A sketch of economic Scotland

       From a statistical perspective, Scotland looks very like the UK as a whole.  Income per head is marginally below the UK average, making Scotland the richest region of the UK after London and the South-East.  Since the Second World War that figure has been between 90% and 100% of the UK figure, reaching a nadir in the 1960s and a peak and above in the 1990s.

       The composition of output is little different from that of the UK.  There is a myth that Scotland is much more dependent on public sector employment.  The proportion of workers employed in the public sector is slightly higher – 24% as against 22% – mainly due to higher staffing levels in health and education but the difference is not great.

       Population is a differentiating factor.  Over a lengthy period, the Scottish population has grown at around ½% per annum less than that of the UK;  this more or less entirely accounts for the reported differential between Scottish and UK economic growth.  At the turn of the century, it appeared that the size of the Scottish population was headed for absolute decline.  This prospect has been averted, or at least postponed, by net immigration.  Eastern Europe has been an important contributor.  The long term demographic profile of Scotland continues to cause concern, however, with the likelihood of an elderly population increasing even more rapidly than that of the UK.

The economies of small states

       In the 19^th century, states became larger and empires extended, the 20^th century saw the reverse trend.  Some small European states – such as Switzerland and those of Scandinavia – displayed extraordinarily rapid growth in the 20^th century, moving from being among the poorest to among the richest countries in the world.  Broadly, this trend was associated with an appreciation that property was not the result of military power or the extent of control over land or other natural resources.  In a global economic environment characterised by relatively free trade, national economic success is the result of exploiting the competitive advantage of individual firms or groups of firms in international trade.

Issues around separation

       Scotland’s economic status as an independent country would be heavily conditioned by the outcome of negotiations with the EU and RUK.  The terms of accession to the EU are mostly predetermined and the limited negotiation would mainly concern the variety of opt outs enjoyed by the UK.  The economic issues raised would principally be the budget rebate (Scotland would stand no chance of inheriting part of this), zero rating under VAT (a continuation could probably be negotiated), adoption of the euro (the EU would probably settle for some vague and indefinitely postponed aspiration that Scotland would participate) and the fiscal compact (clearly interrelated with the agreement negotiated with RUK).

       These fiscal arrangements would be the principal economic issue of controversy in negotiation with RUK.   Retention of sterling would plainly be the best currency option for Scotland but in the light of the travails of the eurozone, agreement to this would almost certainly be contingent on a detailed (and asymmetric) fiscal compact.  Such an outcome is so far from the economic aspirations associated with independence that it is difficult to believe that agreement would be possible.  Probably a separate currency pegged to sterling is the likely, but far from ideal, outcome.  In that case no agreement with RUK is necessary but the question of membership of a EU fiscal compact remains.  In any event, the budgetary freedom available to an independent Scotland would be significantly limited.

The fiscal position

       Presumptively existing debt would be divided on a population or GDP share basis, and oil revenues split on a formula strongly favourable to Scotland.  There is a broad balance between this gain from oil taxation and the higher level of per capita public expenditure in Scotland permitted by the existing block grant so that the overall fiscal position of an independent Scotland would, at least initially, be little different from the present.  The higher level of per capita spending in Scotland is noted, mainly accounted for by higher staffing levels in health and education.  There is little difference in educational attainment between Scotland and the UK as a whole but mortality/morbidity experience is markedly worse.  The extraordinarily rapid growth in the block grant and public expenditure in Scotland over the period 2000-6 facilitated many small populist expenditure gestures – ‘the culture of free’, as some commentators have described it.

       Welfare spending is the largest component of UK public expenditure and much the largest spending item not currently devolved to Scotland.  Presumably in the short term Scotland would continue to apply UK provisions.  Pensions and other expenditure on the elderly dominate welfare spending and disentangling pension arrangements would be a subject of considerable complexity – these issues remain a subject of dispute in the former Czechoslovakia twelve years after separation.

Energy and industry

       Scotland is currently a substantial exporter of both oil and electricity.  Although oil production has peaked it is likely to continue for some considerable time:  Scotland’s electricity capacity, however, is ageing.  There are ambitious plans to replace this with renewable – mainly wine – energy:  these plans make sense, if they make sense at all, only on the basis of an integrated mainland UK electricity network and considerable cross-subsidy from English consumers.

       An independent Scotland could not have rescued its failed banks in 2008 and would have been bankrupt if it had attempted to do so.  Nor should it have tried.  The sensible policy for an independent Scotland is to provide protection and support for domestic retail banking activities and leave the Scottish taxpayer free of any express or implied commitment to provide support or guarantees for other financial institutions.

       As already emphasised, the economic success – or otherwise – of small states depends on the capacity of its firms and industries to develop specialised competitive advantages in global markets.  Scotland has seen a steady drain of headquarters activities out of Scotland over several decades, the loss of effective control over its major banks being the latest – and perhaps final – example.  There have been some specialist successes in establishing new firms or reviving older ones – such as Wood Group, Weis, Clyde Blowers, Stagecoach, but taken as a whole the record of recent Scots entrepreneurship is not particularly strong.   Would independence give a boost to the self confidence of Scottish business, or create a political climate less favourable to enterprise and innovation?  This is the central economic issue on which economic arguments over independence should revolve.