The economics of Scottish independence- Part 1

18/06/2014 | David C. Saha, Bruegel Think Tank

What’s at stake: With the referendum on Scottish independence scheduled for September 2014 coming closer, the debate about the economics of Scottish independence is intensifying. Last week, the UK and Scottish governments both published papers on the effects of Scottish independence on public finances. While Danny Alexander, Chief Secretary of the UK Treasury argued that there is a “UK dividend” worth around £1400 per capita per annum, the Scottish First Minister Alex Salmond claims, based on the Scottish government’s calculations, that an “independence bonus” would be worth £2000 per person and year.

On fiscal dividends of union or independence
David Eiser digs out the different underlying assumptions driving the results of the UK and Scottish government papers. The Scottish government assumes higher oil revenues for Scotland and a more favourable settlement with the UK on the partitioning of national debt. Post 2016, the UK report accounts for a higher premium on debt repayments, a (controversial) measure of the set-up costs of new government institutions (see below) as well as costs and benefits of three major policy proposals by the Scottish government. The Scottish report, on the other hand, factors in three positive economic developments – higher productivity growth, employment rates and immigration – which look credible in scale, but are not deduced from concrete policy proposals.

Charlie Jeffery emphasizes the importance of such estimates for the referendum’s outcome: The best predictor of an individual’s vote is his or her assessment of the effects on her or his personal economic fortunes. Confronted with the ‘£500 question’, being either £500 better off if Scotland were independent, or £500 worse off, a majority of survey respondents were in favour of independence if they were better off and against, if they were worse off.

John McDermott argues that the £2000 “independence bonus” is not based on an assessment of policies proposed by the Scottish National Party (SNP), but simply on the assumption that three good things will happen: A productivity growth increase by 0.3 percentage points, an increase in the employment rate by 3.3 percentage points and an increase in Scotland’s working age population. Without these positive developments, Scotlands fiscal future looks less rosy. And as the “additional boost” to tax revenues is compared to a different scenario for a hypothetical independent Scotland, rather than to Scotland as part of the UK, the bonus is not an independence bonus at all.

Martin Wolf regrets that the debate on such an important topic is too focused on relatively short-term economic effects. On the economic prospects, however, the UK government seems to be right and in agreement with research by independent bodies such as the Institute for Fiscal Studies (IFS) (which is quite optimistic on the current debt trajectory for the UK, but finds that the public debt of an independent Scotland would increase every year as a share of national income and exceed 100% of national income by 2033–34 unless harsh policy action is taken): The Scottish fiscal position is now already slightly worse than that of the UK as a whole and receipts from North Sea oil are likely to fall. And the Scottish government’s plans for the economy – increasing productivity growth, labour force participation and immigration – are not guaranteed to work.

Brian Ashcroft attempts to elucidate whether a “UK dividend” exists outside of hypothetical scenarios by comparing total managed expenditures (TME) in Scotland with tax revenues under independence (including a share of oil revenues), without taking into account hypothetical future changes in policy or transition costs. In this thought experiment, Scotland would have indeed been marginally better off under independence in the last 5 years – but just by £193 million of £8 per person per year and with a negative outlook for the future.

This article comes from the web page «Bruegel«. You can find the original article here: “The economics of Scottish independence».