Economic Concerns with Scottish Independence

With today’s UK Supreme Court decision on 23 November about whether the Scottish Parliament can legally hold a referendum without Westminster’s consent, the question about Scottish independence from the union remains prominent across political discourse, and the plausibility of a referendum in the next few years seems to be rising, with a renewed pro-independence majority at Holyrood.  

It goes without saying that a Scottish vote in favour of independence would upend the economic status quo across Great Britain. England is Scotland’s largest trading partner by a large margin, accounting for some ‘60% of Scottish exports (excluding oil and gas), compared to the EU’s 19% and global exports of 21%’. The health of this critical economic relationship is probably going to be somewhat linked to if Scotland re-joins the European Union, where the unresolved conundrum of the Northern Irish border customs and regulations would be imported across the Irish Sea too, hampering the stability of growth and trade for both nations. A report from the London School of Economics and Political Science found that ‘the costs of independence to the Scottish economy are likely to be two to three times larger than the costs of Brexit’ and ‘rejoining the EU would do little to mitigate these costs’ and lead to a ‘considerably poorer’ Scotland.  

There is simply no guarantee that the EU would even admit Scotland. There are a multitude of potential reasons why, not to mention that they would be accepting a member they knew would likely be struggling to grow and balance its books and withdraw more than it contributes. Accession to the EU also takes significant time to negotiate, ratify and implement, during which period of being out in the cold of both the UK and EU Scotland’s books deteriorate further, or the generic claims of growth from independence advocates doesn’t materialise. All existing members must agree new members unanimously, and some countries may not be keen to promote the principle of separatism. The best example is Spain, trying to temper Catalonian independence sentiment. Scots would also potentially have to commit to join the Euro or risk the refusal of their application. The EU is incredibly unlikely to agree to any of the opt-outs the wider UK enjoyed in the bloc, including avoiding Eurozone participation and the Schengen agreement, among others. The cards are mostly in Brussels’ hands.  

Even without the economic impacts of independence, at present the Scottish government ran at an annual budget deficit of £23.7 billion in 2021-22 and a £35.7 billion deficit in 2020-21. Whilst the exacerbated imbalance is likely explained by the pandemic, it is still noteworthy as it is always possible an independent Scotland could face these unexpected disasters and would not have the fallback that Westminster can help to provide an economic buffer against. Put simply, Scotland spends significantly more revenue than it generates, and that the additional responsibilities it would incur as a new country, from foreign relations commitments to defence, would only add to that. The austerity that the likes of First Minister Nicola Sturgeon so frequently denounces would surely be a feature in Scottish public spending for a while post-independence; not to mention it would ‘start life with a £180bn share of UK debt, and having to borrow a further £20bn a year’. Per capita spending in Scotland already sits at £14,842, 11% above the UK average of £13,414. This would inevitably have to be reduced to mitigate the deficit and tame markets.  

It would be almost inevitable that many of the extras Scotland currently enjoys (that not all of the rest of the UK do), such as free prescriptions, free tuition or some free methods of transport for youth, would have to be slashed alongside many other ordinary but critical services and concurrently coincide with potentially eye-watering tax rises to attempt to balance the budget, which would still be an unenviable task, without even accounting for the fact that oil and gas reserves will run out in the foreseeable future as an economic boost. What would this mean for the ordinary Scot, particularly the younger generation? Economists like David Riley have also warned that any attempt to seek external credit is incredibly risky as the government would struggle to provide assurances to creditors and the market that ‘the government has a credible macroeconomic policy framework, including critically a plan to reduce its budget deficit’. Everybody knows what happens to the markets and the country’s fiscal stability and credibility when politicians devise an implausible economic plan without costing it, as Liz Truss can attest.  

This article does not even delve into the question over currency and all of these possible dire financial consequences are predicated on the assumption Scotland retains the British pound – if it did not, either by developing its own pound or joining the Euro, the repercussions may be even more substantial. There is too much uncertainty and known unknowns surrounding currency options to warrant a proper analysis here. The impact on the ordinary Scot, whether it be the benefit of free tuition for all which inevitably disproportionately aids those on the lower end of the income spectrum or free prescriptions which disproportionately helps the elderly, would be too great to contemplate.  

From an objective economic perspective, on paper, it does not appear that Scotland can really afford independence.  

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