The economics of the Scottish independence referendum

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Last week, 18 September 2014 was unveiled as the date of the Scottish independence referendum. There has long been an assumption that Scotland’s accounts would suffer if it left the UK. Not necessarily, argues Tom Peck

‘I can tell the difference between margarine and butter. I can say Saskatchewan without starting to stutter,’ were two rather forgettable boasts on ‘Cap in Hand’, a 1988 Proclaimers album track.

But the more pressing question posed therein by the twin brothers from Leith – who happen to be Scottish nationalists – has been asked with increasing regularity in the past 25 years. ‘But I can’t understand,’ they opined, ‘why we let someone else rule our land, cap in hand.’

And nor, it seems, can Scotland’s First Minister Alex Salmond. Since his Scottish National Party won a shock outright majority at the Scottish elections, the prospect of the breakup of the Union has become startlingly real. The UK Prime Minister David Cameron maintains that – never mind the answer – even the question of Scotland leaving the Union is harmful to the UK.

The three major UK political parties are united against the move, for a range of political, cultural and economic reasons. And would-be investors know only too well that any breakup of the UK would incur huge costs. Who would pay them? What would happen to the armed forces? Would a UK without Scotland maintain its place on the UN Security Council? The list goes on.

Oil: is black gold in Scottish waters?

Putting any nationalistic fervour, and unwilling Brit Andy Murray, to one side, it is tempting to imagine the issue as a zero-sum game. On the one hand, if Scotland is better off on its own, with its North Sea oil, the remainder of the UK will surely suffer.

On the other hand, the rest of the UK would be better off were it not for the vast amount of taxpayers’ money currently sent north of the border each year. Of course, the truth is in the details, all of which are hotly contested. Could an independent Scotland actually be in the best interests of both the Scots and the rest of the UK?

Should the referendum, which has been slated in for 18 September 2014, return a vote in favour of division, expect to hear more than you ever wished to know about maritime boundary law. As Scotland is not a sovereign state it can be argued that there are no such things as Scottish territorial waters, only UK ones.

Yet the complexity of the UK constitution means the real picture is more complicated. The legal systems of Scotland and England were never unified as part of the 1707 Act of Union, and Scotland thus retains an independent legal system. The reality for those charged with balancing a UK budget after Scottish separation is that maritime areas under the jurisdiction of Scots law encapsulate 90% of the oilfields in the UK.

The SNP maintains that Scotland would take more than 90% of what is currently UK oil revenue. But a UK without Scotland might use legal challenges to claim rights over anywhere between a quarter and a third of oil resources.

Royal Bank of Scotland: who would own the debt burden?

Of course it’s hard to hear the word deficit without thinking of what, not so long ago, was one of Scotland’s proudest institutions: the Royal Bank of Scotland. Now 84% of that business, in 2007 the largest by asset value in the world, is owned by the UK taxpayer. It is far from clear how the debt burden it still owes to the exchequer might be divided between the two countries. Even the cost of arguing over the matter would be substantial.

Strip out the oil money, and it is hard to argue that Scotland is not under-performing economically. True, it has its business successes, such as Michelle Mone of Ultimo lingerie, but according to official Treasury figures, 2010/11 projected average UK government spending per person was £10,212 in Scotland, compared to just £8,588 in England. Spending was also higher in Wales (£9,829) and Northern Ireland (£10,706).

Leaving the union: a boost to the national psyche?

Yet, despite the apparent benefits Scotland receives from being in the Union, could the act of becoming independent trigger an economically important boost to the national psyche? Market-orientated economist John Kay thinks so. To paraphrase Kay, he suggests that independence for Scotland might serve as a kick up the bum for the country.

This is a key consideration. After all, were the Union to end in the imminent future, the nations would probably remain divided long after North Sea oil – however its revenues were divided – had run out.

If Scotland had not reinvented its economy by such a time, it would have to learn pretty fast how to do so. There would be no security blanket, and the desire for a tax-financed public sector to shore up the economy may diminish. Without the UK as a whole to rely on, it may start to realise an economic potential that it might be accused of not fulfilling at the moment.

If there really is no love lost between Scotland and the rest of the UK, and the decision over whether or not to preserve the union is a purely economic one, economists will be in increasing demand in the run-up to next year’s referendum.

No certainty over Scotland’s economic future

But they won’t be able to speak with any certainty over Scotland’s economic future. It was not so long ago that Salmond called for Scotland to join Northern Europe’s ‘arc of prosperity’, encompassing Ireland to the west and Iceland to the north. These words seem foolish now that the economies of both Ireland and Iceland have collapsed.

As the BBC’s Evan Davis points out, it’s not the immediate figures that matter when making huge, long-term decisions such as this one, but the ‘growth capacity of the nation’.

And there remains a huge amount of uncertainty around that. Stay or go, any decision on Scotland’s part has to involve a leap of faith.

Tom Peck is a news reporter at The Independent

Tom Peck is a news reporter at The Independent.

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