The only place Scotland can go is over a cliff

June 26, 2016


 
In the wake of the British vote to leave the European Union the Scottish First Minister has engaged with the broadcast and press media to threaten to take Scotland into a referendum to allow the nation to leave the United Kingdom and join the EU. This is an empty gesture, just posturing by the ruling SNP to try to turn the Scottish dissatisfaction with the Brexit vote into greater support for the SNP.

If Scotland became independent it would be bankrupt in less than four months.

The Scottish economy is in a steep decline and has been for several years. In the wake of the collapse of oil prices the Scottish GNP has declined and the country’s trade balance and tax revenues as a whole has also been badly hit in addition to the decline in oil prices. At the time of the last Scottish referendum the SNP claimed an independent Scotland would economically self-sufficient. The SNP based its forecasts on oil at $110 a barrel and an income of £7.5 billion a year to the Scottish treasury. The oil price is now less than half that, and oil revenues are now down to £35 million.

The latest Economic Commentary by the Scottish Economy Watch notes that Scotland’s economy has recently flirted with recession with growth of only 0.2% in quarter 4 of 2015 (the latest data point) – and -0.1% in quarter 3 2015. Scotland may yet fail to escape recession in the coming months as Scottish growth is set to slow further due to

  • slow investment growth
  • the continuing effects of the fall in the price of oil on household incomes and spending
  • a general slowing in household spending as the rate of household borrowing diminishes, wage income growth is weak, increasing job losses, and house price growth is moderating
  • a worsening demand for Scottish exports as global growth and growth in Scotland’s key export markets slows
  •  
    The North Sea oil industry is in rapid decline. The North Sea oil and gas industry will lose a total of 120,000 jobs by the end of this year as a result of the market downturn. Last year the number of jobs supported by the UK’s oil and gas industry fell by an estimated 84,000 to around 370,000. Companies across the breadth of the industry have been forced to make deep cuts to their job numbers in order to shore-up market-weakened balance sheets. The UK’s largest oil companies, including Shell and BP, have posted record losses in the last year while smaller explorers wrestle with debilitating debt and the looming threat of insolvency. The risks facing oilfield service companies are particularly large because they rely on contracts with the cash-strapped producers for their own income. Advisory firm EY warned that a third of oilfield service firms could be wiped out from the sector by the end of the year as oil producers pull back from uneconomic ventures. Investment is expected to fall by almost 90pc this year as companies continue to slash spending and profitability has plunged to lows not seen since 1997. The Office for National Statistics shows that explorers active in the UK Continental Shelf (UKCS) have seen the rate of return on their investments become negative numbers.

    When Alex Salmond of the SNP was arguing that the Scottish economy was sustainable in the last referendum he figured in the revenues of North Sea oil and the taxes that the producer companies would deliver to the Scottish Treasury. If that referendum had been successful, the almost immediate collapse of the oil price would have bankrupted the newly independent Scotland. It has become even worse for Scotland as time has passed. If it weren’t for the large sums transferred to Scotland by Westminster under the Barnet Formula Scottish governmental income would not meet its daily expenses.

    It gets worse. The SNP government is pledged to oppose the renewal of the Trident program. According to an official statement by the SNP on its website “Do the SNP support Trident renewal? The SNP will never support the renewal of Trident. We believe that nuclear weapons are immoral, ineffective and expensive. In times of imposed austerity, the £100 billion which would be spent on a Trident replacement over the next 30 years could be far, far more effectively used on improving healthcare, childcare, education and building a better future for our children.” This sort of posturing is typical of the SNP, they can soak up support from those opposed to Trident safe in the knowledge that it will be almost certainly ‘forced’ upon them. The reason they actually want to keep it is because it the Trident program brings a huge amount of money to Scotland.

    If Scotland became independent the £100 billion Trident related business will not be given to Scotland or the Barrow shipbuilders, nor will the UK and NATO defence revenues paid to operate the Fasslane naval port be paid to Scotland. These will all be moved out of Scotland, removing jobs, investments and prosperity. Scotland would lose £140 billion in revenues on this project alone. The Scottish unions are scarcely likely to agree such a program.

    If Scotland does become independent and becomes a member of the EU (a process that could take years) it will not benefit the Scottish finances. Each country’s payment to the EU is divided into three parts: a fixed percentage of gross national income (GNI), customs duties collected on behalf of the EU (known as “traditional own resources”) and a percentage of VAT income. Scotland’s GNI would still make them one of the larger economies of the EU and, as revenues are paid to the EU on the basis of their GNI they would become net contributors of the EU budget, not a beneficiary. Scotland would have pay into the EU additional funds rather than become a recipient. If it’s economy starts to improve, it will have to pay even more; just as the UK had to pay in an additional levy of € 2 billion in 2014 because it had improved its GNI.

    Independence would also require that Scotland absorb a significant part of the UK’s long-term debt burden in the final settlement (presumably calculated using something like the Barnet formula), which means that the new nation would start off by being deeply in debt. It would then have sell its own bonds to borrow money to pay for its immediate and large budget deficit, and is likely to have to pay quite a bit more than the UK now pays to attract buyers. Public debt would quickly spiral out of control. If Scotland ends up in the Euro it would be expected to obey the same austerity rules as the rest of the eurozone and severely limit deficits.

    Independence for Scotland would be ruinous and lead to very sharp decline in living standards, increased taxation, and huge cuts in public spending and public services. I think although the SNP will use talk of independence and separate EU membership to bolster its support I can’t see them actually wanting a referendum any time soon and if the Scottish people have any sense they certainly won’t vote for independence.

    But who knows – stranger things have happened.

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