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Professor Robert Rowthorn—Written evidence Professor Robert Rowthorn—Written evidence The Fiscal Implications of Scottish Independence Abstract This submission examines the fiscal implications of Scottish independence for both Scotland and the rest of the UK. These would depend of a number of factors, including world hydrocarbon prices, the extent to which an independent Scotland accepted responsibility for its proportionate share of the UK national debt, and what happened to the Orkney and Shetland Islands. A number of scenarios are considered on the assumption that Scotland becomes independent soon after a hypothetical ‘yes’ vote in the 2014 referendum. At one extreme, Scotland would have a fiscal deficit approaching 6 percent of GDP. This would be the case if hydrocarbon prices fell sharply, the Orkneys and Shetlands remained in the UK, and Scotland shouldered its full share of the national debt. Under these conditions, Scotland might face a funding crisis and the UK might have to step in to help, just as it is currently helping to bail out Ireland. At the other extreme, Scotland might have a small fiscal surplus. This would be the case if hydrocarbon prices remained buoyant, the Orkneys and Shetlands stayed within the Scottish fold and if Scotland took no responsibility for the UK national debt and associated interest payments. In fiscal terms, the rest of UK might gain or lose from the departure of Scotland, but the effect would be small – less than 0.5 percent of GDP either way. Introductory Remarks Scottish independence would affect the rest of the UK economy and government finances in a variety of ways. The following are some of the most important items that are relevant in this context. Economic Cooperation: Given an amicable dissolution, independence should not have a serious impact on economic cooperation between Scotland and the rest of the UK. Trade and investment would continue much as before, although the exact outcome would depend on Scotland’s choice of currency and its broader economic policy. It is unlikely there would be a repetition of the trade war which marred Anglo-Irish economic relations during the 1930s. Currency: Scotland would have a number of options following independence. SNP leader Alex Salmond has stated that an independent Scotland would keep sterling for the time being, but would keep its options open for the future 68 . If permitted, it could join the euro. Or it could have its own currency, which could either float or else shadow the pound or the euro. Each of these options would have somewhat different economic implications for Scotland and also for the UK. The National Debt: When the Anglo-Irish Treaty was signed on 6 th December 1921, the newly formed Irish Free State agreed to assume responsibility for a proportionate part of the 68 Channel 4 News, 11 January, 2012. http://www.youtube.com/watch?v=SpKVK6DI7OQ 238
Professor Robert Rowthorn—Written evidence United Kingdom's debt, as it stood on the date of signature 69 . It is probable that similar arrangements would be made following Scottish independence. In a recent TV interview, Alex Salmond stated that an independent Scotland would take its proportionate share of the national debt, although this cannot be taken for granted 70 . He also stated that Scotland would take no responsibility for the outstanding debts of the Royal Bank of Scotland, citing in justification the £250 billion of mainly Scottish oil revenue that has gone to the UK Treasury since production began in the North Sea. By the time of independence, assuming a ‘yes’ vote in a 2014 referendum, Scotland’s per capita share of the UK national debt might be in the region of £120 billion, and associated interest payments around £5 billion a year. Faced with the prospect of interest payments on this scale, it would be rational for the nationalists to seek to minimize Scotland's responsibility for the national debt. Defence: Military arrangements would alter following Scottish independence. Scotland would take over some existing military facilities and would finance its own armed forces. In response, the UK might reduce its own defence expenditure, or alternatively might continue spending as much as before so as to preserve its previous military capacity. There might also be some form of military cooperation between the Scotland and post-independence UK. One bone of contention would be the Faslane naval base on Gare Loch which serves as home base for the UK fleet of Trident submarines as well as conventionally-armed nuclear powered submarines. There has been ongoing agitation against this base and its future would be uncertain. If the government of an independent Scotland insisted on the removal of these submarines they would have to be relocated elsewhere. Alternatively, the new Scottish government might allow the UK to retain the Faslane base, following the example of the Ukrainian government which allowed the Russians to keep their naval base in Sevastapol after the break-up of the Soviet Union. This would be economically advantageous for Scotland, both in terms of the jobs it would provide and any rent that Scotland might receive. North Sea Oil and Gas: Under the international law of the sea Scotland would be entitled to an exclusive economic zone (EEZ) covering a significant area of the North Sea 71 . This would give Scotland access to substantial tax revenues that currently accrue to the central UK government. The Scottish government has estimated what the effect would be on the assumption that what it calls the “geographical share” of oil-related production and revenue is assigned to Scotland 72 . This share is based on the “median line”, which projects outwards into the North Sea from the coastline at the boundary between England and Scotland. This is the area that might belong to Scotland’s exclusive economic zone in the event of independence. It is estimated that approximately 90 percent of current UK North Sea revenue derives from resources located within this area. The Orkney and Shetland Islands: There is concern in the Orkney and Shetland islands about membership of an independent Scotland, and in the event of Scottish independence it is 69 Article 5 of the Anglo-Irish Agreement states: “The Irish Free State shall assume liability for the service of the Public Debt of the United Kingdom as existing as the date hereof and towards the payment of War Pensions as existing at that date in such proportion as may be fair and equitable, having regard to any just claim on the part of Ireland by way of set-off or counter claim, the amount of such sums being determined in default of agreement by the arbitration of one or more independent persons being citizens of the British Empire”. http://www.nationalarchives.ie/topics/anglo_irish/dfaexhib2.html 70 Channel 4 News, 11 January, 2012. http://www.youtube.com/watch?v=SpKVK6DI7OQ 71 Eric LeGresley (1993): The Law of the Sea Convention, Library of <strong>Parliament</strong> Research Branch, Ottawa, Ontario, Canada. http://publications.gc.ca/Collection-R/LoPBdP/BP/bp322-e.htm 72 Government Expenditure and Revenue Scotland 2010-2011, Scottish Government, March 2012, table 3.1. 239
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