An Acceptable Economic Solution to the Scottish Independence Issue?

A negotiated settlement is more acceptable than victory for either side


1 Background The Scots are about to cast their votes on Thursday 18 September answering the question “Should Scotland be an Independent Country?” That question is on the ballot paper because David Cameron redlined the question which the SNP wished to ask, which might have been “Should Scotland have the maximum tax-raising and spending powers devolved from the Westminster Parliament, including the due income from sales and taxes arising from the Scottish Sector’s production of North Sea Oil?”

However the vote goes, things look very grim for the losing side, whomever that may be.

2 Purpose The purpose of this paper is briefly to set out a better economic solution than either of the the future arrangements currently on the table, in the hope that after the Referendum, whichever side wins, the winning politicians could act with the generosity and intelligence which the situation requires.

3 Viewpoint Suppose we look at these issues from a cooler rational viewpoint outside the heat of the popular democracy on the Scottish streets and the apparent desires of all the Westminster politicians to retain most of status quo. Furthermore, suppose that both sides sat down in good faith with the intention of negotiating to arrive at a fully acceptable solution, aiming at reaching an agreement that both parties could not only live with but which would be enough to satisfy history and the future economic needs of both Scotland and Westminster, retaining honour to all concerned in a fresh constitutional-economic settlement. What might such a solution look like?

Some background information is essential to understanding the economic context of this issue, so a brief summary of the position of both parties follows.

4 The YES Campaign If the YES campaign wins, then the Scottish negotiating team will argue that Scotland is entitled to receive immediately 90% of all North Sea oil income plus the associated taxes arising from that production and the share of the Corporation taxes plus the income tax and National Insurance on the Scottish-based supply industries for North Sea Oil. That would mean the transfer of about £42 billion a year — £33 billion of oil sales plus about £9 billion taxes — and a loss of income from the UK as it reduced to becoming the rUK (the rest of the United Kingdom) and the newly independent state of Scotland was set up. The result of that change is likely to be, as the 1974 McCrone Report pointed out, that

1 North sea oil revenue would give an independent Scotland a large tax surplus, on an “embarrassing”scale, making an independent Scotland “as rich as Switzerland.”

2 If a Scottish pound (or “Poond?) came into being, that currency would become the hardest currency in Europe “with the exception of the Norwegian kronor”.

3 The average income in Scotland might increase by up to 30% per head once the country became an independent state.

The post-Report discussion by senior civil servants in London (including McCrone himself) concluded that McCrone’s findings were accurate, and that

4 Scotland’s “economic problems would disappear”

5 Scotland would become “the Kuwait of the Western world”, but

6 If the Scots relied just upon these oil revenues for future economic success, then Scotland could risk “disaster” if the oil price collapsed, and that

7 There was “a good case for the continuation of the Union” from the viewpoint of the senior civil servants attending that meeting.

From 1974, the McCrone Report was classified by the British Government as “Secret” so as to prevent the use of that information by the Scottish National Party to promote the case for independence. That policy became unstuck in 2005/6 when the SNP, under the Freedom of Information Act, requested reports relating to the effect of oil on Scotland’s economy and received a copy of the McCrone Report. The Wikipedia entry on the McCrone Report is at http://en.wikipedia.org/wiki/McCrone_report and a full PDF photocopy of Report is at http://www.oilofscotland.org/MccronereportScottishOffice.pdf.

The final two sentences of the McCrone Report are prescient:

“If, in five years time [or by 1979] North Sea Oil is contributing massively to the UK Budget, while the economic and social condition of West Central Scotland continues in the poor state it is today, it would be hard to imagine conditions more favourable to the growth of support for the nationalist movement. Very determined steps to urgently transform economic conditions in Scotland will therefore be necessary and the Scottish People will have to be persuaded that their problems really have received the attention and expenditure they deserve if this outcome is to be avoided.”

