would raise howls of outrage because Scots were being taxed more than their fortunate neighbours in England; if they reduced taxes, this would raise howls of outrage because it would mean the generous English taxpayers would be subsidising layabout Scots even more; and if they did not use the powers, that left them open to accusations of demanding more authority and then not using it when it was available. As things have turned out, the Scottish Government has handled it fairly well by some judicious tinkering with the tax bands and rates, so most of that hubbub has died down now.
There is also the fairly basic proposition that if the employment rate could be increased, then more Income Tax revenue would flow. Under the UK’s control, Scottish unemployment is far too high. It will take any Scottish Government time to alter that, and they may not be successful, but they could scarcely do a worse job than the UK. This perspective does not seem to occur to Unionists who remain unable to explain how countries such as Slovenia, Denmark and Malta can pay pensions.
Of course, people are entitled to ask questions about the future of an independent Scotland, although I do believe that the last few years should have amply proven that demanding answers of the future is a rather pointless exercise. However, what I do find disappointing is that far too many people see problems but are unable to envisage solutions. I have said many times before that the point of becoming a normal country is that we should not do things the way the UK does. Sadly, even the Growth Commission Report fell into this trap, and the Scottish Government does seem too willing to follow the UK economic model. But, once again I say that other countries can afford to pay better pensions than the UK, so what are they doing differently? How could Scotland change things? Increasing employment levels, encouraging immigration and even establishing a Universal Basic Income are all possibilities. At the very least, we should look to those other countries and see what it is they are doing that the UK is not.
But, of course, Income Tax is not the only source of Government revenue. Things like Corporation Tax, Capital Gains Tax, Inheritance Tax, Alcohol Duty, Petrol Duty, Road Fund Licences and a host of other things provide Governments with income. In Scotland’s case, we could even start charging England for the electricity generation we supply them with instead of having to pay them for the privilege of keeping their lights on. Unionists never seem to mention any of this, always concentrating on Income Tax which produces only a portion of revenue. After all, Norway did not become the richest country in the world by taxing its citizens’ income. I agree that we want to shift away from extracting oil, but oil is still needed at the moment, so why don’t we tax the oil companies? They pay taxes to every other nation where they drill for oil and gas, yet the UK gives them tax rebates. That is bizarre to say the least.
Again I return to my question. Instead of Unionists demanding to know how Scotland could pay a Pension, they really should ask how other nations can do it. They also need to consider why the UK Pension is so appallingly low in relation to average earnings. It is, I believe, the worst in the OECD and one of the worst in the world. If an independent Scotland could not do better, then I’d say we would have a problem. But, of course, if the Government of a normal Scotland stuck to Tory austerity measures, at least we would have the option of voting them out; something we simply cannot do at a UK level.
All of this does, as most readers will know, ignore the fact that the DWP confirmed in writing as long ago as 2014 that the UK would have an obligation to pay Pensions to anyone who had paid into the UK National Insurance scheme. I expect that this obligation would be transferred to the Scottish Government during independence negotiations, no doubt with some financial transfer being involved, very possibly on an annual payment basis. It would then be up to the Scottish Government to top up Pensions from their own resources in order to provide a decent Pension rather than the paltry sum offered by the UK.
As mentioned, it is impossible to foresee the precise details of how a Scottish economy would operate, but I would suggest that copying the UK model is very much the wrong way to go. For too long, UK citizens (sorry, we are subjects, not citizens), have been repeatedly told that taxes are bad and must be kept low. To match this, wages have been driven down, power given to employers, and the levels of poverty increased. Yet if we look across to our Nordic neighbours, we see high income, high tax and high social security economies. That’s not to say they are perfect, because no country is, but the Nordic countries always do well in the research into national happiness levels. Could that be more than a coincidence? Not that Scotland could suddenly catch up with those countries. That transition would take time, but unless we break free from Westminster control, we will never know how much we are capable of. The only thing we can be sure of is that remaining part of the UK will condemn us to high levels of unemployment and poverty, a failing economy, low wages, and one of the worst Old Age Pensions in the world. Surely we can aspire to better than that?