Scottish Government's economic plan for independence does not add up
The Scottish Government’s economic plan for independence does not add up, even taking into account oil and gas revenues, the CBI said in its analysis of the White Paper.
Blog: Why Scotland's economic plan does not stack up >>
Read the CBI's response to the White Paper >>
There is no credible plan for deficit reduction - even though Scotland’s net deficit will be as large, as well as more volatile, than the rest of the UK; no clarity over what currency it will use; or its future relationship with the European Union.
The UK’s leading business group argues that the White Paper fails to provide a coherent vision for how an independent Scotland would be better off economically from putting up barriers with its biggest export market – the UK.
The analysis confirms the CBI’s view that the best way to deliver jobs and prosperity to the people of Scotland is for it to remain part of the UK.
John Cridland, CBI Director-General, said:
"The minute you draw a line between Gretna and Berwick, Scotland starts to drift apart from its biggest market and loses a significant amount of economic clout.
"The economic plan outlined in the White Paper does not add up. It ignores the need for deficit reduction, instead promising more unfunded spending.
"On the key issues that are critical to jobs and growth, the White Paper’s lack of clarity runs the risk of jeopardising an independent Scotland’s future success.
"Independence would force Scotland’s major industries to grapple with two lots of red tape and lead to Scots facing higher borrowing costs on loans, mortgages and credit cards.
"Keeping the pound is the best option for Scotland but that is only on offer through maintaining the union. The main UK political parties have ruled out currency union as an option, so we’re calling on the Scottish Government to set out a credible plan B.
"An independent Scotland would also have to negotiate hard to get back into the EU, temporarily losing access to the world’s biggest trade area with huge economic consequences.
"Scotland’s economy is a real success story as part of the UK – it has the independence and flexibility of devolution alongside the support of the union.
The fate of Scotland is, of course, a decision for the Scottish people, but business is clear - we are stronger together."
The CBI’s analysis reveals that the Scottish Government’s plans for tax and spend fail to take into account that the squeeze on public services will intensify as the number of Scottish people over-65s grows.
The CBI is also concerned about the negative knock-on effect independence could have on Scotland’s major economic sectors including: defence & aerospace, financial services, energy, food & drink and higher education which together employ almost a million people. As part of the UK, they trade within a closely-integrated internal market; benefit from common regulatory and supervisory organisations; are backed by UK Government support through dedicated industrial strategies; and boast access to the world’s largest single trade market through the European Union.
Looking at the White Paper in more detail in the four key areas which are critical to the success of Scottish businesses, the CBI has found:
On the fiscal outlook
With Scotland’s net deficit larger than the rest of the UK at 8.3% or £2303 per person and considerably more volatile, given its dependence on oil and gas, an independent Scotland would need to prioritise deficit reduction – at the very least it would have to mirror the UK’s Government’s current pace:
- Scotland’s fiscal performance is expected to deteriorate relative to the rest of the UK, according to the Office for Budgetary Responsibility (OBR), and would be 2.7% higher in 2016/17
- In the event of Scottish independence in 2016, its fiscal deficit would be 4.8% of Scottish GDP, higher than the 3% maximum deficit allowed by the EU’s Growth and Stability Pact before members have to consolidate their finances
- There are at least £670m unfunded commitments in the White Paper, despite the Scottish Government’s statement that its immediate policy plans are fiscally neutral – that amounts to at least a 0.4% deterioration in an independent Scotland.
Scotland currently does most of its trade with the rest of the UK: £18 billion more than with any other part of the world. This strong internal market can only be guaranteed by Scotland remaining part of the UK and keeping the Pound. But the UK’s main parties have ruled out the use of Sterling in an independent Scotland and businesses do not want to see an unstable currency union. The Scottish Government must set out a credible plan B on currency. The CBI’s analysis highlights:
- The Pound’s relative stability – widely viewed as a safe haven currency – which reduces uncertainty for Scottish exporters and importers
- As part of the UK’s monetary, banking, fiscal and political union, Scotland benefits from UK Government backing for the banking sector and deposit protection
- The experience of the Eurozone which provides salutary lessons about why a sterling union may not be viable without banking, fiscal and political union.
On breaking up the internal market
The CBI analysis found that breaking up the internal market would increase costs for businesses and consumers on both sides of the border:
- Creating a new border would increase costs for businesses who currently benefit from a common set of rules. For example, in the event of independence complex tax rules for cross-border trade would have to be drawn up and could double the amount of regulation with which firms have to comply
- Costs would increase under independence for consumers, for example, for food – as retailers who currently spread distribution costs across the UK would be forced to pass the full costs on to Scottish consumers. Children’s clothes and new dwellings are also currently VAT exempt in the UK
- The higher interest rate that would inevitably be payable on Scottish government debt would have a knock-on effect for mortgage repayments, loan and credit card bills.
On future European Union membership
The White Paper rightly identifies that full EU membership is in Scotland’s best interests, but an independent Scotland would have to renegotiate membership, which is unlikely to be either a smooth or quick process with new terms potentially leaving it worse off:
- Even if an independent Scotland did eventually re-join the EU - which President Barroso has made clear would be "extremely difficult, if not impossible" - there would be significant business uncertainty and loss of trade in the interim period
- Scotland will not be able to pick and choose the terms of its membership and is likely to be asked to commit to joining the Euro, the Schengen visa area and play a full part in a Banking Union, which could undermine the stability of financial centres in Scotland and the UK – these terms do not apply to the UK. Other UK protections at risk include VAT exemptions on products like Children’s clothes
- An independent Scotland would have reduced influence in the EU, based on the size of its population and economy, compared to the UK, which has the joint largest share of weighted votes in the European Council and the third highest number of MEPs.