Union bashing

There has perhaps never been a point in the last 300 years when the union between England and Scotland has looked so strained and there is increased speculation that Boris Johnson will be the prime minister who presides over a breakup of the Union. From differences over Brexit to concerns about how the pandemic is being handled, there are many issues over which governments in London and Edinburgh are not seeing eye-to-eye. Some of these issues may, however, be overdone by an excitable media.

Scottish rumblings about home rule have existed since Victorian times but it was only in the 1970s that it started to make its presence felt in a big way. The discovery of oil in the North Sea off Scottish shores gave impetus to calls for independence and the failure to bring about a Scottish Assembly in a 1979 referendum, due to a wrinkle in the law, was rectified following a second plebiscite in 1997. A further referendum was held in 2014 on whether Scotland should secede from the UK altogether, which failed by a margin of 55% to 45%. But in the last six years much has changed and calls for a second independence referendum are gathering pace. Like all good macro topics, the politics and the economics are intertwined and I take a look at some of the issues here. 

The politics are unfavourable … 

The Scottish National Party, which has formed the government north of the border since 2007, has enshrined the goal of independence in its party creed. But it believes in doing so as part of a consensual process in which the Westminster government collaborates. David Cameron’s government granted the SNP its wish for an independence referendum which took place in September 2014 but failed to get over the line. Having failed in its objective six years ago the SNP’s attempt to reopen the question has so far fallen on deaf ears in London. Indeed, when the UK government sets itself against a second referendum, as Boris Johnson’s has done, it becomes virtually impossible for the Scottish government to achieve its goal of independence in the manner that it would like.

Recent newspaper headlines have focused on the fact that those supporting independence are now ahead in the opinion polls, with a survey released earlier this month giving them an 11 percentage point lead over the unionists. But as chart 1 illustrates it is only in recent months that pro-independence supporters have started to build up a lead. With around 9% of voters apparently undecided, it is far too soon to conclude that the independence camp has built up an unstoppable head of steam. A big contributory factor to recent trends is the increased opposition to Boris Johnson’s government. Ever since the days of Margaret Thatcher, support for the Conservatives in Scotland has wavered between lukewarm and hatred. Given the Scots’ opposition to Brexit and the fact that the prime minister is its public face, Johnson is not exactly Scotland’s favourite Englishman to start with. His handling of the Covid pandemic has made the situation worse, with a recent poll giving him a net approval rating in Scotland of -43 compared to +61 for First Minister Nicola Sturgeon.

As it is, the Conservatives have only six MPs in Scotland which has stoked resentment that they do not have a mandate to take executive decisions north of the border. But the fact that they captured 345 of their 365 seats in England at the last election means that on a nationwide basis it is very difficult to prevent them from assuming overall parliamentary control. Latest comments from Johnson suggesting that Scottish devolution has been a “disaster” have further added to his unpopularity north of the border and fuelled concerns that whilst Scottish nationalists may form a government in Edinburgh, English nationalists do so in London. The upshot of all this is that it is difficult to disentangle dislike of Johnson from genuine support for independence. If the Brexit referendum of 2016 taught us anything, it is that we have to separate opposition to the government from the issue at hand. For this reason a referendum in the near-term may not be a good idea as it risks conflating a number of issues. 

… the economics even less so 

In many ways the economics of an independent Scotland are even less favourable than they were in 2014 at the time of the last referendum. My view at that time was that the pro-independence lobby significantly understated the economic costs of going it alone. Nothing that has happened in the last six years has changed my view. The Scottish government’s assumption was that the revenue from oil resources would provide a significant safety cushion. Without going through all the calculations here, my 2014 analysis concluded that Scotland had 40-50 years of viable reserves. But since the costs of extraction will rise as the most easily accessible reserves are exhausted, a lot of what is in the ground may not be worth recovering, particularly if oil prices remain low. Six years ago the government assumed a long-term oil price of $100/barrel: It is currently trading at just above $40 and has averaged $55 since 2015. The switch away from fossil fuels will likely put further downward pressure on prices, suggesting that Scotland may not be able to reap the benefits of its oil reserves in the way its government hoped.

Such revenue shortfalls will have significant fiscal implications. In fiscal year 2019-20, the UK recorded a fiscal deficit equivalent to 2.5% of GDP whereas Scotland reported a figure of 8.6% (including Scotland’s share of oil revenues – chart 3). Whilst revenues are lower than the UK average, the real problem is that Scottish spending levels are far higher than the national average accounting for 46% of GDP versus a UK average slightly below 40%.

This does not mean that Scotland will necessarily be unable to fund itself but it may not be able to maintain its spending pledges without significantly raising taxes elsewhere. Since an independent Scotland would be a smaller and more open economy than the rest of the UK, it would have to rely more heavily on taxing immobile factors such as property. It is beyond the scope of this post to cover all of the other economic issues but an independent Scotland would also have to figure out how to meet its share of fiscal liabilities accrued whilst it was part of the UK and would also need to decide on its monetary arrangements. Suffice to say there are a whole lot of economic questions which require answers. And whilst many Scots are keen to see their country re-join the EU, their application would face significant opposition from Spain which has no wish to set a precedent by allowing regions which secede from their former country, such as Catalonia, to join the bloc. 

And yet … 

Whilst there are significant economic costs associated with Scottish independence which have not been fully thought through, the idea of controlling one’s own destiny is an increasingly attractive one at a time when many Scottish voters feel they are being ignored by a government whose ambitions do not coincide with theirs. My position thus remains the same as in 2014 which is that an independent Scotland will fare rather better than the unionists believe but will endure considerably more pain than the secessionists are prepared to admit. With Labour leader Keir Starmer refusing to rule out a second referendum, my long-standing prediction that the Scottish position could echo that of Canada where a second referendum on Quebec was held 15 years after the first could yet come about.