TELEGRAPH SPECIAL FEATURE: Scotland – What the future holds

Alex Salmond was magnanimous in defeat. “Our referendum was an agreed and consented process and Scotland has by a majority decided not, at this stage, to become an independent country,” said the Scottish National Party leader in his concession speech during the early hours of Friday morning.

“I accept that verdict and I call on all of Scotland to follow suit in accepting the democratic verdict of the people of Scotland”.

The vanquished Salmond, though, despite his gracious tone, was also being arch – and even defiant. The key words in the statement above are “at this stage”. Scotland voted No for now, Salmond is saying, but if asked again in a few years’ time the outcome may be different.

The SNP has an overall majority in the Scottish Parliament. It has held the most seats at Holyrood since 2007. The party that Salmond leads has made spectacular progress in recent years, gleaning support from across the political spectrum, not least Scots who’ve grown disenchanted with Labour.

Despite falling short on Thursday, with the Yes-camp gaining 45pc of the vote, the SNP is clearly on a long-term roll. So Scottish independence will remain a vexed question. Westminster may now bend over backwards to devolve further powers to Scotland and, in David Cameron’s words, “settle this issue once and for all”. Or it may not – depending on upcoming negotiations about on-going cash for Scotland the extent to which MPs representing English constituencies, particularly backbench Tory MPs, press the case to exclude their Scottish counterparts from influencing non-Scottish issues.

Whatever the outcome, there is no chance the independence movement will fade away anytime soon. For those fired by the dream of full secession, any form of “devo-max” will never be enough. Unless this fragile post-referendum situation is handled very delicately, in fact, fraught haggling and finger-pointing between politicians in Edinburgh and London will rouse nationalist fervor anew.

For now, though, the judicial, procedural and logistic chaos that would have followed a Yes-vote has thankfully been avoided. Unpicking a 307-year political and economic union of two of the world’s most sophisticated nations wouldn’t have been easy. Scotland’s No-vote, to my mind, is a considerable plus for both the Scottish and broader British economy. Unless we’re extremely careful, though, the constitutional wrangling we now face anyway – after what was still a pretty close result, with 1.6m Scots voting to quit the union – will cast a pall over financial and commercial trade and co-operation across these islands for years to come.

The immediate response to Thursday’s vote was one of mighty relief for much of the business community, both in the UK and elsewhere. The pound, having fallen in recent weeks as opinion polls converged and a Yes-vote looked possible, rocketed as the referendum result became clear. Sterling hit a two-year high against the euro on Friday and was at its strongest for a fortnight against a resurgent dollar. Shares surged, too, with London stock indices staging a chunky relief rally.

Bank shares, in particular, were buoyant. This time last week, the likes of RBS, Lloyds and Standard Life were threatening to move south of the border, given that an independent Scotland would be “too unpredictable”, the fear being that financial institutions would no longer qualify for emergency-support from the Bank of England. But in early morning trading on Friday, investors piled into the shares of all three banks, as RBS spiked 3pc and Lloyds was 2pc up. With the FTSE-100 well over 6,800 this weekend, there’s talk of the main UK equity benchmark now pushing on to 6,930, the all-time high reached in 1999.

I have problems with current valuations on Western stock markets, as regular readers will know, viewing shares as over-priced given the over use of quantitative easing and in the absence of a convincing and sustainable economic recovery. It is surely good news, though, that the referendum is now behind us and we’ve avoided a break-up trauma, with the UK still in tact.

For weeks, the Scottish vote has been a source of major uncertainty, spooking stock markets across the world. There was even guarded talk, among senior figures in the City and elsewhere, that the dissolution of the UK could trigger a run on the pound and possibly turmoil on the widely-watched gilts market, sparking a systemic loss of confidence spreading to the precarious Eurozone and beyond. That immediate danger has been averted – and international investors are, for now, able to cross the Scotland off their still sizeable list of geo-political risks that stalk financial asset markets.

The economic case for Scottish independence never really stacked up. The respective economies of Scotland and the broader UK are obviously highly integrated, casting doubt on the wisdom of erecting an international border and related regulatory structures. Some 70pc of Scottish exports are destined for, and 74pc of Scottish imports come from, the rest of Britain. Why jeopardize such mutually beneficial commerce?

The reality is that Scotland gets a great economic deal from being in the UK. In 2012–13, total public spending directly benefiting Scots was £1,257 per person according to the Institute for Fiscal Studies, some 11.5pc above the average for Britain as a whole. Allocating a geographic share of North Sea revenues to Scotland generated a tax take just £789 higher for each person living north of the border, despite buoyant oil prices. So, even allowing for hydrocarbons, Scotland gets considerably more from the Exchequer than it pays in.

The SNP’s Independence White Paper, meanwhile, outlined some juicy spending increases and tax cuts, in a bid to tempt voters. The package included 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 beyond.

