GERS 2014-15: Reasons to be Cheerful

Summary

The Government Expenditure & Revenue Scotland (GERS) figures for 2014-15 were published this morning¹. If you've followed Chokkablog then the figures will come as no surprise.

All figures quoted in this blog use the Scottish Government's preferred geographic share definition for allocating oil revenues (Scotland is shown keeping all of "our oil") and have been deflated (put in real £ 2014-15 terms) using the latest UK GDP deflator.

In summary:

• Scotland's total deficit was £14.9bn
• Scotland's deficit was 9.7% of GDP compared with the UK total deficit of 4.9% of GDP
• Scotland's deficit per capita was £2,800 compared with the UK total of £1,400

In simple terms: Scotland was running a deficit in 2014-15 that was twice as large as that we shared with the UK (whether you look at it on a per capita or % GDP basis).

On the basis that we take a population share of debt while we're in the UK, the difference between the amount of debt we accrued by being in the UK as opposed to being independent was £1,400 per capita (the difference between £2,800 and £1,400). Gross that up by our population of 5.3 million and the deficit gap versus the UK is £7.4bn.  For the avoidance of doubt: this is not our deficit, it is how much bigger our deficit would be if we were independent (than that we share by being within the United Kingdom).

These figures relate to April 2014 - March 2015 and include £1.8bn of oil revenue for Scotland - this means the onshore deficit gap (i.e. how much worse off we'd be if we didn't have any oil revenues) was £9.2bn.

Given that this year (15-16) oil revenues are predicted to be only c.£0.1bn we will (all else being equal) be looking at a deficit gap of c.£9bn.

It is now clear that, far from scaremongering, those of us who a year ago warned of an £8bn - £9bn annual deficit gap if we voted Yes were pretty much on the money. To put this in referendum propaganda terms: a vote for Yes was a vote to make us immediately £1,400 a year worse off for every man, woman and child in Scotland.

Of course as an independent country we would face a series of new challenges and opportunities that may make that situation better or worse. What's clear - now undeniable - is that the starting point (based on taxes we're used to paying and public spending we're used to receiving) would be £1,400 per person per year worse off than we are by remaining in the UK. That's £2,800 per tax payer.

To understand whether this would really matter - would we need to take drastic action or simply choose to fund this higher deficit with yet more debt? - we need to look at these deficit numbers in context.

Scotland's Deficit in Context

These 2014-15 figures would be the actual numbers we'd be using to negotiate any currency solution and the terms of (indeed the very existence of) our EU membership. One of the less intelligent comments thrown out during debates about the GERS figures and what they tell us about Scotland's deficit is the statement that "every country runs a deficit" as if the scale of the deficit is irrelevant.

Let's look first at the evolution of this deficit over time. The lower line is our onshore deficit (i.e. excluding any oil & gas income) and the upper line is our deficit including oil & gas.

This highlights a very important dynamic: although our overall deficit is worsening, our onshore (underlying) deficit position has been improving  since 2009. As oil declines the lines clearly converge.

Now let's put that in context with the total UK (the red lines)

We can see clearly that oil & gas has a relatively small impact on the UK's total deficit to GDP and that Scotland's onshore deficit (excluding oil & gas) is consistently worse than the UK's (for reasons readers of this blog will understand well, primarily higher expenditure per capita).

The improving trend in onshore (underlying) deficit to GDP tracks the improvement in the UK as a whole. Given the common fiscal approach this is unsurprising. Clearly we don't know what would happen under alternative economic plans, but the current path being pursued by the UK is undeniably leading to a reduction in the scale of the onshore deficit for both the UK and Scotland.

We'll explore the reason why Scotland's onshore deficit is so much worse than the UK's later in this blog, but first let's look at the scale of the deficits we're looking at in an EU context.

It's a bit of an over-kill graph but the following maps each EU country² against the figures for the UK and Scotland both with and without oil

It's a lot to take in but actually the overall picture is pretty clear;

• With oil, Scotland's deficit/GDP tracked the UK's pretty closely until 2011 ... but the subsequent decline in oil revenues predictably caused Scotland's deficit to worsen despite the UK's improving trend
• The "oil is just a bonus" argument is and always has been nonsense. Without oil the scale of Scotland's deficit would have been consistently the worst in Europe over this period ("beaten" only briefly by Ireland in peak financial crisis and Slovenia last year)
• On the most recent year's data, Scotland would have the worst deficit in the EU even with oil

Remember: not only would we be having to work out how to fund this excessive deficit, we'd be taking these figures to the negotiating table to try and renegotiate our EU membership if we'd voted Yes.

The rather gloriously named "corrective arm" of the EU Stability and Growth Pact "ensures that Member States adopt appropriate policy responses to correct excessive deficits by implementing the Excessive Deficit Procedure (EDP)" and defines an excessive deficit as 3% of GDP.

Let's just look at the most recent year's data from the graph above to put that in context

Let there be no doubt: if Scotland had voted Yes and we were facing independence, seeking a currency solution, incurring the costs of separation and negotiating EU membership ... we would be forced to take drastic fiscal steps to reduce this deficit. We would inevitably face tax rises and/or far deeper public spending cuts than we're currently experiencing.

