Can Scottish independence backers win economic argument?

Ahead of Scotland’s 2014 independence referendum, the Scottish National party sought to reassure voters worried about going it alone by citing a resurgent economy, a relatively modest budget deficit and the prospect of untrammelled free trade with both the remaining UK and the EU.

Things are different now.

Brexit means that an independent Scotland in the EU — the SNP government’s goal — would face a hard economic border with England, its most important market. Scottish gross domestic product growth has lagged that of the UK as a whole in recent years.

And data released on Wednesday showed Scotland’s notional fiscal deficit climbing to a hefty £15bn in the year to April, even before the worst of the coronavirus crisis is felt.

While opinion polls in the past few months have recorded unprecedented and sustained support for independence in Scotland, economists said the short to medium term economic and fiscal difficulties of leaving the UK look substantially greater than they did when voters rejected the idea in 2014.

“Many of the arguments around the transition to independence are now more challenging,” said Graeme Roy, director of Strathclyde university’s Fraser of Allander Institute, citing in particular the collapse in oil prices and resulting tax revenues since 2014.

Line chart of Net fiscal balance as a % of GDP showing Scotland's notional deficit worsened before the Covid-19 crisis

The SNP government’s November 2013 white paper, the key document on which it fought the 2014 referendum, outlined scenarios suggesting annual revenues from Scotland’s geographic share of North Sea oil and gas would be worth between £6.8bn and £7.9bn in 2016-17.

In fact, Scotland’s share of oil and gas revenues were worth £157m in 2016-17 and in the year to April reached just £724m, according to the Scottish government’s annual report entitled Government Expenditure and Revenue Scotland.

The coronavirus pandemic means an independent Scotland in the near future would also face a much more difficult global economy, said Professor Roy.

The OECD said on Wednesday that among its 37 member countries real gross domestic product was expected to fall by 9.8 per cent in the second quarter of this year. Scottish exports and tourism income look set to suffer for years.

Brexit poses potentially longer term worries. In 2014, the SNP relied on expectations of future EU membership for both Scotland and the remaining UK to guarantee unrestricted trade.

Line chart showing Annual % change in gross domestic product Scotland’s North Sea revenues have taken a hit

The anti-Brexit SNP remains committed to taking an independent Scotland back into the bloc, but this would now mean creating an economic border with the rest of the UK, which accounts for 60 per cent of Scottish exports — far more than the 19 per cent that goes to EU member states.

David Bell, economics professor at Stirling university, said it was still unclear how damaging to trade Brexit would prove, but that choosing independence within the EU would be likely to mean a near-term overall hit to Scottish exports.

Still, Professor Bell said that weighing the economic merits of independence meant making long term judgments on the prospects for the UK and the EU.

Kate Forbes, Scotland’s finance secretary: “I think the need for independence is more acutely visible than ever before.” © Ken Jack/Getty Images

“The question is what trajectory you see going forward for the UK economy, if it doesn’t make world-beating trade deals with all of the major powers,” he added. “Staying in [the UK], you are going to be part of that. If you get out, the question is can you do relatively better than you would have done within a declining UK.”

Asked by the Financial Times on Wednesday whether she believed the economic and fiscal conditions for Scottish independence had improved or worsened since 2014, Kate Forbes, Scotland’s finance secretary and a leading SNP figure, declined to answer directly.

Instead, Ms Forbes argued that an independent Scotland would have fared better in the virus crisis if it had the policy levers of an independent country. “I think the need for independence is more acutely visible than ever before,” she said.

Opponents of independence said the worsening Scottish notional deficit shown by the latest annual data — widely seen as the best indication of the fiscal starting point for an independent Scotland — demonstrated that current levels of public spending would be impossible outside the UK.

But Ms Forbes suggested low global interest rates and the ease with which countries around the world are currently borrowing to fund deficits showed Scotland had little need to worry.

“If we were to have the levers to manage our public finances and if we were to invest in economic growth, then I don’t for a moment think that we could not have sustainable public finances,” she said.

Economists agreed that any transition to independence would be smoothed by the ease with which even highly indebted states can currently borrow from international capital markets.

Line chart of Annual % change in gross domestic product showing Scotland's economy mirrors the wider UK, only worse

But the SNP’s plan to retain use of sterling in the early years of independence, rather than introduce a new currency, mean it would be unlikely to have access to the Bank of England’s financing facilities and would instead have to borrow from private investors.

And Prof Bell cautioned that an independent Scotland would likely have to pay higher interest rates and do more to demonstrate it could meet its obligations.

“It’s not obvious that as a new borrower you would get the terms and conditions that countries with a longer borrowing history are able to get,” said Prof Bell, adding that demonstrating fiscal sustainability would probably mean cuts to government spending.

John McLaren, an independent economist, said an independent Scotland would initially have to make up for about £11bn a year in fiscal transfers from the rest of the UK and could not assume that the current era of huge deficits and soaring state debt would persist indefinitely.

“It’s true that when everybody’s deficit is up to 15 to 20 per cent [of GDP] across the EU, then if Scotland’s is 22 per cent, it doesn’t look that bad . . . but the deficit will have to come down fairly quickly,” said Mr McLaren.

Pressure could only grow on SNP leaders to work out a new case for independence to match current challenges, he added. “It’s going to be a free hit for the union side if nobody comes out with a credible model,” said Mr McLaren.

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