Is an independent Scotland more economically viable today?

The 2014 referendum was widely seen as having turned on the economic case against independence, with many Scots unconvinced by claims that the country’s prosperity would be maintained outside the union, says Ben Chu. But how does that case look today – and have Brexit and coronavirus changed things?

A major stumbling block for the pro-independence side in the 2014 referendum was the question of what currency an independent Scotland would use (Getty)

On a visit to Scotland on Thursday, Boris Johnson argued that the response to the coronavirus pandemic has demonstrated the “sheer might” of the United Kingdom’s political union.

Others, of course, take the opposite view and feel that the relative performances of the administrations in London and Edinburgh in the crisis have demonstrated that Scotland would be better off independent, with full control of its own affairs.

The pro-independence side was defeated in Scotland’s 2014 referendum, and that was supposed to settle the independence question for a generation.

Yet since then we have seen huge gains for the Scottish Nationalist Party in Westminster and Holyrood elections. And we have had the 2016 Brexit vote, in which a majority of Scots voted to remain in the European Union. On top of that comes the massive economic shock of the coronavirus pandemic.

The vote in 2014 was widely viewed to have turned on the economic case against independence, with many Scots unconvinced by the claims that the country’s prosperity would be maintained outside the union.

How does that case look today? Have Brexit and the coronavirus pandemic changed things? Is an independent Scotland more economically viable now than it was then?

What was the economic case against independence in 2014?

A major stumbling block for the pro-independence side was the question of what currency an independent Scotland would use.

Alex Salmond, the then SNP leader, suggested that Scotland would continue with the pound sterling. However, that raised the question of whether Scotland would have any influence on UK monetary policy, or whether the Bank of England would help prop up bust Scottish lenders such as the Royal Bank of Scotland in a future financial crisis, as it did in 2008.

The question of whether an independent Scotland would seek to – or would be compelled to – join the euro was also an uncomfortable one given the crisis in the single currency area.

Those questions remain.

Yet the Scottish National Party’s Sustainable Growth Commission, which published its report in 2018 after two years of research, at least seems to have delivered a clear line on the issue. It recommended that the currency of an independent Scotland should remain the pound sterling unilaterally for a possibly extended transition period.

It accepted that this would involve giving up some financial freedom of movement, stating: “We recognise that this means that the Scottish government would not secure monetary policy sovereignty in the initial period following an independence vote though the Scottish government would not be in a formal monetary union.”

What about the Scottish public finances?

Another major question in 2014 was what Scotland would have to do without the effective fiscal subsidy from the rest of the UK.

Research from the Institute for Fiscal Studies ahead of the referendum showed that per capita spending on public services was 17 per cent higher than the UK average.

The SNP rejected claims that an independent Scotland would have to enact instant austerity in order to balance its books and prevent a solvency crisis.

But the Sustainable Growth Commission did accept in 2018 that an independent Scotland would have to implement a fiscal consolidation, projecting a deficit on independence of about 6 per cent of GDP.

The body said public spending would have to be very restrained for a decade to cut that deficit in half.

What about oil?

Many supporters of Scottish independence insisted in 2014 that the fiscal transfers to Scotland from London were lower, even non-existent, if one included “Scotland’s share” of taxes from North Sea oil revenues.

As has been widely noted by opponents of independence on both sides of the border, though, the sharp fall in global oil prices shortly after the referendum made this less credible.

It has slumped even further this year, of course, making it even more untenable to suggest that an independent Scotland would enjoy large windfalls from oil wealth which would fill holes in its budget.

What impact will Brexit have?

All credible modelling exercises and economic analyses indicate that leaving the EU’s single market and customs union will be detrimental to the broader UK economy in the long term. Regional analyses suggest that Scotland would be negatively impacted in a roughly similar way to other parts of the UK.

If an independent Scotland rejoined the EU’s single market and customs union, it could possibly mitigate some of the long-term damage from Brexit.

The huge problem is that, in doing so, it would probably have to put trade barriers between itself and the rest of the UK, an area with which it does more trade than the rest of the EU.

About 60 per cent of all Scottish exports are estimated to go England, Wales and Northern Ireland, versus 20 per cent to the rest of the EU.

And how about the coronavirus?

This is projected to be the largest recession since 1706 – the year, as it happens, that Scotland and England were formally joined in political union. But in terms of the recession it’s too soon to make a judgement about whether Scotland has been harder hit than the rest of the UK.

It’s worth noting that the decisions of the Scottish government on the timing of the lockdown and on the stringency of various public health restrictions will likely have an impact on economic activity in Scotland relative to England, as well as having an impact on the relative public health outcomes.

In terms of the economic slump’s impact on public finances, a newly independent Scotland could have a somewhat larger structural deficit to deal with relative to the calculations done in 2018, reflecting the larger deficit projected recently by the Office for Budget Responsibility for the wider UK. That would imply more austerity would be required by an independent Scotland, although it could be spread over a long period.

Scotland’s inherited share of the national debt would also be bigger now. The degree of additional stress that this would put on its public finances would depend on the interest rates that an independent Scotland would be able to borrow, which would depend on how the risk of default or inflation was priced by international investors.

What’s the bottom line?

Despite the rollercoaster of the past six years – the oil-price crash, the Brexit vote and the largest economic collapse since 1706 – the fundamentals of the economic case for and against independence have not, perhaps surprisingly, altered.

Independence would likely force an uncomfortable fiscal adjustment on any future Edinburgh government. It would be folly to rely on oil revenues to balance the books, especially in an era of decarbonisation pledges. There could well be currency instability.

Yet it may well be that the tumultuous events since 2014 have convinced more Scots that, in a world of inordinate political and economic uncertainty inside or outside the United Kingdom, such hazards are better faced with decisions being made closer to home.