Polls indicate that Scots voters might choose to leave the United Kingdom on the 18th September. This has provoked weakness in the pound and a little bit in UK equities too. Authorities in the UK are having a fit of anxiety over this latest lurch downward in the long British decline and all of us here will no doubt feel some sadness if the Scots do leave. We will be particularly sad that the Scottish electorate has been led to this course of action by the outrageous lies of the nationalist leadership but there is some redeeming irony in seeing Gordon Brown, the former British Prime Minister, prominent Scot and campaigner against separation pointing out just how bare-faced these lies are. They are exactly the same lies that his Labour party has used to sway the electorate many times in the past, but perhaps Mr Brown only calls them lies when spoken by someone he disagrees with.
Nostalgia for the formerly ‘Great Britain’ aside, let’s look at the issues that matter for markets. Scotland and Wales have more in common that some imagined Celtic cultural heritage (disclosure - I am Welsh by birth and early upbringing). Both have populations that are inclined to statist and socialist views and the politics of both countries are conducted within that context. The British Labour (socialist) party is strong in both places and is the only real alternative to the nationalists. Each vies to be more socialist than the other.
The result is not a harmless version of social democracy but something more corrosive. The state is seen as the answer to most problems and the results are drearily predictable – welfare dependency on a colossal scale, poor public services where the interests of providers take precedence over those of consumers and a dearth of enterprise. These are not just my authorial assertions as many independent studies have demonstrated. State-provisioned health outcomes and educational attainment are both even worse than in England and there are entire communities that either work for government or depend in some other way on it for their livelihood. More of this death spiral is what the Scottish nationalists are promising to an increasingly avid electorate and the Welsh nationalists are paying close attention to see what lessons they can learn about grabbing their own turn soon.
All of this is currently funded by English taxpayers. The preferential transfer of money to Scotland and Wales for welfare and other government spending is a well established feature of British governance and people have become used to it as the cost of the Union. It keeps taxes on the English higher than they would otherwise be while the effect on the Scots and Welsh of all the extra spending is even worse, perpetuating the dependency trap and so stifling any chance of renewal.
A break-up would be emotionally scarring no doubt but the much touted successes of the Union are in the quite distant Imperial past while the failures are current, ongoing and directly related to the appetite for spending other people’s money that has become embedded in Scotland and Wales. The economic effects would almost certainly be positive for the bits left behind, after a relatively short period. The chance of having another left-wing government in England would be sharply reduced, so the periodic destruction of wealth that has always come with a socialist administration would not happen again. The lower taxes that would be possible would help promote enterprise and yet more wealth creation and the manifest failings of public services in England could finally be tackled by right-of-centre governments who could ignore the self-serving protests of providers that have stalled proper reforms until now.
In contrast, an independent Scotland would soon experience a horrid shock. Without support from the productive remainder of the United Kingdom, and with North Sea oil revenues in irrevocable decline it would be impossible to fund the provision of the comprehensive services promised by the nationalist party. Bond markets are not likely to provide a cheap source of funds to a new, poorly thought-out state and yet the financial needs of this avowedly socialist enterprise would be great.
Not only would the promised services themselves cost a lot of money but the Scottish apparatus of state would be too small either to administer them or provide the other parts of an independent country (embassies, a ministry of defence). More government jobs would be needed to plug the gap, which don’t create any wealth despite being given the same weight as jobs that do when GDP is counted. As a result the economic numbers might look OK for a while but the money would soon run out.
That would be Scotland’s big chance – to switch and adopt a low tax pro-business economy that would play to the Scottish latent strengths of entrepreneurship, brains and venturing. This would require some painful acknowledgements of the extent of the new Scotland’s founding lies but could nonetheless be possible when faced with an empty treasury.
Unfortunately the sense of aggrieved entitlement that comes from welfare dependency probably won’t disappear and the Scots nationalist government might then seek funding to keep going from some unsavoury sources, at the risk of becoming a Cuba with added haggis, providing vocal support and comfort to whoever its latest paymasters may be. Russia, for example needs friends and the end game could be ugly.
The market opportunity here seems to be to play the recovery that remainder of the UK should experience if the ball and chain that is Scotland is removed. There are many points that would require negotiation in a post ‘Yes to independence’ vote, some of which would be expensive for the remaining UK but the enormous benefit of not having to support a welfare-dependent Scotland (and maybe later Wales too) would outweigh these short-term one-off costs dramatically. The pound would recover, probably fast and the best bet is probably to buy long-dated out-of-the-money call options on the pound against the Euro or maybe better against the $ as there is an unrelated risk that the Euro will break up and financial contracts have previously been voided in similar circumstances.
The more likely outcome is that the Scots people will come to their senses before next Thursday and vote to remain in the Union. Change is still coming however and in the panic that has seized Westminster lately the leaders of the three older UK parties have each promised a great increase in devolved powers to Scotland. Assuming that this happens, Wales will surely insist on the same thing and this will lead to another favourable development – the de facto federalisation of the UK with taxing and spending being pushed away from the centre where they are currently concentrated to a much greater degree than in most equivalent countries. This would have many beneficial effects, most of which would result from these profligate regions having to take proper responsibility for their own affairs. Greater autonomy in money matters should lead to a greater sense of financial probity and so expose the current sorry state of affairs in Scotland and Wales. If socialism consists of spending other people’s money until it is all gone then forcing Scots and Welsh devolved parliaments to make hard choices between spending a defined sum on either welfare, road building or tax cuts should lead to a shrinking of the State’s role where it is not effective.
This would help Scotland and Wales by reducing their love of welfare which only creates more demand for it and so making it possible to re-discover the sense of self determination that was so evident in these independent-minded peoples before State provision sapped their will. It would benefit England in much the same way as would a Scottish separation but at a slower pace - no clean break, just a gradual reduction of the burden of subsidies over time. It remains to be seen whether the sensible step of creating an English parliament would then occur, which would be a further positive. The natural Conservative majority in such a body would inhibit any mad excesses of government spending, as only English MPs would vote on English matters. One can even foresee a future in which the regions of a federal UK compete with each other to lower taxes which would lead to a genuine cornucopia, not the socialist mirage of one. This would be a slower win, but a win nevertheless.
When Singapore divorced from Malaysia after an unhappy few years, they were initially gloomy about their prospects. Within a few years the free-market ethos of Singapore had started to lift it from poverty, then quickly through the middle ranks to its status today as a full-fledged first rank country. All this was gained in only fifty years, while the Malayan part still has rubbish dumps inside city limits. The outlook for the English part of Britain is brighter now than before the Scottish referendum debate started, no matter what the outcome.