Alex Salmond, the leader of the Scottish Numpty Party (SNP), has been at full impotent froth over an article in the Economist which describes Scotland as Skintland and carries a map of Scotland with puns on place names such as Glasgone”, “Edinborrow”, the “Loanlands” and the “Shutland Islands” and a headline “It’ll Cost You” (http://www.economist.com/node/21552572). The article concluded that an independent Scotland would be ”one of Europe’s vulnerable, marginal economies”. Salmond vowed the Economist will “rue the day” they engaged in such honesty ..er.. impertinence, although like Lear he was rather short on actual ideas for the ruing*.
The Economist pointed out many of the weaknesses of the Scottish economy: the over-dependence on oil – in 2010/11 18% of the Scottish GDP was derived from offshore activity; the uncertainty of the oil revenues – in 2009/10 oil tax revenues were around £12 billion: in 2010/11 they dropped to about £6 billion; the fact that oil is a declining asset; the heavy costs of decommissioning oil platforms in Scottish waters; the recklessness in pinning high hopes on “green” energy which is heavily dependent on (English) taxpayer subsidies; the likelihood of firms relocating from Scotland if independence arrived and the declining fortunes of the Scottish financial sector : “ Since 2007 Edinburgh has slipped from 15th to 37th on the closely-watched Z/Yen ranking of global financial centres, behind Guernsey, Stockholm and Wellington, in New Zealand.”
Then there are the problems for an independent Scotland of using the Pound . The Economist pointed out the disagreeable fact that an independent Scotland using the Pound would have no control of over the decisions made which affected the currency or any hope of money being transferred from the rest of the UK to Scotland if the country ran into the type of economic trouble being experienced by the likes of Greece and Spain in the Eurozone.
To these problems the Economist added the question of the debt Scotland would inherit as their share of the financial liabilities the UK at the point of independence. The UK national debt is projected to be £1.4 trillion by 2015 which would be the date for independence envisaged by the SNP. A share proportionate to Scotland’s part of the total UK population would be £115 billion (8.2% of £1.4 trillion). That is without allocating any portion of the hundreds of billions which have been pumped into the Scottish banks RBS and HBOs (via the Lloyds Banking Group). Even if that sum was split between Scotland and the rest of the UK on the same basis as the national debt, Scotland’s share would probably push her starting national debt towards £200 billion, an absurd amount for a country of 5 million.
To whatever vast sum the Scottish national debt started from, these costs would have to be added: the costs of oil installation decommissioning (the Economist estimates these at £30 billion by 2040 as things stand, but it could be more if fresh installations are made); the decommissioning of nuclear power stations in Scotland – the Economist gives a figure of £4 billion for this; the cost of servicing all public sector pensions in Scotland and the funding of public spending generally which is, according to the Economist 13% per head greater than in the rest of the Uk.
An independent Scotland would have to fund all that from a national GDP of around £145 billion (assuming it does not shrink from its present size after independence). Nor has the Economist covered all of the additional costs involved with independence. There would be the cost of establishing administrations for all the public service functions now undertaken by the UK on Scotland’s behalf such as foreign affairs and defence; the loss of the lucrative UK government contracts which are currently pushed Scotland’s way and the repatriation of the public sector jobs in Scotland not servicing Scotland , for example, much of England’s social security administration, to the UK.
There is also the other side of the public finances equation: tax revenue. Scotland would lose the comfort of the assured Westminster Treasury payment she presently receives which provides most of the money that the Scottish Parliament spends. (Because of the higher per capita figure Scotland receives compared to England, this gives Scotland around £8 billion pa more than she would get if the Scottish figure was set at the English per capita figure). The SNP would argue that the tax revenues from oil would more than offset this loss. Sadly, as with so many things the SNP claim, it is simply wrong both historically and projected into the future. A 2009 Scottish Office paper shows that even allocating all of the tax Revenue from the North Sea to Scotland (that is, none to England) since 1980 shows Scotland cumulatively gaining £20 billion more from the higher per capita Treasury payment than was taken in tax from the oil (see page 1 –http://www.scotlandoffice.gov.uk/scotlandoffice/files/Scotland%20and%20Oil%20-%20Background%20paper.pdf). As a significant proportion of the North Sea oil was not in Scottish waters so the actual gain was even greater.