As it is - as secured by the fiscal framework agreement - Scotland benefits from a fiscal transfer from the rest of the UK. On the generally accepted assumption that we incur only our population share of the UK's debt this means we are benefiting by about £8bn a year currently as a result of voting No. This is how pooling and sharing works - its the quid pro quo for the massive contribution Scotland made to the UK during the oil boom of the 1980's.


Understanding the Deficit Gap between Scotland and the rest of the UK

Anybody who has read FFA for Dummies will hopefully understand the following graph. Unlike the analysis above which compares Scotland on a % GDP basis with the UK as a whole, this analysis compares us on a per capita basis with the rest of the UK (i.e. the UK without Scotland). As explained in FFA for Dummies: Methodology this approach gives similar answers (particulalry now GDP/Capita is so similar between Scotland and the UK) but has the advantage of putting the numbers in a form people can relate to.

There are three lines:

• The green line shows how much less per capita we raise in taxes in Scotland than the rest of the UK (about £300)
• The black line shows how much more tax we raise per capita when you include oil revenues (in the most recent year this means our total tax generation is in fact at parity with the rest of the UK)
• The red line shows how much more per capita public expenditure we enjoy in Scotland than the rest of the UK (about £1,500)

The figures are almost identical to those we started this blog with: with the most recent year's data now available we see £7.6bn of the £9.2bn onshore deficit gap that exists between Scotland and the rest of the UK revealed by falling oil revenues.

This deficit gap is clearly mainly due the higher spend per capita in Scotland than the rest of the UK. As this blog has covered before (see FFA for Dummies) this is in large part due to Scotland's lower population density, remote communities and unique demographic challenges. None of these would miraculously go away if we were independent.

We really should be thankful we voted No.

---

Experience tells me it's a good idea to include the following summary table here:

Notes:
1. 
As is the way with these things prior years' data have been restated. It's worth noting that there's a material change to TME in 2013-14 leading to a £1bn increase in the reported deficit for Scotland. The UK reported deficit increases by only £3.6bn so this implies an increase in the reported deficit gap between Scotland and the UK which is reflected in this blog. See GERS Appendix B for more detail.

2.
The EU works to calendar years, so our 2014-15 data is mapped here against 2014 EU AMECO data (which is generally the most recent actual year available as of today's date). The definition used for deficit by the EU is:

Excessive Deficit Procedure (EDP) Government surplus / deficit (net lending/borrowing under EDP
= net lending (+)/ net borrowing (-) of 'general government' (as defined in ESA 2010)
= National accounts (ESA 2010) net lending (+)/ net borrowing (-)
= total revenue less total expenditure

This maps closely with GERS/HMRC defined deficit but there are some technical as well as timing differences. I do not claim to have understood all the technical differences but the following graph comparing UK fiscal year data (from GERS) with EU AMECO data shows they match reasonably well

---

A Simple Summary of Scotland's Economy

I've spend a lot of time looking at GERS and associated arguments - this is the simplest summary I can offer

1. Scotland's deficit relative to the rest of the UK (rUK)

• When Scotland's deficit per capita is lower than the rest of the UK we are a net contributor (above the line); when it's higher we are a net beneficiary (below the line)
• Scotland has been a net contributor to the UK economy in three of the last 15 years.
• The five year historical period used for most of the Yes campaign's "average" assertions included a clear outlier in 2008-09
• The Scottish Government White Paper was written using 2011-12 as a starting point - since then Scotland's performance relative to rUK has declined dramatically. As we'll see this is almost entirely explained by oil revenues.
• As long as Scotland is in the UK and the Barnett Formula (or equivalent) is maintained the people of Scotland are spared from the impact of any relative economic under-performance because we pool and share resources UK-wide
• In the two most recent recent years this pooling and sharing has been worth over £800 for every person in Scotland

2. How Scotland's revenue and expenditure compare with rUK

• The gaps between the black revenue and red expenditure lines on this chart are the deficit figures we were looking at in the first chart
• We can see that - as oft stated by the SNP - in each of the last 15 years Scotland (including geographical share of oil & gas revenues) has indeed generated greater tax Revenue per capita than the rest of the UK
• We can also see that - as less oft stated by the SNP -  Expenditure per capita is consistently higher in Scotland (and that the gap has actually increased over the last 15 years)
• The are some structural reasons for the higher per capita expenditure levels in Scotland. To quote directly from GERS "lower population density in Scotland relative to the UK [..] increases the cost of providing the same level of public service activity, particularly in areas such as education, health and transport"
• Of course only when the relatively higher levels of Revenue raised exceed the relatively higher levels of Expenditure made is Scotland's deficit less than that of the rest of the UK.  Again; three of the last 15 years where the black line is above the red.

3. The significance of Oil & Gas

• The difference between the black Revenue line in this chart and the preceding one is that I've simply removed Oil & Gas revenues
• It should be clear to everyone that without the "bonus" of Oil & Gas Scotland consistently generates lower Tax Revenues per capita than the rest of the UK

4. The Trend & Outlook for Oil & Gas

• The extent to which 2008-09 and 2011-12 were particulary good years for oil & gas revenue is obvious
• The Scottish Government oil & gas revenue forecasts used in the White Paper were optimistic when it was published (the "low" scenario was 60% higher than the OBR forecasts that existed at the time)
• The White Paper forecasts have subsequently been shown to have in fact been recklessly optimistic. The red portion of the graph is the difference between the White Paper scenarios and actual figures or (lightest grey) latest OBR forecasts
• It is now widely accepted that even the levels of Oil & Gas Tax revenues enjoyed in 2013-14 are unlikely to be repeated in the foreseeable future

So What?

