Scotland's Constitution Is Not the Problem

By RUTH PORTER

To hear First Minister Alex Salmond tell it, gaining independence from the U.K. is the most pressing issue facing Scots. But a look at the state of the Scottish economy, with public spending totaling more than 55% of GDP, reveals an unsustainably large public sector. This not only drags on the private economy. It also makes it hard to imagine how the Scottish state could ever survive if sundered from subsidies from other U.K. taxpayers.

Today, a quarter of people in Scotland are directly employed in public service. This compares to 20% in England, though it's still well under Northern Ireland's near-Greek 29%. But that's before we count Scotland's large, effective secondary public-sector market, made up of everything from public-relations firms to construction companies.

Many of these businesses are entirely dependent state contracts for their revenue, though it's difficult to estimate just how many. Once we've excluded all these technically private but state-dependent firms, what is left of Scotland's real economy is a small amount of manufacturing, some tourism, bailed-out financial firms and subsidized energy production. This is not enough for a thriving economy to stand on its own.

But rather than addressing Scots' dependency problems, Mr. Salmond would prefer to be sidetracked by how he might win a potential independence referendum. His counterparts elsewhere in the U.K. aren't helping, either. Labour Party leader Ed Miliband recently called for an increase in the size of the public sector throughout the U.K. as a means of solving unemployment problems.

Such solutions will only make the problem worse, by further crowding out the private-sector activity necessary for a sustainable economy. Mr. Miliband's generations-old ideas about stimulating an economy from the top are at least in part how the U.K. wound with unsustainable government spending and ballooning debts in the first place.

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Scotland's First Minister Alex Salmond.

Scotland has in part gotten away with its imbalance through the current incarnation of the Barnett Formula, the mechanism by which the U.K. Treasury calculates its allocations to Northern Ireland, Scotland and Wales. According to the latest figures, the average Scot has roughly £1,600 more spent on him per year than his average counterpart in England. Public spending in Scotland is equivalent to 10% of the U.K.'s total GDP, though Scotland has only 8% of total U.K. population.

Defenders of the system often argue that Scotland could independently afford its imbalances thanks to North Sea oil revenues. But North Sea oil is not limitless, and as current events elsewhere in Europe demonstrate, not even governments can spend beyond their means indefinitely.

Recent research by the Institute of Economic Affairs shows that if Scotland were to take on a share of the U.K.'s national debt based on the proportion of public-sector spending that it receives, it would owe roughly £110 billion—substantially more than the £93 billion it would owe based on population.

Of course, many factors would need to be considered in splitting up the national debt if Scotland did win independence from the U.K. But before getting there, Scots might consider their economy's overdependence on the state, and the consequences their leaders have incurred for their irresponsible attitude toward spending. One cannot help but wonder what Scotland—independent or not—could be if the forces of vibrant private enterprise were unleashed in it.

Industry of any kind will not and cannot thrive with so many of Scotland's best people and industries laboring on taxpayers' money. Empowering profitable businesses and productive workers would mean ending their reliance on government contracts. It would also mean getting the state out of their way, so that these businesses and workers could compete to provide services currently administered by the government. Scottish education, for example, could see important innovations if only the state would allow private, for-profit players to enter the marketplace.

Scotland is hardly alone in its need to move from dependency to enterprise. It is an enduring issue in regions throughout the U.K. and elsewhere in Europe. But Scotland's size and current level of autonomy should give it distinct advantages were its leaders ever to try seriously to turn their economy around. Scotland's story hinges far less on its constitutional future than on its leaders' ability to restore some semblance of balance between public and private enterprise.

Mrs. Porter is communications director at London's Institute of Economic Affairs.