March 9 (Bloomberg) -- Scotland’s voters will have to decide whether or not to quit the U.K. without knowing the numbers behind the issues that define their economic future.
The share of North Sea oil and gas revenue and the amount of U.K. public borrowing that an independent Scotland would assume will determine the state of public finances and is subject to haggling in the event of a “yes” in the referendum planned for the fall of 2014. Based on figures reported this week, Scotland would have a narrower budget deficit than the U.K. with a geographical, or 90 percent, share of the oil, and a per capita, or 8.4 percent, portion of the debt.
“The key issue is the oil settlements and the debt,” Angus Armstrong, director of macroeconomic research at the National Institute of Economic and Social Research, said in an interview. “Do they leave an independent Scotland vulnerable? The debt is not even being talked about.”
Scottish First Minister Alex Salmond argues that the prospects for the 144 billion-pound ($228 billion) economy will improve if Scotland has full control over its finances and its own membership of the European Union. While polls show only a minority wants full independence, enough people are undecided that the 57-year-old could pull it off after winning an unprecedented majority in last year’s Scottish elections.
Figures published by the Scottish government two days ago show that Scotland’s budget deficit, including infrastructure investment, was 7.4 percent of gross domestic product in 2010-2011 compared with 9.2 percent for the U.K. as a whole.
In euro terms, that budget deficit would make Scotland look more like France than Greece. Oil revenue this year would be about 10 billion pounds, while debt interest payments would be about 4 billion pounds, based on reported government figures.
“The thing you have to get over is any misconception that Scotland cannot be a viable economy because clearly it can be,” Michael Saunders, chief European economist at Citigroup Inc. in London, said. “What they would make of that over time is up to them. They could succeed, or they could stuff it up.”
Scotland’s smaller deficit means it is subsidizing the rest of the U.K. rather than the other way round, Salmond said after the Government and Expenditure Revenue Scotland 2010-11, or GERS, published on March 7.
Spending per head has been higher north of the border for decades, prompting complaints from some lawmakers that Scotland is being subsidized by the rest of the U.K. The figures published in GERS show that public expenditure in Scotland in 2010-2011 was 11,785 pounds per person, compared with 10,663 pounds a head for the U.K. as a whole, or more than 10 percent higher. Until about 2008, spending per head was 14 percent more.
“The GERS numbers show that apart from the crisis the current account is running a small surplus of 1 billion pounds a year and has been doing so for a number of years,” Andrew Hughes Hallett, a member of Salmond’s Council of Economic Advisers and an economics professor at St Andrew’s University, said in a telephone interview.
Most economists expect the oil revenue to be split on a geographical basis, which would give Scotland about 10 billion pounds of the 11.1 billion pounds estimated by the tax authority for the fiscal year ending this month. The GERS figures show that on that basis oil and gas accounted for 17 percent, or 25 billion pounds, of the Scottish economy in 2010-2011.
The Office for Budget Responsibility cut its forecast in November for North Sea oil and gas tax revenue between this fiscal year and 2015-2016 by 23 percent to 47 billion pounds compared with its forecast of 61 billion pounds for the same period made eight months earlier.
Production fell 18 percent last year after tax rates were increased, and output is on a declining trend. As a result the Scottish deficit may exceed the U.K.’s from 2014-2015, John McLaren, an economics professor at Glasgow University, said.
On the debt side, the U.K. government expects to spend 50 billion pounds on interest payments for the current financial year, according to the 2011 budget. On a per capita basis and assuming it could borrow on the same AAA-rated terms, Scotland’s share would be about 4.2 billion pounds. In the last financial year, it was 3.7 billion pounds, according to GERS.
“Frankly, if their sovereign rating was to be a little bit lower than AAA, I don’t think that would be a very material factor,” Saunders said. “They might lose it not necessarily because of the country’s size, but simply because as a new country inevitably they wouldn’t have a fiscal record.”
Salmond’s semi-autonomous government in Edinburgh has said it would aim to keep the pound, though doesn’t rule out joining the euro in future.
Up until 2008, Scotland was running a deficit of about 2.5 percent of GDP, within the 3 percent limit members of the euro zone are supposed to adhere to. By 2016, the earliest Scotland could become independent, the deficit should be substantially lower than now, according to forecasts by the Office for Budget Responsibility in London.
“I don’t know as to whether they would qualify by then as full core or not, but I suspect they would be around there,” Saunders said in a telephone interview. “I don’t think they would be a Portugal or Greece.”
Salmond could use the Bank of England as lender of last resort and enter a fiscal stability pact to stop a future Scottish government getting too indebted. U.K. Prime Minister David Cameron, who opposes independence, hasn’t said whether he would countenance any of those options.
The Scottish leadership has also said an independent Scotland should not share responsibility for the 132 billion pounds of impaired assets owned by Edinburgh-based Royal Bank of Scotland Group Plc, Britain’s biggest state-owned lender.
Whether it uses the pound or the euro, being part of either currency would curtail the financial freedom the Scottish government under Salmond is campaigning for, said Ross Walker, an economist at Royal Bank of Scotland.
The debt crisis in the euro zone has shown monetary union needs budgetary union or coordinated fiscal policies, Walker said. Retaining the U.K. currency would therefore require Scotland to run quite a tight fiscal policy, giving it only a limited ability to borrow and sell bonds, he said.
“If you don’t have monetary sovereignty in what sense do you have economic autonomy?” he said. “There’s not much of it in Greece at the moment, or in Portugal, and it’s debatable whether there is in Spain or Italy either.”
The Scottish economy had a shallower and shorter recession than the rest of the U.K. following the global financial crisis, though is rebounding more slowly, the Centre for Public Policy for Regions at Glasgow University found.
At the end of the third quarter last year output in the Scottish economy was 3.3 percent lower than before the recession, compared with 3.9 percent for the U.K., the Scottish government’s chief economist, Gary Gillespie, said in a report on March 5. Scotland’s unemployment rate is higher at 8.6 percent, compared with the U.K. figure of 8.4 percent.
Between 1998, the first time when detailed data on the performance of the Scottish economy became available, and 2010, the Scottish economy lagged the U.K.
Gross value added, a measure of economic performance, rose 24 percent in the U.K. during the period compared with 20 percent in Scotland, according to Scottish government and Office for National Statistics data.
“Our conclusion is that the constraints that an independent Scotland may face are likely to be more binding on policy than they face with the explicit constraints of being part of the U.K,” said Armstrong at the National Institute of Economic and Social Research.
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