Scotland's Economic Performance and the Fiscal Implications of Moving to Independence

Publication date: 7 Feb 2014 | Publication type: National Institute Economic Review | Theme: Exiting the EU & Britain after Brexit | External Author(s): John McLaren; Jo Armstrong No. 227

Scotland's economic performance and fiscal make-up are key elements in the debate leading up to the forthcoming referendum on independence. However, in terms of understanding Scotland's economic performance, the situation is complicated by the high degree of overseas ownership, especially with regards to North Sea activity, and the importance of a natural commodity, oil. This makes the use of traditional measures of economic performance, like GDP or GDP per capita, less relevant than for most countries and suggests a greater need to use both constant price and cash GNI, neither of which are currently available. In terms of its fiscal balance, Scotland's independence would require taxes derived from its offshore (North Sea) activity to be sufficient to offset the extra monies (in per head terms) currently transferred from the rest of the UK (via the Barnett formula system) in order to pay for the current level of public services. Based on current projections, such North Sea related tax revenues would amount to less than the likely Barnett transfer, leading to a net loss in funding at the time of independence. Under such circumstances the question of whether or not Scotland could afford to initiate the building up of an ‘Oil Fund', is largely a redundant one. However, uncertainties over both future oil and gas revenues and over the continuation of the existing Barnett system make it difficult to predict with any great certainty whether Scotland would see a longer-term net fiscal gain or loss post-independence. Apparent inconsistencies between official GNI and Scottish revenue figures also means that the existing fiscal balance position remains open to question.