Would we have been better off under independence?

It’s almost impossible to answer this question with absolute certainty. What one must deal with in these subjects is the balance of probabilities, but any discussion of this type has to start with the point of greatest certainty which is position immediately at the point of independence.

Had Scotland voted Yes then the country would be heading for independence early in 2016. This means that the economic situation right now (late 2015) is our best guide.

That current situation can be reasonably estimated with GERS (Government Expenditure Revenue Service) - to clarify the Government here is the Scottish Government.

GERS is a highly detailed study by the Scottish Government of the financial position of the country, it uses a wide variety of sources and has been subject to rigorous studies and revisions over the years to provide as accurate and authoritative position as possible. It is not supposed to represent the position on independence but the financial position of Scotland at present within the Union. That doesn't stop the nationalists using it as a proxy for the position on independence but as I will show later GERS only flatters the position on independence.

GERS was used by the Yes campaign during the independence referendum and it formed the basis of the analysis used by the Scottish Government in their white paper Scotland’s Future. Therefore, at least from a nationalist perspective, GERS provides a good guide to the economic position of an independent Scotland, so accepting the figures in GERS for the basis of debate should not be under question by nationalists.

The position outlined in the latest GERS shows that compared to the UK (blue) on a per person basis Scotland (red) has a worse deficit than that of the UK of £900 per person. In fact on this basis Scotland has only has one year out of the last 15 when it has a significantly better per person position than the UK. In other words in 14 out of the last 15 years had Scotland become independent in that specific year moment it would have been worse off than had it been in the UK.

What is notable is the deterioration in the position of Scotland in the last couple of years and this is largely due to reduced oil revenue. However as the current set of GERS data only covers the position up to April 2014 the effect of the collapse in the oil price from September 2014 has not yet fed its way into the data.

We now know that the likely tax take from oil in the next GERS figures will be very small if not simply a rounding error in the Scotland’s finances. Therefore it’s possible to view the data in a different way by either eliminating oil from Scotland’s finances or better reducing it significantly. Fortunately GERS allows us to do this as it quotes oil on a geographic basis (used above), on a population basis or with no oil revenue at all.

It may not be readily apparent but the position is obviously considerably worse for Scotland with oil on a population basis but the “gap” between the UK and Scotland has been remarkably consistent at around £1500 per head for the last 10 years. Therefore given what we actually know about oil this year it is more than reasonable to conclude that the position next year will be in line with that position.

So according to the nationalist side’s own figures Scotland would be £1500 per person per year worse off outside the UK than inside it.

We could leave the argument there but I think it’s worthwhile examining the problems I noted with GERS. It is not an estimate of the position on independence but crucially of Scotland within the UK. Independence would change the numbers for Scotland and not in a good way.

Firstly GERS produces a lower estimate of defence spending for an independent Scotland, which under NATO membership needs to be 2% of GDP. Defence is allocated on a population share basis in GERS but because Scotland’s share of UK GDP is greater than its population share it effectively lowballs the cost of defence under independence. That is small change compared to the next two observations.

Secondly GERS makes the assumption that existing debt costs are allocated on a population share basis (which I argue here is very fair to say the least) but paid at UK rates of interest. Under independence this would be an incorrect assumption, Scottish debt interest would be based on the Scottish risk of default not that of the UK. As demonstrated here Scottish interest rates would be higher than that of the UK. This means that for example a 1% spread on Scottish interest rates over rUK rates would mean comfortably over £1bn in extra costs to Scottish taxpayers. This extra cost is not included in GERS.

Finally a deficit of £1500 per person over the UK deficit takes the Scottish deficit to close to 12% of GDP. This is very similar to the level of deficit that Greece had just before it got into serious trouble. This is not to say that Scotland would be Greece but we can say with confidence that capital would be swiftly leaving Scotland before the government had an opportunity to tax it. The effect of this run on capital would make the financial position of Scotland even worse and potentially much worse if a deficit and capital exits spiral took hold.

Indeed it would certainly force the provisional Scottish Government to announce serious and painful cuts to public services if it wished to give the markets any confidence in their public finances. These cuts themselves would be painful and likely make the starting position of an independent Scotland even worse.

So we can say with some considerable certainty that at had we voted Yes then Scotland would be starting out considerably worse off than it was inside the UK, a figure of £1500 per person is a very low estimate of the actual position faced by an independent Scotland.