Scotland’s economy would prosper if it went its own way

The timetable has been set, and the question agreed. The English and the Scots can now have a proper debate about whether they want the union to continue or not.

In the run-up to the referendum in the autumn of 2014, we can expect to hear a lot from the pro-union camp about how an independent Scotland would be an economic basket case. It would be addicted to high and increasingly unaffordable state spending, and it would have few globally competitive industries.

Perhaps most damaging of all, it would have no workable monetary system it would either have to join an increasingly bankrupt eurozone, or else keep the pound and be forced to sign up to fiscal policies set in London. But that is condescending rubbish. Here's why.

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The referendum, when it comes, will turn, like any popular vote, on a whole host of different issues. The stature and skill of the leaders of the yes' and no' campaigns, the popularity of the government in Westminster, and the depth of attachment to the 300-year-old union, will all be crucial factors.

Right now, support for independence has fallen away at least since the highs that saw a Scottish National Party government elected in Edinburgh. With 28% in the latest polls, the nationalists have a mountain to climb if they are to win the day in 2014.

But two years from now, if the economy is still stuck in never-ending recession, Britain has lost its triple-A rating and the coalition is in disarray, the nationalists may well bounce back. In the end, the question may turn on the economics of independence.

The unionists think they have a strong case. Scotland, they argue, has high levels of public spending, subsidised by the English. Britain provides the market for Scottish goods. A strong Bank of England stands behind Scottish financial institutions an important point when it is only a few years since Scotland's two major banks went spectacularly bust and had to be rescued by London.

Most crucially of all, the euro crisis has changed the currency question. While nationalists used to argue that an independent Scotland could simply join the euro, right now that looks about as appealing as a wintry Wednesday afternoon in Aberdeen. Either it becomes another Greece or Portugal a bankrupt, bailed out state or else it becomes another Finland a tiny, prosperous place that has to pay the bills for everyone else.

But in truth, there is no reason why Scotland shouldn't cut state spending and have its own currency as well. It would need to make some tough decisions, but that is true of any nation.

The level of subsidy from England is a matter of debate it turns mainly on how you split up the revenues from North Sea oil. But there is no question an independent Scotland would need to start cutting its dependence on state spending. There is little reason why it shouldn't.

For a small region within a large country, it makes sense to game the system to capture as much state spending as possible. It is a perfectly rational way to behave. The more Britain spends in Scotland, the better for the Scots. Once the country gets independence, the calculations change. There is no system to play any more. The incentive to keep increasing spending in the expectation that someone else will pay for it disappears. At that point the incentive is to cut taxes and spending.

Ireland did brilliantly as a low-tax base for European companies. Scotland could do even better there would be plenty of hedge funds happy to relocate to Edinburgh if they paid less than 45% on their bonuses. It wouldn't take much to persuade Google or Facebook to shift their servers to Glasgow. A hyper-competitive tax system would be a powerful engine for the economy and a Scottish finance minister who boasted that he was taking jobs from England wouldn't do himself any harm at the polls.

Scotland would have to create its own currency. The euro is no longer a viable option; none of the eastern European countries are in any hurry to join and Scotland wouldn't be either. Neither would it be sensible to stick with sterling. Scotland would have no influence over the Bank of England. Nor could the Bank be expected to pay much attention to what was happening north of the border when setting interest rates or printing money.

Scotland would be far better off with its own money. The world is full of flourishing small currencies. The Swiss franc, the Norwegian krone, and the Israeli shekel all do well. Even the Icelandic krona has bounced back strongly since the financial crisis, so even a banking collapse doesn't have to spell permanent ruin for a small currency. And remember, Ireland's great burst of prosperity came during the 1980s and 1990s when it had its own floating punt. There is no reason why a Scottish pound should not do just as well.

In reality, the sterling area is starting to look every bit as dysfunctional as the euro area. Wealth flows relentlessly to London and the southeast. This is not really healthy for anyone the people doing the subsidising feel resentful and the subsidised feel demeaned.

There might well be good political, cultural and historical reasons for keeping the union together. But economically Scotland would do better as an independent country.