As the Brexit negotiations have shown, the idea of true political and economic ‘independence’ in the modern age is largely an illusion.
The reality is much more likely to be some form of shared sovereignty. It is a moot point whether countries within the EU are better referred to as member states of a quasi-federal, central Parliament or as nation states that share some forms of economic and political co-operation.
Hence in the same sense that ‘Brexit means Brexit’ is a meaningless statement (without defining Brexit), then so too would ‘Independence means Independence’ be. That being so, it has been very useful for the post-Brexit vote discussion to highlight the multitude of options available for what Brexit could ultimately look like. We now know that any vote for Scottish independence could result in a similar ‘rainbow’ of potential outcomes being proposed and supported by a minority of voters or politicians.
So, what lessons does Brexit hold for a second referendum on Scottish independence? We look here at the degree to which (i) the economic and (ii) the fiscal impacts are symmetrical between the UK leaving the EU and Scotland leaving the UK and (iii) what lessons might be learnt from the Brexit negotiation process.
1) with respect to economic growth: the Brexit related arguments that the break up of an economic and customs union will result in a negative impact on future economic growth – due to increased tariff and non-tariff barriers – are also valid in the case of Scottish independence from the UK economic union. However, the degree to which this impact might be greater or lesser than for Brexit remains a matter for debate;
2) with respect to any fiscal transfer: it is widely accepted that Scotland will be deprived of a net transfer – in the region of £10 billion – from the rest of the UK in the event of independence. This is in contrast to the UK leaving the EU, where the immediate impact is likely to be positive (although negative once longer term, slower growth, impacts are incorporated);
3) with respect to the final independence arrangement: as has emerged through the Brexit discussions, a vote in favour Scottish independence is likely to lead to a plethora of options for what ‘independence’ might consist of. These range from an old style nation-state to remaining in some form of political and economic union with both the EU and the UK. A bespoke arrangement with both bodies seems likely to result in the most advantageous (or least detrimental) outcome in economic terms. This might involve i) membership of the EEA, similar to Norway, and ii) a form of ‘British Union’, similar in form to the current EU in terms of being an area of shared political sovereignty and economic co-operation amongst its member nation states. Such a ‘British Union’ might allow for the use of sterling, no trade barriers and some degree of continuing fiscal transfer;
4) while, as with Brexit, the first (economic impact) of these changes to the political and economic landscape around a second referendum may have little influence on the electorate, the second (fiscal impact) is more likely to affect, negatively, voting intentions. This in turn may make it more likely that an alternative form of independence is proposed which helps ameliorate some of these impacts.
The economic and fiscal impacts of independence
One of the near universal findings around Brexit is that any deal would produce a worse economic out-turn than the status quo position, both in the short and in the long term. This is due to a combination of higher trade barriers and poorer productivity prospects.
Such a finding is similar to the forecasts made of the impact of dissolving the UK economic union at the time of the First Scottish Independence Referendum in 2014. However, on that occasion the Scottish Government, as led by the SNP, largely discounted such findings. This position has changed for any Second Scottish Independence Referendum due to:
– the commonly acknowledged impact of the breaking up of a closely knit economic union during discussions around Brexit;
– the SNP’s recognition of the negative effects associated with breaking up the European economic union;
– the introduction of a new, independent, Scottish Fiscal Commission, which is likely to produce economic forecasts for Scotland that are in line with those made by the IFS and others at the time of the first referendum.
Despite the general consensus over the negative impacts of dismantling an economic and/or customs union, there will still be claims and counterclaims over whether any such negative impacts would be ‘larger’ or ‘smaller’ than those outlined with regards to Brexit.
For example, on the ‘larger impact than Brexit’ side, opponents of independence might point to: – even closer economic ties between Scotland and the UK than between the UK and the EU. (Note: Scottish exports to the rest of the UK accounted for 61% of all exports in 2016 (EU 17%) while UK exports to the EU in 2016 accounted for 43% (nearer 50% if exports to Scotland are included).)
On the ‘smaller impact than Brexit’ side, proponents of independence might point to:
– the mutual benefits of a ‘soft’ form of economic independence; – retaining sterling and close links with the Bank of England;
– an absence of any border controls;
– the ability of an economically independent Scotland to prosper though achieving faster productivity growth, as outlined in the SNP’s Growth Commission report.
However, objections can be made to such claims, for example, with respect to:
– on the absence of border controls – the Scottish Government could find that the EU will still want a say as may the UK Government, e.g. with regards to the issue of freedom of movement;
– on productivity gains – in the absence of any clear and unequivocal policies to improve productivity, which themselves can be difficult to identify and/or gain political support for, then productivity driven growth gains remains more of an aspiration than a likely outcome.
