Watching closely – Scotland independent and in the Eu? Maybe not a good idea

March 25th saw the beginning of the Scottish Parliament election. The leader of the incumbent SNP Nicola Sturgeon announced that if her party emerges victorious from the election, she will consider it as a mandate to demand the second referendum on Scottish Independence. However, as far as the economy is concerned, it would be a bit of a stretch to assert that the Union puts Scotland at a disadvantage. 

Scotland is dependent in terms of trade and fiscal solvency on its union with England

Scotland is dependent in terms of trade and fiscal solvency on its union with England. According to Scotland’s export statistics, over 60% of Scotland’s trade valued at £85 billion goes to other UK countries. Just 19% goes to the EU. That in itself shows the risk posed by the demands for secession. Another equally worrisome statistic if Scotland were to become independent is its current budget deficit. Under British law, Scotland enjoys extensive autonomy within the United Kingdom. Its government has considerable discretion in managing public finances. In 2018/19, after adding revenues from the North Sea, Scotland’s fiscal deficit stood at -7% (£12.63 billion) of Scotland’s GDP. These factors create a situation in which the size of Scotland’s public sector expenditure as a share of Scotland’s GDP amounts to 41.7% whereas the British public sector spending is 39.3% of the UK’s GDP.

So, how is it possible? Slightly, higher income and property transaction taxes are a part of the answer but do not explain everything. The revenues generated in Scotland, including profits from North Sea oil, amounted to £66 billion. Yet the Scots received circa £81 billions of public spending. This disparity between revenues and spending worth £15 billion is possible thanks to the system of sharing resources with the rest of the UK. Moreover, Scotland benefits from the so-called Barnett Formula – a mechanism used by the Treasury to calculate budgets of the devolved nations. The Treasury uses budgets from the previous year as the benchmark and subsequently adjusts them commensurately with rises and falls of spending per person in England. If hypothetically, England increases its spending on education by £200 million, the Scottish government’s budget would increase by £19.7 million because the size of Scotland’s population is 9.7% of the English population. By the same token, Northern Ireland and Wales’s budgets would also increase in proportion to their populations. But the Formula is applicable solely to the public services that are devolved in each the UK’s nations.  The Formula was initially thought to be an unbiased method for allocating money among the devolved nations. But it turned out to be controversial because it enlarged differences in spending per person between England and the rest of the Union. Historically spending per person in other nations of the UK was higher than in England. Therefore, the formula perpetuates these differences by adding increases in spending to a larger baseline in the devolved nations. In 2018/19, spending per person in Scotland was 21% higher than in England. The same state of affairs prevails in Northern Ireland and Wales where spending per person was 25% and 15% higher than in England respectively

To avoid drastic budget cuts or tax increases, Scotland would have to drastically improve its economic performance

To avoid drastic budget cuts or tax increases, Scotland would have to drastically improve its economic performance. Even as a member of the UK, the state of its economy remains delicate. Scottish nationalists want to join the EU if they achieve independence. That would create a problem akin to Northern Ireland’s current situation –a hard border hindering trade that is dependent on access to the English market. The alternative would be a sharp reduction of the budget deficit. According to a commission established by the SNP, Scotland would have to curb its deficit to 3% of GDP to render it tractable. If, despite all these portents, Scottish voters decided to choose “Yes”, SNP would face many fiscal dilemmas. Regardless of the ultimate decisions stabilizing Scotland’s fiscal situation would be a precondition to accessing international capital markets. Revenues from North Sea oil could hardly make up the inevitable fiscal shortfall– the price of oil declined since its peak in 2012. Given the volatility of the oil market since 2014 and the costs of exploitation at £15 it remains unlikely that oil revenues could return to their previous level. Over the last eight years, oil’s share of the Scottish government’s revenues shrunk from around 6% to just about 1% in 2019/20. That translates into £724 million, down from £1.4 billion in 2018/19. 

Aside from sharing many resources with the UK, Scotland befits from other forms of integration with the Union. The Ministry of Defence spends in Scotland, roughly £320 per head. Under British law, certain kinds of military equipment such as ships must be manufactured domestically. An independent Scotland would no longer be eligible to participate in the construction of new warships for the Royal Navy. Shipbuilders in Rosyth and Glasgow may suddenly find themselves jobless. It is doubtful that the Scottish government alone would be capable of sustaining production at the current level. An independent Scottish government could not guarantee Scottish shipbuilders that the British Ministry of Defence would place any further orders in Scotland. It is only one of many sectors that may become endangered by the breakup of the Union. Edinburgh’s financial hub is another example of close cooperation between England and Scotland that can be severely disrupted. 

The Scots must critically consider the pros and cons of remaining in the Union

The Scots must critically consider the pros and cons of remaining in the Union. By voting “Yes” they will inflict on themselves serious ramifications which will require years to heal. But the Brexit referendum showed the power of emotions. Arguments centered around economics may be strong enough to attenuate nationalistic tendencies. Still, the British government must develop new means of ensuring social cohesion in the Union other than pure economic calculations. They proved insufficient to prevent the UK from voting Leave in 2016. Betting on these arguments in the context of Scottish nationalism is a dangerous gamble. Nonetheless, they will not disappear, and people contemplating to vote for the SNP should be aware of them. 

The Editor: Kamil Kozlowski

Kamil Kozlowski is a MA student in International Political Economy at King’s College London (KCL). In 2020 he graduated from Kozminski University with a Bachelor’s degree in Management. His research interests are focused on the future of the British economy, especially the development of new sectors in it. Another field close to his heart is the evolution of the global energy market and its implications for regional economic growth.

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