Florida Versus Spain Versus Scotland

In a recent post Paul Krugman contrasts Florida and Spain to illustrate the point that optimal currency areas are

much more likely to be workable if you have fiscal federalism, so that there are large automatic transfers to depressed regions. Now, I often compare Spain with Florida: both had huge housing bubbles followed by busts. Florida, however, has its retirement and much of its health care paid for from Washington. .... (In the recession) ... Florida received what amounted to an annual transfer from Washington of $31 billion plus, or more than 4 percent of state GDP. That's a transfer, not a loan. And it's very big. ... Aid on that scale is inconceivable in Europe as currently constituted.

Yet aid on that scale does exist within Europe but within fiscally integrated nation states such as Britain. Scotland is a case in point. Using the GERS data we see the following change in the tax receipts Scotland paid to the UK Treasury and the change in public spending in Scotland during the recession - 2007-08 to 2009-10

In the recent Great Recession Scottish tax receipts fell by £2.8 billion in the recession if North Sea Oil revenues are excluded. If the change in North Sea Oil revenues are added in the deterioration in tax receipts was worse with revenues falling by £4bn.

Yet, not only did Scottish residents retain the same level of public benefits they actually rose by £5.9 billion. This includes an increase in social protection payments by £3 billion and a rise in health spending by under £1 billion - all in nominal terms.

The total benefit to Scotland of fiscal integration with the UK during the recession amounts to 7.6 per cent of GDP ex oil and 7 per cent of GDP including oil. This is substantially bigger than Florida's fiscal integration with the US Federal government as Florida's fiscal integration is much bigger than that of Spain with the EU and Eurozone.

Supporters of Scottish independence will argue that when a geographical share of oil is included Scotland's deficit would have been slightly less than the UK in 2009 -2010 at -10.6% compared to -11.1% in the UK.

But that is not the issue.

The key question is whether an independent Scotland using sterling would have been able to borrow to fund the rise in its deficit during the recession. Would it have experienced the difficulties of Spain or the ease of the UK?

I leave it to the reader to judge.

Comments

[Ian Jenkins]

The blog mischievously assumes that Scotland will need aid.

The way current economics are going the whole Western world will need aid in the next few years as the pendulum swings back and wealth returns to the once rich and powerful east. Some [much of the G20 and 'Wall Street'] say let it, and suffer the huge political unrest. Some say print more money [eg QE] and encourage inflation until the structural problem with the global economy is fixed. This is a well tested practice - didn't the Romans debase their coinage in a vain attempt to hold onto the empire? Certainly Germany tried this in the 1920's - and look where it led. [see http://www.scottisheconomywatch.com/brian-ashcrofts-scottish/2012/03/mr-salmonds-fiscal-plan.html "In a recent book, the Economist's Philip Coggan refers to the inflationary policies introduced by the government of Germany in the 1920's. . ."]

Others appeal for the short-term fix of a debt jubilee [write-off of unrepayable debt] - which has been calculated for the US and Europe at many trillions of dollars, pounds and euros.

Unfortunately there is little interest in restructuring the economic system to make it sustainable, with the international enforcement of new rules. This would require nations to cede some sovereignty - but Washington for starters is unlikely to OK this; although former chair of the US Federal Reserve, Paul Volcker, says "We are left with the certainty, however awkward, that active participation in an open world economy requires some surrender of economic sovereignty."

Politics loses.