Given that most economic models are based on standard economic theory backed up by empirical findings then forecasting bodies will continue to predict an economic downside to independence, due to the introduction of greater trading barriers and slower productivity growth. However, the academic nature of such forecasts, and variation in forecast results, may leave the electorate unconvinced on the matter, as appears to have happened with regards to Brexit.
The issue of currency in any post independence scenario will remain a thorny one. If the UK leaves the EU and Scotland stays in, then the idea of using sterling seems far-fetched, as this would mean participating in an economic union with one body (the EU) while at the same time participating in a currency union with a different body (the UK). This would be especially difficult if the UK increasingly diverged from the EU in terms of its fiscal and monetary policies. At the very least it would be an ugly fit.
One key area of difference between Scottish independence and Brexit is that no ‘official’ claim is likely to be made that leaving the UK would result in any fiscal benefit for Scotland.
Such a claim could be made in the case of Brexit, due to the net transfer of funds to the EU from the UK, even if most forecasters predicted that any such gain would ultimately be lost as a result of slower economic growth over time.
In the case of Scotland leaving the UK, and in the absence of any radical turnaround in the fortunes of the North Sea, an independent Scotland would lose out, due to the ending of a net transfer of funds from the UK to Scotland. This position, largely obfuscated in the White Paper of 2013 through a forecast of sustained high oil tax revenues, is now widely recognised due to:
– recent GERS publications reflecting the low oil tax position;
– the latest (2015) Scottish Government forecast of future oil and gas tax revenues;
– the SNP’s Growth Commission reports analysis of the inherited fiscal position of a newly independent Scotland;
– all independent analysis of the position at the time of the FSIR and since.
It is also important to note that the scale of this shortfall is considerable. Most analysis, including the SNP’s Growth Commission report, acknowledge that it would be worth in the region of £10 billion, possibly higher.
Furthermore, in contrast to the vaguer forecasts of slower future economic growth, predictions of the fiscal loss are more robust. Hence, the impact on Scotland’s tax and spend position and policies becomes a much more immediate and urgent task to address and possibly more influential on voters thinking.
The economic and political shape of independence
As the Brexit negotiations have shown, the idea of true political and economic ‘independence’ in the modern age is largely an illusion. The reality is much more likely to be some form of shared sovereignty. It is a moot point whether countries within the EU are better referred to as member states of a quasi-federal, central, Parliament or as nation states who share some forms of economic and political co-operation.
Hence in the same sense that ‘Brexit means Brexit’ is a meaningless statement (without defining Brexit), then so too would ‘Independence means Independence’ be. That being so, it has been very useful for the post Brexit vote discussion to highlight the multitude of options available for what Brexit could ultimately look like. We now know that any vote for Scottish independence could result in a similar ‘rainbow’ of potential outcomes being proposed and supported by a minority of voters or politicians.
(Note: in the case of the first referendum what was being voted on was clearer. The White Paper (2013) outlined in some detail, the hoped for outcome. But even here negotiation would have been inevitable, over nuclear weapons, debt, currency, assets and liabilities, the North Sea, etc, etc.)
What are the options?
Some of the clearer potential options for Scotland are:
1. No change: staying within the UK;
2. UK federalism : being within an enhanced federal UK;
3. European Union: being outside the UK but within the EU;
4. EEA/EFTA: within the Single Market and/or customs union(s) (i.e. Norway/Switzerland style arrangement);
5. Bespoke arrangement with both the UK and the EU;
6. Independence: outside both the UK and the EU.
When seen in this light then a future Scotland – UK relationship becomes much more flexible.
Assuming that the UK does leave the EU, while also acknowledging that it may still be part of the single market and/or the customs union, then the optimal position for Scotland may well be a bespoke arrangement with both the EU and with the UK.
With respect to the EU, this might involve membership of the EEA (as Norway has) which would in turn allow Scotland to:
– stay in the Single Market;
– leave the CAP and the CFP;
– allow for some degree of freedom with respect to negotiating trade agreements with third countries (i.e. attempting to keep a barrier free relationship with the UK).
With respect to the UK, this might involve:
– using sterling as Scotland’s currency (which seems much more likely than if Scotland were still a member of the EU);
– a sharing of other potentially expensive public sector services, including Defence and some forms of foreign affairs (e.g. embassies);
– some continuing fiscal transfer to Scotland, dependent on the degree of on-going co-operation;
– retaining a fully free trading and open border arrangement, although possibly with some restrictions being applied given the EU freedom of movement commitment associated with being in the EEA.
