By Paul Sutton

One week after the Scottish National Party (SNP) conference in Glasgow in October 2016 the Scottish Government published a draft bill for a second independence referendum to be triggered dependent on the results of the UK wide negotiations to leave the European Union.  In it, the Scottish Government sought as closely as possible to duplicate the details of the first referendum in 2014, including voting for 16 and 17 year olds and posing the same question for or against independence, allowing them to capitalise on the advantage of campaigning for a ‘yes’ vote.

If current opinion polls are to be believed, the chances of the SNP winning a second referendum at the moment are not good. While Scotland voted 62% to 38% to remain in the EU in the June referendum this level of support has not crossed over into more support for an independent Scotland. Analysing the results of recent opinion polls John Curtice, Scotland’s leading pollster, claimed that “the UK wide vote in favour of Brexit has made little difference to the balance of opinion on independence” (1). A majority were still opposed to it.

Indeed the economic circumstances in Scotland have significantly worsened since the first independence referendum, exposing even more effectively than at that time the significant costs to the Scottish people of leaving the United Kingdom.

Deficit

These were most starkly revealed with the publication of the latest Government and Expenditure Revenue Scotland (GERS) figures in August. They showed a massive difference between revenue raised in Scotland of £53.7 billion, including the take from the North Sea oil and gas sector, and government expenditure in Scotland of £68.6 billion. This gives a deficit of nearly £15 billion, equivalent to a 9.5% share of GDP which is the highest percentage figure in the EU outside of Greece and more than double the 4% figure for the UK as a whole.

Were Scotland to be independent and in the EU this would have led to immediate difficulties with the EU Stability and Growth Pact which specifies government deficits must be kept below 3% of GDP. To meet that target an independent Scotland would have had to double the take from income tax or more likely slash government expenditure dramatically.  Given that the highest amount of spending in Scotland is accounted for by social protection (mainly benefits and pensions) and health (together amounting to nearly £40 billion in 2015-16, some 52% of total public spending), this would have had massive impacts on the most vulnerable in society.

Closer to home the size of the deficit underlines the benefits of remaining within the UK. Public expenditure in Scotland in 2015-16 was £12,800 per person which was £1,200 per person greater than the UK average. Public revenue in Scotland was approximately £10,000 per person which is about £400 per person lower than in the UK for the same period. In short, the rest of the UK subsidises the higher spend in Scotland allowing a higher standard of living in Scotland than would otherwise be the case. The Barnett formula which underpins this arrangement continues to benefit Scotland in spite of constant nit-picking criticisms of it by the SNP.

The situation is unlikely to change radically under the new devolved powers assigned to Scotland under the Scotland Act 2016. This transferred increased financial responsibilities to the Scottish government so that now it has control of some 40% of the budget raised in Scotland and oversight of a much greater figure. To date it has done very little to exploit these new possibilities. Tax variations except at the margin have not been attempted and historic debt, such as those amassed under the private finance initiatives and similar more recent ventures, now cost more than one billion pounds a year to service.

Decline

Indeed the SNP government’s overall record on economic growth in the last few years remains poor. In 2015 growth at 1.9% was below that of the UK as a whole and prospects for 2016 remain bleak. While some of this is related to the downturn in North Sea oil other sectors have also performed badly. The contribution of the finance sector, often touted in SNP literature, has remained flat since the financial crisis and the contribution of tourism (broadly conceived) has fallen in the last 10 years (whilst that of the UK has grown). Public services remain severely constrained by various austerity measures. Only the construction sector has improved and that is now set to slow or reverse as large public sector projects such as the Forth Road Bridge replacement come to an end (2).

These trends spell future difficulties for the Scottish economy, not only in terms of attracting and delivering new investments but also in maintaining revenue sources as the Scottish government becomes more reliant on taxes generated in Scotland.

Such difficulties are starkly illustrated by the recent and ongoing collapse of oil prices and revenues from the North Sea. The GERS figures estimate that Scotland’s share of North Sea revenues fell 97% from £1.8 billion in 2014-15 to £60 million this year.

