The UK Supreme Court has ruled that Scotland cannot unilaterally hold an independence referendum without the consent of the government in Westminster. After losing the referendum in 2014, the Scottish National Party have reignited the debate for another referendum on Scottish independence. They argue the circumstances have changed since 2014, largely due to Brexit, and a new vote is now needed. To date, the UK government has categorically ruled out another referendum and seems highly unlikely to change course. As the debate rages on, it is worth exploring what an independent Scotland look like. The SNP has said that North Sea oil and gas incomes would be a key initial source of export income. There is a view to create a new Scottish currency and join the European Union. How feasible are these proposals? This article will explore the SNP’s economic plans for an independent Scotland and some of the challenges they may face.
Before exploring what an independent Scotland would look like, we will briefly review the current economic state of Scotland. With a population of roughly 5.5 million, Scotland is the second largest country in the United Kingdom, after England. The total GDP of Scotland is around £160 billion, less than 10% of the UK’s total. An independent Scotland would be roughly the same size as New Zealand, around 50th in the world. Scotland’s budget deficit increased to 8.6% of GDP in 2019–20, meaning that it is spending more than it makes. Against this backdrop, we explore some of the core themes of the SNP’s plans for an independent Scotland.
Oil and Gas
One of the main revenue generators for Scotland is North Sea oil. Although like the rest of the UK, Scotland remains a service-based economy, oil and gas provide huge revenue streams. North Sea oil and gas revenues soared to £3.2 billion in 2021/22 due to the war in Ukraine. The SNP has put this at the centre of their independence pitch and claim this will support the economy. The Scottish government says oil and gas revenue could pay for £20bn of infrastructure investment over the first ten years of independence. They recognised that the world is moving away from fossil fuels but this initial decade of revenue will support Scotland long enough to diversify their income.
The price volatility of oil and gas, however, could send shockwaves through the economy of an independent Scotland, like it does many other oil dependent economies. Oil and gas would certainly provide solid revenue streams in the short-term, but Scotland would quickly need to diversify in order to maintain stability looking into the 2030’s.
Scotland holds 96% of the UK’s crude oil and 63% of its natural gas. With such a stronghold on oil and gas and increasing calls for greater energy security, the UK government will undoubtedly fight to keep Scotland within the union on this basis alone.
Joining the EU
Brexit was a key impetus for the second Scottish independence referendum debate. In 2016, Scotland voted 62% in favour of remaining within the EU and the SNP protest that Scotland was dragged out by the wider UK. Consequently, one of the SNP’s main pledges is to join the European Union as soon as possible after independence. The SNP are confident an independent Scotland would comfortably join the EU. This, however, may not be so straightforward. The EU has strict rules on applicants’ budget deficits. Depending on what the Scottish economy looks like, it could potentially fail this test. There could also be other unforeseen stumbling blocks that could slow or prevent Scotland’s joining of the EU.
Even if Scotland was successful, joining the EU may not prove as crucial for its economy as maintaining seamless movement of goods, people and services between itself and the UK. Scotland does around 60% of its trade with other parts of the UK. The EU only makes up around 20%. Regaining freedom of movement to the EU may not provide as significant an economic boost for an independent Scotland as is being purported.
The currency of an independent Scotland poses significant questions to address. The SNP has said they plan to keep using sterling immediately after an independence referendum, before exploring the creation of a new currency. While this seems a reasonable choice, options for Scotland are somewhat limited. Adopting the Euro as its primary currency by joining the Eurozone has already been rejected by the SNP, even after successfully joining the EU. The European Debt crisis in 2009 and subsequent collapse of the Euro is still fresh in the memory. While retaining sterling for a limited time will help maintain monetary stability, retaining it for too long would limit the economic autonomy of an independent Scotland. Keeping sterling would see the Bank of England retain control over its monetary policy. Interest rates and Quantitative Easing programmes would be exclusively set in England. This may however, end up being the preferable option for years to come given the challenges of creating a new Scottish currency.
A new Scottish currency is the ultimate ambition of Scottish nationalists, although successfully doing this is not straightforward. With a new currency, a country generally either adopts a floating exchange rate or a fixed rate. Setting up a new currency with a floating exchange rate would leave Scotland at the mercy of currency market forces. The markets would determine the exchange rate based on supply and demand. Being a relatively small country, their currency would be weaker than most major currencies. Scotland imports £24 billion a year worth of goods and a weak currency would make these imports very expensive.
Setting a fixed exchange rate, pegged to the pound, dollar or basket of currencies would prevent any price volatility and prevent exchange rate driven inflation. Investors would be certain of the exchange rate and would make an independent Scotland attractive. The issue with a fixed exchange rate is they hinder economic flexibility and can stunt economic growth. A fixed rate would require significant monetary intervention by a Scottish Central Bank which doesn’t yet exist. A large pool of reserve currency and consistently high interest rates would be required to keep the value of the currency stable. A hybrid option adopted by some countries is a loosely fixed currency exchange rate, allowing greater flexibility while limiting volatility. Creating a new currency that works best for an independent Scotland may take a lot of time and money to finalise.
One of the most important issues with a “Scexit” would be apportioning its debt. As debt and liabilities are currently under a unified UK government balance sheet, Scotland is responsible for a portion of this. Exactly how much though? This would be up for debate.
The Scottish government does not want to take any of the UK’s existing debt onto its own books but says it would agree to service a share of the national debt via an annual “solidarity” payment. This was agreed to before the first referendum in 2014 but given the historic government borrowing to pay for the COVID-19 response and the energy price support packages, this stance could change. The terms of such an agreement could be a huge sticking point and could lead to negotiations being gridlocked.
There is also the issue of Scotland’s budget deficit. Scotland spent £36.3bn more than it raised in tax revenues in 2020-21. The budget deficit is currently buffered by the UK union. An independent Scotland would be forced to balance the books, and this could result in significant cuts to public services.
Based on the plans for independence, there are very limited economic benefits of leaving the United Kingdom. Scotland would lose its influence at the top of the global economic stage and lose key economic support from the union. The creation of a new currency could also prove challenging. The division of assets and liabilities upon leaving the union is a minefield that could leave Scotland significantly poorer. The strongest arguments for independence are political ones. An independent Scotland would have full autonomy over its leadership and policy. This could see it create a society driven by its own people, freed from the proverbial shackles of Westminster. The SNP has undoubtedly been dealt a severe blow by the recent court ruling. Their chances of securing backing from the government in Westminster to proceed with another independence referendum are slim. It appears unlikely in the near future that the SNP’s plans will come to fruition.