Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 1 June 2014

Scottish Independence

Martin Wolf is quite right when he says that the debate about Scottish independence should not focus on relatively short term macroeconomic costs and benefits. I personally would be very sad if Scotland became independent, but that has nothing to do with money and (just as for Martin) everything to do with a British identity of which Scotland is an important part. But I also understand, having lived and worked in Scotland for five years, how these issues are more difficult when you are a minority part of a bigger nation.

Nevertheless my expertise is in macroeconomics, so I should say something about recent claims by both sides. It seems fairly clear to me that the Treasury report is right when it argues that, for the next decade or so at least, people in Scotland will be significantly better off by staying in the Union. The main reason is that additional public spending in Scotland as part of the union exceeds any benefits Scotland would get from having more of the revenue from the North Sea. This is also the conclusion of independent bodies like the IFS or NIESR, and it is only avoided by the Scottish government because they have unusually optimistic projections, particularly for North Sea revenues.  

What the exact benefit is, who knows. The set-up costs assumed in the Treasury report look too high (although Brian Ashcroft would like to see the Scottish government's figures), but they are only a minor component of their £1,400 per person dividend. In the longer term the trends for Scotland do not look favourable: North Sea revenue will decline, but public spending needs will not. So on present plans the Union dividend will not disappear. It is true that the UK government could change its funding formulas in the future to ensure Scotland gets a smaller dividend, but I suspect the threat of independence is quite a powerful incentive against that happening.

So what about the Scottish government’s claims that Scottish people will be better off with independence? Basically these amount to the belief that on its own Scotland will be able to become more productive, work harder and attract more migrants than as part of the union. These are discussed in Chapter 4 of its recent report.

The one area where this chapter has something going for it is with migration. The UK government’s desire to halt net migration will harm the UK’s public finances. If an independent Scotland took a much more positive attitude towards immigration, this could have beneficial macroeconomic effects. (Brian Ashcroft makes the same point here.) But elsewhere the report amounts to little more than hopeful guesses. In terms of productivity improvements, it simply says that the Scottish government has some good policy ideas, and here is a number for the higher productivity growth that these could generate. Is that number based on any detailed economic analysis? Not as far as I can see - it seems to be plucked out of the air. What about the benefits of greater participation of women in the labour force? The Scottish government wants to make better child care provision a priority, but the impact that this might have on participation rates again appears no more than a guess.

However this does mean that speculation about factors that might influence long run macroeconomic trends is pointless. As the migration example illustrates, where UK policy appears to have negative effects on output or growth, and an independent Scottish government would avoid this policy, this is a plus for the yes side. Besides migration, the obvious example is Europe. There has to be a significant probability that the Conservatives will win the next UK election, and despite his efforts, Cameron could lose the referendum he is committed to. An exit from the EU would almost certainly be harmful to the UK, and an independent Scotland would avoid those costs.  

To set against that are the insurance benefits of being part of a larger union. An independent Scotland would be a small open economy heavily dependent on a commodity with a volatile price. Standard precautionary savings theory says that a country dependent on a resource with a volatile price needs a form of insurance as a buffer. For an independent country that insurance has to come from building up a financial fund, which implies lower current spending. As part of a much larger union, however, the union can provide the insurance. And then of course there are the benefits of being part of a currency union which, without going into all the ‘will they do what they say they will do’ stuff that I have talked about before, will be put at risk with independence.

One final consideration involves options. Rejecting independence now does not preclude independence in the near future. For example, if the UK did vote to leave the EU, the case for allowing Scotland another vote shortly thereafter would be difficult to resist. In contrast, if Scotland became independent, the new nation would be unlikely to want to consider union again for decades, and even if it did the terms the UK would impose would almost certainly be less favourable to Scotland. So, for this reason alone, the risks in voting yes are higher.


  1. It seems likely that the Scots will vote 'no', and if the model of Quebec is followed, the Canadian government quickly made it much harder for secession referenda to be held straight after their 'no' vote.

    I also wonder what chance the Tories do have winning the 2015 election. I was struck by Ross McKibbin's view that "whatever else it is, Ukip is not a branch of the Conservative Party." British nationalisms, English nationalisms, Scottish nationalisms all seem in flux.

    [BBC watch again: for the European elections, Andrew Lilico was given a role as an economic expert - the same man who in 2010 while at Policy Exchange predicted that interest rates may have to rise to 8%: "Once the economy gets growing sustainably, there will be a huge expansion in the money supply, which will lead to inflation."]

  2. Two related comments:

    1. Scotland can have a different immigration policy from the remainingUK only with heavy and economically costly border controls on the Scotland-England border.

    2. Scotland cannot insulate itself from EU exit by rUK. Unless rUK stays in the single market, by accepting EU rules including free movement of labour but without any rUK voice in setting the rules (and if rUK is willing to accept all of this, why exit?), Scotland will face a choice between the single market with rUK and the single market with EU. Both options are unattractive, but remaining in the single market with rUK is probably the less unattractive, so Scotland has to exit along with rUK!

  3. "An exit from the EU would almost certainly be harmful to the UK, and an independent Scotland would avoid those costs. "

    This is assuming it is possible for an independent Scotland to remain inside the EU post independence without re-applying, which is far from a done deal. Scotland's EU membership would likely take a few years to sort out and would become extremely complicated if the UK voted to leave whilst Scotland's membership was under consideration; especially if the basis of their membership rests on them already being inside the EU as part of the UK.

