What are the economics of Scottish independence?

Yesterday saw the First Minster of Scotland fire the starting gun for a second vote on independence from the UK for Scotland as the pace of possible change ratchets up yet another notch. With it came am intriguing view of how long a lifetime is these days! Although I am also reminded of the saying that “a week is a long time in politics”. However as ever I look to steer clear of the political melee and look at the economics. So how is the Scottish economy doing?

Economic growth

The Scottish government has published this data.

When rounded to one decimal place, at 2016 Q2 annual GDP growth in Scotland was 0.9 percentage points lower than in the UK. At 2016 Q3, annual GDP growth in Scotland was 1.2 percentage points lower than in the UK. Between 2016 Q2 and 2016 Q3, the gap between annual Scottish and UK GDP growth increased by 0.3 percentage points in favour of the UK (when rounded to one decimal place).

As you can see the recent performance has been around 1% per annum slower than the UK and may well be accelerating. With the UK economy overall having grown by 0.7% in the last quarter of 2016 that seems likely to have continued but of course there are always dangers in any extrapolation. If we look back we see that in the pre credit crunch period GDP growth was similar then Scotland did worse and then better as presumably the oil price boom benefited it ( although the oil sector itself is excluded). Then until the recent phase Scotland did mildly worse than the rest of the UK.

Looking ahead

The Scottish government plans to improve this and with an eye on future policy has set a European Union based objective.

To match the GDP growth rate of the small independent EU countries by 2017.

How is that going so far?

The latest data show that over the year to 2016 Q3 GDP in Scotland grew by 0.7% whilst GDP growth in the Small EU was 3.5% (measured on a rolling four quarter on four quarter basis). When rounded to one decimal place, this resulted in a gap of 2.8 percentage points in favour of Small EU. This compares to an annual increase in GDP to 2016 Q2 of 1.0% in Scotland, and an increase of 4.2% in the Small EU – resulting in a 3.3 percentage point gap in favour of Small EU (when rounded to one decimal place).

As you can see the gap here is much wider and leaves Scotland with a lot of ground to recoup. If you look at the list that may well get harder.

The small independent EU countries are defined as: Austria, Denmark, Finland, Ireland, Portugal and Sweden. Luxembourg has been re-included in the newest update due to a change in availability of data.

Ireland is proving a hard act to follow.

Preliminary estimates indicate that GDP in volume terms increased by 5.2 per cent for the year 2016. GNP showed an increase of 9.0 per cent in 2016 over 2015.

It is an awkward fact that the 21% economic growth registered by Ireland in the first quarter of 2015 lifted the target away from Scotland and it continues to offer something hard to catch. Of course such large moves also challenge the credibility of the Irish data series.

What about employment?

Good but not as good as England currently.

Scotland’s employment rate of 73.6 per cent for Q4 2016, is the second highest across all UK countries, 1.3 percentage points below England. This indicates a worsening position compared with a year ago when Scotland had the highest employment rate across all UK countries, 0.2 percentage points above England (the second highest).

Natutral Resources

Crude Oil and Gas

Plainly Scot;and has considerable resources here although unless there are new discoveries these seem set to decline over time. There have also been big changes in the crude oil price as FullFact reported last October.

It is correct that crude oil prices are currently at around $50 a barrel. Back at the time of the first Scottish independence referendum in September 2014 oil was selling for just over US $90 a barrel.

Energy policy, and how oil revenue would be invested, was part of  the Scottish government’s vision for an independent Scotland……….”With independence we can ensure that taxation revenues from oil and gas support Scottish public services, and that Scotland sets up an Energy Fund to ensure that future generations also benefit from our oil and gas reserves. “

I think that FullFact were being very fair here as there were forecasts from Alex Salmond that the oil price would rise towards US $130 per barrel if my memory serves me right. Whereas it is now US $51 or so in terms of Brent crude oil. So the oil sector has seen something of a recession affecting areas like Aberdeen although there would have been gains for other Scottish businesses and consumers from lower prices.

The Fiscal Position

This has been affected both by the lower oil price and also by the recent trend to lower economic growth than the rest of the UK. The former was highlighted by this from the 2015-16 data.

