The Economic Ramifications of an Independent Scotland

Since the Act of Union in 1707, Scotland has been a part of the United Kingdom. But even though there is a strong unionist tradition, nationalist sentiment has never gone away. Thanks to devolution under the Blair government and the rise in popularity of the SNP in the Holyrood parliament, Scottish voters are to be asked whether they wish to stay a part of the United Kingdom in a critical referendum due in 2014. Should Scotland vote for independence, it faces a number of economic problems due to its separation from the rest of Britain and the economic powerhouse of the South. Here are five of the most problematic economic issues that should be troubling Alex Salmond and the nationalist base:

Currencies

Although an independent Scotland could continue using the pound sterling, this is impractical because it ensures that Scotland either has no lender of last resort or remains dependent on the British government. The other option of using the Euro is problematic because an independent Scotland has serious financial problems and may not meet the minimum criteria for entry into a crisis stricken Eurozone. And with the Euro’s perilous state of affairs, would a newly independent Scotland even want to be part of what many commentators are calling a sinking ship?

Financial Vulnerabilities

First, Scotland has a number of financial institutions (like RBS) that conduct most of their business in the rest of Britain. In a best case scenario, an independent Scotland cannot back them up because it has insufficient resources. In a less optimistic scenarios, these institutions are going to abandon Scotland because the economic detachment hinders their business. Smaller regional banks (like CB Online) do exist, which would be less dependent on business deriving from outside Scottish borders. The other major issue with the banks is the huge amount of debt they owe after being bailed out at the height of the financial crisis. For example, the aforementioned RBS is still 80% owned by the UK Government. What would happen to that debt if Scotland voted for independence?

Global Financing

There is little chance that an independent Scotland can receive AAA ratings from credit rating agencies and thus low interest rates from potential investors. Its rightful portion of the British national debt is too high compared to its revenues for its debt-to-income ratio to inspire much trust. With a reduced credit rating would come restricted access to finance and higher interest rates on Scottish government bonds.

Domestic Spending

Given the high debt-to-income ratio of an independent Scotland, it seems probable that it’ll need extreme measures to bring its budget back into balance. One probable method is for the Scottish government to cut spending on social programs, which will have a detrimental effect on the average citizen out on the street. Given that there is a huge dependency on state funding and benefits in Scotland, there could be serious social unease and a noticeable drop in living standards.

Tax Rates

The other method for reducing national debt available to an independent Scottish government is to raise tax rates and thus revenues. These rates are more likely to fall on residents than on corporations because those corporations already have strong incentives to move their headquarters to Britain or nearby tax havens like Ireland.

Conclusion

Although these problems are not insurmountable, their occurrence during discouraging economic times can compound ongoing problems. A vote for Scottish independence absolutely comes with financial ramifications and they aren’t all good ones. The SNP argue that there is enough oil left in the North Sea to tide Scotland over for the next 50 years, enough time to rebalance their economy. But as the last few years have shown, markets don’t wait for anyone.

References:

http://www.ft.com/cms/s/0/f2abe5a2-428b-11e1-97b1-00144feab49a.html
http://www.guardian.co.uk/news/datablog/2012/mar/07/scotland-spending-data-independence

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