Gavin McCrone: Power to the people?

Scotland exports 20 per cent of the electricity it generates, mainly to England, but subsidies could end if cheaper supplies were available. Picture: PA

As people return from their holidays, some may feel dismay at the prospect of the independence debate continuing for a full year before the referendum takes place. But the decision to be taken in September 2014 will be the most important people living in Scotland are likely ever to take on their country’s future.

Much of the debate has centred on the economic issues. There will be those who would vote for independence regardless of economic consequences, but I believe the vast majority of people want to know how it will affect their lives – whether they will be more or less prosperous, how it will affect employment prospects and whether their incomes will be affected. The SNP have argued that only independence would give them the ‘fiscal levers’ that would enable them to improve Scotland’s economic performance. It is with the aim of explaining the economic implications that I have written my book Scottish Independence: Weighing Up the Economics.

This article attempts to outline just some of the issues that would have to be faced.

Independence would certainly give greater scope for the Scottish Government to vary policy than is available at present or would be likely to be with any scheme of devolution. But it would be a mistake to think that, in an interdependent world, Scotland could pursue policies without thinking how other states, particularly the remainder of the UK and other countries in the European Union, might respond. The close economic integration between Scotland and the rest of the UK would not suddenly come to an end; nor should it, if serious economic disruption is to be avoided. The rest of the UK would continue to be Scotland’s main trading partner, capital and investment would continue to flow freely in either direction and our common language would ensure that the labour market would remain highly integrated.

This has important implications for policy, particularly when considering taxation. Major differences in personal taxation could provide an inducement for people to move to whichever side of the border had the lower taxes. The SNP Scottish Government have stated their wish to cut the rate of corporation tax to encourage investment, following the example of Ireland. But a significant cut in corporation tax could scarcely go unnoticed in the north of England or Wales, parts of the UK that are much less prosperous than Scotland, as measured by the level of GDP per head. They would put intense pressure on the government of the rest of the UK either to follow suit or to adopt some measure that would neutralise the effect. The outcome could be a general loss of tax revenue with little benefit.

Other member states of the EU might also see this as a problem. Several countries wanted to see Ireland’s corporation tax raised at the time of the financial bail-out, which Ireland successfully resisted. But the issue is likely to arise again if, as expected, the eurozone becomes more integrated. Alex Salmond has stated his preference for keeping the pound and retaining monetary integration with the rest of the UK. This means that there would be a single monetary policy for both countries. But following the financial crisis, fiscal integration is now seen as a necessary accompaniment to monetary integration in the EU, which can be expected to lead to some harmonisation of taxes, especially taxes on business. This may be why George Osborne has expressed strong reservations about Scotland being in monetary union with rest of the UK, while several SNP spokesmen have argued that even with monetary union Scotland would still be free to have a separate fiscal policy.

Would Scotland manage to remain in the EU as an independent member state? Scotland has derived much benefit from international investment, much of which chose Scotland only because it offers a good base from which to serve the EU. Continued membership is therefore of major importance. Scotland would either have to join the queue of countries applying for membership or negotiate successfully to retain its membership through a treaty amendment.

This latter course, which is advocated by the former Scottish judge at the European Court of Justice, Sir David Edward, would of course be simpler and quicker. But it would still require unanimous acceptance by other member states, any one of which could exercise a veto. And while that might be thought unreasonable, it cannot be ruled out when several of them are concerned about secession movements in their own countries.

Scotland exports 20 per cent of the electricity it generates, mainly to England but also to Ireland, and Scottish Ministers have made much of our country’s wealth in renewable energy resources. But at present the burden of subsidies for renewable energy, much of which is from Scotland, is borne by consumers throughout the UK through the prices they pay for electricity. Could this continue with independence?

That would probably depend on whether cheaper supplies were available from elsewhere, as the government of the rest of the UK would be free to import electricity from any source it chose; and the development of gas from hydraulic fracturing (fracking), while not reducing consumption of fossil fuels, raises the possibility of alternatives to expensive renewable energy.

Obviously with independence the government would have to decide for itself how much to spend on welfare and social security. But overshadowing the whole debate is the awkward fact that while Scottish onshore tax revenue per head is approximately equal to the UK average, Scottish public expenditure per head, according to the Scottish Government’s own figures, is some 10 per cent higher. All of Scotland’s geographical share of tax revenue from the North Sea would be required to make up this difference, unless other taxes are raised or expenditure cut. The First Minister has argued that some at least of the oil revenue should be paid into a special fund, following the example of Norway’s wealth fund. I welcome this; UK governments should have done this years ago. But unfortunately the budgetary situation would make it impossible at least for the foreseeable future.

Moreover Scotland would be dependent for part of its current expenditure on a revenue source that, even if it lasts for many years, is expected to diminish and, with revenues fluctuating between £5 billion and £11bn in recent years, has proved extremely volatile.

These are just some of the issues that an independent Scotland would have to face. Obviously there are others, such as the future for the financial sector, where there would be important issues to resolve. If Scotland does become independent, I am afraid it could turn out to be a bumpy ride in the early years, until many of these questions were sorted out, with the possibility of considerable dislocation and damage to the economy.

But Scotland is a wealthy country with valuable resources. Its GDP per head is approximately equal to the UK average, even without the income from the North Sea. It is far better placed than Ireland was when it became independent in 1922. It has the means to be a perfectly prosperous independent country. Whether Scotland would do better or less well in the long term, if it was independent, is impossible to say.

It would depend on how other countries, notably our trading partners, responded to the new situation and on the wisdom or otherwise of the policies that an independent Scottish Government adopted.

• Professor Gavin McCrone is a former chief economy adviser to the Scottish office. His book Scottish Independence: Weighing Up the Economics is published by Birlinn at £7.99 and is available from Thursday.

TOMORROW: Greater devolution as an alternative to independence