Scottish ‘Yes’ vote would see 6.4% budget deficit

Scotland would immediately have to contend with a budget deficit of 6.4% if it votes for independence, according to the London- based Centre for Economics and Business Research.

The country goes to the polls at the end of next week to vote on ending the 300-year-old union with the rest of the UK. The latest opinion polls show the ‘Yes’ vote has edged marginally ahead.

According to the research centre, Scotland’s share of UK public spending now appears to have been 9.6% in 2012/13 according to new data released by the Office for National Statistics at the end of July in Public Expenditure Statistical Analyses, whereas its share of the UK’s on-shore economy was only 8.0%.

“Assuming taxes roughly proportional to shares of gross value added, this would imply a non oil deficit of 1.6% of UK gross value added, which may not seem much but amounts to 20.6% of Scottish on-shore gross value added.”

Moreover, oil revenues from the North Sea are dwindling, which will make it harder to offset this deficit in the future. It estimates that Scotland’s budget deficit will be 9.9% this year.

“Looking out to 2016/17 which would be the first full year in which Scotland might be independent, austerity measures already in place and some rise in oil revenues should bring down this deficit to 6.4% of Scotland’s GDP.”

However, this could be much worse because of a potential outflow of investment and the start-up costs of independence. Moreover, it would be extremely difficult for a newly independent country to tap the financial markets. Consequently, the first act of a newly independent Scotland may be to seek a bailout from the IMF, said the research centre.

The ‘Yes’ campaign, led by the Scottish National Party’s, Alex Salmond, had been dogged by claims that its economic policies do not stack up, particularly uncertainties over whether it could still use sterling and how much of the UK national debt it would have to take over.

However, voters seem to be less concerned about these issues as the No campaign flatlines.

“Financial markets hate uncertainty, and this quickly gets translated into prices. The probability of Scottish independence has risen this week, and the prospect of years of negotiation over who pays the interest costs of UK debt, and who uses sterling, has spooked the gilts and foreign exchange markets,” said Professor Roy Batchelor from Cass Business School.

“In economic terms this week’s events are not damaging to the UK — if anything a mild sterling devaluation, and a postponement of monetary tightening by the Bank of England, will help growth and employment.

“The risks to the UK are trivial compared to those triggered in Scotland by the likely flight of capital and business talent if the Yes campaign wins.”