No determined steps were taken by the Conservative Government elected in 1979 and neither the attention nor the expenditure was forthcoming during the subsequent 18 years of Conservative rule. Even the creation of the Scottish Parliament in 1997 had such circumscribed powers (equal to control over about 16% of the taxes raised in Scotland) that the economic conditions in Scotland could not be significantly improved within the delegated budgets. Instead Scotland became a test bed for the Poll Tax, which was introduced in Scotland 18 months prior to its startup in England, and for other privatisation measures. The economic and social conditions in Scotland were substantially worsened when the major heavy industries of Scotland — steel-making in Ravenscraig, shipbuilding on the Clyde, car production at Linwood, aluminium production at Invergordon, the paper-pulp mill at Corpach/Fort William, coal mining in Ayrshire, the Clyde, and Lothian, and the Gartcosh Steel Mill, — were all downsized, for which there was a good case, and ultimately closed down, for which there appeared to be no adequate justification. Virtually all of these industries were partially operating at the highest level of the then available technology, using highly skilled labour and continually updated production machinery. The national media invariably reported the small number of caretaker workers made unemployed by the final closure and not the thousands previously employed by the vast industrial plants of these companies, or the workers made unemployed in the limpet-like supply and other SME companies which surrounded and were dependent upon these vast industrial plants. Many new Scottish business have since developed in business processing, chemical sciences, creative industries, energy, financial services, ICT and electronic technologies, life sciences, and textiles in a much more modern Scotland. When I recently went through this list with a fellow Scot and commented “Despite the loss of Scotland’s once-defining heavy industries, the country has developed new ones and hasn’t done too badly!” he replied, “Aye, but it was all done with no help and often hindrance from the British Government. Just think of how well we could do with a little support! And the new industries are not usually located where the old ones were, so there are large pockets of long-lasting deprivation in Scotland.” It is impossible not to conclude that the report card for all the British Governments for Scotland for the 1980–2014 period would have to be marked: “Could have done much better” for Scotland.

5 The NO Campaign The NO campaign was at first a high-level media campaign of persuasion about the dangers of Scotland becoming independent. It was claimed that Scotland was too small politically (presumably compared with Great Britain) with politicians not versed in international affairs and the country was therefore not well placed to conduct its own affairs. The No campaign started out with the complacent assumption that there was minimal risk of the Scots voting for independence, as the opinion polls at first showed. Even when the opinion polls indicated a trend towards a Yes vote, the Westminster politicians were not alarmed. Suddenly, a mere ten days prior to date of the referendum, the first poll showing a majority for independence appeared, and the whole Westminster apparatus seemed to be thrown into an absolute panic. The BBC which had never shown any enthusiasm for a Yes vote suddenly turned into the major propagandist for the No side. Virtually every development was reported on the main BBC news with an anti-independence bias, and the genuine initial impartiality of BBC Scotland came under strain. The agreed rules of conduct of the Referendum — which was meant to be done under strict rules forbidding the making by either side of new offers 28 days before the date of the referendum — was thrown out by the NO camp and all the leading Westminster politicians made promises of better treatment for Scotland that were not in their original proposals nor within the immediate gift nor perhaps even within their capability to deliver. It is difficult not to think that these actions were a late desperate attempt to shore up the No vote. Labour leader Ed Miliband said the case for the Union came from the “head, heart and soul” and this may be partly so, but the economic facts of the separation case seem to support the view that the main objection to Scottish independence may have come from the Treasury wallet.

The most astonishing claim by the proponents of the No Campaign was that a No vote was really a somehow a vote for much more devolution, possibly even the maximum devolution proposals (or “Devo Max”) which David Cameron would not allow to be put on the ballot paper. William Hague, who was David Cameron’s stand-in a Prime Minister’s Question time on 10 September 2014 when the Prime Minister was in Scotland, in response to a parliamentary question from a Conservative MP assured the House and clarified the offers of the three party leaders for further devolved powers for Scotland if the voters voted No as “akin to a statement in a general election campaign”. As the Herald Scotland reported:

“Mr Hague was responding to Tory Christopher Chope [Conservative, Christchurch] who pointed out that it had been Government policy since 2012 not to offer so called “devo max” in the event of a No vote.

“Mr Chope had asked him: “Since 2012 my right honourable friend and I have been supporting the policy of the Government not to offer so called ‘devo max’ as a consolation prize in the event of a No vote in the Scottish referendum. If this is no longer the policy of the Government when and why did it change? And what opportunity has there been for this House to express its view?”

Standing in for the Prime Minister at his weekly question session, Mr Hague replied and told the Commons: “It has been the policy of the Government for some time to be open to further devolution and I gave examples of what we have done in Wales, for instance, during the lifetime of this Government.

The statements by the party leaders made on this in the last few days are statements by party leaders in a campaign, not a statement of Government policy today but a statement of commitment from the three main political parties, akin to statements by party leaders in a general election campaign of what they intend to do afterwards. It’s on that basis they have made those statements.” See http://www.heraldscotland.com/politics/referendum-news/hague-giving-scotland-more-powers-if-it-votes-no-is-not-government-policy.1410350878.