Scotland’s illustrative share of North Sea revenue fell from £1.8 billion in 2014-15 to £60 million, reflecting a decline in total UK North Sea revenue.

This led to these numbers being reported.

Excluding North Sea revenue, was a deficit of £14.9 billion (10.1 per cent of GDP).

Including an illustrative geographic share of North Sea revenue, was a deficit of £14.8 billion (9.5 per cent of GDP).

For the UK, was a deficit of £75.3 billion (4.0 per cent of GDP).

This adds to an issue I reported on back in my Mindful Money days in November 2013.

So there is something of a shark in the water here. If we add in the fact that Scotland spends more per head than the rest of the UK then the IFS ( Institute for Fiscal Studies) considers that the fiscal position is more dangerous. Both the UK and Scotland spend more than they get in from tax but the Scottish position is more reliant on a fading source of tax revenue. This is what leads to the following conclusion.

As it turns out that source of revenue has ended at least for now and seems to be capped by the shale oil wildcatters for the next few years. All rather different to this.

But a current strength of the numbers is revenue from North Sea oil which was 18.6% of tax revenue in 2011-12 for Scotland.

Of course there would be quite a debate over the share of the UK national debt that would belong to Scotland but the fiscal position is presently poor.

What currency?

This poses a few questions so let me repeat the issues with using the UK Pound.

1. The Bank of England will presumably set interest-rates to suit England (and Wales and Northern Ireland). This may or may not suit Scotland.

2. The value of the pound will mostly be determined by the much larger English economy in some respects similar to the way that Germany dominates the Euro. That has not worked out well for many of the Euro nations.

3. This is to say the least awkward, if further bank bailouts are required. Will the Bank of England be the “lender of last resort” in Scotland? How does this work when it has an independent treasury? Just as a guide, individual nations in the Euro area had their own central banks which survive to this day partly because of this issue.

4. There is also the issue of currency reserves and intervention which presumably also stay with the Bank of England.

5. What about the money supply of Scotland which will again presumably be controlled by the Bank of England and set for the rest of the UK?

6. Has anybody bothered to ask the citizens of the rest of the UK if they are willing to take the risk of having Scotland in a currency but not a political or fiscal union? This would take place just as the Euro is demonstrating many of the risks of such an arrangement. But added to it for the rest of the UK would be new oil or gas discoveries pushing up the value of the pound and thereby making their businesses and industry less competitive.

Comment

Scotland plainly has economic strengths with its natural resources and financial services industry. However since the last vote there has been a deterioration in economic circumstances as we have seem growth fall below that of the rest of the UK. This has led to a problem with the fiscal deficit and it is hard not to think of the criteria for joining the European Union.

New Member States are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro in due course after accession.

We do not know what the national debt would be but the fiscal deficit is around treble the 3% of GDP target per annum in the Euro accession rules. Of course Euro members have often ignored it but they have been much stricter on prospective entrants. Quite a Euro area style austerity squeeze would seem likely and that has been associated with recessions and quite severe ones at that.

Charlotte Hogg’s Resignation

Back on the 1st of March I pointed out the lack of competence on monetary policy she displayed in front of the UK Treasury Select Committee. Today it was announced that she offered to resign last week but Mark Carney would not take it. Now he has.

http://www.bankofengland.co.uk/publications/Documents/news/2017/charlottehoggletter130317.pdf

 

http://www.bankofengland.co.uk/publications/Documents/news/2017/028.pdf

 

 

 

Advertisements

51 thoughts on “What are the economics of Scottish independence?

  1. The whole of the UK should vote on Scottish Independence, and I suspect Nicola might get the result she wants!
    What would be Scotland be like, out of the Union,out of Europe,not using the pound or the euro, with a profligate SNP in power – does not look very appealing future to me.

    • You beat me to that one. I asked a lot of people in London (English) before the first referendum. If my poll was anywhere near accurate Scotland would have been independent and by a large majority.

    • I’d imagine the EU will accept them if it still exists … but it does seem strange to me that these rabid Scottish nationalists who so desperately want the freedom to govern themselves, will instantly hand this freedom and ability to govern themselves back to the Germans i mean the EU.