• Given further oil revenue declines since the most recent GERS numbers, if today we were preparing for independence we would be preparing for every Scot to immediately be at least £1,000 pa. worse off 
• Without repeating the indyref arguments let's simply note that this is before factoring in short term downsides of independence (currency negotiations, increases in unemployment due to jobs shifting South, one-off costs etc) or the (in my view highly debatable) possible long term benefits
• If we succeed in achieving Full Fiscal Autonomy (as is the SNP's stated current aim) we will be making every person in Scotland over £1,000 worse off (unless oil booms again)
• Over time we might see economic growth relative to rUK sufficient to off-set the higher expenditure we currently require - but that seems to be both a highly optimistic assumption and one that implicitly accepts years (decades?) of hardship before we'd get there

If you are curious as to the detail of where the revenue comes from and cost goes please read the following

• How Scotland's Economy Contributes to the UK
• Analysis of 2013-14 GERS

****************
Addendum
****************

The SNP are fond of quoting deficit as a percent of GDP when making comparisons.  This has some merit but is internally inconsistent because we are allocated a per capita share of the debt cost (not a GDP share) so what matters is our per capita contribution to that debt.  If the SNP want to argue that % of GDP is the right measure then GERS should allocate debt cost on a GDP share basis and when negotiating debt split on independence they should argue that Scotland deserves it's GDP share of the debt. They don't. There are also issues due to the high proportion of foreign owned Scottish GDP which means much of the benefit of that GDP doesn't fall to Scotland's citizens.  GNP may be a better measure but let's not get bogged down with that here. Caveats now given; for completeness here's the relative deficit graph on % of GDP terms;

The Case in Summary

"For too long, the referendum debate has been presented as one side representing Scotland and the other side representing Britain.  In fact, the real debate is between two Scottish visions of Scotland's future – the nationalist one based on the breaking of all political links with the UK and our vision based on a strong Scottish parliament backed up by a system of pooling and sharing risks and resources across the UK."
Gordon Brown, 21/04/2014

There will be many detailed posts to come so to help keep a logical thread in place I will attempt to maintain a simple summary of the arguments as I understand them here. I'll try and edit on an ongoing basis, amending as necessary, responding to comment where appropriate, altering my view if persuaded. This is a work in progress, not a completed thesis!


1. We Should Decide who Governs Us (summarises We Should Decide who Governs Us)

"The people of Scotland will always get governments we vote for"
SNP White Paper, part 1 (first bullet point)

This seems to be the most often cited reason for voting for Independence; on the surface hard to argue with but if you scratch the surface of that argument (which I do in some detail, here) you might conclude;

• Making a country smaller does not make it in some way "more democratic", it just makes it smaller. That might be better or worse for a variety of reasons, but being "more democratic" will not be one of them.
• "We" (the people of the UK) do decide who governs us: it's a representative democracy
• In a representative democracy, no constituency always gets the government they vote for
• Of course Scotland is more than "just a constituency": that's why we have a devolved Scottish Parliament
• We make a trade-off between the scale of our democratic State and the extent to which we get what "we" want all the time: otherwise why not "Independence for Shetland"?
• It is naive in the extreme to point at every political failing in the last 50 years and blame it on "Westminster politics". In 13 of the last 17 years the UK has been governed by the party Scotland voted for; we can't pretend failings in that time would not have happened if only the Scottish vote had counted

A point that needs clarifying: This is not a vote for self-determination. The vote is self determination, we - the people of Scotland - are exercising that right, not voting for it. We are voting to decide if we'd rather be separated from the Union ("free to pursue 'our' own path") or remain within the Union ("continuing to benefit from pooling and sharing risks &  resources across the UK").

There is a sensible argument that Scotland is so consistently Left-leaning that we could form an Independent State that would stand as a beacon for social justice around the world (and get involved in fewer wars). It's a good argument if;

• If it is believed with a strength of conviction that justifies the case despite the loss of the benefits of Union, not in denial of them
• If you believe that the politics of an Independent Scotland will be immune from the failings of the Politics of Westminster (they'll still be politicians after all)
• If your aspirations for a more socially just society stop on this side of Hadrian's wall
• If you believe the the aspirational vision presented in the White Paper is actually achievable in any meaningful sense
• There are posts here on Scotland & the EU, Trade with rUK and more to come covering specific areas where the White Paper simply fails to recognise (let alone address) the issues
• Look in the White Paper and see if anywhere the economic implications of the promises made are actually added up. I've looked, I can't find it anywhere. That is an extraordinary failing on the part of those trying to make the case for breaking the Union.

