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Economic Consequences of an Independent Scotland June 2014

Saturday, June 7, 2014

Question 1

Do you agree that that Scotland would better off in economic terms as an independent country?











Question 2

Assuming that Scotland becomes an independent country, do you agree that the UK government's position of ruling out a monetary union is in the economic interests of the continuing UK? 













Would Scotland be better-off in economic terms as an independent country? Not according to an overwhelming majority of respondents to the third monthly survey of the Centre for Macroeconomics (CFM), summarised in this column. As the Scottish electorate prepares to vote on independence in September, a smaller majority of the CFM experts agree that the UK would be acting in its own economic interests by ruling out a monetary union with an independent Scotland.

September’s referendum on Scottish independence

On 18 September 2014, the Scottish electorate will be asked the following question: “Should Scotland be an independent country? Yes/No.” In the event of a ‘Yes’ vote, the plan is that Scotland would become an independent country in March 2016, and thereby no longer a constituent nation of the UK after 307 years. This would be a fundamental change for the governance of Scotland, and for England, Wales and Northern Ireland which together would become the continuing UK. Other countries with strong regional identities may also be influenced by the referendum and there may even be implications for the UK’s international relationships.

The opinion polls have shown a consistent majority against independence, but they have narrowed significantly since the turn of this year to only a 5% majority (excluding the "don't knows"). Both sides of the debate agree that economic issues are at the heart of the referendum. We therefore asked two questions which are absolutely central to this debate.

Economic benefits of independence

Scotland’s population is 5.3 million or 8.3% of the total UK population.[1] The value of output per head in 2012 was £20,571 in Scotland and £21,295 per head in the UK as a whole.[2] Labour productivity is exactly the same in Scotland and the UK, while unemployment is 6.4% in Scotland compared with 6.8% in the UK overall.[3] According to the Scottish government, the onshore fiscal deficit is estimated to have been 14% of output in 2012/13 compared with a 7.3% deficit in the UK overall.[4] If Scotland is allocated 84% (a ‘geographic’ share) of taxes from North Sea oil and gas operations, its deficit is estimated to have been 8.3% of output.[5] In 2012, both Scotland and the rest of the UK had the same old age dependency ratio of 26.8%, which is projected to rise to 40.5% in Scotland and 37.4% in the rest of the UK by 2032.[6]

Under the current fiscal arrangements, the Scottish government is responsible for allocating 60% of public spending in Scotland. Under the Scotland Act 2012, the Scottish government will be responsible for taxes (including part of income tax), which raise 16% of total revenue.[7] If Scotland becomes independent, its government would be responsible for all public spending, revenue raising and borrowing and current cross-border fiscal transfers would cease. The Scottish government has said that it will accept a fair share of the existing UK debt and that it intends to form a formal monetary union with the UK. The UK has ruled out taking part in a formal monetary union with an independent Scotland.

There is inevitably some uncertainty around what would be the final terms of a settlement between an independent Scotland and the rest of the UK. We invited the CFM survey respondents to answer the first question based on their understanding of what these terms are likely to be. We suggested that ‘economic terms’ includes income per capita and possibly other aspects of economic advancement.

Q1: Do you agree that that Scotland would be better off in economic terms as an independent country?

Summary of responses

Twenty eight of our 46 experts replied to this question. The raw results and the results weighted by the respondent’s confidence in their answer are presented in chart 1 below. Three quarters of our respondents said that they either disagree or strongly disagree with the proposition. Only one of our 28 respondents either agrees or strongly agrees. Excluding the six respondents who say they neither agree nor disagree, 95% of respondents either disagree or strongly disagree that Scotland would be better off in economic terms as an independent country.

Our respondents’ main concerns are over the fiscal outlook for an independent Scotland. George Buckley (Deutsche Bank) describes an independent Scotland as being exposed to weaker tax revenues from depleting oil resources and a worse demographic profile than in the rest of the UK. John Driffill (Birkbeck) notes that an independent Scotland could set its own policies to suit preferences in Scotland, but may lose out because some things that are done better jointly by Scotland and the rest of the UK will become more difficult to coordinate. Both Michael Wickens (York) and Martin Ellison (Oxford) say that Scotland might pay higher borrowing costs than the UK.

Several respondents question the wisdom of unpicking many institutions when the effectiveness of the institutions that will replace them is unknown. David Cobham (Heriot-Watt) asks whether pulling apart the members of well integrated nations makes sense; Jagjit Chadha (Kent) raises the possible risks if the new political and economic settlement is not robust; and Michael McMahon (Warwick) thinks that there would be significant transition costs.

Several respondents are concerned at the uncertainty over the time it might take an independent Scotland to (re)-join the European Union (EU). Marco Bassetto (UCL) says that in his view the process of accession to the European Economic Area (and the EU) are more important than the issue of monetary union. Richard Portes (LBS) and Nicholas Oulton (LSE) also express concerns that the uncertainty over the EU could be detrimental for the economy.

