Caledonian cub looks to Celtic Tiger for stimulus

The Celtic Tiger has a playmate, a Caledonian cub

The Celtic Tiger has a playmate, a Caledonian cub. Already well developed, it has been raised in captivity and is now facing a future where it will have to take more responsibility for itself. Should it make a break for freedom? And if it did, how could it survive and thrive?

With a debate over independence having moved this year to the centre ground of Scottish political debate, those are the searching questions which make it look increasingly to Ireland's newfound and glowing reputation as a purring, economic great cat to get some sense of where Scotland could soon be going.

Of course, looking across the North Channel to the Republic is nothing new for Scots. A generation during which it has seen a strong growth in its sense of national identity has seen it look to Ireland's support of its traditional culture and language for inspiration. And over that time, as both countries have sought to attract jobs from multinational inward investors, the two have been locked in often less than playful combat.

In that, Scotland has been often proved equal to Ireland, as a result of which it, too, has an economy which is heavily dependent on foreign companies, boasting its own Silicon Glen. Indeed, there is little dispute that it is too dependent, illustrated by 8,000 recent job losses in the high-tech multinational sector.

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But the lesson now being sought from Dublin is where economics meets politics. And the intense sense of gloom enveloping the UK economy in recent weeks has made that mix a particularly potent one.

At issue is whether the parliament Scotland will have next May, the first in Edinburgh for nearly 300 years, will live up to high expectations. In legislation soon to complete its path through Westminster, Tony Blair's government has given the legislature power to look after plenty of domestic issues, such as education, health and housing.

But its tax-raising powers are very limited. The referendum last September asked not only if Scots wanted a parliament, but also if they wanted it to have tax-varying powers of three pence in the pound.

Voters emphatically said Yes to both, meaning that the 129 parliamentarians could raise (or improbably lower) the basic rate. That would raise up to £450 million sterling, adding to the £14 billion block grant it can expect from London.

But is that enough to make a difference? Are these, as claimed by Mr Blair's Scottish lieutenant, Donald Dewar, grown-up powers for a grown-up parliament? Or will it be merely a glorified local council, blaming London when it cannot afford what it wants?

Can a Scottish parliament meet the expectations built up for it, if it can only change spending at the margins, can do nothing to redistribute and could therefore be left with little left to do except regulate, interfere and disappoint?

The Scottish National Party hopes not, and that the frustrations of these limited powers can work to its advantage. It has only six out of 72 Westminster seats, but has surged in polls this year to a position of roughly level pegging with the ruling Labour Party.

The party has set out on a dualtrack policy for running an administration in Edinburgh, which is aimed at giving Scots confidence in their ability to run their own affairs, but also to show how much better things could be if the parliament were independent of Westminster.

Which is where Ireland comes in. Alex Salmond, the 44-year-old economist who leads the SNP, has been hard at work steering his left-of-centre party towards a business-friendly position, and a crucial element of that has been to cite the Celtic tiger example to show what a small country can do within Europe.

In an independent Scotland, he wants to lower corporation tax selectively to attract inward investment, both to reverse the drain of corporate headquarters out of Scotland and to attract inward investment.

Started during summer, the move caused a bizarre debate in Scottish politics, as politicians grappled with the Laffer Curve, that economic diagram which shows how a cut in tax rates can lead to an increase in tax revenue, and which allowed a nostalgic return to the heady "voodoo economics" of the Reagan years in the US, where Laffer's theory led to a staggeringly large government deficit.

The key to the debate about preserving or severing the union of Scotland and the rest of the UK centres on whether it can, or has the confidence to, go it alone economically, with threats - so far unrealised - that English-based firms will run for safety, and that Scotland will lose the relatively generous allocation of public funds.

One of the changed dynamics in the Scottish debate is that Scotland is no longer England's poor relation. Its nationalist cause can no longer afford to rely on the sense of economic deprivation which allowed it to grow from its roots in the 1930s and take flower from the 1960s. Wales now lags significantly behind Scotland in its income per head, as do northern English regions.

What nationalists now have to argue is that Scotland should have the confidence to cut free from the burden of the rest of the UK, with a more successful education system, more export orientation, its offshore oil industry developing west of Shetland and a strong potential for developing technology sectors, if only it could improve its woeful business start-up rate.

So there is much analysis of how much Ireland's success can be replicated, or whether unique circumstances have been responsible for the Republic's boom times.

It is easily, though inaccurately, dismissed as the result of generous European funding; an argument largely and paradoxically from the same Conservatives who are most hostile to Europe and to subsidy.

While Scotland does have an education system and flexible workforce to impress inward investors, does it crucially lack the demographic boom of young people? And is it simply too developed and industrialised already to achieve high growth rates, whereas Ireland has shifted significantly from a low-income, rurally-based economy.

How significant is it, Scots ask, that so many Irish people are returning home? And could Scotland expect a similar effect from its own diaspora? Indeed, would it want one?

The nationalist plan is to enter the EU and its currency after splitting from the UK, something that no other country within the Union has tried. But what has not yet been learned from Ireland is what the "independence in Europe" slogan actually means in practice.

How much autonomy could there be within the European currency regime? Is Frankfurt likely to be any more sensitive to Scottish economic concerns than London?

The arrival of the euro in Ireland will be closely watched from Scotland, and not only to gauge the cost of a Dublin stag night.