2. We want our fair share of Oil Money (Summarising  Oil & Gas (Part I): For Richer, For Poorer and Oil & Gas (Part II): The Oil Fund)

This one is surprisingly straight-forward when you look at the figures dispassionately.  The numbers used by both sides of the argument are the same, and they show;

• Scotland receives a higher level of public expenditure per head than rUK which almost exactly compensates for the higher tax revenues generated per head even if you give Scotland her geographic share of oil tax revenue
• An independent Scotland (with our geographic share of oil tax revenue and making the same levels of public expenditure as we have been) would be running a higher per capita deficit that the UK
• Comparing *percentage* of tax revenue versus *percentage* of public expenditure is simply not the right way to look at it (they are percentages of different numbers). It's the *absolute* per capita numbers that count as any economist (or honest politician) knows.
• It is demonstrably incorrect to claim that Scotland has not had its "fair share" of the oil revenues generated

All of the above is based on the premise that to show Scotland has been treated fairly within the Union requires us to show that Scotland effectively got to keep its oil revenues in the form of greater public spending. I argue that's not an appropriate way to consider the analysis historically as a part of the Union with the commitments to pooling and sharing that implies.  For me it's like saying "If I'd known I had that winning lottery ticket in my pocket I'd never have married you".

Questions about the strategy of what reserves to exploit when and whether a (UK) oil fund should have been established are separate from this. One of the arguments put forward by the Scottish Government is that we should have had an oil fund, that if we had we'd now be as wealthy as Norway.  That's all well and good but - at the risk of stating the obvious -  to have created an Oil Fund we'd have needed to not spend the money.  I cover this in detail here: Oil & Gas (Part II): The Oil Fund

Norway founded their "Petroleum Fund" in 1990 and have made some tough choices to be able to fund it: the cost of living in Norway is 40% higher than the UK and (for example) the healthcare system is not free at point of use and compares very poorly to the NHS.  Now don't get me wrong - the OECD better life index shows Norway comfortably out-performing the UK on most measures.  My point is not that Norway made bad choices but rather they made tough and at times unpopular choices to get to where they are.  It's all very well - with the benefit of 20:20 hindsight - to say "we could have had an oil fund". The question is not who is saying that now but who was saying that then; can we really assume that an independent Scotland would have made different choices?

So to see if we might have done I checked through the SNP manifestos back as far as 1997 (there is a limit to the suffering I am willing to go through for this blog and that was it).

I found one mention of the possibility of a Scottish oil fund in the 2005 manifesto; nothing before and nothing after. Norway is mentioned once in the 1997 manifesto and only reappears in 2007 (when it is mentioned 5 times). The first mention in Hansard is an early day motion in January 2002.  To put the level of noise made about an oil fund into context: my Hansard searches turned up 68 results relating to "Oil Fund" compared to 674 results relating to "Scottish Gaelic".

I think we can conclude that the Oil Fund about which the SNP are so keen to talk now wasn't very near the top of their priority list when it could have actually made a difference in the 1990s.

So it's hard to argue that an independent Scotland would have had the political vision and conviction to make the sacrifices required to build an oil fund; we can't credibly say "we'd have had an oil fund if only it hadn't been for pesky Westminster". We didn't make the sacrifices at the time, we spent our share of the money. Should've, would've, could've.

Of course all of this is of academic interest only. The past is the past; Time's arrow flies and we can only change what's in front of us.

So what relevance is the Oil Fund debate to the future? Vote for independence and we will have an oil fund, right? Well, not quite.  The relevant passage from the White Paper is extracted below

Let's just pick out the key words: "will be started once Scotland's overall budget deficit is reduced to below the level of long-run economic growth and when debt is on a downward trajectory". That hasn't been the case for any of the last 10 years and it's hard to seeing it being the case for an independent Scotland any time soon.  If there is an opportunity to build an oil fund in the future then that opportunity will exist for the UK as much as it would for an independent Scotland. It's not an independence issues, its a broader question of political will and vision, of whether "we" would be willing to sacrifice "jam today" if we face the choice again.  For reasons outlined elsewhere in this blog, the economic capacity to build an Oil Fund in the future is more likely to exist for Scotland as part of the United Kingdom than for an independent Scotland no longer enjoying the economic benefits of Union.

3. Trading with rUK (Summarising  Independence & Scotland's Trade with rUK.)

Two-thirds of Scotland's exports go to rUK ("rest of UK); as a direct consequence many jobs in Scotland are contingent on seamless trading between Scotland and the UK. In fact (as elaborated in my post Business for Scotland: Who are they?) current best available estimates are that 37% of jobs in Scotland depend on links to the rest of the UK.  That independence will impact that trading relationship is undeniable, the only question is how much and in return for what upside.

One of the underpinning drivers for the Independence case is to allow divergent approaches to the EU; this inevitably creates risks for those trading between an iScotland and rUK and therefore for employment in Scotland.

