Elusive answers begin to emerge

Monday 19 November 2012

The question of just how independent Scotland would be as a separate country is a political and economic conundrum in an increasingly interconnected world.

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The economic health of an independent Scotland would be determined to a significant extent by oil and gas revenue. But energy prices are particularly volatile. So how long could a geographical share of North Sea resources continue to underpin social policies such as free personal care for the elderly and free university tuition?

At present the £1200 additional spending per head in Scotland compared with the rest of the UK is attributable to these policy differences as well as to higher costs resulting from large, sparsely populated, rural areas. The authoritative and independent Institute for Fiscal Studies has concluded a geographic share of oil and gas revenues would be large enough to slightly more than offset these higher levels of public spending. There is, however, an important caveat to this apparent boost for the economic case for independence. It will hold true only in the short term. The fragility of the equation is brought home with the finding that if Scotland were to receive oil and gas revenues based on its population, the situation would be reversed, with Scotland's fiscal position being weaker than that of the UK. Even with a geographical apportionment, as oil and gas revenues decrease, an independent Scotland would have to cut public spending.A separate warning about the limits to financial autonomy an independent Scotland would have if it retained sterling as currency comes from Brian Quinn, a former acting deputy governor of the Bank of England. He says that Scotland's freedom to spend and borrow would be limited as a result of stringent conditions imposed by the UK Government if Scotland were a member of a new "sterling zone", as proposed by Alex Salmond. The eurozone crisis, however, may prove paradoxically fortuitous in its timing despite its depressive effect on the Scottish and UK economies. In advance of the 2014, it provides a salutary example of a flawed model of currency integration. Adopting a single currency before coordinating the other areas of policy, most notably fiscal policy, is now recognised to have been a profound mistake. In Scottish terms, the advantages of retaining sterling must be weighed against the disadvantages of fiscal constraints determined by a government of the rest of the UK. Whether an independent Scotland will be able to retain the UK's current AAA credit rating is not known but its economic status is likely to decline as the dividend from North Sea oil and gas diminishes. Coinciding with this over the next 20-30 years will be a significant increase in the cost of care for the elderly as the "baby-boomers" generation benefits from increased longevity.The cost of establishing independence is a further factor that has yet to be identified. This is partly, as Mr Quinn says, because there is no known model but also because it is not known whether, for example, there would be a separate central bank or financial regulatory authority.With the Edinburgh Agreement having delivered the legal basis for a referendum in 2014, appetite is sharpening for detailed information and debate about the consequences of independence. By bringing together speakers with significant experience, Edinburgh University's David Hume Institute has moved the debate forward. Scottish Financial Enterprise chief Owen Kelly will not be the only one to lament with Johnny Nash that "there are more questions than answers". But the questions must be asked, even if the answers are elusive.

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Elusive answers begin to emerge

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