In the event that such a ‘British Union’ – more along current EU lines than current UK lines – came about then clearly England, due to its size, would dominate it, and to a much greater extent than Germany does the EU. However, if unequal positions of influence can be deemed as acceptable in the EU, given the side benefits to the smaller countries, then presumably they could equally well be accommodated in a British Union.
Any such arrangement could allow for a degree of freedom within common ‘British Union’ fiscal and monetary positions. Equally, with respect to areas like Defence and Foreign Affairs, some type of ‘opt-out’ option could exist where views differ on specific actions.
The major stumbling block at present is the absence of an English Parliament.
The above scenario highlights just one variant that might emerge. Indeed, both the SNP’s Growth Commission’s ‘annual solidarity payment’ and the Scottish Government’s own proposal for a differentiated Brexit solution for Scotland (see ‘Scotland’s Place in Europe’, 2016) could be said to be exploring such new territory.
Summary and Conclusions
This analysis has highlighted the following key differences between a second Scottish Independence referendum and the first:
On the pro-leave side, Scotland could negotiate a stronger relationship with the EU market than if it remained in the UK.
On the pro-remain side would be the, widely acknowledged, negative implications of breaking up a strong economic and customs union (the UK);
Unlike Brexit, where any potential net fiscal loss from the UK leaving the EU is disputed and relatively minor, Scottish independence would result in a widely recognised significant fiscal loss, of the order of £10 billion.
The loss of this current transfer of public funds from the rest of the UK to Scotland will require immediate attention, involving raising taxes and/or on-going constraints on public spending;
Options for ‘independence’
Given the greater scrutiny that Brexit has brought with respect to claims of how simple and costless it is to leave a close economic union, then a second referendum might throw up a range of possible ‘independence’ outcomes.
Some of these ‘bespoke’ variations could potentially offer considerable relief from much of the negative economic and fiscal pressures outlined above, while at the same time notably expanding the sovereignty of the Scottish Government.
How might these three differences to the political and economic landscape affect voting intentions in a second referendum? Recent polling suggests little in the way of a change of heart amongst the Scottish electorate post Brexit but voting patterns may change as minds become more concentrated leading up to any second referendum. Looking at each difference from before in turn:
– it is possible that the first (economic impact) will gain little traction with the public, as appears to be the case with the first independence referendum and Brexit;
– the second (fiscal impact) may be more influential, especially as the SNP’s Growth Commission accepts that there will be a five to ten year transition period post independence when public spending growth will need to be constrained;
– the third (post independence arrangement) may be influenced by any emerging negativity relating to the second. A different model of independence may be sought in attempting to avoid a significant fiscal loss and continuing strong economic and social ties. This might lead to a ‘British Union’ that exhibits a level footing in terms of nationhood but which may still be skewed in terms of effective economic and political power.
How long might it take for both sides to come to accept some new form of independence? That is very difficult to judge. In normal times it might seem a stretch to see a radical shift in stance in a short period of time. However, these are far from normal times and the current febrile political environment makes such radical change seem more possible.
First published by Scottish Trends
Main image courtesy of Ewan Morrison
Common Weal policy podcasts on currency
Sustainable Growth Commission report
Scottish Government latest state of the economy report (February 2019)
Fraser of Allander Institute nowcasts of the Scottish economy
Robert Innes says
Of course, John McLaren is going to insist that there will be a massive fiscal deficit in an Independent Scotland, he’s a committed British Nationalist, and has form. I’ll counter his assertions, as a committed Scottish Nationalist, by saying that I do not believe a single figure the British Government produces in relation to Scotland’s economy under the Union, far less using those figures to assess how it might perform after Independence.
There is absolutely no doubt that under the Union, Brexit will be a disaster for the Scottish economy and the sensible choice is now Independence. The basics of an Independent Scottish economy are sound; we can feed ourselves, we have an abundance of natural resources and, if anything, we are underpopulated, have an educated people and modern industries, that is if Brexit doesn’t wreck them.
The UK is hugely overpopulated, has to import almost half its food requirements, most of its energy, lacks natural resources and is currently lead by one of the most dysfunctional governments in the world.
Sorry John, you’ll have to do a lot better than that if you are to be convincing that remaining in the Union is still a sensible choice.
David Gow says
John McLaren points out that he is politically non-aligned – and was asked by Andrew Wilson, chair of the SNP’s Sustainable Growth Commission, to write a background paper to its report (Para1.7 Page 2). My co-editor and I chose to run John’s piece precisely because we thought it non-tribal – and good analysis of a vital, politically charged topic.