      Same applies to the Irish.

      England will be a far better country without this lot dragging us to the left, would bring the English Labour party more to the right as well or at least the party who replaces them. Might even get a free market Tory party out of it but that’s possibly dreaming a little too much!

      • Yes, I have difficulty understanding why some say they don’t want to be in a small union but do want to be in a large one. And the referenda have shown they actually want to be in both.

    • ‘The whole of the UK should vote on Scottish Independence, and I suspect Nicola might get the result she wants!’

      I think you’re right.A lot of people I know are passionate Scots nationalists,the only problem is that they’re English and don’t have a vote.Personally,I’m a Unionist but when you look at the extra £1000 per capita that gets spent in Scotland,you can see why the English get a little teed off with it.

    • “What would be Scotland be like, out of the Union,out of Europe,not using the pound or the euro, with a profligate SNP in power – does not look very appealing future to me.”

      Just like the UK (whatever form that may take by 2019) will be out of the EU and the UK voted for independence so reason to suppose Scotland won’t do the same.

      It’s already gonna be a helluva show come 2019 and beyond, a scottish independence vote where it is no longer part of any Union will be the icing on the cake and you don’t even have to pay per view!

      • To be fair if the UK economy does implode by then which it could well do irrespective of BREXIT, then it’ll certainly get her many more votes.

        And i just can’t see how they can keep the plates spinning for another 2 years.

        Printing press are so pre 2017.

  2. Thank you for that assessment, as I am sure the versions from both sides are likely to be painted in such a way to suit their own intentions. I am curious in regards to who gets responsibility to mind RBS I read that it is registered in Edinburgh & in the possibility of another financial crisis, it might be something that should be considered.

    Scotland in the EZ with RBS I think in the light of what happened to Greece, might well be a dangerous road to travel.

    • ‘I am curious in regards to who gets responsibility to mind RBS’

      It’ll be interesting to see how the liabilities are spread around (and in RBS’s case,they are legion).

      Scotland may end up with the worst of both worlds,out of the UK and in a collapsing EU with the first requirement of joining to pony up their share of the next Greek bail out.

  3. Scotland is a small part of a small island on the edge of the European mainland. It is also relatively poor; notwithstanding whisky and (some ) oil.

    To paint the prospects of such a place in glowing terms as the SNP does is to turbo charge the Panglossian view of things to a point where it is almost pathalogical.

    The Scots had too much intelligence to swallow independence before and they have not discarded that intelligence since.

    • Hi Bob J

      The economic position is simply a fair bit worse than at the time of the first referendum. A fair bit will depend on whether the OPEC production cuts hold or not as they hold the key to the crude oil price.

  4. What are the economics of Scottish independence?

    They look similar to the Kingdom of Denmark from what I’ve read . So actually no real problem so long as they are ok with the pitfalls of being a small country .

    Sturgeon will obviously get her seat in the EU as a PM ( she hopes )

    the sticking point will be the Banks of course. Too much debt and Scotland will not like it and neither will the fUK if Scotland goes relatively “scott free ” , a-hem .

    in other words the economics don’t matter , it really is a political choice *

    Forbin

    * actually the economics might be better for England if Scotland and NI leave ? that might make a good article , Shaun.

  5. doesn’t it strike you odd that St Nic wants independence …. by dropping one union for another ?

    Forbin,

    PS: maybe she’s wrung as much out of us as she can and now wants to beg from the EU ?

    • Scotland is already part of the European Union via it’s membership of the UK. “St Nic” is requesting the right to decide whether Scotland wants to remain with the EU or the UK but before that can be done Scotland needs to acquire independence from the UK as it has already spoken against EU membership.

  6. The underlying problem is that Scotland is becoming an increasingly different country, possibly more because of the increasing centralisation in England rather than changes over the border.
    From my experience there are a lot more independence supporters than SNP members, and it will be interesting to see whether the SNP handle this any better than they did last time around.
    Of course there will have to be a credible economic case for survival – maybe the OBR could help
    here 🙂
    Personally I don’t think they have a chance of winning whatever the merits of their case.

