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The SNP claim an independent Scotland would be like a post-Soviet republic

By Mark Wallace
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The Scottish independence referendum may be a way off yet, but the headlines war has already begun.

The Herald and the Scotsman today report perhaps the most bizarre SNP claim so far: that an independent Scotland would be economically comparable to the newly freed ex-communist countries of Eastern Europe in the early 1990s.

The story has two major problems. 

First is the idea that Scotland is inherently as attractive to overseas investors as Estonia was when it regained its independence from the Soviets. Just pointing at other countries that became independent once then did well isn't enough - context is everything.

A major element of that is the unexploited potential of the country in question. The ex-SovBloc nations had laboured under a controlling, choking political system which repressed their growth and development. They were impoverished by the huge quantities of private property and industry seized by the state, the repression of profit-making business and practical and legal barriers to trade and investment.

It's absurd to compare the UK and communism - leaving that aside, do the SNP really think Scotland lags as far behind the rest of the world as Estonia, Latvia and Lithuania did when they slipped the Soviet yoke? The report casts it as an advantage that "Scotland already has a developed market economy" - but if anything that's a demonstration that the potential, and therefore the attractiveness to investors, is very different to that of the Baltic Tigers.

The second problem is that investor appeal doesn't just rest on potential. It rests on the willingness of a country's government to introduce reforms where they are necessary. Would an SNP government really be willing to put Scotland in a super-competitive position?

There's a lot of talk in the articles about independence making Scotland more outward-facing on trade. That would be a good idea (for the UK as a whole, too) but it is the EU, not the UK, which places barriers in the way of trade with the majority of the world - and the SNP remain enthusiasts for EU membership. It is similarly hard to see a newly independent Scotland rejecting protectionism if a home industry was threatened by imports.

The size of a state, particularly in this age of sovereign debt crises, is a key indicator for investors. The public sector is estimated to make up the outright majority of the Scottish economy. According to Taxpayer Scotland, the nation's deficit is running at over 13% of GDP. Given Alex Salmond's criticism of the "Westminster cuts", would he be willing to take on the responsibility of implementing bigger cuts himself? Count in the fact the Scottish budget is subsidised by England through the Barnett Formula, and he'd have to ensure his axe was extremely sharp.

Finally, we have taxes. The one sign Alex Salmond has given of the SNP offering any prospect of an internationally competitive Scotland is in his comments about cutting tax. Lower taxes than the rest of the UK would indeed catch the eye of investors, though he'd still need to keep on top of the country's deficit and big state before their effects kicked in. Even then, to match Estonia's performance he'd have to be up for truly radical flat taxation - something he shows no inclination to do.

So, the central assumption of this new report is flawed - if Scotland was to become independent, the words "newly independent" are all it would have in common with the post-Soviet republics. The boom among the Baltic Tigers was due to the regime they escaped and their willingness to change - not the simple fact they'd changed their constitutional arrangements. The First Minister is living up to his nickname in the Scottish press: Alex in Wonderland.

Taxes are perhaps the only vaguely plausible point on which Salmond might be able to show a competitiveness benefit being out rather than in. The answer for unionists should surely be to give Holyrood tax setting powers in return for an end to the Barnett subsidies - that way the only politically acceptable economic lever of value that could be gained with independence would be on offer within the UK, too.