Scottish independence: economic implications
Dr Gary Gillespie, Chief Economic Adviser to the Scottish Government, summarised its economic position as the referendum approaches.
The devolution framework for Scotland shows that a high degree of public expenditure (60 per cent) is devolved and covers areas such as health, education, infrastructure, planning, enterprise policy and justice. The funding is under the Barnett formula which is the same mechanism as Northern Ireland. Scotland had a public expenditure of
£65 billion in 2010-2011, of which £40 billion is devolved.
On the revenue side, including tax revenue from North Sea oil, revenue was £57 billion for the same year of which only 15 per cent is devolved under the new Scotland Act. Before this Act, Scotland like Northern Ireland had effectively devolved local council tax which accounted for £4 billion or 7 per cent of revenues.
The Scotland Act brings additional powers through stamp duty, land tax, shared income tax – which allows the Scottish Parliament to vary the rate of income tax by 10 pence in each band – and also borrowing powers with a total value of £3.2 billion for capital infrastructure, which can be drawn down by up to £300 million per year. The additional powers for stamp duty and borrowing come into effect in 2014-2015.
Fiscal federalism
The motivation for the Scotland Act came from the idea of linking expenditure accountability to financial accountability: the idea that you have 60 per cent of all expenditure but with the choices and decisions you make, you don’t get the feedback effects into the economy as you do with this notion of financial accountability.
In a wider sense, in the economics of the issue around devolution – there was quite a literature in the 1970s on fiscal federalism – the economic arguments can effectively be summarised as you get benefits from devolving power because you get an increase in efficiency because you get better policy-making and the trade-off is with loss in economies of scale with central government.
Looking internationally at the amount of tax revenue collected locally, the average for the OECD is around 24 per cent. In the Scottish context, with the Scotland Bill that will increase to between 14 and 15 per cent. The UK is highly concentrated in terms of tax revenues whereas Canada raises 50 per cent of tax revenues locally in the provinces. This poses the question: why are tax revenues important relative to expenditure? If you control 60 per cent of expenditure, you have a lot of the long-term levers of productivity and you can influence innovation systems and infrastructure investment and you can do a lot on the economy. The arguments on the revenue side are more to do with changing behaviour and incentivising decisions and investments.
Scotland’s economy
Scotland accounts for 8.4 per cent of population in the UK and the economy, excluding oil, accounts for 8.3 per cent. So we are broadly in line with our population share. Scottish GDP is worth £125 billion and if you include oil, it goes up to £150 billion. The general performance of the Scottish economy is very close to the UK on most indicators.
Again if you exclude oil, both economies are very similar – largely service economies with 75 per cent services. Within particular sectors there are slight differences. In financial services, we have 25 per cent of employment in life assurance in Edinburgh. In food and drink, we have a high amount in export products such as whisky. In energy, we have a large offshore oil and gas sector which makes a big difference in terms of tradable services, with a strong cluster around Aberdeen that sells services throughout the world.
I would highlight one figure. Population is 5.3 million which is back to its highest level since 1979. Population is an emotive issue as people view a declining population as people leaving because of a declining economy. This recession has been different from the recession in the early 1980s when we lost 300,000 people, who migrated out of Scotland between 1980 and 1986. In this recession, we have seen population increasing partly driven by EU migrants and an increase in the birth rate.
The Scottish Government has highlighted that there is a long-run growth rate differential between Scotland and the UK. Over a 30-year period, the Scottish economy has lagged the UK growth rate by 0.5 per cent. The UK economic growth was stronger as was that of smaller EU countries, as way of a comparator. The current recession has been shallower for Scotland. Output fell 5 per cent and the UK by 7 per cent. We have had a reasonable recovery with output now just below 1.5 per cent of pre-recession levels.
Two Scotlands
Looking at output per head, there are two Scotlands: Scotland onshore and Scotland offshore (that includes a geographical share of oil). Onshore is very close to the UK average at 98 per cent of GVA per head. Since devolution, that has improved from 94 per cent. Including the geographical share of oil, Scottish output is the highest of all regions with the exception of London, which is the outlier.
The Scottish Government’s narrative is around having unbalanced growth across the UK and the potential negative implications of having such a strong agglomeration within London.
On productivity and GVA per hour worked – which is the total value of output divided by the hours worked – the UK situation is 95 per cent of pre-recession levels of productivity. The UK is producing 98 per cent of output with 102 per cent of labour – more people producing less in the UK.
In Scotland, in 2011 labour productivity is slightly better than the UK average and since then our performance is 5 per cent above our pre-recession levels of output. In Scotland, effectively employed hours has fallen more than output. Those in employment are producing more, particularly in oil and gas, energy and the public sectors, where output has been maintained but with reduced inputs.
Macro-economic framework
In an independent Scotland, there would be a macro-economic framework which was determined by a group called the Fiscal Commission Working Group, who were asked by the Government to look at Scotland’s macro-economic framework, including options around currency. As a ‘new norm’, you would have in addition to the usual fiscal and monetary policy financial stability measures.
The report was published in February 2013 and the Government are proposing to continue in the EU. They have also accepted the recommendation to retain sterling. In terms of trade, Scotland sells goods to the rest of the UK worth
£45 billion. Monetary policy would continue on a “sterling zone basis” so the central bank would continue to set monetary policy. The key motivation within the framework would be for an independent government to get control over fiscal policy and their narrative is about competiveness with a wider social agenda.
The referendum on Scottish independence will take place on 18 September 2014.
