I received today a copy of Ewen Stewart‘s paper for the Scottish Research Society, Much Cost, Little Benefit – The economic consequences of Scottish separation. This excellent paper covers currency, debt and borrowing, public spending and taxation, oil revenues, the Scottish banks, trade, population, energy, defence and more.
The conclusion is robust:
Scotland will either choose continuing union or separation this September. If Scotland chooses separation, it will not be in any true sense independent. It could not exercise policy in a vacuum. It would be obliged to mirror the monetary and fiscal policy of the rest of the UK. If a separated Scotland were to join the EU, it would pass five-sixths of its lawmaking power to that body, with next to no influence on policy. That would be a very limited independence indeed. Worse, a separated Scotland would have less independence, less true freedom of decision and of manoeuvre, that it has now as part of the United Kingdom. Currently, Scotland has its own Parliament, determining policy over critical areas like health and education. However, by being part of the United Kingdom Scotland benefits from the UK balance sheet, a more diversified and much larger economy, the credibility of the Bank of England and a global cultural and diplomatic reach and influence.
In theory, a separated Scotland would control more levers of power, from taxation and borrowing, to social security and pensions. However we have shown, using Scottish government data, that a separated Scotland would start life running a substantial fiscal deficit. If the oil assets were divided on a per-capita basis, that deficit would be the worst in the EU outside Greece and Slovenia. Even under a favourable geographic split, the annual fiscal deficit would be 7.8% of GDP, again one of Europe’s weakest.
The Scottish economy would also be one of the most cyclical in Europe, highly dependent on uncertain and volatile oil revenues. The banks would either need to relocate to London, to benefit from the Bank of England’s much larger balance sheet and protection as the lender of last resort, or substantially reduce their balance sheets, for otherwise growth and tax receipts would suffer. Banking liabilities of 12 times annual GDP, much greater than those of Ireland or Iceland in 2007, would neither be prudential nor sustainable.
A nation’s real power subsists in its economic strength and freedom of manoeuvre. A separated Scotland would be compelled either to increase taxes or to cut public spending, or probably both. That is not real sovereignty. Nor is it in any way beneficial to the people of Scotland.
Scotland has a strong financial services industry, a skilled offshore oil and engineering asset base and genuine strength in the beverages, foodstuffs, tourism and defence sectors. There are other strengths too, notably a number of world-class universities, many of which are largely dependent on UK-wide research grants that might well cease on separation. However these advantages are fragile and dependent on economic strength. Outwith the UK umbrella, many of these advantages will wither.
The Scottish government’s document Scotland’s Future runs to 670 pages. It is not a plan but a wish list. It is not even an economic wish list. It is a political wish list for social democracy without much democracy. Scotland government spending is already in excess of 50% of GDP, 5% higher than the rest of the UK. That is an expression of social democracy. Such a desire – and we make no judgement on whether it is in Scotland’s long-term interest – is only possible with a strong economy, a large balance sheet, a credible currency, diversified and not overly cyclical private sector interests and a secure global environment.
If Scotland wants social democracy, remaining in the UK is the only way of securing it. The pied piper may play a seductive tune, but the end will be the opposite of the aspiration: forced spending cuts, increased taxation and the illusion of sovereignty with little influence in the UK-wide or European decision-making process. Above all, because of the imperative to control the deficit, the average household will be considerably poorer as a result of separation: somewhere between £3400 and £5500 a year, with another £500-£1000 a year in interest for each £100,000 borrowed on mortgage. It is, of course, the Scottish people’s decision whether they vote for separation or not: but at least they will now know, for the first time, what separation would cost them.
I know many of my constituents favour separation. I am not so certain it would be in our interests. Ewen Stewart’s work is not so equivocal: his report makes it clear that the Scottish people would be more prosperous in the UK.
Find the full report here.