By Dan Maher Contributor January 2, 2014

On September 18th 2014, a national referendum, proposed by First Minister and leader of the Scottish National Party (SNP) Alex Salmond, will be held on the question of Scottish independence. A majority vote in favor will mark the first time that Scotland will be a sovereign nation in its own right since the Wars of Independence in the 14th century. Opponents of independence claim that Scotland cannot support itself economically outside of the United Kingdom, specifically with regard to sovereign debt and budget deficits. However, economic data contained within the SNP’s recent white paper, “Scotland’s Future,” presents compelling evidence that the economic case for Scottish independence is far more favorable than first imagined.

As a part of the United Kingdom, Scotland is held accountable for a certain percentage of its sovereign debt, which is estimated at just over 1.2 trillion pounds. Upon separation, Scotland will inherit a negotiated portion of that debt. Without any history of servicing national debt, economists have estimated that the interest rates for Scottish debt could rise anywhere from 0.72 percent to 1.65 percent over the currentUK rate of 2.90 percent on 10-year bonds. Estimates of the current debt burden Scotland carries range from 56 billion pounds to 92 billion pounds depending on if the figure is calculated based on historically averaged debt levels or on a per capita basis, respectively. In the 2016/2017 fiscal year, when independence would come into effect, estimates of the debt burden rise to approximately 86 percent of Scotland’s GDP, which, including its share of oil revenues from the North Sea, stands at £150 billion. Opponents of independence are quick to point out that the cost of servicing such a high level of debt could potentially pauperize the Scottish government and severely impede its ability to close the estimated 5 to 10 billion pound national deficit by reducing its capacity to borrow and forcing the government to increase already burdensome taxes.

However, recent figures contained within the SNP’s “white paper” indicate that Scotland possesses significant sources of revenue that have the potential to drive down its budget deficit and reduce the amount of money Scotland would have to borrow to service their debt. Scotland is the European Union’s largest producer of oil, with current reserves estimated at a value of 1.5 trillion pounds. Sale of these resources is expected to amass 48 billion pounds in tax revenue for Scotland over the next six years. Additionally, a booming whisky industry maintains annual exports worth over 4.2 billion pounds. Currently, this represents 23 percent of the United Kingdom’s total export of food and drink related goods. Scottish tourism brings in an additional 5 billion pounds per year and, more importantly, is the source of 200,000 jobs. Moreover, the construction industry in Scotland infuses an average of 21.4 billion pounds a year into the government’s annual tax levy. Lastly, the Scottish agriculture industry adds approximately 2.7 billion more pounds to the economy, representing just over 11 percent of the total agricultural output of the United Kingdom.

Though these sources of revenue are indeed robust, the SNP has recognized that they are not enough. This is why an additional solution to the problem of sovereign debt has been presented. The SNP has proposed establishing a currency union with the United Kingdom, analogous to the Eurozone – albeit on a much smaller scale. In such a union, Scotland can maintain the pound sterling as its legal tender and ensure continuity and stability in Scottish financial markets by tying interest rates to those of the United Kingdom. Essentially, this would mean that rather than having to establish its own credit history, Scotland will be able to amalgamate its credit with that of the United Kingdom and thereby keep borrowing costs low in the international currency market. Moreover, the relative strength of the pound compared to other world currencies will draw investors looking for a high return on investment to purchase Scottish bonds. The agreement will further ensure that the value of investments, goods, and services, will remain unchanged and therefore avoid the financial chaos that would result from attempting to establish the value of a new national currency. Though it would keep Scotland’s currency and spending policies tied to a foreign government, a currency union is the best option for the success of Scottish independence, at least in the short term. Instituting a new currency would inflate interest rates and therefore Scottish debt; and attempting to join the Eurozone would not be immediately feasible as entrance requires a country to have a debt-to-GDP ratio of less than 60 percent. Additionally, entrance into the Eurozone has met with little public support within Scotland. Combined with Scotland’s revenue potential, a currency union – while not guaranteed – can ensure the affordability of Scottish independence and will receive serious consideration should the referendum pass.

To be sure, economic stability is only one of many issues, including provisions for national defense, the environment, pensions, housing, childcare benefits, taxation, and the management of critical agricultural and fishery zones. Scots must take each of these issues into account when wrestling with the question of independence. The SNP’s recently published white paper lays out a blueprint for how each of these issues would be handled under an independent Scottish government. A great deal of the actual negotiations to resolve these issues will not take place until after passage of the referendum in 2014. Between then and now, we can only use speculative analysis to project how these issues will play out. At least in terms of the financial stability of an independent Scotland, the outlook is much more promising than many at first believed.

Dan Maher is a first year graduate student with a concentration in U.S. Foreign Policy at the Elliott School of International Affairs. He has a Bachelor of Arts in Political Science. His primary interests concern US-European relations.

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