By Paul Sutton

The one constant in the opinion polls on the September referendum is that among the committed voters there is a majority voting against independence, although the large number of voters yet to make up their minds does not mean the ‘no’ vote will win on the day.

There is also one other constant: the economy. All polls show this is the most important single issue informing voting choice and one series of polls has summarised its significance using the figure of £500. It simply asks one question: will you be better or worse off by £500 should Scotland become independent?

The answer consistently given since it was first asked in 2011 is that a majority would support independence if they were £500 better off and a majority oppose it if they were £500 worse off. The figures for 2011 were 65% would support independence if £500 better off and in 2013 it was 52%.

If the reverse question is put: would you be against independence if you were £500 worse off, the figures are for 2011, 66% and for 2013, 72%. Together both sets of figures show a hardening of opinion against independence if it carries a financial cost. Or alternatively, they show an increasing degree of doubt about how robust the Scottish economy will be following independence.

Those polled are right to be sceptical. As the referendum date looms nearer a larger and increasing number of questions are being asked about how the economy will work and to whose benefit. The answers to them are crucial to the outcome of the referendum and to the living standards of the vast majority of the Scottish people.

Currency

The most important to date has been on the issue of currency. Scotland has four options: (a) continue to use sterling with a formal agreement with the rest of the UK (a sterling currency union); (b) use sterling unilaterally, with no formal agreement with the rest of the UK (‘sterlingisation’); (c) join the euro; (d) introduce a new Scottish currency.

The SNP once favoured both (c) and (d), but has now moved to (a). That position is now simply unsustainable. On February 13^th the Chancellor of the Exchequer, George Osborne, delivered a speech in Edinburgh ruling out any chance of negotiations between an independent Scotland and the rest of the UK (rUK) on a monetary union. The position was further strengthened with statements the same day by Danny Alexander, the Chief Secretary to the Treasury, on behalf of the Liberal Democrats and by Ed Balls, the Shadow Chancellor, on behalf of the Labour Party.

This position has been reiterated by all three on several occasions since then. It has also been strengthened by technical analysis set out in a speech in Edinburgh by Mark Carney, the Governor of the Bank of England, and confirmed in detail in the Scotland Analysis papers.  The most recent on a sterling union states: “There is no rule or principle in international law that would require the continuing UK to formally share its currency with an independent Scottish state. Independence means leaving the UK’s monetary union and leaving the UK pound” (Scotland Analysis: Assessment of a sterling currency union. 13 February, 2014).

The reaction of the SNP is to claim this is ‘bullying and bluff’ and that following a decision by Scotland to become independent it would be in the best interests of the rUK to agree a sterling union. This is not credible. A currency union will only work if rUK taxpayers agree to underwrite deposits held in Scottish banks and Scotland allow the Bank of England oversee the financial stability of both states. In short, both Scotland and the rUK would need to cede some sovereignty to mitigate risk and safeguard financial stability in an independent Scotland and this has been ruled out. Osborne concluded his speech as follows: he “could not recommend” that the rUK should enter into a currency union with an independent Scotland. “That’s not going to happen. The people of the rest of the UK would not accept it and Parliament would not pass it” (www.gov.uk/speeches)

The refusal of the SNP to accept this situation raises questions about the quality of judgements being made by leading SNP figures who are not above their own ‘bullying and bluff’ tactics. See, for example, recent statements by John Swinney, the SNP Minister of Finance, that Scotland might not assume its share of the UK national debt (some £100 billion) if a negotiated currency union is denied (BBC News Scotland, 7 March).

If, in fact, Scotland chose not assume its share of the debt it would leave itself a ‘hostage to fortune’. The bond markets would be hesitant to lend it money, except at a premium rate, and the rest of the international community, along with the rUK, could be expected to be sceptical of Scotland’s probity and commitment, with all that means as to negotiations with the EU and others.

Scotland would, indeed, be exposed naked in the conference chamber.

Of course, Scotland can use the pound without the consent of the rUK. But such a strategy is to deny itself a monetary policy: it would have no power to issue money or reserves, borrowing would be more expensive, and it would have to absorb any shocks to the Scottish economy by reducing public spending or increasing taxes. It would signal the end of Scotland as a credible financial centre.

 It is why the SNP created Fiscal Commission recommended against it. It is, however, where Scotland will end up should it vote for independence. It will be ‘the worst of all worlds’ given it has ruled out joining the euro or creating its own currency, either of which remains an alternative albeit ones the SNP refuse to consider.

