What would Scottish independence mean for the rest of the UK?

With its high levels of public spending, Scotland is perceived by many to be something of a drain on the overall UK economy, suggesting that independence might be to the advantage of the remaining UK.

But, in practice, Scotland’s departure from the Union is unlikely to benefit the rest of the UK and could even represent a net economic cost. The UK would probably retain some of the disadvantages of current links with Scotland, including the need to continue acting as a backstop to the Scottish financial sector, but independence would offer few benefits, at least in the near-term.

Admittedly, the direct fiscal consequences of Scottish independence to the UK would probably be minor and could eventually swing in the rest of the UK’s favour. There are some concerns that, if an independent Scotland took a major chunk of North Sea revenues, it would leave a hole in the rest of the UK’s public finances. But oil revenues are not actually that big and are forecast to decline. And Scotland consumes a disproportionate share of public spending.

But the potential monetary implications of Scotland exiting the Union are more troublesome. The SNP currently plans to keep using the pound after independence, which would probably involve negotiating to use the Bank of England as a 'lender of last resort'. In that case, the Bank, and behind it, UK taxpayers, would be on the hook if Scottish financial institutions got into trouble. The importance of these institutions to the UK economy means it would be difficult for the UK not to stand behind them, whether it wanted to grant Scotland this privilege or not.

Of course, the residual UK might, therefore, insist on overseeing Scotland’s fiscal management via some form of treaty imposing fiscal rules. But it is not clear how effective they would be in practice.

And while an independent Scotland’s continued use of the pound would avoid disruption to UK firms selling north of the border, there may be a continuing cost to exporters in the remaining UK since Scottish oil exports probably cause the pound to trade at a higher level than otherwise. But independence would mean the UK no longer shared in the tax revenue from those exports.

The close knit relationship between Scotland and the rest of the UK means that independence for Scotland would still leave substantial economic ties in place. The nature of some of those ties would present potential costs to the remaining UK. But disunion would offer it little in the way of benefits. So, for the rest of the UK, Scottish independence is arguably och aye the no.

Martin Beck is UK Economist at Capital Economics

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