• It becomes likely (it can be argued as inevitable) that we will have separate currencies within a few years because Sterling-zone participation is incompatible with the conditions likely to be imposed for an iScotland to negotiate continued (constructive) EU membership.
• This point is important: the White Paper asserts that an iScotland can negotiate to remain in the EU without making any concessions on Euro or Schengen Area participation, while retaining the UK Rebate and other opt-outs and simultaneously improving our share of CAP payments, extending fishing rights etc. This is plainly unrealistic; if you disagree please read my detailed analysis here: Independent Scotland and the EU.
• Independence creates the conditions where it is possible for one of iScotland or rUK to be in the EU whilst the other is out; where sales from a Scottish businesses to rUK could become cross-border from an EU perspective. That this "one in, the other out" scenario would make trade with rUK more difficult than it is today is obvious. To be clear; it's not inevitable, but it is a significant risk that only a pro-independence vote exposes us to.
• The line that "the biggest risk to Scotland with respect to the EU is an in/out referendum" is often used in this context. Let's think this through;
• Independence doesn't protect Scotland from the major downside of a possible "out" vote. Excluding Oil & Gas, Scotland exports four time as much to rUK as it does to the rest of the EU [Scotland's Global Connections Survey 2012]
• If one was to pursue a purely rational self-interest argument on this point alone: surely better to be "in the UK outside the EU" than "inside the EU outside the UK"?  
• I want my vote to be able to keep the whole of the UK in the EU (by voting against the parties pushing for a referendum and/or by exercising my vote in such a referendum if it ever takes place). At the risk of stating the obvious; the Scottish electorate lose any say in that matter if we vote Yes on September 18th
• Assuming both iScotland and rUK remain in the EU (IMHO the likely end-game under an independence scenario) the concessions an iScotland will have had to make (nobody credibly argues concessions won't be required) can only create complications to trade with the UK. 

Continuing to physically ship goods "across the border" is vital to our economic success; a Yes vote would fundamentally change the risk profile of many Scottish businesses. This is not a marginal issue; this is about employment in and the wider economic success of an independent Scotland.

To be absolutely clear: there are other arguments for and against (I will try and cover many of them) but for me this issue is the one which seems least well understood in the debates I have participated in and witnessed.  I am NOT saying that an independent Scotland couldn't continue to trade with rUK and EU, I'm NOT saying an independent Scotland couldn't succeed on the global stage: all I am saying is that I am convinced that Scotland as part of the Union will be more successful than Scotland outside of it because of our seamless trading links with rUK.

Any credible argument for Independence must be made despite these risks, not in denial of them.

If you're not convinced, please read the full post here: Independence & Scotland's Trade with rUK.


4. Scotland and the EU (summarising Independent Scotland and the EU)

The following are Verbatim quotes from the White Paper (the emphases are my own)

• "While the Scottish Government recognises the political and economic objectives of the Eurozone, an independent Scotland will not seek membership"
• "Will Scotland be forced to join the Euro? No"
• "Nor will we seek membership of the Schengen area."
• "Would an independent Scotland be forced to join the Schengen Agreement? No."
• "the Scottish Government will not seek to re-open budget discussions until the next funding cycle ... the UK rebate will be a matter for agreement between the Scottish and Westminster Governments"
• "We will seek to negotiate an uplift in CAP Pillar 2 funding"
• "will give Scotland the opportunity to take a leadership role in reforming the Common Fisheries Policy"
• "the Scottish Government will seek to retain the current flexibility to opt into new measures on Justice and Home Affairs."

You will notice a lot of "seeking to" and "not Seeking to". Nobody should (or reasonably could) believe that all of the benefits and concessions "sought" will be achieved. Similarly nobody is arguing that an independent Scotland could be "forced" into anything either. It's a negotiation, Scotland can decide if the conditions placed on it to remain in the EU are too onerous, can choose not to remain in the EU, can decide to trade-off various elements of the wish-list in return for the benefit of remaining in the EU. It's a negotiation.

To understand the context of this negotiation let's accept the most favourable scenario, the one the SNP base their case on: the written evidence provided to the Scottish parliament by Graham Avery. Verbatim quotes (again emphases my own):

• "In accession negotiations with non-member countries the EU has always strongly resisted other changes or opt-outs from the basic Treaties; at this stage it remains to be seen what might be requested by Scottish representatives concerning the euro or the Schengen area of free movement of persons."
• "it remains to be seen whether Scottish representatives would request changes in the application of EU rules and policies, for example the fisheries policy or payments into the EU budget"

If you read the White Paper and listen to the rhetoric used in debate, these issues don't "remain to be seen". It appears Mr Avery's case is not predicated on the same assumptions as the White Paper; or at least he has been careful to distance himself from those assumptions when making his case for a possible negotiated remaining in the EU. I personally think those statements are a tacit admission on his part that the conditions "sought" in the White Paper are clearly unachievable, but maybe I'm reaching a little there. Form your own view.

The SNP often adopts the line "we couldn't be made to join [Eurozone or Schengen]  because we don't meet the conditions".  Yet. We don't meet the conditions yet. Given all new member states have to join, it seems pretty much inevitable that legally binding commitments will be sought from an Independent Scotland to join these arrangements within a set period of becoming a new Member State.  As I have mentioned elsewhere on this blog, Chic Brodie (SNP MSP) offered, during a public debate, that in his opinion commitments to join the Euro would indeed inevitably be required. 

Let's move on to the the specific process required, again to quote Mr Avery's paper:

• "a modification of the EU Treaties would be necessary"
• "[Scotland] could indicate its wish for Scotland to remain in the EU, and this would lead to negotiations in an appropriate framework to prepare the necessary modification of the Treaties. Proposals would be submitted for approval to the EU institutions and the Parliaments of 28 member states".