The Financial Sector

In 2010 the financial services sector contributed £8.8 billion to the Scottish economy and employed directly 85,000 people and indirectly 100,000. It involves large banks such as the Bank of Scotland and the Royal Bank of Scotland (RBS), insurance and pension providers such as Standard Life and financial management firms such as Aberdeen Asset Management. In 2009 the finance sector sold nearly half (47%) of its output to the rUK (Scotland Analysis: Financial and banking services. 20 May, 2013).

RBS almost failed in 2008 and was taken over by the UK government. It provided some £320 billion to stabilise the bank, equivalent to 211% of the Scottish GDP that year. The question must be asked as to whether an independent Scotland could have financed such a rescue plan out of its own resources given that an independent Scotland would need to establish its own regulatory mechanisms for the financial sector, including financial consumer protection and its own deposits guarantee fund to compensate savers if a bank failed.

This becomes even more problematic if the total size of the financial sector is considered. Scottish banks have assets totalling around 1254% of an independent Scotland’s GDP. This is well above a figure of 700% for Cyprus and 880% for Iceland where financial crises resulted in major bank failures. In September 2012 banking sector contingent liabilities were around £30,000 per capita for the UK but in an independent Scotland they are £65,000. This could be the cost to a Scottish taxpayer of a future banking crisis.

In short, there is considerable uncertainty as to whether a Scottish financial sector can be viable outside the current UK framework and whether an independent Scotland will still retain the confidence of financial markets. These uncertainties have already led Alliance Trust, a Dundee based investment company, and Standard Life (90% of whose customers are south of the border) to commit to establish businesses in rUK should there be a ‘yes’ vote to independence.

And on March 11^th, Mark Carney told the House of Commons Treasury Committee that there was “a distinct possibility” that RBS would relocate to rUK following independence (BBC News Scotland, 11 March).

Business

In Scotland, the services sector accounts for around three-quarters of GDP and 82% of employment. In general the performance of the Scottish economy is similar to that of the rUK with levels of productivity and employment broadly in line with the UK average (Scotland Analysis: Business and microeconomic framework. 2 July, 2013).

The Scotland Analysis report attributes much of this to the fact that the UK is a true domestic single market with no significant barriers between Scotland and the rUK. It argues this is of considerable benefit to both Scotland and the rUK. In 2011 Scotland ‘exported’ £36 billion worth of goods and services to the rUK, around double what it exported to the rest of the world, and ‘imported’ £49 billion. Among the leading export sectors were financial and professional services, food and drink, and energy.

In support of this activity is a shared business framework that allows for the development of effective common regulations, a unified labour market, a shared knowledge base and an integrated infrastructure. An example is the free movement of labour between Scotland and the rUK, with around 34,000 people of working age moving in each direction in 2011. In all, some 700,000 people born in Scotland now live in the rUK while around 500,000 born in the rUK now live in Scotland.

Another example is foreign direct investment (FDI) with Scotland in 2012 the recipient of just under 11% of the FDI in the UK, which is in line with its share of GDP. An independent Scotland would find it more challenging to attract FDI unless it made considerable concessions to attract it.

In sum, the current business framework provides ‘economies of scale’ which reduce the costs on doing business. Independence will erode these through the creation of new barriers in the form of differences in regulations and their enforcement, which will increase the costs and complexity of doing business.

That, of course, would massively increase were Scotland to have to adopt another currency than sterling.   Business would have to bear the transaction cost of a change from sterling to the Scottish currency unit and vice versa, inevitably leading to cost and price increases and making business less competitive.

Government Policy

Under devolution the Scottish government were given some limited powers to develop an economic policy. These were further enhanced with the Scotland Act of 2012, including additional tax raising and borrowing powers. The major part of Scottish government spending, however, is by way of a block grant from the UK government of around £30 billion annually.

Public spending per person in Scotland has been around 10% higher than the UK average. The pro-independence campaign claim that the revenues Scotland generates, onshore and offshore via North Sea oil and gas, more than cover its expenditure and are large enough to support independence.

Much of this revolves around North Sea oil. Since devolution, Scotland’s geographical share of North Sea oil and gas receipts has fluctuated between £2 billion and £12 billion (from 2.4% to 8.3% of Scottish GDP). The latest figure for 2012-13, reported in the Government Expenditure and Revenue Scotland (GERS) puts the receipts at £6.6 billion, a 41% drop over the previous year (BBC News Scotland, 12 March, 2014).

This demonstrates its volatility as a revenue source. Under the current funding arrangements of the block grant derived from UK wide taxation this volatility is accommodated and smoothed out to provide a stable source of funds year on year. Under independence greater volatility would apply. In some years this would deliver a bonanza and in others a deficit in revenues.

