WHY SCOTS SHOULD SAY NO TO INDEPENDENCE

Until now, I’ve been hesitant to write about the Scottish independence referendum, though there is no reason whatsoever why the English, the Welsh and the Northern Irish should desist from commenting on a matter that, after all, will affect everyone.

As someone once said, “a country is more an idea than a place”, and I recognise that questions of national identity involve issues which are as much heart as head. Consequently, perusal of statistics cannot alone provide answers, so it is with considerable reluctance that I conclude that going it alone is not an economically attractive option for Scots.

Though I’m not a Scot, I began my working life north of the border, where I found that Scotland is indeed a very different country from England, and in many ways a better one. On grounds not just of history but also of culture and education, the ‘heart’ case for independence is a compelling one. Moreover, I can understand Scots’ aversion to government from Westminster and Whitehall. Indeed, were it on offer I would certainly vote in favour of all four nations securing independence from London!

And yet, and yet. The head, as much as the heart, has to come into the equation, and it is on matters of economics that the case for Scottish independence falls flat on its face.

North Sea oil is a critical part of the equation, yet the heated public debate over this issue has almost entirely missed the point. The focus on remaining recoverable reserves is irrelevant, since whether these reserves are 10 or 20 billion barrels makes very little difference.

What matters is production and, relatedly, the profitability and tax-yielding capability of North Sea oil. Over the ten years from 2003 to 2013, British (for which read “overwhelmingly Scottish”) production of oil declined by 62%, and output fell by almost 9% last year alone. I expect the pace of decline to slacken, but nevertheless to continue, reducing output by a further 30% between now and 2020.

Moreover, the perfectly logical cherry-picking of the past means that remaining oil reserves are becoming increasingly expensive to produce, with some reserves likely to cost as much as US$60/bbl in capital investment alone. If we add in operating expenses, transport costs and the return on up-front capital, it becomes clear that unit profitability is on a severe downwards trend.

The North Sea may continue to produce substantial quantities of oil, then, but its tax-gathering capacity is eroding at annual percentage rates well into double figures.

In short, tax revenue from oil is likely to fall more rapidly than production, probably halving by 2020.

The second issue is Scotland’s income from financial services. The SNP’s glib assumption that an independent Scotland would be invited into the EU as a matter of course ignores the likelihood that Spain, mindful of Catalan ambitions, might veto this precedent. Even if Scotland were admitted, it is likely that she would be compelled to adopt the Euro.

The alternative of piggy-backing on Sterling would be very nearly as bad, since Scotland would be surrendering monetary policy to a foreign country, and would find her room for fiscal manoeuvre very seriously constrained as well.

This combination of monetary considerations suggests that much of Scotland’s financial services industry would “tak’ the low road” to London, stripping Scotland of significant output and revenue just as the North Sea contribution, too, is in sharp decline.

Critical though oil and financial services are, the clincher, for me, has to be public sector pensions.

Unlike private sector provision, which puts money aside to meet future liabilities, the British public sector pension system is a state-sanctioned Ponzi scheme in which the workers of today receive their pensions from the taxpayers of tomorrow. If the government of today were required to put money aside to pay future public sector pensions, the sum required would be of the order of £1,000 billion.

All such Ponzi schemes unravel eventually, and the gap between payments and contributions has already widened alarmingly. This is likely to continue, and the time will certainly come when Britain has to face a painful choice between reducing public sector pensions or hiking general taxation. Unfortunately, this choice is likely to be forced on Scotland much more quickly than it will be imposed on the United Kingdom.

The fiscal cocktail facing an independent Scotland would, or certainly should, daunt the bravest heart. With monetary (and probably fiscal) policy imposed from abroad, with North Sea oil taxes in steep decline and with much of the financial services sector in flight, an independent Scotland might pretty soon find itself unable to meet pension commitments without imposing still more taxation on a shrunken economic base which will already be taxed to the hilt.

As an aside, I do wonder whether public sector workers in Scotland realise the personal risk that a “yes” vote would entail.

More broadly, the choice between “devo max” and full independence looks, perhaps sadly, a pretty straightforward one.