Wall Street Journal on The Economics of Scottish Independence
We’re not in the habit of reprinting articles from the Wall Street Journal but we’ll make an exception for this one. The article below was published on 3rd May by the WSJ in their MarketWatch section. It examines whether the economics of Independence add up. It’s an article worth bookmarking.
MAKING SCOTTISH INDEPENDENCE ADD UP
As the countdown to the Scottish independence vote in the autumn of 2014 draws closer, temperatures are rising fast as the debate moves to the hard-nosed economics of what will it cost. The Economist magazine recently poured gasoline onto the flames by running a map of Scotland on its cover labeled “Skintland.”
Even if this jibe is taken with an element of tongue in cheek, it still hits close to home: Scotland might not be skint — or poor — but for many the fear is, live in Scotland and you might be.
For years if not centuries a disproportionate stream of Scots have made homes overseas — from North America to New Zealand — seeking better fortunes and better weather. All too often Scotland tends not to offer the rewards available elsewhere.
If the nationalists are right, independence can reverse this situation. They can also point to some influential supporters including News Corp. chairman Rupert Murdoch who earlier this year tweeted: “Let Scotland go and compete. Everyone would win.” News Corp. is the owner of MarketWatch, the publisher of this report.
The crux of the nationalist argument is that Scotland underperforms because a dysfunctional Westminster political system has systematically relegated its interests: Government was either by a Conservative party with too few Scottish MPs to care, or a Labour Party who traded electoral success for economic mediocrity and mass welfare dependency.
Give Scotland independence and it will reverse this drift and ensure prosperity, they argue.
As well as the electorate, investors will also be watching plans carefully. The Eurozone crisis has shown how ruthlessly any hint of weakness in financial performance is punished.
No quick answers
Yet, there is no quick answer or unanimity to the economics of an independent Scotland. It requires more than just a snapshot of the country’s assets and liabilities upon separation. What is also needed is a sense of what kind of economy Scotland can achieve holding the full levers of power. If Scotland is put under new management, how much better will it do?
All too often this debate rarely gets past the sneering view that Scotland would be too poor (skint), or too small to stand on its own two feet outside the U.K.
But the claim that a penurious Scotland is a subsidy junkie has already been proved a myth.
New accounts of revenue and expenditure from Treasury data show Scotland regularly gives more than it receives from U.K. coffers.
Last year Scotland contributed 9.6% of U.K. taxes, yet received only 9.3% of U.K. spending in return with just 8.4% of the population. Take a geographical share of oil revenues into account and its 2011 budget deficit would be just 4.4% of gross domestic product, versus an equivalent figure for the U.K. of 6.6%.
There is now little dispute that Scotland on its own can be a viable economy. But just how strong depends on where you come down on the big arguments over oil, currency and how effectively an independent Scotland can govern.
The Economist questions Scotland’s dependence on oil, which it says is running out, while the price of oil may fall. Yet the claim of vanishing oil has been turning up since the 1970s. Latest reports estimate 24 billion barrels remain, equating to a wholesale value of some £1.5 trillion at today’s prices. With the world’s second largest consumer of oil, China, adding close to a million new cars on its roads every month, worrying about lower oil prices looks a red herring.
Another critique is that Scotland would be a vulnerable small economy on its own. Yet its GDP puts it on a par with the likes of Singapore and Hong Kong and would be ranked 6th in the OECD in terms of GDP per head.
One resurgent success is the national tipple. Helped along by surging sales in Asia where whiskey is often drunk by the bottle rather than by the nip, exports grew 23% last year to £4.23 billion.
One advantage of independence frequently cited is it confers tax-raising powers. Scotland could attract industries where it has a competitive advantage to relocate — be it asset management, game development or green renewable energy.
Singapore has successfully used tax incentives to support its wealth management industry. Scotland would have scope to consolidate Edinburgh as a financial center. It is already the fourth largest in Europe in terms of assets under management. Likewise policy could seek to attract corporate headquarter functions as Ireland has successfully managed. Scotland’s educated workforce benefits from having universities in the world’s top 200.
Yet come independence, there will still be housekeeping realities to deal with of dividing up assets and liabilities. Scotland will get its share of U.K. debt that needs to be paid.
And of course investors like nothing worse than uncertainty. This is one reason a cautious approach to establishing a new currency is likely. The current frailty of the euro has taken that option off the table and the SNP policy is to stick with sterling at least for the initial years of independence.
Despite this, ratings firms are likely to look closely at the newly structured U.K. It is not inconceivable the upheaval for both countries could lead to ratings review of the U.K.’s sovereign AAA rating. Later, if Scotland did have its own currency it would at least start from an enviable position of having substantial oil and gas asset backing.
As the SNP spells out its detailed policy plans, hopefully the debate can focus on more than just what there is to lose from independence. Then perhaps everyone can win, rather than just worry about who will be skint.
Craig Stephen is a native Scot living in Hong Kong.