Report reveals independence 'cost'

Scottish flagScottish independence is unlikely to benefit a shrunken UK and could even represent a net economic cost, according to a former Treasury economist.

Independence could shrink the UK economy by more than 10%, damage UK exports, scare off investors and reduce tax receipts, international macroeconomics firm Capital Economics has warned.%VIRTUAL-SkimlinksPromo%

Economist Martin Beck, who recently joined the firm after 12 years with HM Treasury, said: "We think that Scotland's exit from the Union would be unlikely to benefit the rest of the UK (rUK) 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."

Writing in Capital Economics' latest UK Economics Focus on Tuesday, Mr Beck said the direct fiscal consequences of independence to the UK would probably be minor, but that the monetary consequences are "more troublesome".

"With 8.5% of the population, but public spending per person 14% above the national average, Scotland receives about 10% of total UK public spending," said Mr Beck. "In fact, this is roughly in line with its share of GDP and contribution to tax receipts, when an estimate of Scotland's share of North Sea production is accounted for. It follows that, despite frequent claims to the contrary, Scottish public spending is not 'subsidised', since higher public spending per head is offset by a disproportionate contribution to UK tax revenues."

But he added: "If Scotland continued using sterling and negotiated to use the Bank of England as a "lender of last resort", 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."

Mr Beck added that an oil boom or increased demand for Scotch whisky could cause the pound to appreciate, leaving rUK businesses with higher export costs without the tax benefits that Scotland would enjoy.

Scottish independence could have some benefits for rUK, according to Mr Beck, particularly if oil-rich Shetland chooses to remain in the UK and the loss of Scottish Labour MPs leads to a Westminster majority for the more "investor-friendly" Conservative Party.

Mr Beck said Scottish independence could lead to the further secession of Shetland, "perhaps resulting in a situation analogous to that between Denmark and the Faroe Islands, where the latter, while being part of the Kingdom of Denmark, has a high degree of self-government". "Or Shetland could conceivably choose to remain as part of the UK, with implications for the balance of gain and loss to rUK from Scotland's departure from the Union," he added.

He said the lost of Scottish Labour seats could be attractive to investors who "rightly or wrongly consider the Conservative Party to be more business-friendly than the Labour Party". However, he dismissed speculation that independence could lead to a "permanent majority" for the Conservatives in Westminster. "In none of 18 post-war general elections have Scottish MPs turned what would have been a Conservative government into a Labour one, or indeed vice versa," he said.

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