Currency arrangements

In the event that Scotland becomes an independent country, the remaining nations of England, Wales and Northern Ireland will constitute the continuing UK state. All current institutions of the UK state, except those physically located in Scotland, would automatically continue to be institutions of the continuing UK. This includes the Bank of England, which, as an institution constituted under the UK Parliament, would become the central bank of the continuing UK with no responsibility for an independent Scotland, unless otherwise agreed.

Exports from Scotland to the rest of the UK are estimated to have been £48bn or 38% of estimated Scottish GDP in 2012 (excluding oil and gas). The rest of the UK is estimated to have exported between £50bn and £60bn to Scotland or around 4% of the rest of UK GDP in 2012. Both Scotland and the UK have large financial sectors with banking sector assets estimated to be many times their GDP. If an independent Scotland takes on a population share of the UK’s gross public debt, its debt-to-GDP ratio is projected to be 86% in 2016.[8]

The Scottish government has proposed that if Scotland becomes an independent country, it would seek a formal monetary union with the rest of the UK, which it says would also be in the interests of the rest of the UK.[9] Bank of England Governor Mark Carney has argued that successful monetary unions require fiscal and banking unions and some ceding of national sovereignty.[10] The Chancellor and Chief Secretary in the UK coalition government and the Shadow Chancellor have all firmly ruled out entering into a monetary union if Scotland becomes an independent nation.

Q2: Assuming that Scotland becomes an independent country, do you agree that the UK government's position of ruling out a monetary union is in the economic interests of the continuing UK?

Summary of responses

Thirty four respondents answered this question and the results are presented in chart 2 below. Views are much more evenly split than for the first question: 53% agree or strongly agree that ruling out a monetary union is in the economic interests of the continuing UK while 41% disagree or strongly disagree. Excluding those who neither agree nor disagree (two respondents), the share who agree is 60% when weighted by respondents’ confidence in their answers. A majority of our experts believe that the UK is acting in its own interests by ruling out a monetary union and the responses reveal uncertainty over whether a robust supporting framework is viable. 

The differences in views between our experts in large part depend on whether they believe that credible and robust fiscal arrangements to support a monetary union could be implemented.

Martin Ellison (Oxford) says that the recent euro crisis shows how challenging a monetary union is without a fiscal, political and banking union. David Cobham (Heriot-Watt) thinks than any satisfactory constraints for the UK would preclude anything that could be called independence for Scotland. Luis Garicano (LSE) considers that any commitment not to bail-out an independent Scotland would not be credible with the world or the Scottish government. Therefore, the UK would end up with the worst of both worlds: a lack of market discipline and moral hazard.

Other respondents think that the taxpayers of each sovereign state could be isolated from the risks or the other. Andrew Mountford (Royal Holloway) considers that it should be possible to agree such arrangements. Wendy Carlin (UCL) and Simon Wren-Lewis (Oxford) are of the view that the UK could introduce conditions that would insulate it from risks, although they may prove problematic for an independent Scotland. Two respondents, Sir Christopher Pissarides (LSE) and John Driffill (Birkbeck), think that the UK’s stance is purely motivated to influence the referendum.  

Some respondents question whether a monetary union is appropriate, irrespective of fiscal constraints. Richard Portes (LBS) notes that there are already enough problems with regional heterogeneity for the Monetary Policy Committee setting a single policy rate; Jagjit Chadha (Kent) believes that a monetary union makes sense as a transitional arrangement only; and George Buckley (Deutsche Bank) thinks that any decision to form a monetary union should be put to the people of the continuing UK.

[1] As Scotland is a constituent nation of the UK, all of the economic data and projections are published by the Office for National Statistics (ONS) unless otherwise stated.

[2] Measured by Gross Value Added (GVA) per head.

[3] Labour productivity is measured by GVA per hour worked in 2011.

[4] Estimates of Scotland's fiscal accounts are published in Government Expenditure and Revenues Scotland (GERS)

[5] The allocation of UK offshore assets including oil and gas fields depends on what would be the agreed maritime boundary of an independent Scotland. The median line principle creates a so-called ‘geographic’ share, which the GERS report shows would allocate 84.2% of the related tax revenue to Scotland. 

[6] Defined as the ratio of those aged 65 years and above divided by those aged between 16 and 65.

[7] If Scotland remains within the UK, the Scotland Act 2012 will come into force in April 2016.

[8] Based on Office for Budget Responsibility (OBR) projections of the level of gross debt at the end of the fiscal year 2015-16, and assuming that Scotland receives a geographic share of the GDP from North Sea oil and gas, and that Scottish and rest of UK GDP grow at the same rate until independence.

[9] Scottish Government’s White Paper, pages 110-111

[10] Mark Carney,

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