The analogy with a statement in a general election campaign is not a happy one. Political campaign promises during many UK elections have the track record of not being delivered.

6 The YES Campaign The Yes campaign from the very beginning set up numerous locally-organised support groups on the streets of Scotland. The campaign did not talk down to the people of Scotland, it involved them, listened to them, discussed what they wanted Scotland to be, and promised a better outcome than had been delivered by political pundits in the past. The death of hope and the long tradition of accepting industrial decline and a less good future for Scotland’s children in the Thatcherist-caused depressed areas was turned around and people began to see that a better future was possible through a political process that worked in their interests. It seems likely that the previously purposeless unemployed workers found new meaning and new hope in the Yes campaign, which promised jobs and a better life in a way the NO campaign could not match. The arguments of that YES campaign had a much better traction on the ground than visitors, however well-placed, from the Westminster village, could match. The arguments which these visitors met with caused an immediate dismay on their faces — “If it is going to be better by voting NO, why isn’t it better now?” “What are you going to do to improve things if I vote NO?” The Yes campaign had a thought-through strategy about what they would do if they succeeded. There is Scottish Government Strategy called “Reindustrialising Scotland for the 21st Century: A Sustainable Industrial Strategy for a Modern, Independent Nation” which is aimed at creating new jobs and restoring the depressed communities (see http://www.scotland.gov.uk/Publications/2014/06/5184 ). The political visitors who had arrived hotfoot from London did not seem to know anything about that. Predicting disaster from no apparent cause also did not play well with the Yes crowds. At times it seemed that the individuals in the happy Yes crowds were better informed than their visitors. In the end the Yes camp and the NO camp chose to continue to preach to the already converted, a fruitless outcome if the object of visits were to persuade wavering voters or change the voting of people in the opposite camp.

7 A possible solution?

A much better solution appears to be available to both sides, if there could be an outbreak of common sense. In a single political entity, the tax incomes and foreign sales of the oil and gas resources of each part of the nation can be used however the central government decides. But if a part of that nation (such as Scotland) becomes an independent country, then the geographical resources arising within the land resources and the sea economic zone of that nation are reallocated to the newly independent state. That is all very clear.

But it is quite inappropriate, and not helpful, given the history of the Scottish and English peoples of these islands, for the newly-independent Scots to beggar the rUK and to create a additional and unresolvable (in the short run) balance of payments problem for the rUK.

And if the NO vote wins, then having won the vote on the basis of mistaken information (and the illegal misuse of the BBC) the British Government may wish to return to business as usual, as they have done twice before, and to imagine they can resume spending all the Scottish North Sea Oil assets and maintaining an unnecessary policy of austerity which is no longer politically acceptable North (or, for that matter, South) of Hadrian’s wall.

That better solution for all is a negotiated settlement — the politicians of both Scotland and the UK need to act outside their caricatures and to negotiate a long term solution based upon an appeal to the generosity of the Scots (an aspect of their character they are, perhaps unjustly, not famous for) and the honesty of the English (ditto).

It is an accident of geology that most of the North Sea oil and gas is inside the Scottish Sector. The transfer of the vast wealth of that asset should not be used by a newly independent Scottish Government to beggar the rUK. Scotland does not need 90% of North Sea assets to develop a much better economy, but maybe 30% (the ratio of the land area of Scotland to the area of the UK) of oil sales plus the appropriate tax receipts might be acceptable. The British Government could cope with an increase in borrowing to support the balance of payments of an extra £20bn pa but an extra £42bn pa might be a bridge too far.

The British Coalition Government need to be more honest about the financial and commercial nature of the case for the Scots within the Union. A British Government victory based upon the misinformation of the No campaign would not stick. It is not true, Paul Krugman notwithstanding, that an independent Scotland would struggle to be a viable entity. An independent Scotland would be much more likely to be economically successful than Scotland within the Union, or the Union without Scotland.

The panic of the No vote politicians is very real, and is based upon a loss of £42 bn of government revenue which the rUK could not easily afford without great economic and policy difficulties.

Scottish grievances are very genuine. A negotiated settlement is a much better solution than victory for either side. However the referendum votes fall, if either side allow victory to become vengeance then the Yes vote campaign’s mangling of the No campaign’s Slogan of “Better Together” into “Bitter together” will come true.

