Economics will decide the referendum - so is an independent Scotland a richer Scotland?

Potential oil revenue and lost subsidy from English taxpayers will likely cancel each other out. Let's concentrate on the uncertain aspects of Scotland's economic future

Related Topics

So Scotland gets its referendum on independence. The general perception is that the debate will now switch to the economics of it all. It is a perception given a certain spice by an opinion poll suggesting that if Scots felt they would be £500 a year a head better off they would vote in favour, and if the same amount worse off they would vote against.

The economics are liable to be twisted depending on people’s political aims but there are some clear facts as well as many imponderables. As it happens, I was at a seminar in Edinburgh last week organised by the David Hume Institute, which helped clarify what is known, what can be guessed at, and what is unknowable.

Up to now, most of the debate has focused, on the one hand, on the scale of the subsidy that the English taxpayer gives to Scotland and, on the other, the bonus that Scottish oil revenues give to the rest of the UK. Yet that is one of the simplest aspects of the calculation because the two flows roughly cancel out. Scotland has higher state spending per capita than England and Wales, notwithstanding the fact that its GDP per head is the same as the UK’s as a whole. But, under international law, it would get some 90 per cent of the oil revenues, which would be enough to sustain that higher spending.

There are obvious uncertainties here, including the oil price and production. In view of these, Scotland would be wise to set aside some oil revenues in good years and build up a national wealth fund, as Norway has done. The oil will eventually run out. But there are uncertainties even now, such as the political sustainability of annual transfers from south of the border as austerity bites.

There is also an uncertainty over the apportioning of the National Debt. Should it be divided on a per capita basis, or proportionate to GDP? There’s no international law to guide here, so it would be a negotiation. But with good will on both sides, you can see a fiscal deal that could be cut.

The monetary and institutional issues are less clear. Initially at least, Scotland would retain the pound. Ireland linked its currency to sterling for nearly 60 years after it became independent. There would be the theoretical disadvantage of having no say in setting interest rates but that would not change things, for there is no Scottish representative on the Bank of England’s monetary policy committee now. But there are other practical problems. I am not sure how quantitative easing would be carried out, nor who would be lender of last resort to the Scottish banks. Could Scotland support a bank of the size of RBS and, if not, how would it and the Bank of Scotland side of Lloyds be apportioned for regulation? Beyond that, there is the European dimension, though I find it hard to see the EU blocking Scottish membership, particularly if England is to disengage further.

Would the dynamics of the Scottish economy shift if the country were to be independent?

But beyond all these practical questions, there is the biggest question of all: would the dynamics of the Scottish economy shift if the country were to be independent?

Some argued at the seminar that there would be a burst of “ animal spirits” (Keynes’s phrase) that would boost economic performance. Others wondered about the impact on human capital: would more talented workers want to come to an independent Scotland or might some non-Scots feel less comfortable and leave? My own view, as a part-Scot, brought up in Ireland and living mostly in London, is that this is the most important issue of all. It is also the hardest one to gauge – but that is economics for you.

Has Krugman got the answer?

High jinks in Parliament, from economists rather than politicians, in a debate on the economics of deficit reduction. Paul Krugman, of Princeton, and Jonathan Portes, of the National Institute of Ecomics and Social Research, argued that countries should not be cutting their deficits as fast as, for example, the UK, while Stephen King, of HSBC, and Bridget Rosewell, of Volterra Partners, countered that deficit reduction was a necessary correction to the debt overhang. It is important because  the Opposition follows Krugman/Portes, while the Coalition cleaves to King/Rosewell.

Some observations. First, governments everywhere are cutting deficits – though we don’t know the speed at which the US will until after the election. So whatever the intellectual arguments, in practice the consolidators are winning in terms of practical policy. Second, most arguments that deficit reduction should be slower come from the US which can borrow more than other countries can because of the reserve role of the dollar and breadth of the US bond market.

A third point relevant to the UK is the fact that we can finance our deficit so cheaply – evidence for Krugman that we can and should borrow more – maybe precisely because we have a credible plan to cut the deficit.

Do you agree with the Scottish referendum on independence?

React Now

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Junior Web Designer - Client Liaison

£6 per hour: Recruitment Genius: This is an exciting opportunity to join a gro...

Recruitment Genius: Service Delivery Manager

Negotiable: Recruitment Genius: A Service Delivery Manager is required to join...

Recruitment Genius: Massage Therapist / Sports Therapist

£12000 - £24000 per annum: Recruitment Genius: A opportunity has arisen for a ...

Ashdown Group: Practice Accountant - Bournemouth - £38,000

£32000 - £38000 per annum: Ashdown Group: A successful accountancy practice in...

Day In a Page

Read Next
Ed Miliband and David Cameron  

Cameron and Miliband should have faith in their bolder policies

Ian Birrell
Andreas Lubitz runs the Airport Race half marathon in Hamburg on 13 September 2009  

Being sensitive to mental health need not lead us to downplay the horror of what Lubitz did

Will Gore
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

How to make your own Easter egg

Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

Bill Granger's twist on Easter Sunday lunch

Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
Joe Marler: 'It's the way I think the game should be played'

Joe Marler: 'It's the way I think the game should be played'

The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

Cricket World Cup 2015

Has the success of the tournament spelt the end for Test matches?
The Last Word: Justin Gatlin knows the price of everything, the value of nothing

Michael Calvin's Last Word

Justin Gatlin knows the price of everything, the value of nothing