To meet these extra costs, the White paper identified just £500m a year in higher taxes and spending cuts, with another £235m of savings linked to vague promises about public sector efficiency and less tax avoidance. So a newly-independent Scotland would have been plunged further into deficit, with spending cut further and taxes rising more than the rest of the UK.

This relative fiscal weakness would have been compounded as a post-independence Edinburgh government would pay more to borrow on international markets given that currency union with the rest of Britain, and the related pooling of sovereign debt, wasn’t an option. The tax revenues of a stand-alone Scotland would meanwhile be far more vulnerable to oil price swings than the UK as a whole, with demography weaker – both of which, again, point to higher government borrowing costs, which inevitably feed through to mortgage-holders and businesses.

Several weeks ago, as a Yes-vote suddenly looked possible, it became fashionable to argue that while the SNP had cleverly appealed to emotion, and the romance of emerging statehood, the No-side had focused too much on economics. As the polls narrowed, wealthy yet financially illiterate media commentators screamed that talking about currencies and pension payments was dry and uninspiring.

This was always nonsense, as shown by detailed study of last Thursday’s vote. There is clear evidence that large numbers of lower-income folk, women in particular, rejected independence due to the SNP’s inability to provide convincing answers on fundamental economic issues repeatedly and rightly raised by Former Chancellor Alistair Darling and other leaders of the Better Together campaign. Yet again, concerns about economic insecurity were key in determining the outcome of a national UK vote.

So, what are the economic implications of the No-vote, now it has happened? Well, it’s probably less like the UK will vote to leave the European Union in any future referendum. Had Scotland become independent, a UK electorate where England featured even more heavily would, on balance, be more inclined to quit the EU, given that English voters are generally more Eurosceptic than Scots.

Now there is less focus on the referendum, and the prolonged and painful implementation of a split has been avoided, the Bank of England is more likely to press ahead with raising interest rates early next year.

While the UK economy is basically being propelled by artificially cheap money, GDP is likely to grow by 3pc in 2014 and, if the global economy keeps recovering and a market meltdown can be avoided, by about the same in 2015. Unemployment is falling, heading for 6pc by the end of the year and the housing market, if patchy, is strong in enough parts of the country to boost the overall number of first-time buyers during the second quarter of 2014 to a 7-year high.

Had the Scots voted Yes, the resulting panic and related financial volatility may have see the Bank of England further delay the first increase in interest rates from 0.5pc, where they’ve been since 2009. The No-vote means, in contrast, that we could see rates increase before the end of this year.

Overshadowing this relatively rosy scenario, though, is the spectre of on-going, if more low-key, political uncertainty. With just 10 percentage points separating the two sides, meaning just a 5pc of voters need to switch to change the outcome, we could move from referendum to “neverendum” – with the SNP pressing the case for repeat votes on independence, the related dangers continuing to loom. “Let us not dwell on the distance we have fallen short,” said Salmond during his speech to SNP supporters on Friday morning. “Let us dwell on the distance we have travelled”.

It’s my view that, as this referendum campaign hotted-up in recent months, some of the SNP’s statements actually scared many business leaders, in Britain and elsewhere. Salmond claimed, for instance, during a television debate in late August, that a Yes vote would give him a “mandate” to insist the rest of the UK agrees to currency union with a newly-independent Scotland. How can choosing to walk away from the UK provide a mandate compelling the country you’ve just left to formally back your national debt and your banks?

SNP luminaries also warned Scotland might renege on its share of the UK’s national debt, if on-going currency union was denied. So the party was trying to force the rest of Britain to underwrite Scotland’s future debts by threatening not to honour debts already existing. That’s economically absurd, and sounds more like Labour rhetoric during the mid-1970s, when the UK ended up being bailed-out by the International Monetary Fund, than the policy of a modern, competent party, ready to lead an advanced, successful nation.

My fear is that panicked promises made to voters over the last week of the campaign, pledging that that even more powers will be extended to Scotland, will come back to haunt us, causing political tensions to explode.

During the last few days of the campaign, Former Prime Minister Gordon Brown, entering the fray very late and perhaps trying to upstage Darling, talked repeatedly of “promises” he’d extracted from the leaders of the three main parties to extend further power to Scotland, if voters agreed to stay in the UK.

The trouble is that those promises were oral, vague – and it’s not at all clear that Brown was talking with the express authority of the Prime Minister, Labour Leader Ed Miliband or Lib Dem supremo Nick Clegg.

As such, and with Cameron already under huge pressure from his backbenchers not to extend further favours to Scotland that don’t apply to the rest of the UK, the scope for bitterness and rancor remains huge. The SNP will claim that Scottish voters have been misled, and the campaign for an independence referendum will begin anew.

Thursday’s vote saved the union. That made sense, so strengthening the UK economy. The trouble is that one side’s relief at victory, like the other’s magnanimity in defeat will be remarkably short-lived.

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