Me Bungo Pony says
I’m sure Mr McLaren is, from his point of view, attempting to be objective. However, he was a committed Unionist in 2014 (pitching in gloom and doom at various points on cue) and had (may still do) strong links with the Labour Party. As a result, he comes to the table with a certain amount of bias, whether conscious or unconscious. Such as the £10bn fiscal transfer figure, which others have debunked several times, and the claim of “negative implications of breaking up a strong economic and customs union” which could have come straight out of the “Unionism 101 – handbook for Project Fear”.
I’m not saying he is attempting to be in any way dishonest here. I’m just saying we do not have to take his every assumption, claim and conclusion as gospel. It is merely his learned opinion. Others just as learned will disagree.
David Gow says
The fact that somebody has links – surmised or actual – to Labour does not invalidate their analysis. The same holds true for SNP supporters/members and/or pro-independence thinkers. The “negative implications” – as in the case of leaving the EU’s customs union and single market – cannot simply be brushed aside though one can obviously argue about their scale.
Fay Young says
Further recommended reading
‘But GERS does not give the whole of the rather nasty picture’Economist Margaret Cuthbert on GERS and the need to be honest about the state of the Scottish economy.
It’s a bracing read.
Fay Young says
And a quick add, as co-editor, I’m aware of the limitations in ‘debates’ online. It’s often uplifting to meet people in real life, people whose votes and politics may be very different from mine, yet as we talk we discover we share common interests in the common good. The great challenge is finding a way to turn this goodwill into constructive changes on the ground.
My gut instinct is that we need to be much clearer about the sharing of power, responsibilities and resources. The combination of centralisation and austerity has had devastating effects on social wellbeing throughout Britain, in Scotland as well as the rest of the UK. And much of Europe. We need to be courageous in debating these issues honestly.
Robert Innes says
Thank you for your comment. Professor McLaren repeats over and over, that there will be a net fiscal deficit in a newly Independent Scotland of around £10Bn. He seems to base this principally on the GERS figures.
Not everybody agrees that these GERS figures are reliable. In fact, I would argue that they have been widely discredited. See some different aspects on this subject from Professor Richard Murphy: –
here: – https://www.taxresearch.org.uk/Blog/2018/08/22/gers-really-is-crap/
and here: – http://www.taxresearch.org.uk/Blog/2017/09/10/its-time-for-the-gers-debate-to-move-on-it-seems-that-everyone-with-any-sense-now-agrees-that-its-just-not-good-enough/
More recently Craig Dalzell points out, at a public meeting, how poorly GERS represents the likely financial position in an Independent Scotland whose government would inevitably adopt different spending priorities from Westminster: –
I found it particularly interesting in his talk, that according to the GERS figures, just three regions of the UK (Scotland, Wales and N. Ireland) account for 55% of the UK government’s deficit, while comprising only 15.8% of the population. That just does not seem credible to me.
If Scotland is so lavishly “subsidised”, why have so many here become dependent on food banks for their subsistence, why are so many children living in poverty and why has “austerity” had such a devastating effect on the numbers now experiencing poverty?
I think we could do very much better than presently, in an Independent Scotland.
Keith Macdonald says
The most important point in this article is that “independence” can no longer be considered a clear or definite option. Total independence, in the sense that nothing the UK could do would affect Scotland, is clearly impossible. It is up to those who advocate it, therefore, to say what kind of independence they advocate.
If Scotland were ever to vote for just “independence” as offered in 2014 we would simply find ourselves in exactly the situation the UK is currently in. Two and three quarter years have been spent arguing about the meaning of an apparently binding referendum result. This has not only wasted an enormous amount of time and left many serious problems untackled but has caused great bitterness and division. No patriot should wish that on Scotland.
Nationalists will never give up using the word because it sounds so good. Non-nationalists should refuse to use it unless it is qualified by referring to a specific proposal or area of policy. Any future referendum in Scotland should offer the option of staying in or leaving the UK with a second referendum on the negotiated terms of withdrawal if required.
Brian Daily says
I’m a Scottish Nationalist , not a British Nationalist like the author. But I grew up British, my history is about somebody burning cakes and I can sing the tow row row of the British Grenadiers. Additionally I am pro SNP. Question, where and when did Westminster spoil it for me?
The authors British Nationalist arguments all sound great. Here’s the thing. All the discussions are about the money. Has anybody noticed we went through austerity and the rich are getting richer. We lie about GDP which punishes the environment to put profits in the corporations. We lie of GERS depending which side we sit on. We lie about Oil reserves then discover new ones. It’s all about money.
I don’t want the same Westminster in Edinburgh. In all of this, the resource known as Sovereign Scots is never mentioned. This is why we are tied to the UK. This is our big deposit for a future for our children. Not oil, or whisky. Or wee jimmy hats, nor colloquialism.
We are big enough, rich enough and smart enough. ????????????????????????????