Politics and Economics

How Independent Would an Independent Scotland be?

The Scottish Nationalist Party (SNP) dream of an independent Socialist Republic of Scotland where they believe they can better create a more equal, fairer society.   A sort of socially-just Xanadu where the wealth of the nation is more equally spread.  A society with generous housing and pension benefits, free childcare, free prescriptions, free health service, free tuition…..free everything.

This has to be paid for and Scottish North Sea oil reserves would be asked to cover much of the costs.  But can it?  Ignoring North Sea oil and gas, Scottish tax revenues per head are almost the same as the UK average but public spending per head is about £1,200 a year higher in Scotland than in the UK as a whole.  Oil revenue would have to cover the existing higher level of public spending as well as the SNP’s planned increases.

North Sea Oil_graphic_767622a

Scotland’s oil reserves are running out at a time when large shale oil reserves have been found in England.  Additionally the international norms for determining territorial waters would also mean Scotland will get a smaller share of North Sea oil than the SNP are claiming.  Some of these reserves will actually belong to England.  Also, most of Scotland’s oil belongs to the Orkney and Shetland Islands, who have clearly stated their reluctance to be subservient to Edinburgh and would prefer an allegiance to London.  They don’t feel particularly Scottish and their history proves it.  If you ask a Shetlander “who are you?” They will say “Shetlander”, not “Scottish”.  In the event of a Yes vote for independence expect Shetland to ask for their own referendum or at least more autonomy over “their” oil.  Scotland will need Shetland more than Shetland will need Scotland so their negotiating position will be strong.

In any case oil revenue is highly volatile.  North Sea oil and gas revenues would have accounted for over 15% of Scottish revenues in 2010-11 compared with 1.6% for the UK as a whole. They were more than 20% of Scottish revenue in 2008-09 but just 12% in 2009-10. Looking back further they accounted for nearly half of all revenue in the mid 1980s, falling to just 3% in 1991-92.

But the cost of running a socialist state is not volatile.  It is high, constant and addictive. The ups and downs of Scottish oil revenue would need supplementing with borrowing in order to pay the social bill every year.

Borrowing costs are likely to rise in an independent Scotland as the financial markets would worry about Scotland paying back the debt without the reassurance of the Bank of England as bank of last resort. Rating agencies have already indicated that Scotland would have a lower credit rating than the UK, requiring a higher yield and therefore higher interest rates. The assets of Scottish banks are an alarming 12 times the country’s GDP adding markedly to the perceived risk of Scottish debt.  This is much higher than the multiple in Iceland before their economic crash.  The equivalent multiple for the rest of Britain is below five and for Ireland on the eve of the financial crisis it was about seven. In another economic meltdown Scotland would struggle to rescue its banks.

Scotland would also have to take its fair share of UK debt after independence, which would amount to perhaps £100 billion ($161 billion)— a lot for a small country to issue at once.  Scotland’s likely high debt, fiscal deficit, weak economic growth, lack of institutional frameworks and low foreign exchange reserves suggest it would pay a higher interest rate than the British government.  Brokers estimate an extra 1-1.5 percentage points a year.

In any case this still leaves somewhere between 80% and 97% of Scottish Government income coming from sources other than North Sea oil. How easily can the SNP and Scottish Labour party raise taxes and benefit spending in an independent Scotland with an economy on their doorstep that is 10 times larger?

The rest of the UK (rUK) stripped of Scotland would be more likely to produce Conservative governments. The chance of an old Labour socialist style Government would be much diminished.  Labour has had the majority of seats in Scotland in all but two General Elections: 1951 and 1955.  The Conservative share of seats has been 2% or less since 1997.  Also the Scottish Labour MPs tend to be more socialist Old Labour style politicians than we find in England.  Tony Blair’s New Labour would still have achieved overall majorities in the elections of 1997, 2001 and 2005 even if all Scottish votes had been declared invalid, but his politics were hardly the Socialist Nirvana dreamed of by the SNP.  Tony Blair’s top rate of income tax was lower than that of the current Tory led coalition.

