The Economic Consequences of Mr Salmond

2014 is building up to be one of Great Britain’s most important years in recent memory. On the 18th of September 2014, Scotland will be asked whether they want to become an independent sovereign state. It is not often that a 300-year-old union is broken, so the vote will have ramifications far beyond a land of 5 million people.  Alex Salmond is rebuilding Hadrian’s Wall as we speak! Scottish independence could lead to a break-up of the United Kingdom and its key industries such as North Sea Oil and naval ship building yards.

Even with the political and cultural arguments ringing around the referendum, the most important argument is that of the economics of independence – almost fitting for the birthplace of Adam Smith! One poll found that only 21% of Scots would favor independence if it would leave them £500 a year worse off, and only 24% would vote to stay in the union even if they would be less well off sticking with Britain. Almost everyone else would vote for independence if it brought in roughly enough money to buy a new iPad, and against it if not.

Opinions on the economics of independence are starkly divided. Nationalists argue that, mostly thanks to North Sea oil and gas, Scotland would be better off alone to reap the benefits of its natural resources.  However this view has a sell by date. The richest reserves have already been exploited, leaving inaccessible oil that becomes uneconomic when prices fall. North Sea production has been falling by about 6% a year for the past decade leaving an eventuality that the oil will run out. Many fields will stop producing in the 2020s; by the 2040s oil is likely to be dribbling rather than gushing forth. Tax revenues from oil and gas are highly volatile; prices are high now but due to its unreliable nature, Scotland would depend on oil for some 18% of its GDP, making it subject to shifts in global commodity prices and the heavy reliance on natural resources could lead to dire economic conditions in time to come.

What will remain Scotland’s biggest problem as an independent state is its currency. Due to the UK being the largest trade partner for Scotland, it would be beneficial for them to keep the pound as their currency to allow easier cross border trading and therefore more economically integrated with the UK. Given that 60% of all Scottish exports are to the rest of the UK, a separation could hit it hard. However, in keeping the pound, gives away any right to its governing. Interest rates would be kept under the Bank of England’s control, leaving many to argue whether a nation with no control over their currency, can truly be called independent. Furthermore there is no guarantee that England and Wales would accept a currency union which would lead to Scotland being forced to join the euro and then be inevitably sucked into the struggling eurozone. In an era when most of the discussion is about leaving the euro rather than anyone new joining up. With problems in eurozone countries reverberating through the entire single currency area, Scots would be wary to vote yes when this is a strikingly clear possibility.

The Scottish vote would also have knock on effects for the rest of the UK. It is hard to compute exactly how much the Scots cost the English. But according to figures published today by the Institute of Fiscal Studies, total public spending was around 11 per cent higher per person in Scotland than in the UK as a whole in 2011-12. Scotland’s welfare bill alone is huge and utterly unsustainable without some form of external funding. Its pension’s bill is £13.3?billion a year, health care costs £11?billion and social security £8?billion. To many Englishmen, an independent Scotland may be in their best interest. As English tax payers are propping up many a Scotsman, the reduction in public spending in Scotland would encourage the increase in spending in the rest of the UK which would introduce more government subsidies and fund the rejuvenation of UK businesses; thus raising GDP and raising employment.

On the other hand in the eventuality that Scotland remains in an economic union with the rest of the UK would avoid disruption to UK firms selling north of the border, there may be a cost to exporters in the remaining UK since Scottish oil exports probably cause the pound to trade at a higher level than otherwise. However, due to independence from the rest of the UK,   Wales and England would not benefit from a share of the tax revenues from exports such as gas and manufacturing. This would leave a considerable hole within the British economy that would be difficult to replace as Scotland is both rich in natural resources and production capabilities.

For many, it appears that the independence of Scotland represents a large and daunting risk to the Scottish economy. The Scottish sentiment surrounding the vote will inevitably sway many Scots to the independent vote, but the overwhelming risk associated with the “Yes” vote will be difficult for Alex Salmond to ignore much longer. The aim of SNP is for Scotland to gain independence and carve a place for Scotland within the European and Global market place. For the degree of economic independence a small European country can enjoy in a global marketplace is inescapably limited. It is unlikely that Scotland from now up until the vote will have resolved the flaws of their over reliance on finite resources for revenue or their uncertain stance on currency. It is likely that the vote will end in failure for Mr. Salmond as in a global climate already full of economic uncertainty it would be doubtful that the people of Scotland would want to take a risk that for many, seems senseless.

 

Contributed By Jack Albert Editor-in-Chief

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