One year from now, Scots will decide whether they want to break away from the United Kingdom.
The economics of independence will no doubt be at the forefront of the debate over the next 12 months.
We FactChecked the Scottish economy in 2011 and found that few economists believed that an independent Scotland would not be economically viable. But there was huge uncertainty over the kind of prosperity its citizens would enjoy.
Since then, some of the numbers have changed dramatically. Will a “yes” vote unlock Scotland’s natural wealth or lead to hard times?
The bottom line remains the same: we simply don’t know what kind of political settlement a newly independent Scotland would get from Westminster.
We know that there would have to be serious bargaining and negotiating, because two key issues would decide the economic strength of the new nation: oil and debt.
The black stuff
According to the latest estimates, oil and gas produced in Scottish waters contribute 94 per cent of the tax money raised from the North Sea hydrocarbon industry.
Historically, North Sea tax receipts have belonged to the whole of the UK and it has been up to the UK government to decide how the money is shared out.
Is that desperately unfair? Perhaps – if you think this is “Scottish oil” you could argue that Scotland pays in much more tax than other parts of the UK.
But Scotland also tends to get more public money per capita. The average Scot has received just under £1,200 more than the average UK citizen over the last five years.
Over the years, this public spending premium has pretty much made up for Scotland not getting the lion’s share of oil and gas revenues, according to Professor Brian Ashcroft of the University of Strathclyde.
He looked at tax receipts and spending from 1980 to 2012. Over 32 years, Scotland had paid in £1,425bn in tax receipts, including a geographic share of oil revenues. Public spending in and for Scotland was £15bn more at £1,440bn.
This idea that a newly independent Scotland would be allocated a geographic share of North Sea gas and oil production –based on which reserves are in which country’s waters – is crucial to the economic case for independence.
Anything less – say, a per capita share – and Scotland is operating at a huge budget deficit. If Scotland gets most of the oil money it is in a slightly stronger position than the UK, as the latest official figures show.
In 2011/12 Scotland was running a budget deficit equivalent to 5 per cent of GDP, compared to 7.9 per cent of GDP for the whole of the UK. That’s if we include a geographic share of North Sea revenue.
Give Scotland a per capita share instead and the deficit is a whopping 13.5 per cent.
These figures also illustrate the potential volatility of Scotland’s fiscal position. In 2008/09, with oil prices riding high, the country runs a trifling deficit of 2.6 per cent, much better than the UK position.
One year on, oil prices have collapsed, revenues are cut by half and Scotland’s deficit has increased to 10.7 per cent, almost on a par with the UK deficit.
The SNP says it wants to set up a Norwegian-style oil fund, so the profits in good years are banked for the future instead of spent. George Osborne says putting away such a large chunk of national income would inevitably mean tax rises or spending cuts in the short term.
What will happen to gas and oil receipts in the long term? That’s a whole other FactCheck, but the Office for Budget Responsibility’s £11bn downgrade of its long-term forecasts was not good news for the pro-independence lobby.
Reaction from Scottish nationalists tended to range from scornful assessments of the OBR’s track record as a forecaster to outright accusations of political bias from the supposedly independent body.
But the downgrade simply reflects a decline in production and lower-than-expected prices. Developments like the discovery of shale gas in the US and England create even more uncertainty over long-term oil prices.
In private, the Scottish Finance Secretary John Swinney is cautious but not dismissive about the OBR’s forecasts, as we know from a confidential memo leaked to the Better Together campaign.
In the paper Mr Swinney accepts the “high level of volatility” in gas and oil revenue, which “creates considerable uncertainty in projecting forward Scotland’s fiscal position”.
This is the flip side of the coin.
If Scotland wants to profit from UK assets in the North Sea, presumably it ought to shoulder its share of the country’s debts as well.
Mr Swinney has suggested in the past that Scotland would have some kind of legal case for refusing to take on any of the UK’s public sector debt, but we think he’s got this completely wrong. See here for the full details.
The negotiation is more likely to focus on how much debt is passed on to a new state.
A historic share based on past borrowing would come to £56bn or 38 per cent of GDP. A per capita share would be £92 billion or 62 per cent of Scotland’s GDP.
The National Institute of Economic and Social Research thinks that with a per capita share of debt and a geographic share of oil – arguably the most realistic scenario – Scotland would need to raise taxes or cut back public spending, or both.
The country would need to run a surplus of 3.1 per cent instead of its average estimated deficit of 2.3 per cent to be in reasonable shape after ten years of independence, according to the think-tank.
And this is based on the hypothetical scenario of Scotland staying in a Sterling currency zone and managing to keep its borrowing costs at the lower end of the scale – another two big “ifs”.
The only thing we can be certain of is uncertainty when it comes to forecasting Scotland’s future. Since we looked at the issue two years ago events have probably weakened the nationalist position slightly.
At that time, the most recent figures were from 2008/09, a very good year for Scotland’s finances, with the country in the unusual position of running a slight current budget surplus. Subsequent years have shown that to be a blip, and have shown how oil revenues can fluctuate wildly.
None of this changes the fact that Scotland tends to be in a stronger position than the rest of the UK – but only if you assume that oil and gas production in Scottish waters will pass into Scottish hands and will continue to be a major money-spinner.
That’s a huge question mark. We also don’t know how much debt an independent Scotland would take on, what its borrowing costs would be, what currency it would use and how much it would cost to set up all the institutions of a new state.
Of course the UK government could answer most of those questions before the referendum if it wanted to. But why would it, when economic uncertainty is likely to weigh heavily in the minds of voters?
By Patrick Worrall