Would an independent Scotland’s finances add up?

Picture: TSPL
Picture: TSPL
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The Scotsman has asked the Centre for Public Policy for Regions to assess the claims made by the pro-independence Yes Campaign in relation to its recent “It all adds up to a more prosperous Scotland” launch.

The following are the “big questions” posed and the main claims for a more prosperous Scotland post-independence. They are all taken from the Yes Campaign’s “It all adds up” documents. In each case, the Yes Campaign’s claims are followed by CPPR’s own analysis, led by John McLaren.

THE QUESTIONS

ON THE funding of an independent Scotland, the Yes Campaign has posed five key questions.

Q. Yes Campaign: Can Scotland afford to pay for its public services?

A. Yes Campaign: In 2011-12 public spending in Scotland took up 42.7 per cent of GDP (our total national wealth) – lower than the UK (45.5 per cent) and most other western European nations.


CPPR analysis: The Yes Campaign’s answer refers only to the size of the public sector and not to affordability or who might pay.

If the question actually means can we afford the current level of public services in an independent Scotland, then the answer currently is yes, as North Sea tax revenues are relatively high. Unfortunately, the answer in the future remains uncertain as North Sea revenues are highly erratic.

Q. Yes Campaign: Do we have a strong enough tax base?

A. Yes Campaign: In 2011-12, tax revenues in Scotland were equivalent to £10,700 per person, compared to £9,000 in the UK as a whole. Tax revenue has been higher in Scotland for each of the past 30 years.

CPPR analysis: The more pertinent question is whether we have a strong enough tax base to pay for a certain level of services. The Yes Campaign’s answer looks only at one side of this question, so little can be drawn from it. The claim that Scotland’s tax revenue per person is higher than the UK’s is correct, once North Sea revenues are added, but so too is expenditure per person in Scotland. At present, this higher spend is paid for by a transfer of funds from the UK Exchequer. An independent Scotland would instead use the tax revenues paid by North Sea oil and gas producers to pay for it.

Q. Yes Campaign: Do we have strong enough public finances?

A. Yes Campaign: Over the past five years, Scotland and the UK have both been “in the red”. But Scotland’s national accounts (all that we spend and all that we earn) have been £12.6 billion healthier than the UK’s over this period.

CPPR analysis: Scotland’s fiscal balance has been relatively better than the UK’s in recent years due to high North Sea tax revenues. Current projections for North Sea taxes are lower. The volatility of oil prices and production mean that little can be assumed with regards to Scotland’s future fiscal position relative to the UK. However, for both the UK and Scotland, it is the current weakness of public finances that is the main concern.

Q. Yes Campaign: Is there more to this than oil and gas?

A. Yes Campaign: Oil and gas are not the biggest part of our revenue. Even if they had been 29 per cent lower over the past five years, we would still have had healthier national accounts than the UK.

CPPR analysis: As with the answer to question three, it is the uncertainty over North Sea revenues that means little can be taken from the recent past with regards to even the near future.

Q. Yes Campaign: Can we afford to pay for things like pensions and the welfare state?

A. Yes Campaign: In 2011-12, total spending in Scotland on “social protection” (including pensions and benefits) was £21.7bn. In the past five years, we’ve spent a lower share of our national wealth on pensions and benefits than the UK as a whole.

CPPR analysis: The lower national wealth share calculation for Scotland depends on this being defined as GDP including the North Sea. However, much of the North Sea is not Scottish owned, so the wealth associated with these overseas-owned assets ends up abroad. Adjusting for this, it seems likely that Scotland and the UK would be in a roughly similar position with regards to affordability.

The more general “prosperity” claims made in the “It all adds up” documents are:

OVERALL WEALTH

Yes Campaign claim: An independent Scotland would be ranked the eighth wealthiest country in the OECD (in terms of GDP per head) compared to the UK’s 17th place (2011).

CPPR analysis: This implies that the average Scot would be about £5,000 better off post-independence. Yes Scotland does not explain how this transformation would arise.

In fact, as CPPR highlighted in a paper issued last week, Scotland’s wealth is likely to be on a par with the UK’s, post-independence. The confusion is caused by the low degree to which North Sea related GDP would actually contribute towards the wealth of individual Scots.

RENEWABLES

Yes Campaign claim: We have around 25 per cent of Europe’s potential offshore wind and tidal energy and 
10 per cent of Europe’s wave power potential.

CPPR analysis: This statement is talking about potential in a world where future energy trends – whether in respect of nuclear, shale gas, green energy etc – are highly uncertain. As a result, the future benefit from this potential is difficult to quantify.

PUBLIC FINANCES

Yes Campaign claim: Our public finances are stronger than the UK’s. For every one of the last 30 years, Scotland has generated more tax revenue per head than the UK.

CPPR analysis: The revenue claim only looks at one half of the relevant fiscal balance equation. The other half – expenditure per head – is also higher in Scotland than for the UK average.

INWARD INVESTMENT

Yes Campaign claim: Scotland tops the UK charts for levels of inward investment in jobs by overseas companies.

EDUCATION

Yes Campaign claim: We have three of the top 100 universities in the world. Our universities compete at the top of the world leagues for the quality of their research.

CPPR analysis: In the cases both of inward investment and education, these claims are based on independent sources. Whether these good results –from a position where Scotland is within the UK – would be further improved from a position of independence is not covered by the Yes Campaign.

INDUSTRY

Yes Campaign claim: Recent figures show food and drink exports at an all-time high of £5.4bn. Our world-leading industries include engineering, life sciences, tourism, life assurance and wealth management.

CPPR analysis: The absolute size of an industry is largely irrelevant. For example, a much bigger country would probably have bigger food and drink exports, however that would not necessarily indicate it had a “better” food and drinks industry.

OIL

Yes Campaign claim: Up to 24 billion barrels remain in the North Sea. This equates to a wholesale value of up to 
£1.5 trillion at today’s prices – that’s ten times our share of the UK national debt.

CPPR analysis: This figure is based on an estimate from the Oil & Gas UK trade body but has little bearing on current annual North Sea tax revenues.

Just what taxable value the remaining production in the North Sea has will depend on a variety of relevant factors such as: the cost of extracting the oil and gas; the energy prices paid; technology developments that allow for the extraction of the harder to reach hydrocarbons.

As such it has little immediate relevance to the debate over an independent Scotland’s economic and financial prosperity.

Analysis by CPPR, both here and elsewhere, suggests that an independent Scotland and the UK would start off having similar levels of standard of living and government fiscal balances.

This rough economic and financial parity puts neither the Yes nor the No campaign at a relative disadvantage. As such, it shifts the onus more on to wider points such as explaining how an improved economic outlook might be delivered.

However, over-claiming the benefits or dis-benefits of independence is neither good for the debate nor is it likely to stand up when analysed in detail.

• John McLaren is an economist with the Centre for Public Policy for Regions.

The Scotsman has also asked the CPPR to conduct a similar exercise in relation to the pro-Union Better Together campaign claims. We will publish this in due course.