As for collecting tax generally, a distinction has to be made between tax collected from public servants and those employed by companies which derive all or a large part of their revenue stream from public contracts and tax collected from private institutions which receive no money from the taxpayer. The tax and national insurance collected from public servants’ wages and the tax and national insurance taken from those employed by private companies who pay wages from the money they receive from public contracts is not new money, but simply the regaining by government of tax which they have paid out. In short , obtaining tax from these sources is merely a book-keeping exercise. The taxpayer gives out the money with one hand and collects it with the other. The only tax which counts as new tax revenue is that derived from companies and other employers who do not receive any taxpayers’ money.
Scotland has a larger public sector than England – (25% as against 20% of jobs in England (http://englandcalling.wordpress.com/2011/05/19/the-wages-of-scottish-independence-public-sector-employment/) with more than 60% of Scottish GDP being derived from public spending (http://www.telegraph.co.uk/news/uknews/scotland/4217793/Scotlands-dependence-on-state-increasing.html). This means that an independent Scotland would have to fund all its public expenditure from less than 40% of the economic activity in the country.
It is worth adding that notional tax takes and tax actually collected are very different things. At present the Scottish government has an assured income stream because they know that Westminster will pay over what is due each year under the Barnett Formula. This means the Scottish government can plan. Once they have to collect the tax themselves they move into the realm of uncertainty. An analogy would be between a publicly funded body and a private company deriving its revenue purely from what it can make in the market. The Scottish government at present is like a publicly funded body: after independence it would be like a private company.
I have been pointing out these problems (and others) arising from Scottish independence for yonks – see my http://englandcalling.wordpress.com/2011/07/23/the-complete-wages-of-scottish-independence/ . Because of these difficulties there is a strong probability that an independent Scotland would be churchmouse poor and dangerously reliant on a few industries and publicly funded employment (the proportion of Scottish GDP dependent on public money is heading towards 70%) .
The English reader might shrug their shoulders and say so what, they made their bed let them lie on it. If only it were that simple. There is a very real danger that England would be left picking up many of the debts Scotland could not pay if Scotland became independent and got into a financial mess which was beyond her economic strength to repair.
The clean way for Scotland to divorce from the Union would be for her to raise money by issuing bonds sufficient to pay the rest of the UK what Scotland owed as her share of the UK national debt and the debts arising from the RBS and HBOS bailouts. (The other liabilities mentioned above would automatically rest with Scotland). Once the bonds were sold, the proceeds of their sale would be given to the Westminster government who would reduce their borrowing accordingly. That would make a clean break with the risk that the bonds were not serviced resting entirely on the Scottish government’s ability and willing to pay the interest and ultimately for the redemption of the bonds.
The problem is a newly independent country the size of Scotland would not be able to come close to raise the money to cover her proportionate share of even the national debt, let alone the payout resulting from RBS and HBOS bailouts. This would mean that the debt would remain with the rest of the UK, (effectively with England ) with Scotland paying so much a year to Westminster. If Scotland was unwilling or unable to meet her payments to Westminster the English would end up paying because the debts would legally still be the UKs.
But practical financial liabilities for England do not stop there. An independent Scotland which ran into serious financial trouble would, at best, present England with the same problem that the Republic of Ireland (RoI) presented when the Eurozone ran into problems. It is probable that any likely Westminster government would feel obliged to bail them out just as they bailed out the RoI. If Scotland continue to use the Pound the position would be much worse, because any Scottish financial crisis would have a damaging effect on the currency as a whole. It would place the remainder of the UK in the same position as Germany is in with the Erurozone, a currency union without political union, with all that entails.
What should the Coalition do? A little ridicule does no harm, especially when dealing with preternaturally thin-skinned creatures such as Salmon because it makes them behave in outlandish ways. But the prime tool in unscrewing the SNP platform is not to pander to them or to Scottish sensibilities generally, but to demolish the SNP’s claims of Scottish self-sufficiency by a straightforward description of what independence for Scotland will mean. Tell them that they will not have the Pound. Make it clear they must take on the debts of the UK at the time of independence. Spell out the facts about jobs which will be removed from Scotland. Veto the DevoMax option. Make it clear that independence will mean independence. Faced with that dire reality, few Scots would vote for independence.
*”I will have such revenges on you both
That all the world shall—I will do such things—
What they are yet I know not”
“but they shall be
The terrors of the earth.
King Lear Act 2, Scene 4.