The response by the SNP has been a proposal to create an oil fund, similar to that in Norway, which would act to smooth out oil and gas revenues by saving in good years and spending in bad years. However, such a fund is expensive to establish. A study cited in the ‘Scotland Analysis: macroeconomic and fiscal report’ (3 September, 2013) suggests that starting from a balanced budget in 2016-17 (by no means a certainty as noted in the paragraph below) an independent Scotland would need to raise £8.4 billion in real terms, which implies either spending cuts of 13% from current levels or onshore tax rises of 18% for that year.

In fact, the situation might be even worse. A forecast by the UK Treasury on the government deficit for that year contrasts figures released by the SNP in its White Paper (Scotland’s Future: Your guide to an independent Scotland, November 2013, p. 75) with those of independent forecasters. This shows that the SNP forecast of a deficit of £5.5 billion in 2016-17 (£1020 per head) is significantly out of line with others and its own, which it gives as £9.1 billion (£1690 per head) (Further HM Treasury analysis on Scottish forecasts for the Scottish deficit in 2016-17, 11 March, 2014).

So much for the prosperity and feel-good factor the first year of independence would bring! And who knows how much oil and gas is left out there anyway? The SNP consistently assume greater revenue from it than others do, as shown in the figures above where the difference is largely explained by SNP optimism on future returns from oil and gas.

Most others, however, suggest that tax revenues from North Sea oil and gas are on a long-term downward trend. This makes nonsense of many of the SNP’s promises for more and better government services following independence.

The SNP Vision

In fact, the SNP vision for the Scottish economy set out in the White Paper (Scotland’s Future: Your guide to an independent Scotland, November 2013) does not match realities.

The figures always err on the side of optimism and the process of moving toward independence is seen as a ‘seamless transition’ without significant disruption. Take, for example, the comment on the currency where it states: “our proposal to continue to share the pound as our currency…..would involve partnerships and co-operation with other countries. However, the decisions on when to co-operate would be entirely ours to make” (White Paper p. 43).

The decision on whether to co-operate is not, of course, the SNP’s decision alone and the proposal on the currency has already been rejected by the rUK. The same applies to its bid for membership of the EU and for NATO, where the SNP assumes co-operation will be forthcoming and sees negotiations as a relatively simple matter between like-minded governments.

The statement by European Commission President Jose Barroso that “it would be extremely difficult, if not impossible” for an independent Scotland to join the EU has brutally exposed the weakness in this approach (BBC Scotland News, 16 February, 2014).

Take another comment: “Having responsibility for all economic levers in Scotland will allow us to transform our country….that builds on our existing strengths and which helps deliver a more outward focused, dynamic and resilient economy” (White Paper p. 91).

The decision to unilaterally adopt sterling (‘sterlingisation’) effectively surrenders monetary policy to the rUK along with key aspects of fiscal policy. This is not the ‘all economic levers’ promised.

The policy on sterling also puts at risk an ‘existing strength’ in finance and a vote for independence an ‘existing strength’ in shipbuilding on the Clyde. As the Scotland Analysis paper on Defence (8 October, 2014) put it: “The Ministry of Defence is, by far, the primary customer for the shipbuilding industry in Scotland….In the event of independence, companies based in an independent Scottish state would no longer be eligible for contracts that the UK chose to place for national security reasons….(other than during wartime) the UK has not had a complex warship built outside the UK since the start of the 20^th century at least”  (pp. 12-13).

And the arguments made earlier on oil and gas revenues show that far from Scotland being more ‘resilient’ it will be more vulnerable following independence.

In fact, the only argument that is remotely credible is the promise of an ‘outward focus’. The SNP has staked the economic future of Scotland on developing “a supportive, competitive and dynamic business environment” (White Paper p. 96) by attracting business through cuts in corporation tax and leaving untouched the current laws restricting employment rights. The only ‘transformation’ that will take place under an SNP government in an independent Scotland will be toward capital and against labour.

As the Red Paper on the White Paper concluded: “the proposals set out by the Scottish Government in its Independence White Paper…..surrenders the key powers over the economy to external institutions, the Bank of England and European Commission, institutions which inevitably enforce the same neo-liberal policies, on terms set by big business and finance, that are currently destroying jobs and welfare across Britain and the EU” (Red Paper Collective, 2013).

The sum and substance of the White Paper is not independence: it is the direct negation of it. The way forward for the majority in both Scotland and the rest of the United Kingdom is the common and shared projection of an alternative economic policy that promotes public ownership, economic regeneration, full employment and a taxation system targeted to reducing inequality. And that is best done within a United Kingdom.