So far markets have remained calm amid the passions. But while the polls indicate a Yes vote is a low probability, it is still a high-risk event for business and markets. What do we stand to gain or lose?
In the event of a Yes vote, the pound would almost certainly take a hit on debt and deficit uncertainties. Banks would be affected, as would financial institutions, and companies with a high degree of Scottish-rUK cross-border trade.
But a No vote would not signify a return to some equable status quo. Constitutional uncertainties would not go away. Further devolution would be likely to encourage demands in other parts of the UK for similar devolution. And business and investor concerns would also come to focus on uncertainties over the outcome of the 2015 UK election, with Nigel Farage’s Ukip adding to calls for a referendum on the UK’s membership of the European Union.
Whatever relief may be shown in markets by Scotland remaining in the Union would be quickly replaced by concerns over a “Brexit” (the UK leaving the EU).
A detailed appraisal of the Scottish referendum consequentials has just been released by investment bank Citigroup. Its chief UK economist, Michael Saunders, does not cover what the SNP believes would be the longer term benefits of growth stimulus: it focuses strictly on the immediate and near term consequences of the vote.
For business, comfort may be drawn from those consistent opinion poll readings pointing to a No outcome. International experience also shows while voters may express the desire for political change, they are typically risk-averse once inside the polling booth.
But that by no means removes concerns. “The UK political landscape”, Saunders writes, “is likely to remain in a state of flux. With the combination of a likely enduring Scottish independence movement, the rise of Ukip as a political force, the moderate-to-high probability of a change of government in 2015 elections, and the non-negligible risk of a referendum on UK exit from the EU in 2017, we believe that UK political risks are under-priced.”
The good news from which both sides can take comfort is that Scotland is enjoying a robust economic upturn. The latest State of the Economy Report from Scottish Government chief economist Dr Gary Gillespie, which I highlighted here last week, covered falling unemployment, record numbers in work, successive quarters of growth and concluded that we are set fair for further expansion. Real year-on-year GDP growth in the first quarter hit 2.6 per cent. This looks set to be at least maintained for now.
However, the picture elsewhere is less benign. Saunders calculates that the fiscal deficit of an independent Scotland would be 2-3 per cent of GDP above the UK average in coming years, reflecting our relatively high level of public spending per head and diminishing oil and gas tax revenues, trending down amidst falling output and rising production costs. Scotland’s overall tax revenues fell 2.1 per cent last year after a 2 per cent drop in 2012, with oil and gas tax revenues down 37 per cent year-on-year in 2013 after a 24 per cent drop in 2012.
Scotland’s oil and gas tax revenues in 2013 totalled just £4.4 billion, down from £9.2bn in 2011 and the lowest as a share of Scotland’s nominal GDP since 1999. Aggregate UK receipts of petroleum revenue tax fell a further 42 per cent year-on-year in January-July this year.
The Citi assessment shares the concerns of the Scottish Government’s own Fiscal Commission on informal currency sharing (“sterlingisation”). An independent Scotland pursuing this option, he writes, “would have no say in the monetary policy of the rest of the UK.
“In our view,” he adds, “it is astonishing that the Scottish Government, in seeking independence, has reached this stage without a clear plan for an issue as basic as its currency and monetary policy setup.”
The worst case scenario is if Scotland walks away from its share of existing debt liabilities. As well as impacting on Scotland’s credit rating, this would send the debt to GDP ratio for the continuing UK ballooning from 91.1 per cent currently to close to 100 per cent. “This could well prompt a downgrade, most likely from S&P who currently rate the UK as AAA. Or, as Fitch put it in April, such a ‘debt shock’ may just delay any ratings upgrade.”
Meanwhile, if Scotland’s banking system, with assets in excess of 1,000 per cent of Scotland’s annual GDP and including large businesses in the rest of the UK, remains Scottish-based, “then the potential costs if the Scottish Government has to provide a bail-out or deposit guarantee insurance could threaten Scotland’s fiscal position.” However, as the National Institute warns, “regulatory pressures might force these banks to re-domicile to the UK”.
Meanwhile, uncertainties over the economic prospects, policies and currency arrangements of an independent Scotland would probably hit growth in both Scotland and the rest of the UK, raising the incentive for firms to “wait and see” or to expand elsewhere.
In the event of a No vote, “the dream of Scottish independence probably would not vanish totally”. There would be pressure for another referendum on independence within ten years.
And, with a No vote, the UK would still face rising political uncertainties, with the “moderate-to-high” probability of a change of government in the 2015 elections, uncertainties over post-election fiscal policy and a possible referendum on a UK exit from the EU in 2017-18. Little wonder Saunders concludes even if No prevails on 18 September, “we do not foresee a return to the pre-referendum status quo in the UK. In our view, the outlook for UK political risks will remain elevated well beyond the referendum.” «