From the Bruegel blog:
What’s at stake: With the referendum on Scottish independence scheduled for September 2014 coming closer, the debate about the economics of Scottish independence is intensifying. Last week, the UK and Scottish governments both published papers on the effects of Scottish independence on public finances.
While Danny Alexander, Chief Secretary of the UK Treasury argued that there is a “UK Dividend” worth around £1400 per capita per annum, the Scottish First Minister Alex Salmond claims, based on the Scottish government’s calculations, that an “independence bonus” would be worth £2000 per person and year.
On fiscal dividends of union or independence David Eiser digs out the different underlying assumptions driving the results of the UK and Scottish government papers. The Scottish government assumes higher oil revenues for Scotland and a more favourable settlement with the UK on the partitioning of national debt. Post 2016, the UK report accounts for a higher premium on debt repayments, a (controversial) measure of the set-up costs of new government institutions (see below) as well as costs and benefits of three major policy proposals by the Scottish government.
The Scottish report, on the other hand, factors in three positive economic developments – higher productivity growth, employment rates and immigration – which look credible in scale, but are not deduced from concrete policy proposals. Charlie Jeffery emphasizes the importance of such estimates for the referendum’s outcome:
The best predictor of an individual’s vote is his or her assessment of the effects on her or his personal economic fortunes. Confronted with the ‘£500 question’, being either £500 better off if Scotland were independent, or £500 worse off, a majority of survey respondents were in favour of independence if they were better off and against, if they were worse off.Fig.1: Attitudes to the “£500 Question”, 2013
Source: Scottish Social Attitudes 2013 in John Curtice, The Score at Half Time: Trends in Support for Independence via Charlie Jeffery John McDermott argues that the £2000 “independence bonus” is not based on an assessment of policies proposed by the Scottish National Party (SNP), but simply on the assumption that three good things will happen: A productivity growth increase by 0.3 percentage points, an increase in the employment rate by 3.3 percentage points and an increase in Scotland’s working age population. Without these positive developments, Scotlands fiscal future looks less rosy. And as the “additional boost” to tax revenues is compared to a different scenario for a hypothetical independent Scotland, rather than to Scotland as part of the UK, the bonus is not an independence bonus at all.
Fig. 2 Debt Projections for Scotland under 3 scenarios
