Scottish Independence: £600 Better Off Claim

Key Economics Of An Independent Scotland

Updated: 3:23pm UK, Tuesday 26 November 2013

For those without the time to sift through all 650 pages of the Scottish White Paper, here are some of the key points on the economics of an independent Scotland.

:: The Big Picture

At present, Scotland has only limited autonomy to change taxes or spending - with many of the key decisions taken in Westminster.

An independent Scotland would have the autonomy to determine its own taxes and spending plans. However, the White Paper says that the country will accept some constraints on these in order to keep the pound.

It would have the independence to control the flow of both people and goods across its borders - though, again, the White Paper says the plan would be to leave this flow unchanged.

The paper presents a vision of a country which could become a small, independent dynamic economy with a vital corporate sector, low taxes and high exports.

Whether this is possible remains a matter for debate. The Scottish economy is indeed a dynamic, relatively prosperous area, albeit with a high reliance on oil revenues.

However, attractive as independence might seem to many, it would come with some costs and constraints, as the White Paper reflects (occasionally).

:: The Public Finances

Scotland generates more tax than the rest of the UK thanks largely to North Sea oil revenues.

However, it also spends more, per head, than the rest of the UK. The upshot is that its net position is remarkably similar. In 2012/13 Scotland had a primary deficit (eg borrowing before interest costs) of 5.3% of GDP deficit. So did the rest of the UK.

However, the estimates for where Scotland will be in the coming years differ depending on whose numbers you use.

The White Paper calculates that the deficit will be between 1.6% and 3.2% of GDP by 2016/17 – the potential year of independence if there is a "yes" vote in next year's referendum.

However the Institute for Fiscal Studies thinks the deficit will be significantly higher at just over 4% of GDP by then.

The real difference of opinion occurs in the following years. The IFS thinks that as North Sea oil revenues decline and Scotland's growth rate remains steady, it could be left with a big hole in its public finances, equivalent to 4.1% of national income.

This is what Danny Alexander's claim of a £1,000 tax rise for each Scot is based on.

Alex Salmond, by contrast, believes that North Sea revenues will last longer, and that Scotland will be able to generate enough growth as a small, dynamic independent economy, akin to Singapore or Hong Kong, to avoid such an outcome.

However, the SNP has not provided any long-term forecasts to compare with the IFS's numbers.

:: The National Debt

Britain has a sizeable pile of debts built up over recent decades - by 2016/17 they will stand at £1.6 trillion. The White Paper accepts that some of this should be borne by an independent Scotland (which in turn means Scotland will have to service that debt, paying interest on it for many years into the future).

It suggests two ways of calculating the scale of that debt:

1. A population share: under this, the national debt would be split between Scotland and the rest of the UK based on their population sizes. Under this, the White Paper says Scotland would take responsibility for around £130bn - leaving it with total debts equivalent to 76% of GDP. This is a relatively high debt-to-GDP ratio by international standards.

2. An historical share: under this plan, the national debt would be split based on how much in the way of debt (or surpluses) Scotland and the rest of the UK generated in recent years. Because Scotland has generated a series of budget surpluses due to North Sea oil revenues, its share of the debt would considerably lower at approximately £100bn - 55% of Scottish GDP.

:: Currency

The White Paper says that Scotland will keep the pound, becoming a part of an effective currency union with the rest of the UK.

It says that it is entitled to do so as an effective shareholder of the Bank of England. The Bank would set monetary policy (in other words, interest rates and various banking regulations) for the entire currency area.

Westminster politicians have raised questions over whether the UK Treasury, or indeed the Bank itself, would be willing to authorise this. The SNP suggests it will be a Scottish right.

The White Paper says that an independent Scotland would agree to be bound by fiscal rules and an independent Scottish Fiscal Commission to keep its public finances in check. What this might mean in practice is that the country will not have the tax-and-spend independence it would otherwise have with a fully independent currency.

It's a similar analogy to the euro, where the single currency's members are having to sign up to a "fiscal compact" barring them from borrowing excessively.

:: Financial Regulation

One area covered in only scant detail in the report is precisely what would happen in the event of a future financial crisis - a significant question given that Scottish banks (RBS, HBOS) were at the centre of the recent financial crisis.

The report says that the Bank of England would remain in place as a lender of last resort if a bank was in trouble. However, it also says that while the Bank of England would be partly responsible for broader "macroprudential" financial regulation in Scotland, Edinburgh would also have her own independent financial regulator which would take on the job of the Financial Conduct Authority in Scotland. Whether this complex system of structures would cohere remains an open question.

And there is a deeper, more worrying issue: the Bank of England's Lender of Last Resort function kicks in only if a bank is having cash-flow issues, not if it is fundamentally insolvent.

If a bank is to be bailed out, taxpayers tend to have to step in to rescue the failed institution. Quite which taxpayers that would be is left unclear in the document.

:: North Sea Oil

One of the key elements underlying the White Paper is that the UK Government has benefited from billions of pounds of North Sea oil related revenues over recent decades, and not been set aside for future generations (let alone for those in Scotland specifically).

Indeed, unlike in some countries, including Norway, where a chunk of the proceeds of revenues is put into a fund for the future, Britain's revenues went towards current spending, helping boost the overall economy and public finances through the 1980s and 1990s.

Even today, Scotland is responsible for 94% of North Sea oil revenue (though this is not an enormous total earner for Britain, at 0.4% of GDP).

As a result, the country, which has 8.3% of the population, pays 9.2% of total taxes. However, at present that extra revenue is compensated for by extra spending.

The White Paper suggests that in future the oil revenue could be put towards a sovereign wealth fund, called the Scottish Energy Fund. However, some will ask whether this is really compatible with the rest of the White Paper's calculations, which seem to imply a large role for North Sea revenues in paying off the country's net debt.

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