This means every one of the 28 member states has to agree to any Treaty amendments "in accordance with their own constitutional requirements" -- as I understand it that means in some cases even requiring a referendum on the issue in their own country, that it may be necessary for a referendum in France to be held to ratify the Treaty changes required.  To quote Alex Barker of the FT on "how do you revise EU treaties": "The conference of member states will have to agree each and every tweak to the treaty by unanimity. All 27 [28 with Croatia] member states hold a veto and could stop the process in its tracks."

In my detailed post I elaborate on the broader context, the stances of those we would be negotiating with. There is an excellent summary of the Member states' summarised positions (or lack of position) on the BBC website (here) or read my full post on the topic here: Independent Scotland & the EU.  I think we can achieve consensus around this point: an independent Scotland would face an almighty challenge to achieve unanimous agreement from all 28 Member states given the clear (and understandable) resistance from some.

So how is an independent Scotland being positioned for this negotiation?  As recently as April 28th Alex Salmond was grabbing headlines [Alex Salmond's fisheries threat to EU alarms industry] by claimed that 12 European nations could be barred from Scottish and Norwegian waters if an independent Scotland was refused EU membership.

How about the timing of all this? Let me quote again from the White Paper: "The 18 month period between the referendum and the planned date of formal independence provides sufficient time for discussions settling an independent Scotland’s terms of EU membership."

So there we have it. A requirement for unanimous agreement from 28 Member states, clear resistance from many, antagonistic posturing from Alex Salmond, a wish-list that even the most optimistic separatists would appear to accept is unachievable and 18 months to negotiate it. What could possibly go wrong?

As I've said elsewhere; the SNP position on this is akin to asking you to jump with them out of a plane without a parachute on the basis that you will be able to negotiate a parachute on the way down. And you'll be able to keep hold of your Gin and Tonic. We'll probably be able to get some of those nice nibbles too ...

Lets be clear: an Independent Scotland could play an important role in the EU, could 'hold its own' as an independent country.  But a thoughtful voter should, I submit, ask themselves these questions;

• Understanding the nature of the context outlined here, would we be in a better position with respect to the EU following the discontinuity and renegotiation that separation from the UK would require?
• Is it realistic to assume that an independent Scotland could both remain in the EU and achieve even half of the White Paper wish-list?
• Is it realistic that full and productive participation in the EU can be achieved without making commitments to join the Euro?

5. The Benefits of Union (summarising The Positive Case for No)

You Don't Know What You've Got. Till it's Gone

"Our two economies benefit from a flow of people, goods, investment, capital and ideas on a scale that is rare even in this era of global economic integration"
Scotland's Future: Your Guide to an Independent Scotland p.248

The quote above (from a joint statement made by David Cameron and Enda Kenny relating to British/Irish relations) is taken directly from the White Paper; my natural reaction is:

• If that statement accurately describes British/Irish relations, how much more accurately does it describing existing rUK/Scottish relations?

In addition to the economic and social benefits of this "free flow" within the Union we need to consider the "pooling & sharing" benefits most pithily summed up by the Better Together campaign:

"...our vision based on a strong Scottish parliament backed up by a system of pooling and sharing risks and resources across the UK."
Gordon Brown, 21/04/2014


Context

The pro-Independence camp often ask the pro-Union camp to be more positive; the context does make this difficult (but not impossible)

• The question has been formed as a Yes / No question; those arguing to maintain the Union are seeking the answer "No". It's quite hard to argue that case without sounding - um - negative.
• If you're arguing to change something that has worked for 300+ years then the burden of proof is yours; you are obliged to make the case for change. Pointing out that the burden of proof has not been met by the arguments presented - that the arguments simply lack logical sense, appear based on irrational resentment, involve sums that don't add up or are based on wildly optimistic assumptions - may be negative, but it's hardly inappropriate.
• Given we start with the benefits of Union, it's pretty hard to argue against separation without pointing out what will be lost, the downsides of separation. If that's being negative well - again - it's hardly inappropriate
• There's a wider, relevant point here: it's always going to be harder to get people exercised and engaged by the positive arguments in defence of the Status Quo
• What do we want?
• The Status Quo!
• When do we want it?
• errr... we've already got it
• It's possible to look at any success achieved within the Union and blithely assert "we could have achieved that without being in the Union"  (in the same way some point at any political failings in the past 300 years - there have been plenty - and say "that's the sort of thing that wouldn't have happened if we were independent").  I believe that all of the positives listed here have been at the very least helped by the existence of the Union and in some cases are achievements that would be unimaginable without it
• The benefits of Union listed here flow both ways.  How the benefits are shared is a different and wider question, touched on by this post >  Oil & Gas (Part I): For Richer For Poorer
• It can be argued that these benefits could - at least in part - be maintained through negotiation and agreement.  Where that is the case it simply reinforces the fact that these are benefits of Union; we achieve those benefits without the "arm's length" contractual negotiations that would be required between iScotland and rUK.  Anyone who believes that those contractual negotiations will be straight forward has - I would suggest - not been paying attention.

