Economics of Scottish independence
Academics Graeme Roy, from the University of Strathclyde, and Hanwei Huang et al, from the London School of Economics, consider some of the economic arguments around Scottish independence. In addition, journalist Martin Fletcher discusses how economics may not be the deciding factor in any new referendum.
Graeme Roy argues that the economic landscape has changed “markedly” since the 2014 referendum; for example, he refers to declining revenues from North Sea oil. He says this income was “a key part of the economic case for independence” in 2014. He states that estimates at the time suggested revenues of £7 billion to £8 billion a year. Now they have fallen to less than £1 billion.
Roy then discusses Brexit. He states that the administrative issues encountered since the end of the transition period might dissuade some voters from breaking away from the rest of the UK (rUK). More fundamentally, he says that Brexit might change the entire economic model for independence. Roy states that supporters of independence in 2014 proposed that Scotland would retain sterling and the Bank of England, and have an open border with rUK underpinned by the EU single market. However, following Brexit, there have been calls for a more radical approach, including a separate currency. Roy believes this would lead to additional “short term risk and upheaval”.
Turning to coronavirus, Roy notes that the Scottish National Party believes independence is necessary to help the recovery. However, he argues that the economic consequences of the pandemic would make the transition to independence more difficult.
Roy calls for a more complete debate on the economic case for independence. He believes this should also cover issues such as inequality and the target of reaching net zero greenhouse gas emissions by 2050.
Hanwei Huang et al argue that Scottish trade, and thereby the wider economy, would be affected if independence resulted in an international border with rUK.
They first note how closely the Scottish economy is tied to that of rUK; for example, they state that rUK accounted for 61% of Scottish exports and 67% of imports in 2017. The authors then model an increase in border costs with rUK of between 15% and 30%. They estimate these costs would reduce long–run Scottish income per capita by between 6.5% and 8.7%. They suggest these costs would be two to three times larger than the economic impact of Brexit on Scotland.
The authors then explore the argument that Scotland should become independent in order to rejoin the EU. They describe this as a “paradox”. They say that Scotland would only be better off in the EU, rather than in a common market with rUK, if independence reduced trade with rUK so significantly that the EU became a more important trade partner. However, if rUK trade were reduced this far, the economic costs would be “substantial”. The authors therefore find that “for rejoining the EU to be economically desirable, independence itself must bring substantial economic costs”.
As a result, the authors conclude that, from the point of view of reducing economic cost, “Scotland’s medium-run priority following independence should be keeping border costs with the rest of the UK as low as possible”.
Martin Fletcher acknowledges that Scotland “depends heavily on the UK for trade and fiscal support, and would face a tough transition to EU membership”. However, he argues that there are ten EU member states smaller than Scotland and that “the EU is designed to protect their interests”. Therefore, he concludes that there is “no reason why it should not prosper after rejoining”.
In addition, he reports opinion polls suggesting that Scottish voters support independence even though more believe it will make the country worse off than better off. This, he concludes, shows that “economic arguments tend to be trumped nowadays by arguments based on identity and emotion”.
Read the full articles:
- Scottish independence referendum: why the economic issues are quite different to 2014 (Graeme Roy, Fraser of Allander Institute, on The Conversation, 28 January 2021);
- Disunited Kingdom? Brexit, trade and Scottish independence (Hanwei Huang et al, Centre for Economic Performance, London School of Economics, 3 February 2021); and
- ‘I have cherished the union but I would now vote for Scottish independence’ (Martin Fletcher, New Statesman, 1 February 2021).