Iain Macwhirter: The Union cannot survive the impending post-pandemic financial cataclysm

UK debt will rise to £2.8 trillion – that’s nearly £ 1 trillion more than at the budget in 2019. Unemployment is expected to rise to 7.6 per cent, or 2.7 million at a conservative estimate. In reality, it is likely to rise to over three million, much of it disguised, as workless people in their 50s and 60s drop out of the labour market entirely.

And none of this includes Brexit. The Chancellor didn’t mention the B word in his spending review, even though the independent Office for Budgetary Responsibility said very clearly that a bad deal could make the financial situation considerably worse.Borrowing on this scale is only possible because of two contingent factors: uniquely low interest rates and the printing of money.

The Bank of England is busy buying up Government debt with phoney funds – a total of £900bn has been printed so far. Quantitative easing serves to boost inflation. It also makes the rich richer because it inflates asset prices like big houses and boosts the value of shares, making inequality worse.

It hardly needs to be said that this can’t go on indefinitely. That many EU countries are in an even worse state is little consolation. We are returning to the kind of wretched economic circumstances last seen in the 1980s. Margaret Thatcher’s recessions then led to violent confrontation with the unions and to the destruction of much of Scotland’s manufacturing industry.

You can’t have mass unemployment without political upheaval. The 1980s was the moment Scottish voters finally abandoned the Conservative and Unionist Party, which had dominated Scotland in the post-war period. This time a similar break is likely – only a more profound one, as the Union itself comes under unbearable strain.

This Covid shock comes after a decade in which real wages in the UK stagnated. Many people are going to get poorer – which explains two of the more cynical measures in Rishi Sunak’s spending review.

Why bother lopping 2% off the aid budget? This is a drop in the bucket, but sends a grim message to the world about Britain’s geopolitical standing. And why freeze public-sector pay? That only saves a paltry £1bn and there is an argument that pay should be kept bouyant as one of the stabilisers against recession? These moves had very little to do with fiscal policy or deficit reduction and were largely about politics. Many working-class voters think it is crazy to spend £14bn on foreign aid – more than was paid to the EU before Brexit – when Britain is in deep financial trouble. It doesn’t help that some of this money goes to countries like Pakistan and China which have little regard for Britain.

According to a Savanta/ComRes poll nearly two-thirds of voters support the Chancellor’s aid cut of £2.9bn.

Similarly, the vast majority – 80% – of British workers who are in the private sector are seeing wages slashed and jobs disappearing. Public-sector employees earn more, have better job security and generous pensions. A pay rise in the middle of the Covid crisis would have seemed unfair to many of the Government’s new supporters in the north of England. According to Savanta/ComRes, 44% of UK voters support the freeze, 30% opposed.

It is also convenient for Boris Johnson for Labour to appear to be more concerned about workers in China than in Workington, and more concerned about public-sector bureaucrats, than Red Wall grafters. NHS workers and public employees earning less than £24,000 are exempt from the public pay freeze.

This puts the Scottish Government on the spot. At the time of writing, Nicola Sturgeon is not saying whether or not she will increase the pay of public-sector workers. If she does, she may have to consider increasing taxes to boost the pay of civil servants, teachers and council officials. Either way, she will blame Rishi Sunak.

In her conference speech tomorrow, Sturgeon will accuse Boris Johnson of imposing a new era of Tory austerity on public-sector workers, benefit claimants and the low paid.

Conservatives will respond that the Government has already given Scotland £8.2bn and more spending is on the way. And, unlike in 2010, the First Minister has the powers to increase public spending if she wants.

She will respond that she doesn’t have the right borrowing and tax powers to address the problem. The independent Higgins report on economic recovery said that Scotland needs £6bn in new borrowing powers.

There is only so long that this dialogue of the deaf can continue, as Britain sinks below the waves. Something has to give: most likely the constitution.

Sturgeon will also call tomorrow for a referendum on independence in the first half of the next Scottish parliamentary term – before 2023.

She will say that independence is the only way to protect Scotland from the predations of Boris Johnson who, as this column remarked last week, arouses profound loathing among Scottish voters.

But loathing is a two-way street. There has been a distinct change of mood among Conservatives and Tory voters recently on the Scottish question. There is a growing realisation that the Barnett Formula, which provides Scotland with a block grant based on UK spending, is no longer working. It is effectively a handout and goes against Tory principles.

Senior Conservatives, like Sir Malcolm Rifkind and John Major, are calling for a radical reappraisal of devolution.

Rifkind wants a new kind of federalism, in which Scotland would have nearly all the powers of a state except for foreign affairs, defence and currency. If this happened, Barnett would be phased out and Scottish spending would be paid out of taxation.

The logic is too compelling to be ignored. Fiscal autonomy is anyway the policy of the Scottish National Party. There has to be some kind of response from Westminster if and when the SNP win the expected landslide majority in the Scottish election in May. Nicola Sturgeon will call indyref2 and will have a firm electoral mandate to justify it.

The UK may have no choice but to offer, instead of the status quo, a new constitutional settlement. It might well propose that Scotland takes effective control of its own economic affairs within a broad UK wrapper.

This is not devo max, but it would appeal to the vast majority of Scots who favour self-government but want to retain some link to the United Kingdom.

Fiscal autonomy would be no walk in the park since Scotland currently raises less in taxes than is spent by the Government. But change is definitely coming as this crisis cannot be resolved within the present arrangements.

It seems highly likely that the Union, as we know it, will be one of the final casualties of Covid-19.