Tuesday, 2 December 2014

Scottish independence: a country's brush with disaster

One of the reasons Scots voted so decisively against independence back in September was that the economic case for separation just had not been made convincingly. Indeed, the economic part of the Scottish National Party's prospectus appeared to have been written in the sand, washed away not only by the tides but pretty much by every puddle that lapped over it.

Anyway, that debate's all over now, isn't it? Except that it's important to say that the economic outlook for an independent Scotland has been getting worse almost every single day since the referendum. As the SNP's membership and poll ratngs continue to surge, as the party looks forward to making lots of gains at Labour's expense in the May 2015 General Election, and Nicola Sturgeon as Scotland's new First Minister enjoys something of a honeymoon period, this reality will soon intrude into Scottish and British national life.

The oil price has been falling. Not just falling, but caving in - down from the Scottish Government's White Paper estimates of over $100 a barrel (the very lowest they would project over the summer was $99) to something more like $70 (or even lower) today. Despite Scottish Ministers' rather desperate-sounding claims to the contrary, no-one really believes that the price will rise much beyond $80 in the next year or so. Indeed, as Scotland's oil and gas reserves run down over the next twenty to thirty years, it's possible that even the next ten years' relatively strong production (against a weak medium-term backdrop) will only bring in small change compared to what the Edinburgh administration hoped and believed. As the rouble falls, and US shale gas production ramps up, who wants to buy expensive energy from the North Sea? No-one, that's who.

Now we did actually say this during the independence referendum, but we'll leave that to one side for now.

During the independence referendum campaign, the Scottish government argued that there could only be a £100m drop in oil revenue flowing to the government over the next five years. Its most optimistic projections were for a rise of over £2bn. That's all fantasy now. Scotland's government brings in about £7bn from oil every year. A fall of 36% in the oil price means that it'd be £2.5bn down from where it thought it might be. That's something like an 8.3% fall in the Scottish Government's total budget - the equivalent of losing the whole of that administration's education spending, or almost all of the Holyrood Parliament's infrastructure expenditure. No developed country could take such a shock without massive tax rises or a prolonged recession. Case closed.

The result? An independent Scotland, at this oil price, would be a very austere place indeed. Most of those different and distinctive (and welcome) parts of Scottish national life that the mostly left-leaning Yes campaign prize as uniquely their own would have to go. The council tax freeze. Free tuition fees (cost over three years: £1bn). Elderly care that's free at the point of use. The lot - even without accounting for the larger currency fund that would have to be built up to defend an independent Scotland's currency in such circumstances. If oil prices rise, great. They are very volatile, and they might. Then there can be a bit of an oil fund. There can be quite high levels of spending, on the Nordic model.

But make no mistake: Scots, especially poorer and more vulnerable Scots, would have been badly burned had they voted 'yes' in September. This petro-economy just has to be more diverse if it's to have both political independence and high levels of public spending. That could happen, and it's a valuable, achievable goal in and of itself. But at the moment an independent Scotland would have neither prosperity nor egalité.