Amid all the debate about the economic viability of an independent Scotland, one element of the debate has been left behind, namely what Scottish independence would mean for the rest of the UK.
Martin Beck of Capital Economics has sought to remedy that today, putting out a 12-page briefing note on whether the rest of the UK would suffer if Scotland went it alone. Many of the conclusions are speculative: an awful lot depends on what the independence settlement looks like and what happens to the economy after 2014. But there are some interesting points definitely worth pulling out:
1) Contrary to what both some Westminster politicians and the SNP say, Scotland pretty much pays its own way. Many unionists claim Scotland is a drain on the exchequer, because of the fact it receives a larger share of taxpayers money than it should based on population size, but the SNP says it is a net contributor because of North Sea oil revenues. Beck finds that the two largely balance each other out, arguing:
From a direct fiscal angle the effect on the rest of the UK on Scottish independence would be roughly neutral in the short-run.
2) Almost all North Sea oil is based around the Shetlands, and Scottish independence could trigger the emboldened Shetland Islands to bid for their own independence, which would be a heavy blow for the new Scottish government.
3) The SNP’s promises of a lower corporation tax are unlikely to entice many businesses to the country, as those looking for lower tax rates could go to Ireland, which levies a 12.5 per cent rate, well below the SNP’s proposed 20 per cent. In fact, doubts about which body would act as a lender of last resort in case of a crisis could even lead some Scottish financial firms to choose to move south of the border post-independence.
4) An independent Scotland is likely to use sterling as its currency. This would mean that, in the event of an oil price spike, the Scottish government would enjoy the benefit of extra revenues from oil companies, but businesses on both sides of the border would have to cope with a strengthening of the pound, which could harm exports.
5) Potentially, the most important consideration, however, is that Scottish financial institutions are likely to remain of systemic importance to the rest of the UK. For example, insurers based in Scotland sell 94 per cent of their products to postcodes in the rest of the UK, while 84 per cent of mortgages sold from Scotland are sold to the rest of the country. In the event that a major financial institution failed, it is unlikely that the Scottish government could underwrite it, no matter what prior agreements were in place between the two governments. Beck therefore argues:
The importance of the Scottish financial sector to the rest of the UK economy may be so significant that the Bank of England, and behind it, UK taxpayers, might be compelled to support these institutions, whether voluntarily or not.
So although the fiscal consequences of independence would be largely neutral in the short term, Beck says that Scottish financial institutions would continue to pose a systemic threat to UK taxpayers. As these taxpayers would not receive the reciprocal benefit of the tax receipts from those companies, he argues:
For the rest of the UK, Scottish independence is arguably och aye the no.
Jim Pickard
Kiran Stacey