• Thursday 16th July 2020

The Scottish Play: The Economics Of Home Rule

IN THE debate over whether Scotland should be independent, each side has for years lobbed economic grenades at the other

Scotland could probably go it alone now, but the economics of independence are steadily worsening

IN THE debate over whether Scotland should be independent, each side has for years lobbed economic grenades at the other. The pro-independence Scottish National Party (SNP) broke into mainstream politics in the 1970s with the slogan, “It’s Scotland’s Oil”. Alex Salmond, Scotland’s first minister and SNP leader, calls it “larceny” that revenues from oil and gas production, most of which comes from Scottish waters, have stuffed London’s coffers for the past 40 years. George Osborne, Britain’s chancellor, retorts that Scotland would be the poorer for secession.

So would an independent Scotland be an impoverished backwater or a land flowing with oil and money? A precise answer is impossible, since Whitehall does not count all of Britain’s revenue and spending streams by geography. Scotland gets a block grant from Westminster, but some things, such as welfare and defence, are paid for directly. But a close reading of the figures suggests an answer, which is less dramatic than either staunch nationalists or unionists might hope.

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Related topicsNorth SeaUnited KingdomAlex SalmondScotland
Scotland’s accounts of revenue and expenditure, based on Treasury data, show that it is not a ward of the state, grossly subsidised from Westminster. In fact it performs better than all regions outside the south-east of England, and has done particularly well in the past decade (see chart). In 2010-11 Scotland’s GDP was £145 billion ($225 billion) including a geographical share of North Sea oil and gas, around 10% of Britain’s, with 8.4% of the population.

Historically Scotland has received bigger grants per head from central government than Wales, for example-in part a tacit acknowledgment that it contributes handsomely to oil revenues, which in 2010-11 amounted to £8.8 billion. An independent Scotland would lose that subsidy, but gain the right to collect taxes on hydrocarbons locally. For the moment, Scotland’s day-to-day accounts would look little different to now. But the argument does not end there.

Not so long ago, North Sea oil and gas would have made Scotland rich, had the nation been able to seize it. Declassified documents show that, in the 1970s, Treasury officials reckoned Scotland could comfortably have paid its own way-a big reason the government was so alarmed by rising nationalism. The situation is now more finely balanced. And there are four big reasons to question Scotland’s longer-term prospects.

Oil and trouble (Salmond’s bubble)

The first problem is oil. An independent Scotland would rely heavily on oil and gas-in 2010-11 offshore activity accounted for 18% of GDP. The equivalent share for the whole of Britain was just 1.8%. Norway is even more reliant on hydrocarbons, but it has far more oil and has for over 20 years been setting funds aside for the day the stuff runs out. Britain has no such retirement fund on which an independent Scotland could draw.

The North Sea is gradually running dry. Many fields will stop producing in the 2020s; by the 2040s oil is likely to be dribbling rather than gushing forth. Tax revenues from oil and gas are highly volatile-they are soaring now because commodity prices are high. And if prices fall both production and receipts could plummet because the remaining North Sea oil is pricey to exploit, says Alex Kemp of Aberdeen University. He forecasts that, at $90 a barrel, 23 billion barrels of oil and gas could still be extracted; at $70, this falls to 16.5 billion barrels. Either scenario is possible. The average oil price was $62 a barrel in 2009; in 2011 it was $111.

There are also hidden liabilities in the North Sea. Decommissioning the installations there, most of which are in Scottish waters, will cost more than £30 billion by 2040, predicts Oil & Gas UK, a trade body. Westminster is currently on the hook for more than half that sum in tax relief, a bill it would happily hand over to Holyrood.

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