JEREMY PEAT

We continue to teeter along in the midst of deep uncertainties. Aggregate UK growth is holding up, but appears patchy. The sharp depreciation of sterling is helping exporters and encouraging international tourists and domestic ‘staycations’. Meanwhile investment is very subdued, while the consumer is carrying on almost regardless. However, the impacts we are seeing on our economy now are those of the post-referendum uncertainties rather than of BREXIT per se, or even anticipation of a known BREXIT outcome.

Indeed we still do not know what BREXIT will mean for the UK as a whole let alone Scotland. But there are hints that the UK Government might accept a deal involving damaging limitations on the UK’s access to the single market, in order to ensure the firming up of borders so that the UK is not subject to unconstrained immigration from Europe.

That trade off may suit some English politicians but is unlikely to find favour with their Scottish counterparts or indeed those whose prime interest is in Scotland’s economic prospects. To the latter more(particularly skilled) immigration may help to re-balance an ageing population, and raise growth and productivity levels; while constraints on single market access would not only inhibit our exporters but also severely limit the prospects of a continuing strong inward investment performance.

The potential ‘hard BREXIT’ option which is emerging from Prime Minister Theresa May’s deliberations provides further grounds for seeking an alternative route for Scotland. However, going it alone would appear likely to lead to even greater problems than staying in the EU outwith the UK. Maintaining sterling as our currency while Scotland headed for the EU as the rest of the UK exited would not be feasible. That would imply either early adoption of the euro or creation of a new currency as a transition stage towards euro adoption.

Operating with a different currency than the rest of the UK would generate exchange rate uncertainties and be likely to damage seriously Scotland’s trade and wider economic relations with rUK – which constitutes (like it or not) far and away Scotland’s biggest trading partner and strongest economic relationship. Further, establishing a new currency and heading towards the euro would be very tough in terms of economic and financial governance – including monetary and fiscal policies. (And that is ignoring the prospect of a hard border to fit in with the English policy of strict immigration controls.)

Higher interest rates, to support a new currency, would be bad for consumers and business – and the Government finances; and we already know from the Government’s latest paper on Expenditure and Revenues how wide the fiscal gap is now and how constrained expenditures will be going forward. More will be revealed next week in the Fraser of Allander Institute’s first Scottish ‘Green Budget’. That is most welcome as a major contribution to the informed debate, but will make for painful reading within and outwith Government circles. Managing the Government finances is going to involve a range of tough decisions even within the existing context.

So is there any alternative scenario whereby Scotland can retain some crucial links with the EU whilst remaining within the UK? The answer appears to be maybe, just maybe – but very difficult to achieve. Flanders is cited as an example of a sub-unit of a nation with full external powers in the context of internal competences; and with its own relationship with the EU. Clearly the UK is much less of a federal entity than Belgium. But maybe there is some way to help safeguard some Scottish sectors. Making progress would be contingent upon remarkable good will from both the UK and the EU. However, the alternatives are so unattractive that seeking some another solution, however unlikely, must merit some effort. At the very least Scotland’s voice needs to be heard loud and clear by the UK government as it prepares for battle and also by the EU Commission and member states as tough negotiations get underway.

Meantime Scotland must get on with managing its economic and financial policies and prospects as effectively as is feasible within this uncertain world. ‘Economic Governance’ may sound incredibly dreary as a topic for debate. In fact it is incredibly important – especially in this uncertain world, with the extent of devolution increasing markedly, and all within a still evolving constitutional framework in Scotland. It is by no means clear that we have the information flows, the objective analysis or the checks and balances that the post-Calman and post-Smith world demands.

That is why it is really to be welcomed that a conference is to be held at Strathclyde next Monday, to thrash out governance issues. This is bringing together key players from Parliament and its auditors, as well as the likes of David Bell, Paul Johnson (Director of the UK’s Institute for Fiscal Studies) and Graeme Roy (Director of the Fraser of Allander Institute); not to mention top political scientists and informed observers.

The very next day the FAI will be combining with the IFS to present the Scottish Green Budget referred to earlier. Both events should work towards the most desirable end of generating a more effective and informed environment within which Scotland’s economic and financial policy decisions can be made.

However uncertain the future we must strive to make the best of what we have.

Jeremy Peat is visiting professor at the University of Strathclyde International Public Policy Institute