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A Separate or United Kingdom: The context and consequences of the independence referendumMartin Wolf is quite right when he says that the debate about Scottish independence should not focus on relatively short term macroeconomic costs and benefits. I personally would be very sad if Scotland became independent, but that has nothing to do with money and (just as for Martin) everything to do with a British identity of which Scotland is an important part. But I also understand, having lived and worked in Scotland for five years, how these issues are more difficult when you are a minority part of a bigger nation.

Nevertheless my expertise is in macroeconomics, so I should say something about recent claims by both sides. It seems fairly clear to me that the Treasury report is right when it argues that, for the next decade or so at least, people in Scotland will be significantly better off by staying in the Union. The main reason is that additional public spending in Scotland as part of the union exceeds any benefits Scotland would get from having more of the revenue from the North Sea. This is also the conclusion of independent bodies like the IFS or NIESR, and it is only avoided by the Scottish government because they have unusually optimistic projections, particularly for North Sea revenues.

What the exact benefit is, who knows. The set-up costs assumed in the Treasury report look too high (although Brian Ashcroft would like to see the Scottish government’s figures), but they are only a minor component of their £1,400 per person dividend. In the longer term the trends for Scotland do not look favourable: North Sea revenue will decline, but public spending needs will not. So on present plans the Union dividend will not disappear. It is true that the UK government could change its funding formulas in the future to ensure Scotland gets a smaller dividend, but I suspect the threat of independence is quite a powerful incentive against that happening.

So what about the Scottish government’s claims that Scottish people will be better off with independence? Basically these amount to the belief that on its own Scotland will be able to become more productive, work harder and attract more migrants than as part of the union. These are discussed in Chapter 4 of its recent report.

The one area where this chapter has something going for it is with migration. The UK government’s desire to halt net migration will harm the UK’s public finances. If an independent Scotland took a much more positive attitude towards immigration, this could have beneficial macroeconomic effects. (Brian Ashcroft makes the same point here.) But elsewhere the report amounts to little more than hopeful guesses. In terms of productivity improvements, it simply says that the Scottish government has some good policy ideas, and here is a number for the higher productivity growth that these could generate. Is that number based on any detailed economic analysis? Not as far as I can see – it seems to be plucked out of the air. What about the benefits of greater participation of women in the labour force? The Scottish government wants to make better child care provision a priority, but the impact that this might have on participation rates again appears no more than a guess.

However this does mean that speculation about factors that might influence long run macroeconomic trends is pointless. As the migration example illustrates, where UK policy appears to have negative effects on output or growth, and an independent Scottish government would avoid this policy, this is a plus for the yes side. Besides migration, the obvious example is Europe. There has to be a significant probability that the Conservatives will win the next UK election, and despite his efforts, Cameron could lose the referendum he is committed to. An exit from the EU would almost certainly be harmful to the UK, and an independent Scotland would avoid those costs.

To set against that are the insurance benefits of being part of a larger union. An independent Scotland would be a small open economy heavily dependent on a commodity with a volatile price. Standard precautionary savings theory says that a country dependent on a resource with a volatile price needs a form of insurance as a buffer. For an independent country that insurance has to come from building up a financial fund, which implies lower current spending. As part of a much larger union, however, the union can provide the insurance. And then of course there are the benefits of being part of a currency union which, without going into all the ‘will they do what they say they will do’ stuff that I have talked about before, will be put at risk with independence.

One final consideration involves options. Rejecting independence now does not preclude independence in the near future. For example, if the UK did vote to leave the EU, the case for allowing Scotland another vote shortly thereafter would be difficult to resist. In contrast, if Scotland became independent, the new nation would be unlikely to want to consider union again for decades, and even if it did the terms the UK would impose would almost certainly be less favourable to Scotland. So, for this reason alone, the risks in voting yes are higher.

This post is part of “A Separate or United Kingdom“, our blog series analysing the issues surrounding the Scottish referendum.

This article first appeared on Professor Wren-Lewis’s blog.



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