Scottish independence – not a pretty scenario

This column warned, in February and again in May, that Alex Salmond wasn’t to be under-estimated. The Scottish National Party’s canny leader has a track record of surging late to secure a close-run victory. He did it in the Scottish parliamentary elections of both 2007 and 2011.

The Union is now in grave danger. Over 300 years of history could be reversed when Scotland votes on Thursday 18 September. No-one should be surprised by the latest “shock” polls showing the pro-independence vote within spitting distance of upending the 1707 Act of Union. For some time, the momentum has been with the Yes-camp, as it has steadily come from behind. In mid-2013, 65pc of the Scottish electorate said they wanted to stay in the UK. By May this year, that figure had fallen to just over half.

Polls last week showed the No-vote with a lead of just 6 percentage points, excluding those expressing a preference, down from 14 percentage points a fortnight ago and 22 percentage points in early August. The UK is four distinct countries, each with its own proud identity, but one coherent nation. Cobbled together, in a form that somehow works, our combined history of achievement and success is as rich as any country on earth. It’s a tragedy the spine of our unique nation, the England-Scotland axis, could be about to break.

With Yes and No voters seemingly entrenched, the future of the UK is now in the hands of Scotland’s “don’t knows”. A year ago, polls suggested up to a third of Scottish voters had yet to decide how they would cast their ballot. That undecided share has now fallen to just 10pc.

For numerous Scots, the choice between independence and on-going UK membership is based on instinct, an engrained sense of national identity. Such voters, whether ardent unionists or nationalists, were always clear about their choice. The remaining rump of “don’t knows”, then, those without a decisive emotional pull one way or the other, are largely pragmatic. The decision they make 11 days from now will be driven by perceptions of economic self-interest. Emotional votes having been all but cast, we’re down to the economic brass tacks.

Such wavering voters should know that independence would be an economic disaster for Scotland. The main reason Scotland would be worse off on its own is that the existing currency union with the rest of the UK, which has operated well for centuries, protecting Scotland through world wars and global financial crises, would no longer be on offer.

For years, Scotland has benefited enormously from the broad support of the British state. Currency union has seen those living north of the border enjoying inflation and borrowing costs lower than they’d otherwise be, due to the backing of the Bank of England. Salmond, in his latest television debate with Former Chancellor Alistair Darling, leader of the “Better Together” campaign, kept claiming that a Yes vote would give him a “mandate” to insist that the rest of the UK agrees to currency union with a newly-independent Scotland.

This is nonsense. How can voting to leave the union, choosing to walk away from the UK, provide a mandate for the country you’ve just left to formally back your national debt and your banks? There is absolutely no reason why Westminster should agree to a currency union with a newly- independent Scotland, as all three main parties have made clear, and numerous reasons why it should not. For a clever man, Salmond is talking rot.

The most likely outcome, at least in the short- to medium-term, is that an independent Scotland continues to use the pound, but without the support of the Bank of England or any guarantee of Scotland’s debt. While such “sterlingisation” would help maintain trade between Scotland and the rest of the UK, Edinburgh would have to pay a lot more to borrow, forcing the new Scottish government to raise taxes and cut spending more than is commonly understood.

This would be particularly true, and how, if the SNP follows through on its threat to repudiate Scotland’s share of the UK’s national debt if Westminster refuses to maintain currency union. Financial markets would then shun new debt issues, lending only at inflated rates – not only because Edinburgh will have recently walked away from other obligations but because the tax revenues of a stand-alone Scotland would be far more vulnerable to oil price swings than the UK as a whole. Again, Salmond’s current position – attempting to force the rest of the UK to underwrite Scotland’s future debts by threatening not to honour debts already existing – is economically absurd.

It is possible, of course, that Scotland could set up its own currency. That, after all, is the only route to the true independence the SNP says it wants. A separate currency, though, would be costly to Scottish business and, during the early uncertainty, the exchange rate would be extremely volatile, with capital likely to flee.

The SNP points to the Norway, which has the krone. But Oslo has formidable reserves, a long record of currency management and the prospect of ever-increasing oil and gas exports. Scotland’s oil production peaked at the end of the last century, and has been falling sharply ever since. A newly-independent Scotland, with its own cobbled together currency, would actually be in a category closer to Greece, with the proviso that at least Greece has the backing of the European Central Bank.

What the SNP is loathe to admit is that Scotland gets a great economic deal from being in the UK. In 2012–13, total public spending directly benefiting Scotland was £1,257 per person according to the independent Institute for Fiscal Studies, some 11.5pc higher than the average for Britain as a whole. Allocating a geographic share of North Sea revenues to Scotland saw a tax take just £789 higher per person. So, even allowing for hydrocarbons, Scots get considerably more from the Exchequer than they pay in.

The SNP’s Independence White Paper outlined numerous spending increases and tax cuts, in a bid to tempt voters, not least the pragmatic “don’t knows”, to vote yes. The package of measures, including enhanced childcare and a delayed rise in the state pension age, amounted to a £1.2bn a year giveaway in the short-term, the IFS calculated, and considerably more further ahead.

To meet these extra costs, the White paper outlined just £500m a year in higher taxes and spending cuts, with another £235m associated with promises to promote public sector efficiency and clamp-down on tax avoidance. In other words, a newly-independent Scotland would plunge further into deficit, while anyway facing rising borrowing costs. It’s not a pretty scenario.

The danger of Scottish independence relates not just to Scotland but to the rest of the UK too. The combined balance sheets of the UK’s banks amount to a massive five times annual GDP. We have the most bloated banking sector of any major economy, making our public finances extremely vulnerable in the event of another ruinously expensive bail-out.

An independent Scotland, though, would be even more financially top-heavy – with bank balance sheets a monstrous 12 times national income. When Iceland’s banks crippled the entire country, the equivalent figure was seven times.

Would London really be able to stand idly by if Scotland’s banks imploded, given the complex web of cultural and financial links between us? Of course not. A Salmond-led government could allow Scotland’s banks to let rip, engaging in a regulatory race to the bottom with London. Again, it’s not a pretty scenario.

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