Oil prices will increase in the future but they are unlikely to reach $100 a barrel again for a long time. This does not stop the Scottish government using this figure in planning its future revenue scenarios but it is totally unrealistic. More likely is the $60 a barrel figure given as the basis of planning by the Offshore Co-ordinating Group of the Scottish Trade Union Congress in their recent Annual Report.

Additionally, revenues will be depleted by reductions in offshore tax rates and allowances to incentivise investment. Douglas Fraser, BBC Scotland’s business editor, commented as follows:

“The 2015-16 figure for petroleum revenue tax includes allowances and comes to £562 million in reverse revenue. Next year and for the rest of this decade, the GERS figures could include a negative total for oil and gas. Add to that the factor of clever corporate accountants. A trade union report has been published this week looking into the tax practices of North Sea producers, and alleging a lot of imaginative and opaque ways of transferring prices out of the UK jurisdiction and into a more attractive one for tax liability” (3).

There is nothing on the horizon to suggest that an independent Scotland will be more capable of countering this tax avoidance than the UK. There is however much in its recent past to suggest that the SNP can delude itself on economic forecasting or more uncharitably, seek to pull the wool over the eyes of the Scottish public.

Wishful Thinking

The 2013 White Paper setting out the case for Scottish independence included a lot of what are now revealed as overly optimistic figures and claims that are not now supported by the facts. Some key ones identified by John McLaren are that, compared to the UK, Scotland:

• contributes more tax per head (in 2011-12 this was given as £1,700 per head whereas in 2015-16 it is £400 lower than the equivalent UK figure)
• has stronger public finances (in the five year period to 2011-12 this was said to be £2,400 per head whereas now in the five year period to 2015-16 public finances in Scotland were weaker by almost £4,300 per head)
• has a much higher GDP per head (this was said to be 20% higher ranking Scotland as 8^th out of 34 OECD member countries whilst now it ranks as 15^th with a GDP only 1% higher) (4).

McLaren also notes that subsequent revisions to the 2013 figures show lower figures than then stated -  in 2011-12 the tax receipts were £500 lower per head and Scottish finances stronger by only £200 per head. Given this, the oft made claim during the independence campaign by the then Scottish Finance Secretary John Swinney that he did not recognise the economic figures put before him by those opposed to independence can be seen to be deliberately myopic or at best disingenuous.

 The Scottish economy, in short, is underperforming and immediate future prospects do not look particularly good.

Brexit has added to the uncertainty but it does not in itself carry within it a plausible case for independence from the UK.

In October the Fraser of Allander Institute at the University of Strathclyde released a report commissioned by the Scottish Parliament on the implications of Brexit for Scotland. This confirmed that over the long term Brexit would have a negative impact on trade, labour mobility and investment in Scotland, although less than that on the rest of the UK, with losses dependent on whatever relationship with the EU is finally agreed (5).

What, of course, such a relationship might be is presently unknown. But what is known is that Scotland is much more closely integrated with the rest of the UK than with the EU. Given what we already know about the complexities of the UK leaving the EU what does this say about the difficulties in untangling the UK relationship!

In the independence referendum the SNP proposed a window of only 18 months between the date it was held and their favoured date for independence if they had won. This time period was unrealistic then and would be unrealistic if proposed again. So is any argument that Scotland is more prosperous than the rest of the UK and would be even more prosperous if it were outside it.

Wishful thinking makes bad policy and even worse economics.

(1) ‘What Scotland Thinks’, 18 September 2016.

(2) Figures from John Mclaren, Scottish Trends, press release 17 May 2016.

(3) BBC Scotland news, 24 August 2016.

(4) Scottish Trends, press release 24 August 2016.

(5) Long-term Economic Implications of Brexit, 6 October 2016

"If current opinion polls at to be believed, the chances of the SNP winning a second referendum at the moment are not good."

"There is...much in its recent past to suggest that the SNP can delude itself on economic forecasting or more uncharitably, seek to pull the wool over the eyes of the Scottish public."