The Fantasy Economics behind the case for Scottish independence - by Professor David Blake
Updated: May 5, 2021
Two articles have been written for Briefings for Britain by Professor David Blake of the City University of London.
An extract from the first one dated the 4th April 2021 is shown here but both articles can be read by clicking on the links below or by downloading both of them in pdf.
The economic cost to Scotland
It is important to remember that, in terms of trade, 60% of Scotland’s exports and 67% of its imports are to and from RUK. In 2018, Scotland exported £51.2bn to the UK (60%), £17.7bn to the rest of the world (21%) and only £16.1bn to the EU (19%).
A study by the London School of Economics recently estimated the trade costs of Scottish independence. It assumes that independence will increase trade costs between Scotland and the RUK by between 15% and 30%, depending on the size of the border costs. It predicts that Scotland’s long-run real income per capita will fall by between 4.5% and 6.7%, or by between £1,385 and £2,155 per person. This means that the Scottish economy could shrink by £11bn a year if the country breaks away from the UK. This is the pure border-cost effect.
The loss of Barnett formula fiscal transfers from the rest of the UK would be additional. Fiscal transfers to Scotland for 2021-22 will be £38bn. Scotland’s public spending is £81bn, while £66bn in taxes are collected in Scotland, including those on North Sea oil revenues. This implies that there will be a net reduction in Gross Domestic Product (GDP) of £15bn due to the loss of fiscal transfers.
Adding these losses together implies a £26bn total reduction in Scottish GDP which is equivalent to 15% of Scotland’s 2019 GDP of £168.14bn.
The UK economy has just experienced a 10% reduction in GDP due to the covid pandemic. This is the largest fall in 300 years. The UK economy will eventually bounce back from this. Scottish independence means a permanent reduction in GDP of 15%, which is 50% more than the cost of covid. The Scottish economy will never recover from this.
The LSE study’s authors said: ‘What surprised us is just how exposed Scotland is to the increase in trade costs of independence because it has this very high dependence on trade with the rest of the UK [compared with the EU]. Since trade with the rest of the UK is more important, that at least for the foreseeable future, it wouldn’t really make sense for Scotland to rejoin the EU economically’.
An independent Scotland would also need to cut public spending or raise taxes to compensate for the loss of Barnett funding. It has been estimated that to continue the current level of government spending after independence, the basic rate of income tax in Scotland would have to increase from 20% to 46% or the standard VAT rate would have to increase from 20% to 49%.
With only a little exaggeration, this is the reality of Scottish independence ‒ under EU rules. The SNP are deluded if they think there will be a smooth transition from being part of the UK to being part of the EU. And they are just as deluded if they believe there is some form of Free Trade Agreement that will allow frictionless trade between Scotland and the UK as well as frictionless trade between Scotland and the EU – as Northern Ireland has clearly demonstrated. Precisely the same will happen between Scotland and the RUK. There is no ‘best of both worlds’ solution as Nicola Sturgeon repeatedly suggests. Time for a very big reality check.
Both articles can be accessed via the Briefings for Britain website if you click on these links:
For your convenience, however, we have created one pdf file containing both articles that can be downloaded here: