The misplaced economics of Scottish independence

I had an interesting discussion today on the economics of Scottish independence, and I recalled this piece by Evan Davis:

[...] It is interesting to ask what economic cases can be built for or against an independent Scotland. Indeed, lots of economists are taking to the newspapers and airwaves to offer a view.

Here's mine. It starts with the basic premise that Scotland has two things that England does not. The first is a disproportionate level of UK funded public spending. The second is oil, the revenues of which are taken by the UK government.

If Scotland were independent, it could expect to lose the UK funded public spending; but it could expect to gain the oil money. In the short term, that's the fiscal choice Scotland would be making if it decided to leave the UK and go it alone.

As it happens, the choice is a fairly balanced one at the moment. The oil money Westminster takes, more or less pays for the "extra" public spending Scotland enjoys.

Now, given the uncertainties of this debate, that's about all the data you need to make a short term assessment of Scotland's "viability" as an independent nation. If Scotland had been independent last year, and had stuck to the same spending policies, it would have had a government whose fiscal position was not that different to that of the UK.

A lot of debate has been stirred by this however. You can read about the competing claims in my postscript below. The Scottish Executive claims about Scotland's deficit make it sound unviable; the SNP claims make it sound as though Scotland is in surplus. The truth I think lies in between. On my calculation for last year, I think Scotland would have had a deficit of £3.5 billion, which would have been manageable.

However, does all this statistical banter matter? Probably not much. The short term is not the best horizon over which one should assess Scotland's viability.

The choice to take money out of the North Sea rather than out of the Westminister Parliament would have long term implications. And one negative implication in particular, is that an independent Scotland would be very dependent on oil.

Oil would be vital to sustaining the current level of Scottish public spending, accounting for a fifth of government revenue, and about the same proportion of national income. And yet, at some stage, the oil will run out or diminish. Or the price will fall. And then what?

The decision to go independent then, involves a gamble: that Scotland could re-develop itself better as a separate economy than as part of the UK; and that it could do so before the huge oil economy faded out of its current significance.

It's a gamble because we don't know what will happen to oil, and nor do we know how successful Scotland will be at reinvigorating its economy. It could go right, as it has for Ireland in recent years. Or it could go wrong, as it did for Ireland in the first few decades of its history.

However, there is one other implication of independence. And this is perhaps the most important, and the least predictable. Would it move the political centre of gravity in Scotland? For London-based journalists, it is striking just how far left of England, Scotland's politics lies. How would independence affect that?

There is something bothering me about this analysis, and Evan Davis's post is by no means an isolated example. It's not that Scottish independence is not, or should not be seen as, an economic issue: everything is an economic issue, including nationhood.

What strikes me as odd is the timeframe of the analysis. Is the government's fiscal position over the next five years really such an important element of national identity? Do you really want your grandkids to say their country went independent for a handful of pounds per capita?

Maybe my approach to discounting the future is too extreme, and I should be putting more weight on the present. But in a similar manner to the Stern Review on the environment, I believe the right timeframe for assessing nationhood should never be the nations' equivalent of next weekend.

If your wife's decision on whether to leave you or not hinges on how her car insurance premium will be affected over the next five years, you would not be unreasonable to think something's not quite right.


  1. Anonymous Says:

    Any economist will agree that the reason scotland needs more money is because it is devolved-northern ireland gets about the same amount and geographically more diverse thus travel and post problems.

    Unlike england that has 4 islands domains mainland jersey wright and scilly scotland has 180 islands thus transport is a huge barrier.
    Figures also show scotland has surplus.