The decision by the United Kingdom to leave the European Union was taken in the face of overwhelming evidence that the outcome would be negative for the UK economy. However, a majority of the electorate, albeit a slight one, discounted the evidence or were more concerned about other issues.
Now, following the Brexit decision, the Scottish government has decided to seek a second independence referendum. While it is easy to sympathise with how they feel about Scottish interests being ignored in official Brexit strategy, the economics of independence have deteriorated for Scotland since its ballot on the matter in 2014. That places a large question mark over how voters would now react.
Three years ago, oil revenues were important to funding an independent Scotland. The price of oil has fallen dramatically since and, with it, revenues from North Sea oil. This would leave a major hole in the budget of an independent Scotland.
Following this fall in oil prices, the Institute for Fiscal Studies in London estimated that the Scottish budget deficit for 2016/17 would be over 9 per cent of Scottish gross domestic product (GDP), and it would still be 6 per cent of GDP by 2020. Such a deficit would not be sustainable in a new independent Scotland, requiring major cutbacks or tax increases to close the gap.
In turn, as we know only too well, fiscal austerity would seriously affect growth.
There is also the vexed question of how the UK national debt would be split between an independent Scotland and the remainder of the UK. Ireland’s experience in avoiding any responsibility for a share in the UK debt when we left is probably unique, and a precedent unlikely to be repeated.
While the Anglo-Irish Treaty had provided for Ireland to take on a share of that debt, when publication of the unfavourable Boundary Commission report was imminent, the Free State government persuaded the UK government to waive the requirement that Ireland take a share of the debt, in return for Ireland agreeing to give up its claim for a redrawing of the Border.
Economically intertwined
However, probably the biggest economic challenge facing an independent Scotland would be its commercial relationship with the rest of Britain. Whereas in 2014 an independent Scotland would have shared membership of the EU single market with the “rump” UK, in future its neighbour – with which it is so economically intertwined – will be outside the EU.
This is very similar to our own post-Brexit plight. While it may not prove necessary to shore up Hadrian’s Wall along the Scotland-England border, there would still have to be customs barriers between the two independent countries.
A study published by the Scottish Economic Association before the last referendum looked at the exceptional dependence of Scotland on its exports to the rest of the UK. In 2014, even with both Scotland and the rest of the UK being members of the EU, that study suggested trade with the UK would be adversely hit by independence, eventually cutting Scottish GDP by 5.5 per cent.
While there could be offsetting benefits from increased integration into Europe, they could take some time to be realised. This estimated cost assumed that Scotland’s relationship with the UK after independence would be similar to Ireland’s today. With the UK outside the EU, these costs would be greatly magnified.
As in the case of Ireland, having to introduce customs barriers with the UK would have a very negative effect on that trade. However, for Scotland, trade with the rest of the UK is far more important.
Unfavourable timing
The timing of any future referendum is likely to be very unfavourable for Scotland. If Scotland were already independent today, it would have an opportunity to pick up some of the business likely to leave the UK because of Brexit. However, even if Scotland does hold a referendum, it could be years before Scotland’s status within the EU was firmly established. In the interim, Scotland would suffer from the loss of business with the UK, and it would be unable to attract business fleeing the UK.
From a Scottish point of view, however unlikely it is to happen, it would be better if England, Wales and the North were to secede from the United Kingdom, leaving Scotland as a sort of “ slimmed-down UK” retaining a continuity of the country’s EU membership. That scenario could avoid Scotland engaging in divorce and then remarriage proceedings with the EU, but of course its own divorce from the rest of the UK would undoubtedly still be a messy one.
