Scotch mist: Brexit and independence

The SNP is using the uncertainty caused by Brexit to remake the case for independence – yet the warning signs about Scotland’s economy should already be on

Paul SuttonIn her recent SPERI Annual Lecture Nicola Sturgeon, First Minister for Scotland and leader of the Scottish National Party (SNP), cited a report by Strathclyde University’s Fraser of Allander Institute which estimated that ‘a hard Brexit could cost up to  80,000 jobs in Scotland after 10 years, and see real wages fall by an average of £2,000 per year’.  Whilst a ‘hard Brexit’ would undoubtedly hit the Scottish economy hard, the First Minister hasn’t been presenting the full picture about economic uncertainty in Scotland.

What Sturgeon did not say in her SPERI lecture was that two other scenarios presented in the Strathclyde report, based on the Norwegian and Swiss model respectively, set out a less harsh outcome and that in all three scenarios the impact on the rest of the UK (rUK) economy were ‘more severe than those on Scotland’. The reason given was that ‘this reflects in part that the rUK has greater exposure to EU trade than Scotland and complex inter-linkages between Scotland and the rUK which acerbate/dampen certain effects’.

In short, Scotland’s integration with the rUK potentially offsets some of the damaging effects Brexit will have on Scotland. Given this large qualification it is interesting to note that in October the Scottish Government published a draft bill for consultation on another independence referendum citing the impact of Brexit as the major reason to do so.  Whether it will proceed on this course is another matter.  If current opinion polls are to be believed, the chances of the SNP winning a second referendum at the moment are not good.  John Curtice, Scotland’s leading pollster, claimed that ‘the UK wide vote in favour of Brexit has made little difference to the balance of opinion on independence’.  A majority were still opposed to it.

The present economic circumstances of Scotland also tell against it. The first is the deficit in government finances.  Figures given in the latest Government and Expenditure Revenue Scotland (GERS) published in August show a massive difference between revenue raised in Scotland of £53.7 billion, including the take from the North Sea oil and gas sector, and government expenditure in Scotland of £68.6 billion.  The deficit of nearly £15 billion is equivalent to a 9.5% share of GDP, more than double the 4% figure for the UK as a whole.

Public expenditure in Scotland in 2015-16 was £12,800 per person, which was £1,200 per person greater than the UK average, whilst public revenue was approximately £10,000 per person, which is about £400 per person lower than in the UK for the same period. In short, the rest of the UK through the Barnett Formula subsidises the higher spend in Scotland, allowing a higher standard of living than would otherwise be the case.

Second, the last few years have seen a collapse of oil prices and revenues from the North Sea. The GERS figures estimate that Scotland’s share of North Sea revenues fell 97% from £1.8 billion in 2014-15 to £60 million this year.  Additionally, revenues will be depleted by further reductions in offshore tax rates and allowances to incentivise investment.  Douglas Fraser, BBC Scotland’s business editor, points out that ‘the 2015-16 figure for petroleum revenue tax includes allowances and comes to £562 million in reverse revenue.  Next year and for the rest of this decade, the GERS figures could include a negative total for oil and gas’.

There is also no sign of respite on the horizon. A figure of above US$ 100 for a barrel of oil is in the past and more realistic planning for the medium term envisages US$ 60-70.

Third, the SNP Government’s record on economic growth in the last few years remains poor.  In 2015 growth at 1.9% was below that of the UK as a whole and prospects for the rest of 2016 and 2017 remain bleak.  While some of this is related to the downturn in North Sea oil other sectors have also performed badly.  The contribution of the finance sector has remained flat since the financial crisis and the contribution of tourism (broadly conceived) has fallen in the last 10 years (whilst that of the UK has grown).  Public services remain severely constrained by various austerity measures.  Only the construction sector has improved and that is now set to slow or reverse as large public sector projects such as the Forth Road Bridge replacement come to an end.

Together these factors make the case for independence weaker than they were at the time of the 2014 referendum. Figures provided then in the Scottish Government’s White Paper making the case for independence appeared to show that the Scottish economy was doing significantly better than the rUK, contributing more in taxes and with stronger public finances.  Subsequent revisions to these figures show that the differences were not as large as then stated and the situation is now reversed with Scotland contributing £400 less per head than the equivalent UK figure and with public finances in the last five years weaker by almost £4,300 per head.  These are not figures to change the mind of those who voted to remain in the UK in 2014 and given that most analyses of the independence referendum highlight economic causes as the most prominent explanation for the failure of the SNP to win it, the SNP will find it difficult to present a more convincing case next time round.

Brexit adds to the problems. A substantial proportion of those who voted for independence for Scotland also voted to leave the EU and vice versa.  The recent debate in the Scottish Parliament on Brexit showed there was no consensus among the political parties and the SNP won the vote to ‘maintain Scotland’s place in the single market’ only with the support of the Green MSPs.

What in fact this shows is a level of political and economic uncertainty created by Brexit in Scotland at least as great as in the rUK and perhaps even greater, with knock-on consequences for private sector confidence, macroeconomic management, and political strategy.

The fabulous views from Scotland’s mountains that are so often clouded in mist here find an echo in Scotland’s current economic predicament, which is open to no easy answer, with independence or without. To safeguard Scotland’s interest another way will have to be found.