Economics in the event of a no vote

Academics were asked to evaluate the case for Union and share their thoughts on what might unfold if Scotland votes NO. With this in mind, Jo Armstrong writes on the economic situation of post-referendum Scotland within the Union.

Scotland’s growth prospects in the next two years appear relatively buoyant, with the Fraser of Allander forecasting 2.3% for 2014 and 2015, almost double that in 2013. Employment is growing, unemployment continues to fall and, with this continued economic growth, employment levels are forecast to keep rising and unemployment fall.

These outcomes do depend on growth continuing in Scotland’s main trading areas principally the Rest of the UK and Europe. Being able to use sterling for trading with the Rest of the UK will ensure Scottish businesses do not face higher trading costs and, being able to use Sterling within a formal monetary union means the Scottish Government carries none of the associated exchange rate volatility risks.

Staying within the Union means Scotland’s public sector spending will continue to fall. The UK’s coalition Government has signalled total spending cuts need to continue to 2018-19 to achieve what it believes are more sustainable public finances, key to keeping UK interest rates low and affordable for consumers and businesses.

The UK Chancellor’s fiscal target is that, by 2018-19, taxes raised need to be sufficient to meet known annual spending commitments. Scotland is not currently on track to meet this target ahead of the UK.

Scotland’s on-shore fiscal deficit (ie, ignoring the revenues arising from North Sea taxes) in 2014-15, is projected to be -£3,020 per person, £1,480 higher than the UK. Including North Sea revenues helps improve but not eliminate Scotland’s relative fiscal deficit position. Scotland’s total fiscal deficit in 2014-15 (ie, including a geographical share of North Sea taxes taken from the OBR’s latest projections) is -£2,420, £940 per person higher than the UK. And, at the point when the UK is projected to be in surplus, Scotland is still projected to be running a fiscal deficit of around £1,000 per person.

As a part of the Union, this relative fiscal difference is not something Scotland has to manage on its own. The Scottish Government receives support for spending via the Barnett block grant which helps level-off fiscal variations across the UK.

Scotland will also be able to plan its spending commitments irrespective of taxes raised from the North Sea. These tax revenues are becoming increasingly uncertain because production is declining (and has been since 2000), profitability is falling as production costs rise and international oil prices are extremely hard to predict. In 2008-09, for example, total North Sea tax revenues were £12 .5 billion, by 2012-13 they had fallen to £6.1 billion and by 2018-19 they are projected to be around £3.5 billion, a 3 to 4-fold fall in that period.

Staying within the Union means implementing the new tax and borrowing arrangements arising from the Scotland Act. Scotland will able to raise more of its revenues through new income tax, new property tax and new landfill tax arrangements whilst also being able to borrowing of its own account. The introduction of these new arrangements will mean the Barnett grant will be adjusted downwards, reflecting the taxes raised in Scotland, for Scotland. Exactly how much the block grant will be cut has yet to be agreed between the UK and Scottish Governments.

With future North Sea taxes likely to be erratic, an independent Scotland could seek to make use of an Oil Fund to smooth annual variations. However, since Scotland currently spends more than it raises in taxes, creating such a fund requires either spending cuts or raising other taxes to compensate. The Barnett grant provides Scotland with a safety net when North Sea taxes have been low and will continue to provide Scotland with a level of financial control that will allow it to plan spending independent of the vagaries of international oil prices.

The Barnet formula may face further adjustments as other parts of the UK seek a larger share of the total revenues raised within the UK. Wales, for example, has suggested that on a “needs basis” they should be receiving a higher share than currently is the case, which means others would need to be scaled back if Wales is successful (and overall spending remains fixed). In addition, as the desire for additional powers for Holyrood grows, it would seem likely the current UK fiscal arrangements are open to further revision. Just how quickly and by how much the block grant arrangements could be adapted is unknown although, as is normal in such circumstances, changes could be introduced along with transitional arrangements aimed at minimising any significant negative effects. 

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Jo Armstrong's picture
post by Jo Armstrong
University of Glasgow
26th April 2014
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