The Benefits of Union

Ironically perhaps the White Paper is a great place to look if you want to find some of the benefits of Union. If the White Paper talks of the need to negotiate agreements, divide assets, create on-going asset sharing agreements or invest in new infrastructure you will probably be looking at a benefit of the Union behind it all. The detailed post this summarises includes lengthy quote from the White Paper which I have removed here for brevity

• A single currency
• This has been such a contentious issue exactly because it is such a great example of a benefit of Union.
• There has been plenty written on this topic and I think the jury is in: at best there will be a significant economic cost to an iScotland of any agreement to "keep" the pound (or to pursue "dollarisation" whereby Scotland pegs to the pound).
• There are plenty of self-explanatory links on this topic in the Who Can We Trust section of this blog
• EU membership and opt-outs
• The EU opt-outs currently enjoyed by Scotland as part of the UK are an asset, a benefit of Union  
• I've covered this topic at great length under Independent Scotland and the EU; given the real politik of the negotiations triggered by a Yes vote it is hard not to conclude that Scotland's relationship with the EU has benefited from being part of the Union.
• Borderless Trade
• If you doubt the scale of this benefit I 'm guessing you have not been involved in making high volumes of shipments outside of the EU. For most of this debate I'm a curious observer, learning as I go; but on this topic I will claim a significant level of experiential knowledge, some of which is covered in my post Independence and Scotland's Trade with rUK .
• I cite borderless trade as a benefit distinct from EU membership itself because a "benefit of Union" is that we can't end up with a "one of us in, one of us out" scenario.
• Inward investment
• All of the above adds up to make Scotland an attractive location for inward investment.  It would be hard to dispute that sharing a currency and EU membership with the rest of the UK adds to our attractiveness as an inward investment location.
• Royal Mail
• Given Scotland's relatively lower population density (not to mention number of islands) - and therefore higher cost-to-serve - in this case there can be no debate about "who gets the benefit"; Scotland benefits from the Royal Mail's Universal Service Obligation (one price goes anywhere, meeting specified minimum service levels)
• The controversial privatisation of the Royal Mail is a separate issue (I don't like it); the USO is still protected so the privatisation issue is relevant only to the wider political arguments about independence and I'm sticking with the task in hand here: the Royal Mail Universal Service Obligation is a benefit that Scotland achieves within the Union
• A Single Energy Market
• This is a huge issue and worthy of a post all on its own. I think we can chalk the existence of the single energy market, integrated transmission networks and shared support for renewables up as a benefit of the Union.
• Global Diplomatic and Trade Network
• Scotland benefits from the UK's Embassies & High Commissions and diplomatic infrastructure. 
• The White Paper recognises the need to replicate this but suggests doing so only partially
• The BBC
• The White Paper implicitly recognises the value of this asset (although some of the more paranoid pro-independence campaigners don't) even going so far as to - hilariously - name check specific programmes that will still be available in an iScotland
• Shared Assets & Government Agencies
• At the time of writing this is a very hot topic because of disagreements about the costs required to recreate these assets and agencies in Scotland. Neither side comes out of the debate well. I expand here > Lies, Damn Lies & Cost Estimates
• Further interventions from Professor Dunleavy have left him looking somewhat - how can i put this? - less that impartial.  See Dunleavy & The Costs of Independence; its clear the one-off costs are in fact well over £1bn
• Assets and resources relevant to this include: security & intelligence, border & migration service, Motor services Agency, the BBC and its archives, systems for administering welfare & taxation, Jobcentre Plus, DWP and HMRC offices, the Crown Estate and the defence estate. It will also include assets outside Scotland in which Scotland nevertheless has an interest as part of the UK, such as the overseas missions of the Foreign and Commonwealth Office.
• Defence Alliances
• I'm too tired to work out if I think these are a benefit of Union or not. You decide
• Issues include membership of the United Nations, NATO, the Organisation for Security and Co-operation in Europe
• NATO membership for iScotland is no gimme - it's worth noting that former Secretary General of the NATO Lord Robertson of Port Ellen stated "He's taking the Scottish people for fools by claiming that [the SNP] would want Scotland to be in Nato but laying down conditions that would make it impossible. It's a confidence trick both on their membership and the Scottish people." He may have over-cooked his case in some of his statements but on this specific issue he has a point; he's been quoted elsewhere as saying "while the alliance had no issue with non-nuclear members, it had no room for anti-nuclear ones"
• Other International Organisation Memberships
• International Monetary Fund, the World Bank Group and the World Trade Organisation.
• Distinct Cultural Identity
• The Union structure has allowed Scotland to retain a distinct National identity and for our unique culture to not only survive but thrive. That we share the benefits above whilst maintaining this identity is a benefit of Union in it's own right

Independence & Scotland's Trade with rUK

The single most important purely rational argument in this debate for me is underpinned by the fact that 2/3 of Scotland's exports go to rUK ("rest of UK); as a direct consequence many jobs in Scotland are contingent on seamless trading between Scotland and the UK.  That independence will impact that trading relationship is undeniable, the only question is how much and in return for what upside.

I will discuss the upside case for Independence elsewhere; I have engaged, read and listened on that topic. I will also elaborate separately on the detail of the Currency Union debate and negotiations required to remain in or rejoin the EU; I've done the background work, I will share it, what follows is reasoned conclusion not emotional assertion.