  7. Hi Shaun
    Fast forward to the Scottish Republic 2027.
    Following the collapse of the euro and the default of
    all debts owed to the sassenachs President Andy
    Murray has decided against calling the new currency
    the racket or the lob in favour of the sporran because
    it would hide from the people what they shouldn’t see.
    Further south the new chancellor, Joey Essex
    has finally cancelled HS2 to fund the rebuilding of
    Hadrians wall.

    I find it amazing that the BOE appoint senior staff
    without vetting them for any possible future banana
    skins!

    JRH

  8. Shaun,

    Thanks for another thought provoking piece.

    I just can’t see how Scoxit will work out.70% of their trade is within the UK.They receive £1000 per capita govt spending above the UK average according to the BBC (I know,I know).

    They will turn their back on that and join an EU that appears to be in serious decline economically,politically and socially.

    Interesting times.

    • Hi Dutch

      My pleasure. This from Holyrood.com suggests a smilar set of figures to the ones you quote.

      “GERS show a tax take equivalent to £10,000 per person in Scotland, with expenditure of £12,800 per person, £1,200 per person greater than the UK average.”

  9. Hi Shaun
    The Spanish would make it very difficult for the EU to accept Scotland.
    After Brexit there would be no reason for the BoE to offer GBP to Scotland.
    One of the two ‘economic strengths’ , ie financial sector, is only in Edinburgh because its part of the UK and there are nice houses in the West End. They would mainly decamp to somewhere in England.
    Scoxit is bloody stupid for the Scots, I think there are enough sensible Scots to see this off for good.

    • calling RBS an ‘economic strength’ is an alternate fact. England would be best advised to cut it’s RBS losses, after 8+ years repeated losses – ongoing subsidising losses looks like throwing good money after bad.

  10. Is there anything to stop an independent Scotland “doing an Eire” in terms of lowering Corporation Tax as a new revenue stream? How would that affect the remaining portion of the UK?

    • Hi Peter

      It would depend on their negotiations to join the European Union. I believe the rules have been tightened up on that subject after what Ireland did and they tend to be quite strict on accession requirements. So such a move would likely prevent EU accession.

      Also Ireland and perhaps Britain could retaliate in kind….

  11. Does anyone think the Royal family would allow an annexation of Scotland that would result in them having to ask permission to use or heaven forbid repurchase the following properties:
    Palace of Holyrood House
    Balmoral Castle
    Birkhall House
    Craigowan Lodge
    Delnadamph Lodge.

    Or will an agreement be reached whereby UK taxpayers subsidise the profligacy of the Scottish government to its populace in perpetuity?
    Hmmmm….

  12. Separatists in Quebec have done very well out of blackmailing the rest of Canada for decades. The trick is not to push too far. The Scots receive about £7 billion from the rest of the UK each year (possibly much more; pity we don’t have all the numbers). I suspect they are too canny to risk losing this. Is this the time to call their bluff?

    • Your sources are a bit old. The Spanish foreign minister one is dated 2012. I think the foreign minister has said more fresher quotes since then…

  13. 4) So the Scottish economy is growing at a rate of 0.3% of GDP less than England’s.
    This conveniently misses two glaringly obvious facts:
    I) The population of England is rising at a much faster rate than in Scotland, so one would expect the GDP to.
    II) Everyone on here has stated how much better off the UK economy would be if all economic policy wasn’t directed towards the banks & the CoL.
    An independent Scotland’s obviously wouldn’t.

    5) The GBP.
    Belongs to every Scot just as much as every Englishman/N.Irishman/Welshman, as does the Bank of England, which was nationalised with tax money from all over the UK.
    You don’t want us to have a say in fiscal policy post-independence?
    No interest in the house means no mortgage payments. Scotland starts debt-free.

    • (Southern) England’s GDP must benefit far more from QE, TFS, ZIRP, being as Southern Englands economy is pretty much the housing market and these 3 forms of thieving pour straight into this.

      And if Scotland starts debt free, they’d be akin to Argentina.

  14. Pingback: The Ukrainian Argument for Scottish Independence – Bloomberg View | PressAware

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s