This is prompted by an article yesterday in The Herald: “Coronavirus has sent Scottish economy into ‘sharp economic downturn’”
I’ll return to it later. It encouraged a look at what’s going on elsewhere in terms of economic policy responses to the pandemic, especially in smaller independent Western countries. And alongside this, it’s interesting to see what is being revealed of their intrinsic resilience.
How does Norway cope with crisis?
It’s common in Scotland to look to Norway as an example of ‘what might have been’ for our country. On 18 March, Reuters reported that the Norwegian Government had committed $8.85 billion to support the economy. However, the article reminds us that in addition Norway “can also draw from its sovereign wealth fund, the world’s largest, which had a value of $885 billion on Wednesday (18 March) …”.
In setting out its response to the crisis the Norwegian government has stated: “Norway has ample room for manoeuvre in economic policy.”
It noted: “The Norwegian sovereign wealth fund (Government Pension Fund Global – GPFG) provides a sizeable fiscal buffer. The Norwegian petroleum wealth has been transformed from natural resource wealth into financial wealth. The GPFG is now around three times the size of Norway’s mainland economy (non-oil economy). The sovereign wealth fund is designed for the long term, but in a way that makes it possible to draw on when required.”
Can Denmark cope with crisis?
When looking at how smaller Western countries are coping, perhaps Norway is not a convincing comparator, after all an independent Scotland would no longer have the opportunity to ‘transform natural resource wealth into financial wealth’ to the same extent as Norway over past decades of oil & gas production. So let’s look instead at Denmark.
What follows is from an interview with Professor Flemming Larsen, of the Center for Labor Market Research at Denmark’s Aalborg University. It was published in The Atlantic magazine.
It estimates the size of the Danish government’s intervention up to 21 March of 287 billon DKK, the equivalent of c.13 percent of the country’s GDP. (For context, it explains that in the USA this would equate to an intervention of the order of c.$2.5 trillion.)
Moreover Larsen notes: “.. today, the Danish economy is extremely strong. We have a huge surplus. We have a negative interest rate. There is a lot of public savings. So there is a lot of room to do this now.”
And he adds: “I have to say that the decision-making process in Denmark has been very extraordinary. We have 10 parties in Parliament. From the very left-wing to the really, really right-wing. And they all agree. There is nearly 100 percent consensus about this. And that’s really amazing. People are convinced that it’s wise to do this now.”
It is also notable how Denmark, a country of c. 5.7 million people and even without a Norway-style wealth fund, is not just economically (and politically) resilient. This is from an OECD assessment of Denmark’s national health care system:
“Health spending in Denmark is higher than in most other EU countries: in 2017, Denmark spent 10.1 % of its GDP on health, above the EU average (9.8 %), but a lower share than in other Nordic countries like Sweden and Norway .… Spending per person was also higher than the EU average …. (adjusted for differences in purchasing power).”
And importantly the OECD report adds: “Public spending on health is high, but long-term fiscal sustainability is not threatened.”
Source: OECD (2019) State of Health in the EU – Denmark: Country Health Profile.
Too wee, too poor, too stupid? Certainly not Denmark – even without a sovereign wealth fund!
Scotland’s ‘sharp downturn’ in crisis – the rest of the story
So to return to the start, The Herald and its piece headlined: “Coronavirus has sent Scottish economy into ‘sharp economic downturn’”. This is based on recent output from the Fraser of Allander Institute (FOAI):
Source: Fraser of Allander Institute (2020) Economic Commentary Vol 44 No 1 – Coronavirus Special Edition.
Although the pandemic will undoubtedly be having a very serious impact on Scotland’s economy, it perhaps comes as no surprise to find that the FOAI tells us some other things of value for CONTEXT that are not reported by The Herald!
Firstly, to state the obvious perhaps, Scotland’s economy is neither only or uniquely affected. In the Foreword to the FOAI report John Macintosh, Tax Partner at Deloitte, writes: “COVID-19 is a truly global crisis and its economic implications will be felt by all. Businesses across Scotland, the UK, and the rest of the world are, for one of the first times in history, facing many of the same challenges.”
Picking up on the theme of resilience, the FOAI report asks: “One immediate question is how resilient is our economy to coping with a downturn (and possibly a severe downturn)?” Notably it offers this assurance omitted by The Herald: “…. we have A STRONG AND ROBUST ECONOMY IN SCOTLAND ..”
And then there is this: “During the latest of Deloitte’s weekly ‘Responding to COVID-19’ webinars on 19 March, which was joined by c.4,000 people from businesses and other organisations, almost three-quarters of participants expected activity to come back in the second half of this year.”
It goes on (with my emphasis): “But that could imply a short, sharp hit to activity with a RECOVERY THIS SUMMER OR A MORE PROTRACTED SLUMP AND A RECOVERY IN THE WINTER MONTHS. The Fraser comments suggest that THEY SEE THE PROTRACTED SLUMP as a more realistic assessment at this stage.”
So this appears to indicate that a recovery in the ‘winter months’ is (more) realistic by what is a ‘strong and robust’ Scottish economy. This context is also absent from The Herald’s piece: too much positivity?
Why we are where we are
However in making further, sensible, cautionary statements about economic recovery, the FOAI report helpfully reminds us of the conditions under which Scotland’s economy has been operating in the lead up to the pandemic. Again I’ll add this to give context that The Herald omitted:
“The crisis comes on the back of THREE AND A HALF YEARS OF BREXIT UNCERTAINTY, which has STALLED INVESTMENT and ERODED CONFIDENCE. UK growth in 2019 was just 1.4%, the slowest rate of growth since the financial crisis.”
“… unlike recoveries from previous recessions, the performance of both the Scottish and UK economies since the 2008-09 financial crisis has been – at best – weak. Flatlining productivity, coupled with A PERIOD OF AUSTERITY, has led to a decade of fragile growth.”
And finally, important questions arise
It is perfectly legitimate for us in Scotland to pose certain questions:
- who was responsible for Brexit and its damaging uncertainty?
- who has been responsible for monetary policy under which Scotland’s economy has had to operate?
- who has been responsible for the bulk of fiscal policy under which Scotland’s economy has had to operate?
- who’s political choice was it to impose austerity?
- who has been responsible for labour market and employment policies under which Scotland’s economy has had to operate?
In short, who holds the levers of power over Scotland’s economy? The questions are all too easy to answer – and where responsibility lies is self-evident!