As speculation mounts about a second independence referendum, Robert Hoskins re-examines the economic case for independence and finds that while it was dubious in 2014, it is now effectively infeasible.
During the 2014 independence referendum campaign I attended a ‘Just Say Naw’ meeting. Once the obligatory nationalist hecklers had been identified and evicted and the speeches began, the contribution which stood out the most for me and still resonates to this day was that of the University of Glasgow’s Research Professor of Macroeconomics and International Finance, Ronald MacDonald.
Professor MacDonald gave a withering critique of every aspect of the Yes campaign’s economic case for independence, including its impact on currency choice, deficit and debt. The deficit and debt arguments in particular had never been properly aired during the campaign itself. Using layman’s language to communicate complex economic arguments, the good professor not only blew the economic case for independence out of the water but he also warned of the economic catastrophe which awaited had the country voted Yes.
A fiscal deficit of £4 billion would have arisen even after the fabled £6 billion of oil tax receipts had flowed into the Scottish treasury. Prof MacDonald argued that the only option for reducing this deficit would have been to go to the money markets and borrow. But how do you borrow when Scotland’s population share of its UK inherited debt in 2014 amounted to £120 billion?
We were told if this debt was paid off over 20 years that would have resulted in £6 billion per year plus the interest payments associated with servicing that debt amounting to an additional £5 billion per year. The combined cost of the fiscal deficit, the debt and the associated interest payments that a newly independent Scotland would have been saddled with came to an eye-watering £15 billion per year. To put that figure into perspective, Scotland’s NHS costs £13 billion per year to run.
This message failed to get across in 2014 as the nationalist leadership cleverly rebutted such inconvenient truths as being part of a wider conspiratorial ‘Project Fear’ campaign designed to specifically undermine the case for independence. The economic argument which did connect with the electorate focused almost exclusively on currency choice to the exclusion of the pounds, shillings and pence of the fiscal deficit and debt figures.
I went into this meeting in September 2014 thinking that my knowledge of the economic debate was better than most. I left it with only 4 days to go to the referendum wondering why I, let alone the rest of the nation, had not heard about this £15 billion per year which an independent Scotland would have been saddled with from day one. If the electorate had been properly informed of the dire economic cost to them and the turbo charged austerity that awaited if the nation had voted Yes, the dynamic of the referendum debate surely would have dramatically changed and would have boiled down to the simple question of whether penury is a price worth paying for independence.
If a referendum broadcast slot or two had been dedicated to getting this figure and this question across it could have convinced far more than just half of the 30% of undecided voters to vote for the union due to the turbo-charged austerity, tax hikes and swingeing welfare cut backs that would have inevitably followed a Yes victory. The constitutional question would indeed have been settled as the threadbare oil-dependent pro-independence argument would have been exposed to the electorate for the cruel con that it was.
If the nationalists are to be believed another referendum (however unwanted by the vast majority of the electorate) is apparently now ‘inevitable’. The most bizarre aspect of the SNP’s clamour for a second referendum is the complete absence thus far of any new economic case to put before the electorate, two and a half years since their defeat. The only attempts at rectifying this were the recent Indy 2 conference and the Common Weal White Paper Project, whose well intentioned efforts at tackling how an independent Scotland would create deficit parity with the UK without cutting public services has subsequently been brutally dismantled and has exposed an alarming naivety in strategic thinking amongst the separation camp.
If the SNP leadership and activist community have had little to say in terms of what the economic case for a second independence referendum might look like, what about the pro independence opinion piece journalists who write weekly columns in the main stream press, surely they would have been able to offer some fresh ideas on how an independent Scotland would solve its currency, deficit and debt dilemma?
Sadly the only thing which appears to unite pro-independence journalists – apart from their fundamentalist belief that independence is the answer to every Scottish political question – is their complete silence on the economic case. They have made no attempt to open a debate with their readership with regard to what services would be cut or what taxes would have to rise to fund the mountain of debt which would arise from Scotland’s burgeoning fiscal deficit and population share of UK debt.
It appears that all talk about a second referendum has been held in an economic vacuum, with all debate in the press and media being stripped of any economic context. The failure to provide any sort of fiscal scrutiny to the case for a second independence referendum might also explain why it has taken two and a half years for the pro-separation vote to recede to nearly its September 18th 2014 level.
How much weaker would the economic case for an independent Scotland be if there indeed was a second referendum, bearing in mind that the last GERS figures stated that oil receipts have slumped to £60 million and show no signs of recovering in the next couple of years? To answer that question let us re-visit Professor MacDonald’s 2014 figures and put them into a 2017 context. This will give us an updated snapshot of the economics which will shape any upcoming referendum debate.
Due to the collapse of the oil price since the last referendum, Scotland’s fiscal deficit has increased from an estimated £4 billion in 2014 to the current £15 billion. Even if we leave Scotland’s share of the UK national debt unchanged at £120 billion, paid off over the same 20 year period at £6 billion per year incurring the same £5 billion of interest charges per annum, the combined debt in 2017 would rocket to more than £26 billion per year – which is more than twice Scotland’s NHS budget.
If the aim of the pro-UK side this time is to achieve what they should have done at the first time of asking and deliver the knockout blow to the economic case for independence, the current set of figures could not provide it with better ammunition. Remember, this calculation does not include the additional billions of pounds which would be needed to setup the new structures necessary for an independent country to function, nor does it include the £40 billion of foreign exchange reserves which Prof MacDonald argues would eventually have to be found to support a new Scottish currency.
As the clock ticks down to the triggering of Article 50, signifying the start of the UK’s departure from the EU, the speculation surrounding a second independence referendum is reaching fever pitch. It is a damning indictment of the mainstream media that they are, with a few notable exceptions, sleepwalking their readerships into another referendum by not giving them access to the above information.
The evidence is clear. The financial consequences for an independent Scotland today would be far more devastating, for rich and poor alike, than it would have been in 2014.