What Sturgeon’s Fall Means For Your Money

Welcome to Money DistilledJohn Stepek. Every week day I look at the biggest developments in the world of markets and economics, and explain exactly what it all means for your money.

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What Sturgeon’s fall means for your money

Don’t miss: there’s a special edition of Merryn Talks Money out tomorrow, all about your favourite topic, the housing market. Merryn and I had a chat with Bloomberg’s Neil Callanan — all I’ll say right now is, if you think I’m bearish, wait ‘til you hear Neil…! Subscribe at Apple or Spotify (or wherever you get your podcasts) so you don’t miss it. I’ll also send round the link in tomorrow’s newsletter. Meanwhile, make sure you don’t miss the current podcast, where GMO’s Ben Inker talks value stocks, crypto and “growth traps” with Merryn.  

Nicola Sturgeon has handed in her notice as the First Minister of Scotland. 

You can read the political obituaries elsewhere. But the one common (and unsurprising) thread that ran through her premiership was the campaign for independence. 

So now she’s off, where does that leave the independence cause, and in turn, what does that mean for your money as either a Scotland-based taxpayer or someone in the rest of the UK? 

Two Big Independence Hurdles

There are entirely valid arguments both for and against Scottish independence. Not everything is about economics. 

But economics is important. It’s the focus of this particular newsletter. And the reality is that the economic challenges facing an independent Scotland are formidable. You can sum them up in two main points.

One, Scotland as it is currently governed spends a lot more than it earns. The country’s annual deficit (the gap between the tax take and actual spending) is currently around 12% of GDP, compared to 6% for the UK as a whole. All of that is distorted by Covid, but the gap was similarly extensive from 2014 to 2019, averaging 9.2% versus 3.1% for the UK as a whole, according to a 2022 paper from the Economics Observatory think tank.

Two, the currency question. If an independent Scotland uses sterling, then it is importing monetary policy from the rest of the UK. Like it or not, that means leaving a powerful policy tool in the hands of another nation. In some ways, it’s like being a small euro-zone country, except you don’t even have a theoretical seat at the decision-making table. 

The alternatives are to embrace the complexity and uncertainty of setting up an entirely new currency (a prospect guaranteed to unnerve voters), or to make a plan to join the euro (which means that deficit is even more of a problem).  

So an independent Scotland would have to consider what to do about its currency, and it would have to consider how to cut the deficit. Both of these would realistically involve some drastic changes in the country’s business model and a fair bit of economic upheaval along the way.   

Now, since 2014, under Nicola Sturgeon, it’s hard to argue that much progress has been made in providing concrete answers to either of these problems. Support for independence overall has not definitively or clearly changed from being a significant minority, rather than majority, of eligible voters during that time. 

Moreover, polls imply that the impetus for independence which (I think it’s fair to argue) probably peaked under Boris Johnson and during the Brexit political battles, has waned somewhat. 

A Focus Shift

As my colleague Lizzy put it on Bloomberg TV this morning, if Sturgeon (who if nothing else, was a strong figurehead for the independence movement) can’t make it happen, and under what were particularly ripe political conditions, then who can?   

This changes the political calculus quite significantly. All else being equal, it makes independence less likely. There is no obvious successor to Sturgeon, which in turn suggests that the SNP’s appeal as a party will be weakened and that the independence campaign might even splinter between various other parties.  

If you throw in the fact that the current Conservative government is struggling, and Labour looks like a serious political force again, then you have a recipe for a shift of political focus in Scotland.   

How that will manifest itself is the tricky question. As a devolved nation, Scotland has substantial tax-tinkering powers already. In my view, a sensible approach for any party, unionist or pro-independence, would be to focus on what can be done to improve the lot of Scotland’s residents by making the maximum use of existing powers as opposed to always fruitlessly agitating for more.

Having been in the wilderness for so long, you could argue that both Scottish Labour and Scottish Conservatives can afford to cut intellectual and tribal ties with their parent parties and campaign on far more local issues. And for pro-independence parties, in the longer term, a more successful Scotland within the union would help to build the case for independence.

The thing is, Scotland already has significantly higher taxes than the rest of the UK. We haven’t seen a brain drain yet, but it’s early days. We won’t know the direction of travel until we’ve seen who takes over from Sturgeon — but raising taxes further would be a BRAVE decision given how porous the border is

What About The Rest of The UK?

The main impact for the rest of the UK is that this makes a Labour government more likely, because future seats lost by the SNP are quite likely to have been won from Labour in the first place.

It’s a little bit early to be speculating as to what a Labour victory at the next election would mean for your personal finances. Neither of the main UK parties right now are exactly campaigning on a “small government, low tax” platform. But it’s hardly going to be controversial to suspect that a Labour government would be a bit more inclined to raise taxes, or introduce new ones, or reduce allowances. 

It already makes sense to use as much of your pension and Isa allowances each year as you can afford to. I’d just reiterate that message — use it while you’ve got it. 

And on the off chance, if you’re already an experienced property investor, perhaps homes up near the border, designed for tax-efficient commuting, might be an opportunity worth investigating?    

Did a friend or colleague forward this to you? You have good taste in friends. Meanwhile, please subscribe under your own name so you can get future editions direct to your inbox — sign up here

What I’ve been reading this morning

• 300 years of high-quality financial advice, and where has it got us? Merryn asks why we’re not all rich already.
• The world’s most hated banks are bouncing: European banks are finally having their day in the sun, writes Marc Rubinstein
• The emerging market comeback: John Authers looks at how a weaker dollar and a stronger China have been great news for beleaguered emerging market stocks. 
• Barclays is being unfairly punished by investors: Paul J Davies reckons the bank is worth another look after its share price took a hammering yesterday. 

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