IN THE debate over whether Scotland should be independent, each side has for years lobbed economic grenades at the other. The pro-independence Scottish National Party (SNP) broke into mainstream politics in the 1970s with the slogan, "It's Scotland's Oil." Alex Salmond, Scotland's first minister and SNP leader, calls it "larceny" that revenues from oil and gas production, most of which comes from Scottish waters, have stuffed London's coffers for 40 years. George Osborne, Britain's chancellor, retorts that Scotland would be the poorer for secession.
So would an independent Scotland be an impoverished backwater or a land flowing with oil and money? A precise answer is impossible, since Whitehall does not count all of Britain's revenue and spending streams by geography. But a close reading of the figures suggests an answer, which is less dramatic than either staunch nationalists or unionists might hope.
Scotland's accounts of revenue and expenditure, based on Treasury data, show that it is not a ward of the state, grossly subsidized from Westminster. In fact, it performs better than all regions outside the southeast of England and has done particularly well in the past decade. In 2010-11, Scotland's GDP was $225 billion including a geographical share of North Sea oil and gas, around 10 per cent of Britain's, with 8.4 per cent of the population.
Historically, Scotland has received bigger grants per head from central government than Wales, for example -- in part a tacit acknowledgment that it contributes handsomely to oil revenues, which in 2010-11 amounted to $14 billion. An independent Scotland would lose that subsidy, but gain the right to collect taxes on hydrocarbons locally. For the moment, Scotland's day-to-day accounts would look little different to now. But the argument does not end there.
Not so long ago, North Sea oil and gas would have made Scotland rich, had the nation been able to seize it. Declassified documents show that, in the 1970s, Treasury officials reckoned Scotland could comfortably have paid its own way -- a big reason the government was so alarmed by rising nationalism. The situation is now more finely balanced. And there are four big reasons to question Scotland's longer-term prospects.
The first problem is oil. An independent Scotland would rely heavily on oil and gas -- in 2010-11, offshore activity accounted for 18 per cent of GDP. The equivalent share for the whole of Britain was just 1.8 per cent. The North Sea is gradually running dry. Many fields will stop producing in the 2020s; by the 2040s oil is likely to be dribbling rather than gushing forth. Tax revenues from oil and gas are highly volatile -- they are soaring now because commodity prices are high. And if prices fall, both production and receipts could plummet because the remaining North Sea oil is pricey to exploit, says Alex Kemp of Aberdeen University. He forecasts that, at $90 a barrel, 23 billion barrels of oil and gas could still be extracted; at $70, this falls to 16.5 billion barrels. The average oil price was $62 a barrel in 2009; in 2011 it was $111.
There are also hidden liabilities in the North Sea. Decommissioning the installations there, most of which are in Scottish waters, will cost more than $48 billion by 2040, predicts Oil & Gas UK.
The second question over Scotland's future is whether renewable energy could replace oil as a cash cow, as Salmond hopes. Scotland is blustery, but wind power is heavily subsidized by consumers (many of them south of the border). Marine energy is still not commercially viable. Fat profits from renewables could prove as elusive as the fabled Loch Ness monster.
Scotland's third long-term problem is the state of its financial-services industry. The country has done well out of banking, but in the past five years the problems of having an outsize banking sector have become apparent. In 2008, the British government bailed out Scotland's two biggest banks, Royal Bank of Scotland (RBS) and HBOS, which was acquired by Lloyds Banking Group. These would probably be broken up as part of an independence settlement, not least because many of their assets are English.
But Edinburgh's fortunes as a banking centre would be hard to revive. A small, newly seceded economy would struggle to support a large financial sector, particularly following the financial crisis. Salmond rebuffs the possibility of taking a share of RBS's $298 billion of toxic assets.
Edinburgh's fund management industry, which includes companies such as Scottish Widows and Standard Life, still makes it a financial centre. Yet, that bloom is fading too. Since 2007, Edinburgh has slipped from to 37th from 15th on the closely watched Z/Yen ranking of global financial centres.
A better bet for continued growth is oil services. There is already a thriving hub of technical firms around Aberdeen. Yet, even some of these are being lured south.
Fourth and most testing for Scotland's future would be the question of its currency. Salmond's hopes of joining the euro have soured -- for now he plans to stick with the pound. Yet the eurozone has amply demonstrated the dangers of entering a monetary union without fiscal union. Scotland would pay a premium for being part of a monetary union that could break. It would have no central bank, no monetary freedom and limited fiscal autonomy.
Other bills would rack up even from an amicable divorce. Scotland would take a per capita share of the national debt, reckons Salmond. The tab for decommissioning its nuclear power stations is $6.4 billion. Other practical questions abound, such as who would pay out pensions agreed under Westminster's auspices -- as those of Scotland's teachers and health staff are.
Such arithmetic calls into question not just Scotland's economic future but its political one. Spending per head is currently 13 per cent more than in Britain as a whole, supplying free university tuition, for example, which is not available south of the border. Welfare spending, which consumes a third of public funds, is 11 per cent higher than in England and is rising faster as a share of public expenditure than any other category. The SNP hopes to extend state paternalism further, promising free universal child care and more generous state pensions. Public sector employment, already 24 per cent in Scotland compared with Britain's 20 per cent, would presumably increase. Salmond hopes to fund all this by adopting low corporation taxes to attract investment.
It remains a matter of judgment whether Scotland could go it alone. But after the banking and eurozone crises, Scotland would be far more vulnerable to shocks as a nation of five million people than as part of a diversified economy of 62 million. There is an irony here: To preserve a distinctively open-handed Scottish social model, staying in the union might be the safest choice.