March 27, 2017    8 minute read

The Economics of Scottish Independence

I Want to Break Free?    March 27, 2017    8 minute read

The Economics of Scottish Independence

A divorce after a 40-year relationship is pulling the seams of a 300-year old union.

Scotland’s First Minister Nicola Sturgeon said on March 13th that she would seek permission from Westminster for another chance at Scotland’s independence. Seven days later, PM Theresa May declared March 29th would be the day to trigger Article 50 of the Lisbon Treaty, the formal procedure for the United Kingdom to leave the European Union. No wonder May accuses Sturgeon of compounding the complexity of Brexit and peppering the government with extra uncertainties: the Scottish leader wants a referendum between the autumn of 2018 and spring of 2019 when the Brexit negotiations are set to be in their final and bitterest stage.

Troublesome as it may seem to Whitehall, the timing could hardly be better for Sturgeon and her Scottish National Party (SNP). Surveys by ScotCen, a social research institution, show that the percentage of support for Scottish independence is at a record high (46%) since data started being collected in 1999. Among these supporters, 80% are becoming more inclined to vote for SNP (see Figure 1).

Figure 1. Ascending

(Source: ScotCen)

The underlying rationale goes in chime with that of the Brexiteers: taking back control. While Downing Street is tired of taking orders from politicians in Brussels it never elects, Bute House in Edinburgh is sick of handing over powers to MPs they never appoint either. No. 10’s decision to quit the single market and custom union leaves Scots, 62% of whom voted to remain in last year’s EU referendum, pondering again the possibility of a hard border on the south.

Hopes of an independent Scotland rekindled by Brexit may help SNP politicians unload some criticism as they struggled to push the economy forward in the last two years (Figure 2) and help Scots who have longed hoped for more power and control over their own affairs achieve their political aspirations. But leaving the Union without a speedy rejoining agreement will be an economic disaster for Scotland.

Figure 2. UK Comparison, Quarterly Growth in GDP

(Source: The Scottish Government)

A Freefalling Black Gold

Scotland’s economy and government revenues depend heavily on the North Sea’s oil output. So profoundly paramount the North Sea is to the government that when a barrel of Brent crude cost $50 (an average price nowadays) instead of $110 back in 2014, the expected energy tax revenues for an independent Scotland slumped from £8.3bn to less than £83m. In fact, the Scottish government’s total revenues closely follow the Brent crude price (Figure 3). The recent fiasco in oil price is eating into the country’s revenues (Figure 4).

(Source: Scottish Government)

(Source: Scottish Government, Research by the Author)

 

Though a plummeting oil price foreshadows an abysmal GDP growth, what’s even worse is that an appreciating black gold does not necessarily lift up the economy either. The Scottish GDP remained tepid when Brent crude witnessed a few spikes over the last two years (Figure 5).

(Source: Research by the Author)

Pressure from a doggedly low oil price will not subdue given Saudi’s determination to cut output and new players such as American shale producers. In fact, the North Sea is becoming one of the most expensive places to extract oil on the planet, and its output is shrinking as well. Hoteliers in Aberdeen can no longer charge whatever they like when the drilling season comes.

But the price of oil is not the only protagonist in this independence drama. Oil revenues from the North Sea will be one of the key points of negotiation between Westminster and Scotland should the latter seek independence.

According to the London-based National Institute of Economic and Social Research (Niesr), Scotland will accrue 90% of the oil tax revenues if one draws a median line out across the North Sea from the border. The number slumps to 9% if the calculation is done on the basis of population (there are 5.3m Scots and 54.8m English south of the border). Nicola Sturgeon will not risk her political capital and the future of an independent Scotland if she has little confidence in being able to keep most of the future North Sea oil revenues.

The Lion’s Share

Food products and beverages including whisky contributed £1.83bn, or 15% of total exports to the EU in 2015, second only to refined petroleum and chemical products (£2.32bn, 19%). The number doubles when exporting to the rest of the UK. In 2015, total food and beverages exports to the rest of the UK amounted to £4.08bn (or 8%).