    1. I think Scotland's EU membership would be sorted out within 12-18 months because who wants a hole in the Single Market?

    2. Not a chance. It would need a unanimous vote by all the member states. Just calling a treaty 'summit' would take longer than 18 months.

  4. I think outside the economics profession, a lot of people are saying that healthy society, and economy, is one that is decentralised and encourages local participation. Scotland would be better dealing with its unemployment problem directly than rely on cheap labour from outside. The Scottish political elite are unwise to push the case for immigration, that is a sure way for them to lose support. Remember it is per capita GNP growth that is important, and furthermore, this growth must be equitable to be truly sustainable. This may be at odds with Ricardian theories of comparative advantage that pushes the advantages of free movement of money, people and goods - which history shows can increase inequality as much as decrease it (and consistent with Piketty's findings about inherent tendencies towards inequality in international capitalism - perhaps we will see more investigation into this). Rather than benefit from wealth concentrated in London and huge pressures that arise from a concentration of a movement of people into such areas, Scotland may be better off being free from it. Perhaps the right macro policy for London and the South East with its tendencies for house price inflation is also not the right one for the Union as a whole. And membership in the EU? Switzerland and Norway are probably the best performers in Europe. It can be done without it.

    1. Scotland would not necessarily be relieved from the issue of wealth concentration as an independent state, though. Would not Aberdeen and Edinburgh play the role for Scotland that London does for the UK?

    2. I do also think that the solution to issues of wealth inequality benefits from having centralised government in large nation-states. The democratic majority has the ability to control such governments, and so manage the wealth transfer out of richer regions to poorer regions. If individual segments locally self-govern, however, the mechanism for such transfer tends to disappear. To the extent that it already exists, 'local participation' for locations like the financial centers of London exacerbate the problem.

    3. "Would not Aberdeen and Edinburgh play the role for Scotland that London does for the UK"

      Hopefully not. They could follow Germany, Switzerland's, or many other northern European examples where we do not see such centralisation. This is another example of inequality - in this case spatial inequality and clusters of wealth effects of international capitalism (as opposed to Ricardian equilibriating effects) well identified by Myrdal

      Problem in England is the power of the City. They are very good at justifying their existence. Even in the 20s and 30s they were influential in maintaining the Gold standard because of London's "international financial status" - to considerable cost to England's manufacturing position. Kowtowing to the City and London has come at the expense of much of British industry and the regions - and the vast bulk of its population. Whatever happens, I hope we get more devolution - for Scotland, and non-London England.

    4. "I do also think that the solution to issues of wealth inequality benefits from having centralised government in large nation-states".

      In theory that is plausible, if fiscal transfers are large enough out of the centre to the periphery. This is a problem with the EU.

      However in the UK we do have fiscal transfers, but they have not solved the problem of regional inequalities.

      I think the answer may lie in returning some decision making power to the regions.

  5. I think the EU factor in all of this might be more important than we might realize. People are not fond of more layers of government.

  6. "this does mean that speculation about factors that might influence long run macroeconomic trends is pointless" Although I find the economic debate fascinating and this piece particularly considered, there's always a point in speculating about the future where coherent projections are found to be built on a (necessarily) occluded view of the future. That's why I think we should be deciding on the basis of political, philosophical, sociological and psychological reasons. Salmond is no Moses, but surely we can lift our gaze beyond the fleshpots of Egypt.

  7. Scotland managed without England for 10,000 years. We managed as two separate nations only until recent history. Why are we racist enough to believe only London can be the top ruler of Scotland? Scottish law has ever remained different to English law, so they already are a different nation in many ways. There are a great many small nations on earth that do very nicely thank you. Not least the Scotland neighbour of Norway. At least there will be some help to women aged 60 since 2013 losing state pension payout, when women MPs kept the pension payout since 2012. There is no reason for women to vote at all in England nor into the future, with the current political class in London. See why -

  8. With productivity and government policy I guess there's scope in Scotland, given its a tad more social democratic than the R-UK, to pay a bit more attention to say the Manchester University CRESC ideas or the Welsh Government's public sector procurement policies.

    Then there's the farce, presented by Alistair Darling as somehow being a positive, of British military spending whereby the fact the UK spends more on its military than the economy warrants could be right-sized in an independent Scotland.

    And then its possible to speculate about how having an independent government could attract or at least discourage Scottish companies from relocating to London by dint of the fact Scotland would have its own law and decision makers (and that's before considering the chat about copying the Irish approach to multinationals).

    Re: Oil revenues - I've yet to see a year go by when the forward production curve for N.Sea oil didn't get pushed out a year or two. Yes its finite, just not as much as pro-union supporters would have you believe.

    And of course the other one that usually gets called out is the dependence on financial services, except what that actually means is a lot of people working in call centres in businesses, that, if all the ring-fencing twaddle is correct, pose far less risk than a typical Canary Wharf based investment bank. Oh and are cheaper and easier to regulate as well.

  9. "An exit from the EU would almost certainly be harmful to the UK, and an independent Scotland would avoid those costs."

    No. An independent Scotland would be forced to leave the EU. This is obvious, given the EU voting structure. Ow the UK could become 50 little independent states and thereby comprise a majority of the EU. In the USA the federal government has a say on whether states can split, again for obvious reasons given that every state gets two Senators and a minimum number of electoral votes for President. The EU can't let nations divide, and paradoxically would be more amenable for Scotland to become a member of the EU should England leave.


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