The Certainty of Independence

Earlier this week First Minister Nicola Sturgeon suggested: “it may well be that the option that offers us the greatest certainty, stability and maximum control of our own destiny is that of independence”.

Her uncharacteristic coyness in only saying independence “may well be” the best option in those terms betrays the fact that she knows it would in fact offer just one certainty: greater uncertainty and even more instability.

Take the issue of trade. 64% of Scotland’s exports go to the rest of the UK whereas just 15% go to the EU. We won’t know until Brexit negotiations are completed whether leaving the EU might jeopardise 15% of our exports, but if it does then leaving the UK would be placing four times as much of our trade at risk.

As for stability, latest figures show Scotland running a deficit of 9.7% of GDP, a level that would be unsustainable without the support we receive from being an integral part of the UK.

Establishing our own currency and/or being a stand-alone member of the EU would inevitably require a level of fiscal discipline that might not translate into having “maximum control of our own destiny” – just ask Greece.

Which brings us to the biggest source of instability that independence would create. We would be certain to lose the effective fiscal transfer (the cash) we receive from the rest of the UK. This issue is hugely important but so poorly understood that it’s worth taking time to explain it (with apologies to regular readers of Chokkablog).

This graph covers the last 17 years and has just three lines on it. When you know what these lines mean you will realise the simple truth that the SNP seem determined to avoid people understanding.

Look at the black line. This shows us how much more tax per person Scotland contributes than the rest of the UK when you include all of “our oil”. This line shows that it was quite correct to say “Scotland contributes more in tax per head than the rest of the UK” all the way through the independence referendum and up until March 2016 when the most recent figures were published. Unfortunately that’s no longer the case and it was only ever half the picture anyway.

The green line shows how much less tax per person Scotland contributes before including oil. This shows that our onshore economy underperforms relative to the rest of the UK by about £350 per person. Frankly that's not very much in the grand scheme of things.

The red line shows how much more spending we receive than the rest of the UK - consistently about £1,500 per person more, a somewhat more significant issue than the relative lower onshore tax revenue generation.

The relative difference between Scotland and the rest of the UK's deficit performance is far more to do with the fact that we spend more than the fact that our onshore economy generates slightly less tax income. This is why I have little patience for those who claim the scale of Scotland's notional deficit shows how badly "Westminster" handles our economy. By that logic if Westminster slashed our budget by scrapping the Barnett Formula and reneging on the fiscal framework these same people would presumably applaud them for managing our economy more responsibly?

Moving on. Because we share the cost of the UK’s deficit, when the red line is above the black line the difference between them is the amount of cash we effectively receive from the rest of the UK. In 2014-15 that amount was over £8bn.

We can plot the difference between the red and black lines to show the historical scale of our net contribution to (above the line) or benefit from (below the line) UK wide pooling and sharing.

In only three of the last 17 years has Scotland been a net contributor on this basis - and only materially so when oil peaked in 2008-09.

The Independence White Paper was written when the most recent figures available were those for 2011-12, coincidentally the last year we could say we "paid our way". This is why despite more up-to-date figures for 2012-13 being published 6 months before the referendum, these were studiously ignored by the Yes campaign. Since then we've had another two years worth of figures published and yet SNP politicians still frequently make assertions based on the ridiculously out-dated 2011-12 figures. You can clearly see why. You can also clearly see why anybody suggesting oil was "just a bonus"(as Alex Salmond did) was either badly misinformed or simply attempting to deceive their audience.

---

For those who thinks it might make a material difference, here's the same analysis versus total UK and on a percentage of GDP basis - the picture barely changes

---

But this is all in the past. We’re interested in the future and – because we know oil tax revenues have effectively declined to zero - going forwards it’s the gap between the red and green lines we’re looking at.

The current fiscal settlement allows us to maintain the relatively higher public spending we’re used to, so the red line will remain roughly where it is. The same is true for the green line if our onshore economy maintains its performance relative to the rest of the UK.

This means that under the status quo we will effectively go on to receive about £1,900 per person annually from the rest of the UK. Multiply by our population and you find the £10bn “black hole” in Scotland’s finances. This £10bn is the amount we’d need to find just to maintain our deficit at UK levels if we left; it shouldn’t be confused with our total Scottish deficit which was actually £14.9bn in 2014-15.

Of course this only shows us what happens if we continue raising taxes and spending money as we’ve become used to and if we were independent that wouldn’t be possible. So what would we do?

There are plenty of reasons to believe that independence may slow the growth of the Scottish economy (not least by creating a border with the market where 64% of our exports go), but even if you believe independence would deliver superior economic growth it would realistically take several generations to close the gap through lifting that green line alone. [See: Let's Talk About Growth]

So to close the gap we’d need to lower the red line by cutting public spending. Now of course some of the figures allocated to us as spending in GERS are sums of money spent for us or on us but not by us. This causes a crazy amount of confusion with people believing we're being charged for things like infrastructure projects in London (we're not) and other unfair costs. This blog has debunked many of those myths (see; Stop Getting GERS Wrong and Appendix A of The Price of Independence) but all you really need to know is that the Scottish Government is responsible for these figures and that the SNP's own White Paper could only find £0.6bn of savings versus the spending allocated to us in GERS (primarily from defence spending).

So we'd still be looking to find a further £9bn of annual savings or £1,700 a year for every man, woman and child in Scotland. That’s 13% of our total spending - it’s more than Scotland’s entire education budget.

Maybe our First Minister’s coyness comes from knowing that the option of independence offers only one certainty: spending cuts that would make the austerity we’ve experienced to date pale into insignificance.