If the Yes vote succeeds, what advantage would there be in the Government of Scotland bankrupting its former partner, and creating instability in the value of the shared currency of the pound? Most of Scotland’s trade would still be with its Southern neighbour. rUK’s financial and economic stability is in Scotland’s interest. And if the No vote wins, how likely are the Party Political leaders, supporting the No vote, to move forward on the promised Devo Max proposal when that option involves the complete transfer of 100% of tax-raising and spending powers including 90% of North Sea Oil revenues to a not-independent Scotland? If the three Westminster Party leaders, in the heat of the pre-referendum days, could not agree on the level and nature of the devolution which would follow a NO vote, how likely is it that they could keep to the quick-to-trot timescale produced by Gordon Brown? The worst and most usual UK political response to this kind of issue is to set up a Royal Commission which would not report for years.

Even if the Yes vote wins, the rUK cannot afford the balance of payments deficit to rise from its existing UK level of 4.4% to 6.9% of rUK GDP. The negotiations for Scottish independence would be made endless by an unhappy rUK team which could not afford the financial consequences of the completion of the negotiations.

And if the NO vote wins and the British Government decide to disregard this issue until after the next UK election, despite all the promises made of rapid activity during the last few days before the Referendum, how quickly would another Scottish independence movement arise, and what would the result be the next time around? The UK government could lose all use of the Scottish-based oil revenues forever afterwards.

In my considered opinion, the UK Government would need to negotiate a similar settlement however the votes fall. That settlement should be close to the Devo Max promised during the closing days before the referendum and should perhaps involve 30% of North Sea Oil proceeds being transferred to the Scottish Government, plus the oil taxes due to Scotland. I think that might be acceptable to both sides.

There are only two reasons why a negotiated settlement would be preferable to the continuation of the present impasse. The Westminster Government will not give up its addiction to the use of North Sea oil income to support some of its activities and the negotiations for a complete surrender of 90% of these sales would become interminable, so even if the YES vote succeeds, it might take many years for a genuinely independent Scottish Government to be agreed. Second, if the Westminster Government do not negotiate in good faith and surrender all the tax-raising and tax-using powers to Scotland, plus a share of North Sea oil, a future British government is much more likely to lose all the oil income and Scotland as well.

There is much more oil in Scottish waters than has ever come out. The prize of making a proper agreed shared use of these use of these is fundamental to the future success of both Scotland and the rUK, or Scotland in the UK.

If a negotiated settlement is not arrived at whoever wins the referendum, then these issues will fester until the rising incomes from North Sea Oil and another referendum drives the Scottish People entirely out of the Union.

The Future Of Oil from Scottish Waters

The reserves, and the income from oil, in Scottish (no longer just North Sea) waters is about to rise dramatically due to recent discoveries and improved technology. Many of the oilfields discovered in the North Sea were not at first considered to be commercially exploitable — in fields too small, or reserves too deep, or otherwise too difficult with the old technology. The sea based oil extraction technology has improved significantly and on some estimates about half the oil now being extracted would not have been extractable ten years ago. The Scottish Government are proposing legally to require the oil-producing companies to share their North Sea pipeline recovery systems and a lot of small fields not economically recoverable in isolation can be more easily exploited by connection to a nearby pipeline. If you assume that these more difficult oilfields could be exploited by modifying the technologies currently available on land, then North Sea oil reserves might double. The Kimmeridge oil-containing clayfields are massive but they are only accessible by fracking — and the technology currently under development in the Gulf of Mexico has to be failsafe before that field can be developed. The new deep drilling technologies make West of Shetland oilfields like Clair Ridge commercial. And see

http://newsnetscotland.com/index.php/scottish-news/9535-rumours-of-massive-oil-find-follow-camerons-secret-shetland-visit and http://www.businessforscotland.co.uk/clair-ridge-and.../ and http://www.energyvoice.com/.../offshore-fracking.../ etc etc.

Fracking is how the USA became self-sufficient in oil supplies, in a very short time. There is much more oil to come out of Scottish waters than that so far extracted and it is better for both the campaigning parties to share the income from that resource on a basis acceptable to all, than to continue with all-or-nothing proposals — however legal, however historically justified — which only benefit one side. Both sides need a negotiated solution to arrive at a position which sticks.

© George Tait Edwards 2014

Note: George Tait Edwards has published a book about “Shimomuran Economics” at http://www.lulu.com/shop/george-tait-edwards/shimomuran-economics/paperback/product-21688864.html

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