Without Labour’s 41 Scottish seats the Tories would have had an absolute majority in the current Westminster parliament rather than having to share power with the Liberal Democrats. This would suggest a long series of Conservative or Centrist rUK governments committed to lower public spending, no increases in the higher rates of income tax and downward pressure on business rates. Where would that leave the Scottish Government?

If Scottish taxes rise to pay for more benefits how will the SNP stop high earning, affluent Scots and Scottish businesses moving across the border to seek a more favourable tax regime?  How will the SNP stop English benefit seekers moving north to maximize their income from the State?  There are few geographical, language and cultural barriers to quell a massive movement of people and capital.  With such a large economy on their doorstep the Scots’ ability to manage their own tax and spend would be much diminished unless they were prepared to put up a Berlin style wall to stop the affluent leaving and the poor arriving. It would reproduce the mass emigration we saw from the Republic of Ireland, a flight that did not abate until the Irish abandoned the worst of their country’s ultra-nationalist business cronyism and implemented some of the most attractive low tax packages in the western world.

Currently SNP and Scottish Labour MPs are able to influence the economic policy of the UK, which they would not be able to do if they were independent. Despite the Tories being wiped out in Scotland in terms of Westminster Government seats their style of politics is not as unpopular there as many pre-suppose.  They still accumulated 413,000 votes in the 2010 general election — hardly a different order-of-magniude from the 491,000 votes won by the SNP.  An independent Scotland voting for its Government using proportional representation would have to take these political views into account.

So a vote for independence would most likely result in a series of more right wing, low tax, low spend governments in England, which would then severely limit an independent Scotland’s ability to mange its own tax and spend as it would wish.  They would have to fall in line to manage their government finances and maintain their competitiveness.

This mirage of independence would also be further diminished if they entered a currency union with the rUK. Counter-intuitively Scotland will have more independence as part of the UK than they would as an independent nation. England is likely to do well despite a breakaway from Scotland. It would be free to have a more friendly tax policy to attract businesses and talented, motivated individuals.  As North Sea oil dwindles the English taxpayer will not have to fund the higher public spending and faster aging population of Scotland.

The main Scottish banks and pension funds are likely to relocate much of their assets and many of their jobs to England, boosting English GDP and creating more high value employment.

English depositors will be unhappy to hold their money in a foreign bank (the Icelandic banking meltdown is a sobering example).  They will worry about the future of their pension and life-assurance policies held with the likes of Standard Life, Scottish Widows (owned by Lloyds) and Aegon (formerly Scottish Equitable). All are Edinburgh-based and among the largest pension funds in Britain. English investors will want to know whether they would still be paid in pounds and will also worry that they would no longer have any influence through the ballot box over the tax regime governing their pensions.

If Scotland votes to leave the UK the flow of pension money into the Scottish-based insurance companies from outside Scotland may well dry up and there would be transfers out, to English-based companies.  The main Scottish financial institutions have already announced they will move much of their business to England in the event of independence to reassure their depositors and prevent this from happening.  Edinburgh’s financial sector will be weaker and London’s stronger after a split. This is significant because finance is a highly lucrative business and already pays 12% of all UK taxes.

Quebec_investment_graphic_767622a

In fact, business investment and employment in general will probably increase in England at the expense of Scotland. Look at what happened in Quebec after it tried to break away from Canada in 1995. Investment as a share of GDP before the referendum roughly matched the rest of Canada. Afterwards, even though Quebec voted against independence, a big gap opened up as investors decided the political risk was too great. They took their money elsewhere in Canada.

Many companies serving Scottish markets may be tempted to base themselves in Newcastle or York, boosting jobs and investment in the North of England. This will be in addition to the expected migration of talent from north of the border to seek better opportunities and lower taxes in England.

The loss of British influence in the United Nations, NATO, G7, Security Council and European Union will be a major blow to both Scotland and the rUK, but England will suffer less.  It will cope well without Scotland and may well flourish at Scotland’s expense.

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One thought on “How Independent Would an Independent Scotland be?

  1. Pingback: How Independent Would an Independent Scotland be? | RGAmbler

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