Sunday, September 14, 2014
Don't go, but Scotland needs the UK a lot more than the UK needs Scotland
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

With days to go, it it is still not clear whether Scotland will avoid the economic car-crash that would follow independence. It could still, as Deutsche Bank's chief economist puts it, be on the brink of a historic economic and political mistake.

The fact that independence will be bad for Scotland’s economy is so clear that it surprises and rather saddens me when some business people north of the border either say there will be little difference whichever way Thursday’s vote goes or that Scotland will be better off.

For a sensible business view of independence, I would look to Terry Scuoler, the Glaswegian chief executive of the EEF, which represents Britain’s manufacturers. As he wrote in The Times on Thursday: “A ‘yes’ vote would be deeply damaging for the Scottish economy, and thereby the living standards of ordinary Scots, for decades to come.”

That’s enough on that, without reprising all last week’s arguments. Let me move on to a different tack. Last week’s dash up to Scotland my the prime minister and the other Westminster leaders, together with the general air of panic about the risks of a “yes” vote, have led to some nationalists making an interesting claim. The reason the rest of the UK is so worried, they say, is because it has been exploiting Scotland all these years.

There are three things wrong with this argument. The first is that it is hard to claim exploitation when Scotland’s income per head – measured by gross value-added - is the highest in the UK outside London and the south-east, even without allocating it a geographic share of North Sea oil. Wales, Northern Ireland and the north-east of England, with income per head on this measure less than 80% of the Scottish level, are entitled to feel hard done by. Scotland is not.

Second, the UK is an economic and monetary union that works. The sum really is greater than the parts. The rest of the UK can regret the loss of Scotland, not because it exploits it, but because if you remove part of any integrated economic system it leads to short-term dislocation – and in this case the short-term could mean several years – and significant adjustment problems.

Separation has economic consequences. When retailers and other companies warn of higher prices in an independent Scotland, they are not bluffing. Once you remove the benefits of an integrated system, and a genuine single market, Scottish consumers will be hit by higher distribution costs and the loss of economies of scale. The greater the currency uncertainty, the bigger such effects will be.

Thirdly, and most importantly, in the long-term the rest of the UK would do very well without Scotland. If there has been a criticism from readers about my take on Scottish independence, it is that I have not emphasised the benefits of separation to the rest of the UK.

We are already seeing some of those effects. A “yes” vote on Thursday will see a substantial migration of Scotland’s banking and financial services industry southwards. Royal Bank of Scotland, desperate to try to please both sides, has said a shift of head office need not mean a reduction of operations and jobs north of the border.

That, however, is an untenable position. The Bank of England is not going to provide lender of last resort facilities and regulatory oversight to a bank that remains substantially Scottish in the event of independence. There will be a large-scale and meaningful migration.

Other businesses are also likely to shift. The problem for England’s northern regions, and for Wales, has been competing with the inducements on offer to invest in Scotland. Veterans of UK trade promotion tell of Scotland, with the support of UK taxpayers, paying perhaps three times per job in investment inducements as the English regions.

Those days will be over, or such inducements will be balanced by the disadvantage for Scotland of being outside the UK. Over the long-term, England’s regions, Wales and Northern Ireland will benefit both from the outflow of investment from Scotland and a greater share of inward investment from overseas.

Britain’s or rather the rest of the UK’s fiscal position will also benefit. As my piece a week ago pointed out, Scotland has run a bigger budget deficit than the UK as a whole for the past 25 years. Oil revenues are in long-term decline. In future, as a result of this, the subsidy from taxpayers in the rest of the UK to fund Scotland’s higher per capita public spending will increase. Removing this liability will benefit the rest of the UK’s public finances, not hugely, but it will benefit them.

Surely, however, Independence would expose the fundamental weakness of Britains’s trade position. In July, the trade deficit in goods was £10.2bn, reduced to £3.3bn by the surplus on services. Last year North Sea oil exports were £39bn. Scotland’s “geographic” 90% share of that would be £35bn. That is a lot of exports for the UK to lose.

It is, but it would be offset by Scotland’s £12bn trade deficit with the rest of the UK, the fact that around £20bn of North Sea profits are currently remitted abroad and, over the long-term, by the shift in activity southwards. An independent Scotland would lose a substantial chunk of her financial services exports, and probably other exports as well. In any event, Britain has to adjust to declining North Sea production and exports. This would merely hasten that adjustment.

In trade, as in everything else, Scotland needs the UK a lot more than the UK needs Scotland. Nearly half of Scotland’s exports go to the rest of the UK. The end of three centuries of economic and monetary integration would hurt the smaller economy moving away a lot more than it would the larger one staying. Losing Scotland would take the UK’s population back to where it was in 2000.

The economic tail, if it does patter off into the distance, would not wag the dog.
None of this should be taken to mean that I want to see a vote for independence this week. This is no time for economic and financial disruption.

At a time when an unsuccessful economic and monetary union is being held together in Europe, it would be bizarre to break up a successful one in the UK. The question is whether voters in Scotland see the sense of that.