Economic case for independence is dead in water
THE latest Scottish Government GERS figures confirm what informed commentators have long said: Scotland consistently spends more per capita on public services than the rest of the UK, and the drop in North Sea oil revenues means this would be unsustainable for an independent Scotland.
In the past, ‘Scotland’s oil’ revenues have sometimes been sufficient to largely offset our higher public spending and allow the SNP to claim that GERS figures demonstrated Scotland having stronger public sector finances than the rest of the UK. This is unequivocally no longer the case.
The SNP’s problem is that was only ever true when oil revenues were booming. It could only make a case for independence that didn’t involve drastic spending cuts by assuming oil revenues would continue at close to recent historical peak levels.
The latest GERS figures confirm that oil revenues have now slumped to close to zero (£0.2billion last year) and so Scotland runs a far higher deficit per capita than the average of the rest of the UK.
Scotland takes a population share of the UK’s debt, so when we run a higher per capita deficit we are effectively provided a fiscal transfer of that amount. This is what’s known as the Deficit Gap and the latest GERS figures show this was £1,900 per capita, or £10.3billion in the past year.
The graph on this page illustrates how the Deficit Gap arises. The green line shows Scotland’s relatively higher public spending, a figure which has risen to more than £1,500 per person more than the rest of UK. This has happened at least in part because of the way the current fiscal framework (underpinned by the Barnett Formula) relatively favours Scotland. Needless to say, this hard evidence that UK pooling and sharing has allowed a relative increase in Scottish spending in recent years is not something you’ll hear the SNP mention.
The blue line shows Scotland’s onshore economy consistently generates about £350 per person less than the rest of the UK average. The gap between the blue and green lines represents the Onshore Deficit Gap – a gap which is large and growing. The red line shows what happens when we add Scotland’s volatile oil revenues to the picture. In just two recent peak oil years, oil revenues were enough to compensate for Scotland’s higher spending.
The SNP’s problem is its independence case relied on oil revenues returning to (and remaining at) levels of £6.8-7.9billion a year. With oil revenues now close to zero, those SNP revenue forecasts have proven to be recklessly optimistic.
Its economic case lies in tatters. The GERS data shows that the starting point for discussion about the economics of independence is that it would make us more than £10billion worse off. That’s £1,900 a year worse off for every man, woman and child in Scotland. The SNP spin-machine is of course now in overdrive to try to prevent Scottish voters understanding what these GERS figures mean. But the SNP cannot escape what its own Independence White Paper correctly told us: ‘[GERS] provides a useful indication of the relative strength of Scotland’s public finances as part of the UK and a starting point for discussions of Scotland’s fiscal position following independence.’
What this starting point now tells us is that with North Sea oil revenues close to zero, an independent Scotland would need to dramatically cut the levels of public spending Scots are used to receiving. This is the discussion we should be having and the one the SNP is studiously trying to avoid.
The SNP could try to argue for superior onshore revenue growth as a result of independence. The problem it has there is that with unresolved issues around currency and the fact that we’d be leaving the UKsingle market (which is four times more important to Scotland as an export market than the EU) there is far more likely to be a downside rather than upside for growth.
To be clear: nobody is saying that trade with the UK would stop – but if an independent Scotland were to end up on the wrong side of EU/UK trade barriers, it’s hard not to believe that trade would be damaged.
EVEN if the SNP does come up with a credible case for independence creating new economic growth, under any realistic assumptions it would take generations to close the Deficit Gap through revenue growth alone.
The current GERS figures show Scotland’s deficit running at 8.3 per cent of GDP compared to the 2.4 per cent deficit we currently share across the UK. Even if Scots were willing to be worse off in deficit terms, an independent Scotland would have to find budget savings of £8.5billion versus these GERS figures just to meet the EU’s ‘excessive deficit’ threshold of 3 per cent – equivalent to more than £1,500 for every man, woman and child in Scotland.
The notoriously optimistic Independence White Paper could only find £0.6billion of net savings (equivalent to £110 per capita) – a figure which includes the defence/Trident savings which are the most commonly used rhetorical ammunition in this debate. It’s worth noting for those who attempt to deflect from this debate by saying GERS figures are estimates and allocations; that’s not true for the spending figures which explain the large majority of the deficit gap – these are all based on actual spending data.
It’s not surprising the SNP is spinning like crazy to try to avoid these GERS figures being rationally debated. They prove beyond doubt that the economic case for Scottish independence is dead in the water.
Figures in this article will differ from others you may see quoted which compare Scottish figures with those for the UK as a whole. That is because these figures compare Scottish figures with those for ‘rest of UK’ (rUK) where rUK = UK minus Scotland.