One of the underpinning drivers for the Independence case is to allow divergent approaches to the EU; this inevitably creates risks for those trading between an iScotland and rUK and therefore for employment in Scotland.

• It becomes likely (it can be argued as inevitable) that we will have separate currencies within a few years because Sterling-zone participation is incompatible with the conditions likely to be imposed for an iScotland to negotiate continued EU membership. I explain my reasoning in detail here, but you don't need to take my word for it: Chis Brodie (SNP MSP) stated in a public debate (a small village hall debate in Gifford East Lothian on 15/05/14) that in the negotiations to remain within the EU he expected an iScotland to be required to make commitments about joining the Euro. This is in direct contradiction with the currency assertions made in the White Paper, p.378 "Will Scotland join the Euro? No."
• This point is important: the White Paper asserts that an iScotland can negotiate to remain in the EU without making any concessions on Euro or Schengen Area participation, while retaining the UK Rebate and other opt-outs and simultaneously improving our share of CAP payments, extending fishing rights etc. I don't believe there is an informed person in this debate who believes that is possible and I include in that the experts the SNP cite as being "on their side". The (informed) pro-independence lobby are knowingly misleading the electorate on this point, relying on the hope that you won't check the facts and understand the complexities of how the EU works; heaven knows I didn't until I researched it for this --if your interested I elaborate here
• Independence also creates the conditions where it is possible for one of iScotland or rUK to be in the EU whilst the other is out; where sales from a Scottish businesses to rUK could become cross-border from an EU perspective. That this "one in, the other out" scenario would make trade with rUK more difficult than it is today is obvious. To be clear; it's not inevitable, but it is a significant risk that only a pro-independence vote exposes us to.
• The line that "the biggest risk to Scotland with respect to the EU is an in/out referendum" is often used in this context. Let's think this through
• Independence doesn't protect Scotland from the major downside of a possible "out" vote. Excluding Oil & Gas, Scotland exports four time as much to rUK as it does to the rest of the EU [Scotland's Global Connections Survey 2012]
• If one was to pursue a purely rational self-interest argument on this point alone: surely better to be "in the UK outside the EU" than "inside the EU outside the UK"?  
• All of the above is why I want my vote to be able to keep the whole of the UK in the EU (by voting against the parties pushing for a referendum and/or by exercising my vote in such a referendum if it ever takes place). At the risk of stating the obvious; the Scottish electorate lose any say in that matter if we vote Yes on September 18th
• Assuming both iScotland and rUK remain in the EU (in my opinion the likely end-game under an independence scenario) the concessions an iScotland will have had to make (nobody credibly argues concessions won't be required)  can only create complications to trade with the UK. Euro and Schengen area participation are the headline grabbers but EU attempts to drive VAT rate harmonisation will also be a material factor; I certainly don't claim to have assembled a complete list of the issues.
• As the HM Government paper Scotland Analysis: Borders & Citizenship makes clear;
• "In the event of a vote for independence, an international border would be created between an independent Scottish state and the continuing UK. Trade across that border, classed currently as domestic, will become international trade: import–export. This, together with the likely divergence over time of tax, excise duty, regulatory and administrative regimes would be expected to trigger a ’border effect‘: international evidence shows that flows of trade, labour and capital are much larger between two regions of the same country than between two (otherwise similar) regions of two different countries. This effect occurs even when there is no physical border between countries and even where trade agreements and structures, such as the European Single Market, are in place. While historical and cultural ties between Scotland and the continuing UK would prevent an immediate fall off in trade flows, evidence of previous separations points to the erosion of these ties as time passes. Combined with regulatory divergence, Scottish independence would lead to barriers to trade and obstacles to labour and capital mobility"

Two-thirds of Scottish Exports are to rUK, manufacturing industries account for 26% of those exports, Food & Drink forms a major part; continuing to physically ship goods "across the border" is vital to our economic success; adding possible (likely) exposure to currency risk on top of "cross border" shipping requirements would fundamentally change the risk profile of many Scottish businesses.

This is not a marginal issue, the businesses I can speak for are not unusual.  This is not about making threats or protecting the interests of a few rich shareholders.  I don't deny that I believe a vote for independence would damage my businesses and that would impact me directly (I don't expect anybody else to care about that, if you read My Bona Fides you might accept its not what motivates me in this debate); the point is there are wider implications for employment and the economic success of an independent Scotland that I feel should be understood by anyone wishing to make an informed decision as to how to cast their vote on September 18th.

The businesses I am involved with are already contingency planning around our options in the case of a Yes vote. Our heads tell us that we would need to relocate our stock-holding and warehousing to protect our businesses under that scenario; the prospect of having to do so fills my heart with genuine sadness. That's why I'm speaking out, adding my voice to those arguing for a No vote on September the 18th, doing what I can to avoid the outcome I dread.

To be absolutely clear: there are other arguments for and against (I will try and cover many of them) but for me this issue is the one which seems least well understood in the debates I have participated in and witnessed.  I am NOT saying that an independent Scotland couldn't continue to trade with rUK and EU, I'm NOT saying an independent Scotland couldn't succeed on the global stage: all I am saying is that this logic convinces me that Scotland as part of the Union will be more successful than Scotland outside of it because of our trade relationship with rUK.