A PRETENDYREF IS THE LAST THING SMALL AND MEDIUM BUSINESSES NEED

Supply chain inflation is here to stay and it proves scexit offers no economic solutions to the central long term challenge the Scottish economy faces

Jul 3, 2022

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Supply chain inflation is pushing businesses to the brink, even before facing off against a wage inflationary squeeze. The cost of doing business for small and medium sized enterprises (SMEs) is getting harder, and these constitute the engines of our economy. Amid this level of economic dislocation, any notion that now is the time to focus on the constitution is reckless and irresponsible beyond words.

Most people realise inflation is bad, we can all see our energy bills going up, and the spiralling cost of weekly shopping baskets. But the sheer scale of the inflationary nightmare engulfing our economy is not properly understood. If it were, nobody would be putting up with talk of ‘de facto referendums’ or ‘pretendyrefs’.

To illustrate the challenges the UK and Scottish economy is venturing through right now, let’s talk about inflation intelligibly. Typically most people panic when confronted by the jargon of economics, but there really is no need. Let us focus on producer inflation, and stay with me.

Producer price inflation tells us about changes in the prices of goods bought and sold by UK manufacturers. This including price indices of materials and fuels purchased (input prices) and factory gate prices (output prices).

The Input price inflation measures changes in the prices of materials and fuels bought by UK manufacturers for processing (input prices). Whereas the output prices tells us price inflation changes in the prices of products as they “leave the factory gate”. That is to say, before being sent to wholesalers and retailers.

So producer price inflation (input) can tell us about the cost businesses face for actually providing goods and services. The producer price inflation (output) can help us understand the profit margins that businesses make on their products.

With all that in mind, one thing is clear: supply chain chaos caused by lockdown and brexit are undoubtedly driving up input inflation businesses face. Worse still, if we compare the input with the output inflation producers are facing, we can see things are going to get much much worse. And this is all ignoring the waves of wage inflationary pressures inevitably about to strike too.

The Office for National Statistics (ONS) reveals as of May 2022 that producer price inflation (input) rose to a whopping 22.1%. To put that in historical context, it is the the highest the rate has been since records began in January 1985

This alone tells us that supply chain disruption is a key inflationary driver undermining our economy. That input price inflation for producers is comfortably over 20% underscores what SMEs have been screaming about for months.

Furthermore, the producer price inflation (output) is recorded at a lower (but still high) 15.7%. And this divergence between the input and output inflationary costs are significant. Not least since it tells us that Scottish and British SMEs are being brutally squeezed right now.

Yes, it is true that big companies enjoying economies of scale are assuredly exploiting the current situation to jack up prices more than the inflationary costs for producing their products require; but this is not true for our SMEs.

The input costs faced by UK producers is comfortably over 20%, yet the prices of their products as they leave the ‘factory gate’ is only a little over 15%. This means the profit margins for smaller to medium sizes businesses is being pulverised right now. It also means we can all likely expect further rises in prices across the board as businesses look to stabilise their profit margins as things get worse.

And they will get worse, as I repeat, none of this accounts for the waves of inflation approaching which will be driven by wage-inflation.

Thus this brings us to a central question: does anyone believe that now is the time to debate the constitution? If your answer is ‘yes’, on the basis you believe independence can give Scotland the ‘levers’ to better battle this economic nightmare you need to rethink. Independence for Scotland at an economic time like this would only create further supply chain disruptions, worsening the inflationary costs for doing businesses our SMEs face. It does not make sense at a time like this to repeat the economic harm of brexit legacy disruption and dislocation by piling on top of all that the much worse scexit legacy harms.

Even members of the First Minister’s council of economic advisers is warning that scexit is likely to repeat the economic harms caused by brexit, only multifold. Professor Mark Blyth, professor of international economics at the Watson Institute of Brown University in Rhode Island, warned last year that

It [the Union] has been together for over 300 years. So, if pulling apart 30 years of economic integration with Europe is going to hurt, 300 is going to hurt a lot.
That means one of two things. Either you have brass-plate independence — you declare independence, you get a vote, but nothing really changes, you put up some brass plates in Edinburgh, and nothing really changes, you keep the pound and all that stuff.
“Or you go for regulatory divergence — different currency, different economic policy, etc, which will entail significant short to medium-term costs. There’s no way around that. We know that because it’s Brexit times ten.”
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Nicola Sturgeon’s economic advisor warned about economic dangers of scexit. Current supply chain inflation gives us a concrete example of what he meant

Brexit times ten. If you think that that represents the correct economic response as inflation ripples across Scottish businesses then you are guilty of ideological possession and are not interested in grappling with reality.

SMEs account for over half of UK output and two-thirds of all jobs, so none of this is a theoretical debate about economic theories. Scexit means divergence, barriers to trade, increased costs of doing business between Scotland and out largest export market (rest of the UK)

. All of this and much more means huge new disruptions to established Scottish supply chains if we opted for independence. And all at a time when producer price inflation is already threatening our small to medium size businesses - which are the engine of our economy and vital for jobs and employment.

The Scottish Government needs to understand - and as a matter of urgency - that producer price inflation is significantly worse than current headlines they are hearing as they sink into their ministerial limousines.

As the economist and journalist Liam Halligan explains British politicians must

“also grasp that while some major corporates are deliberately price gouging, taking advantage of inflation, our SMEs – collectively far more important, both economically and politically – are disproportionately suffering.”
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The current economic crisis should serve as a wakeup call to anyone who persists in the belief that independence is a sensible answer to the current economic challenges Scottish businesses face. It does not, and the inflationary crisis proves it. The supply chain inflationary pressures are not a flash-in-the-pan crisis, it’s a long term challenge. An independence referendum ought to be the last thing on Nicola Sturgeon’s mind.

ONS (2022, 22 June), ‘ Producer price inflation, UK: May 2022’, Office for National Statistics, https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/producerpriceinflation/may2022

McCann, David (2021, 6 Sept) ‘Leaving Union would be Brexit times ten, says Sturgeon adviser’, The Times, https://www.thetimes.co.uk/article/leaving-union-would-be-brexit-times-ten-says-sturgeon-adviser-xvrv8grcc

ScotGov (2021, 9 Dec), ‘Export statistics Scotland: 2019’, https://www.gov.scot/publications/export-statistics-scotland-2019/#:~:text=Scotland's%20Exports%20in%202019&text=Since%202010%2C%20Scotland's%20international%20exports,%C2%A318.7%20billion%20in%202019.

Halligan, Liam (2022, 3 July), ‘Cost of living tsar’s tin-eared plans are a slap in the face for business’, The Telegraph,https://www.telegraph.co.uk/business/2022/07/03/cost-living-tsars-tin-eared-plans-slap-face-business/