Scotland and the Brexit paradox

Posted on August 24, 2016

Scotland's First Minister Nicola Sturgeon speaks at the public Question and Answer event with EU nationals living in Scotland, at the Corn Exchange, Edinburgh, Scotland August 17, 2016. REUTERS/Russell Cheyne©Reuters

Nicola Sturgeon, Scotland’s first minister, says the Scottish economy will suffer by between £300 and £2,100 a head as a result of Brexit

When Scots voted against independence from the UK in the referendum in 2014, it seemed to be the reality of economics that won it.

While most Scots identify themselves as Scottish first and British second or not at all, the argument that an independent Scotland would be taking big risks with public finances and the currency appeared to weigh heavily.

    This year’s vote for the UK to leave the EU has heightened that contradiction. Scotland, a country where a majority of the population sees itself as European and voted for Remain, now has a stronger reason to quit the UK and attempt to stay within the EU on the grounds of identity. But whatever the Scottish government tries to argue, the Leave vote also creates a bigger economic cost to Scotland if it breaks up Britain.

    Nicola Sturgeon, Scotland’s first minister, this week claimed that the Scottish economy would suffer by between £300 and £2,100 a head as a result of Brexit and argued that the UK was no longer an economic haven.

    However, Ms Sturgeon’s claim of the extent of damage to Scottish gross domestic product is an extrapolation from estimates published by the UK Treasury and independent forecasters before the independence referendum that she described as “overblown” at the time. It also makes no attempt to correct for Scotland’s profile — a smaller financial services sector, for a start — compared with that of the whole UK.

    If the UK economy is damaged by being cut off from the European single market, Scotland would suffer even bigger losses from the trade barriers with the UK that would be erected if it left Britain and remained within the EU.

    Scottish exports, 64 per cent go to England, Wales and Northern Ireland and only 15 per cent to the rest of the EU. The harder the Brexit, and thus the stronger the case for Scottish independence, the bigger the cost to Scottish exports of leaving the UK.

    Moreover, the prospects for Scottish public finances if it left the UK — already precarious at the time of the independence referendum — have worsened sharply. The collapse in oil prices and the decline in yields from the North Sea fields have reduced Scotland’s notional share of British oil revenues from £9.6bn in 2011-12 to just £60m in 2015-16.

    If Scotland became independent tomorrow, it would start life with a government budget deficit of nearly 10 per cent of GDP — more than twice that of Britain as a whole. Any economic shock from Brexit would almost certainly make that shortfall worse by reducing growth and tax revenue. An independent Scotland, even if it managed to rejoin the EU, would face a double blow of losing export markets to and fiscal transfers from the rest of the UK. Economically, Scotland’s best hope is to argue for the closest relationship between a unified Britain and the EU.

    Although it does not have a veto on any final arrangement, Scotland can claim particular legitimacy thanks to its constitutional position.

    The Scottish government would do better trying to achieve the best deal for the UK rather than trying to manoeuvre its way to another independence referendum.

    It may seem unfair that having voted in a majority against Brexit, Scotland should be outvoted by the rest of the UK and then find that vote had increased the cost of it becoming independent. That, however, is the position in which Scotland finds itself and no amount of obfuscation or complaint from the Scottish government will change it.

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