Does Scotland really need the UK?

published 25 April 2007

The Scottish National Party is threatening Labour dominance north of the border, making independence an issue once again. Jody Clarke reports

How is Scotland's economy performing?

With an annual growth rate of less than 2%, the Scottish economy has underperformed the rest of the UK since 1975. Incomes are 7% less than the UK average, and Scots receive £1,500 more per head from Westminster than their English neighbours. Critics say that independence would leave Scots with an enormous tax bill to pay a "£5,000 hit for average households and a 3p local income tax", Tony Blair told MPs last month. Indeed, a recent report from Oxford Economics concluded that Scotland ran a deficit of almost £11bn last year, backing similar figures from the Scottish Executive.

Not at all, argues the Scottish National Party. If oil revenue is taken into account, the SNP argues that Scotland is subsidising the rest of the UK to the tune of £800 per head a year. In fact, if Scotland were to reap the benefits of all its resources, it would be the eighth-richest nation in the world, say the nationalists. In any case, Scotland is no different to most of the UK in receiving subsidies from London; the only net contributors to the Exchequer are the South East, East Anglia and London.

Although North Sea oil production peaked in 1999, there are still an estimated 20 billion barrels of oil left to be pumped out. This is the foundation of the SNP's case for independence. Assuming Scotland were to exercise control over all the UK oil fields currently governed by Scottish law, it would be entitled to about 90% of the oil. From this, SNP leader Alex Salmond says the party will create a £90bn Scotland Oil fund, along the lines of Norway's national pension fund, within ten years. Norway's own piggy bank is worth £123bn, set to grow to £250bn by 2010. The author of the Oxford Economics report, former Treasury adviser Alan Wilson, says that in 2004-2005 Government spending in Scotland came to £45.9bn. With a tax take of just £34bn to £35bn, that's still an annual deficit of about £10bn. The SNP disputes the figure, saying it does not take oil revenues into account. However, oil revenues for that period were just over £5bn, still leaving a £5bn black hole to plug.

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As is the case everywhere else in the UK, the manufacturing industry is shrinking, but financial services, especially in Edinburgh, are thriving the sector near doubled in size between 1998 and 2005, says The Observer. According to Gordon Brown, independence would put the sector at risk, as almost 75% of its work is for English clients. This could mean the loss of 125,000 jobs. But this has been described as "patently absurd" by former Royal Bank of Scotland boss Sir George Mathewson. "Currently, a huge proportion of the English financial services market is supplied by companies in the US, in Holland, Germany, Ireland, etc. Globalisation is here and Scottish companies have embraced it and indeed have benefited from it."

At 1.7%, Scotland's annual economic growth trails the so-called arc of prosperity'. Small countries like Ireland boast growth of 5.2%, Iceland is on 3.7% and Norway 3%. The country lags in innovation too corporate spending on research and development at 1.5% of GDP is below the UK rate of 1.7%, while patent filings at 2.1 per 10,000 of the population is below the 3.1 figure for the rest of the union. Scotland has a lot to do to catch up with the rest of the UK, let alone the likes of Ireland. But the SNP argues that with full fiscal autonomy (in effect the power of Holyrood to set their own taxes) Scotland could achieve similar rates of growth. The party proposes dropping corporation tax to 20%, which would bring it in direct competition with the rest of the UK on 28%. But despite pointing to Ireland's prosperity as a blueprint for the Scottish economy, Scotland would have to think of matching Ireland's corporate tax rate of 12.5% if was to do anything like that, says Hamish McRae in The Independent. Only that might help it "become a magnet for talent", as Ireland did in the late 1980s when it began drawing expats home.

Quite possibly. According to SNP figures, the Westminster Treasury would lose £64.5bn in oil tax revenue in the six years after independence. Douglas McWilliams, director of the Centre for Economic and Business Research, says there "is also a question of economic weight, in the EU for example. The UK economy is bigger than that of France, but the English economy is not. That could have an impact on influence in Brussels," he tells The Observer.

This is not the first time Westminster has fretted over Scottish claims to North Sea oil. In the mid-1970s, the then Scottish Office economist Gavin McCrone said that North Sea oil would provide an independent Scotland with "embarrassingly large tax surpluses". Not surprisingly, his full report on the subject was never made public. Nevertheless, in order to satisfy Scottish fervour for some sort of autonomy, in 1974 the Labour government at the time proposed a Scottish Assembly with control over some aspect of domestic policy. The subsequent referendum required that 40% of the Scottish electorate would have to vote in favour in order for the proposal to pass instead of a simple majority. In the event, the vote was indecisive 33% voted in favour and 31% against.

Jody studied at the University of Limerick and was a senior writer for MoneyWeek. Jody is experienced in interviewing, for example digging into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.