Results from the Centre for Macroeconomics1 June Survey. In the article that follows this, Andrew Hughes Hallett explores the difficulties of making these judgements.
Would Scotland be better-off in economic terms as an independent country? Not according to an overwhelming majority of respondents to the third monthly survey of the Centre for Macroeconomics (CFM). But suppose that Scotland were to make that choice. What should the rest of the UK do when it comes to a monetary union with an independent Scotland? A majority, albeit a smaller one, of the same experts agree that the UK would be acting in its own economic interests by ruling out a monetary union with an independent Scotland. This is the first survey of independent professional economists specifically to address economic issues in the Scottish independence debate.2
Scotland’s population is 5.3 million or 8.3 per cent of the total UK population.3 The value of output per head in 2012 was £20,571 in Scotland and £21,295 per head in the UK as a whole.4 Labour productivity is exactly the same in Scotland and the UK, while unemployment is 6.4 per cent in Scotland compared with 6.8 per cent in the UK overall.5 According to the Scottish government, the onshore fiscal deficit is estimated to have been 14 per cent of output in 2012/13 compared with a 7.3 per cent deficit in the UK overall.6 If Scotland is allocated 84 per cent (a ‘geographic’ share) of taxes from North Sea oil and gas operations, its deficit is estimated to have been 8.3 per cent of output.7 In 2012, both Scotland and the rest of the UK had the same old age dependency ratio of 26.8 per cent, which is projected to rise to 40.5 per cent in Scotland and 37.4 per cent in the rest of the UK by 2032.8
Under the current fiscal arrangements, the Scottish government is responsible for allocating 60 per cent of public spending in Scotland. Under the Scotland Act 2012, the Scottish government will be responsible for taxes (including part of income tax), which raise 16 per cent of total revenue.9 If Scotland becomes independent, its government would be responsible for all public spending, revenue raising and borrowing and current cross-border fiscal transfers would cease. The Scottish government has said that it will accept a fair share of the existing UK debt and that it intends to form a formal monetary union with the UK. The UK has ruled out taking part in a formal monetary union with an independent Scotland.
There is inevitably some uncertainty around what would be the final terms of a settlement between an independent Scotland and the rest of the UK. We invited the CFM survey respondents to answer the first question based on their understanding of what these terms are likely to be. We suggested that ‘economic terms’ includes income per capita and possibly other aspects of economic advancement.
On 18 September 2014, the Scottish electorate will be asked the following question: ‘Should Scotland be an independent country? Yes/No.’ In the event of a ‘Yes’ vote, the plan is that Scotland would become an independent country in March 2016, and thereby no longer a constituent nation of the UK after 307 years. The CFM survey asked two key questions about the potential economic consequences of a ‘Yes’ vote:
Question 1: Do you agree that Scotland would be better-off in economic terms as an independent country?
Twenty eight of the 46 CFM experts replied to this question. Three quarters of the respondents said that they either disagree or strongly disagree with the proposition. Only one of the 28 respondents either agrees or strongly agrees. Excluding the six respondents who say they neither agree nor disagree, 95 per cent of respondents either disagree or strongly disagree that Scotland would be better-off in economic terms as an independent country.
The CFM respondents’ main concerns are over the fiscal outlook for an independent Scotland. George Buckley (Deutsche Bank) describes an independent Scotland as being exposed to weaker tax revenues from declining oil resources and a worse demographic profile than in the rest of the UK. John Driffill (Birkbeck) notes that an independent Scotland could set its own policies to suit preferences in Scotland, but may lose out because some things that are done better jointly by Scotland and the rest of the UK will become more difficult to coordinate. Both Michael Wickens (York) and Martin Ellison (Oxford) say that Scotland might pay higher borrowing costs than the UK.
Several respondents question the wisdom of unpicking many institutions when the effectiveness of the institutions that will replace them is unknown. David Cobham (Heriot-Watt) asks whether pulling apart the members of well integrated nations makes sense; Jagjit Chadha (Kent) raises the possible risks if the new political and economic settlement is not robust; and Michael McMahon (Warwick) thinks that there would be significant transition costs.
Several respondents are concerned at the uncertainty over the time it might take an independent Scotland to (re)-join the European Union (EU). Marco Bassetto (UCL) says that in his view the process of accession to the European Economic Area (and the EU) are more important than the issue of monetary union. Richard Portes (LBS) and Nicholas Oulton (LSE) also express concerns that the uncertainty over the EU could be detrimental for the economy.
Question 2: Assuming that Scotland becomes an independent country, do you agree that the UK government’s position of ruling out a monetary union is in the economic interests of the continuing UK?
Thirty four respondents answered this question. Views are much more evenly split than for the first question: 53 per cent agree or strongly agree that ruling out a monetary union is in the economic interests of the continuing UK while 41 per cent disagree or strongly disagree. Excluding those who neither agree nor disagree (two respondents), the share who agree is 60 per cent when weighted by respondents’ confidence in their answers. A majority of the CFM experts believe that the UK is acting in its own interests by ruling out a monetary union and the responses reveal uncertainty over whether a robust supporting framework is viable.
The differences in views between the CFM experts in large part depend on whether they believe that credible and robust fiscal arrangements to support a monetary union could be implemented.
Martin Ellison (Oxford) says that the recent euro crisis shows how challenging a monetary union is without a fiscal, political and banking union. David Cobham (Heriot-Watt) thinks than any satisfactory constraints for the UK would preclude anything that could be called independence for Scotland. Luis Garicano (LSE) considers that any commitment not to bail-out an independent Scotland would not be credible with the world or the Scottish government. Therefore, the UK would end up with the worst of both worlds: a lack of market discipline and moral hazard.
Other respondents think that the taxpayers of each sovereign state could be isolated from the risks or the other. Andrew Mountford (Royal Holloway) considers that it should be possible to agree such arrangements. Wendy Carlin (UCL) and Simon Wren-Lewis (Oxford) are of the view that the UK could introduce conditions that would insulate it from risks, although they may prove problematic for an independent Scotland. Two respondents, Sir Christopher Pissarides (LSE) and John Driffill (Birkbeck), think that the UK’s stance is purely motivated to influence the referendum.
Some respondents question whether a monetary union is appropriate, irrespective of fiscal constraints. Richard Portes (LBS) notes that there are already enough problems with regional heterogeneity for the Monetary Policy Committee setting a single policy rate; Jagjit Chadha (Kent) believes that a monetary union makes sense as a transitional arrangement only; and George Buckley (Deutsche Bank) thinks that any decision to form a monetary union should be put to the people of the continuing UK.
1. The Centre for Macroeconomics (CFM) – an ESRC-funded research centre including the University of Cambridge, the London School of Economics (LSE), University College London (UCL) and the National Institute of Economic and Social Research (NIESR) – published these results of its third monthly survey last month.
2. All background information to the survey and individual responses are available on the Centre for Macroeconomics website http://www.cfmsurvey.org. A summary of the results by Angus Armstrong (NIESR), Francesco Caselli (LSE), Jagjit Chadha (Kent) and Wouter Den Haan (LSE) are also published on http://www.voxeu.org This article is based on an earlier summary by Angus Armstrong and Romesh Vaitalingam. Any enquiries: should be addressed to Angus Armstrong, Director of Macroeconomics at NIESR: firstname.lastname@example.org or 0207-654-1925 and
7. The allocation of UK offshore assets including oil and gas fields depends on what would be the agreed maritime boundary of an independent Scotland. The median line principle creates a so-called ‘geographic’ share, which the GERS report shows would allocate 84.2 per cent of the related tax revenue to Scotland.