Scots may be entitled to complacency for their beverages, but any contentment in their ability to strike a fair and favourable deal with Westminster after their independence will be met with harsh economic realities.

Out of £78.6bn worth of exports from Scotland in 2015, 63% went to the rest of the UK while a patchy 16% to the EU. Indeed, Scottish exporters are evermore dependent on the rest of the UK. Exports to other three countries nearly doubled in the last 14 years when those to the EU barely inched up (Figure 6).

Figure 6. Scotland’s Exports to EU and the rest of the UK, 2002-2015

(Source: Export Statistics Scotland 2015)

If seceded from the Union, Scotland must speedily rejoin the EU to prevent its exporters from being subjected to WTO rules, international standards that imply high trade barriers and torturing negotiations.

However, this is nearly impossible not only because EU officials have already dismissed the option of a “fast track” to readmit previous members, but under the current system in which every EU member country has a veto power to reject candidates, Spain will seek by all means to torment Scotland in order to discourage its own nationalist Catalan from following a similar course.

Win Some, Lose Some

If Scots decided to vote out of the Union without immediately rejoining the EU and a hard border lined up south of the country, Scotland would lose much more economically than it could potentially gain politically.

Scotland’s exports rely so much on the rest of the UK that if high trade tariffs erect up along the border, Scottish services industry would crumble even if Scotland remains part of the EU. Financial institutions, which contribute 15% of exports to the rest of the UK, will have to compete with peers in Frankfurt and Paris to lure businesses from London.

And motor repair stores and retailers which make up 13% of exports to the rest of the UK will wrestle with counterparts in Eastern Europe that enjoy cheap labour and less stringent environment protection standards. In both manufacturing and service sectors, the rest of the UK cannot be more vital to a robust Scottish economy (Figure 7 & 8).

(Source: Research by the Author)

(Source: Research by the Author)

A Closer Look

The picture becomes even gloomier when zooming in. Among the top three Scottish exports to the EU, only the growth of coke, refined petroleum and chemical products follows a similar course to the EU’s economic growth (Figure 9). In other words, a robust EU economy (which is currently moving upwards given the rising inflation and PPI around the bloc) does not necessarily translate into stronger Scottish exports. Whereas growth in the rest of the UK is more intertwined with that of Scotland, Scottish total exports to the EU merely inched up when the bloc witnessed its strongest growth since the Great Recession in 2010.

Of those £49bn Scottish exports to the rest of the UK in 2015, financial and insurance activities top the list with £7bn, while professional, scientific and technical activities make up £4.4bn.

The two industries correlate well with UK’s economic activities in general (Figure 10) and thus are more exposed to an economic slowdown south of the border than to the decline on the continent. Still, in 2015, the aforementioned two industries only respectively exporting £210m and £980m worth of goods to the continent.

(Source: Research by the Author)

(Source: Research by the Author)

Sports and Politics

Another group less known in the field of economics may well join exporters to defend the Union: athletes.

Though players such as the current world No 1 in Men’s Tennis Singles, Glasgow-born Andy Murray take pride in their Scottish lineage and favour independence, many of their training facilities, funding and commercial sponsors live south of the border. Patriotism does not equal separatism. Pride in one’s sports club need not come in conflict with a grudging respect for a bigger group that one lives in, especially when the two are so interweaved and one can hardly be better off by leaving any one of them.

Nicola Sturgeon and her SNP undoubtedly understand the economics behind another chance at independence. Even though sovereignty and self-pride overshadow economic concerns, leaving the Union and individually joining the EU may not achieve what the First Minister wants because Scots’ suspicion of the EU is edging up in chime with their affection for independence (Figure 11).

Figure 11. Leaving One. Joining Another?

(Source: ScotCen)

Taking back control from Westminster and handing it over to Brussels does not sound gripping enough once voters realise few has fundamentally changed in the way Edinburgh runs. Picking neither side of the duel is even more tantalisingly dangerous.

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