The economic consequences of a Yes vote

By Valentina Magri

On Thursday a 307-year long union might come to an end.

In just a matter of days we will know whether Scotland will become independent from the UK, with fierce arguments being fielded from both the Yes and No camps. The vote is currently on a knife-edge, although our poll found 68 per cent of people believe a Yes vote is the most likely.

The first YouGov poll suggesting a victory of the Scottish National Party (SNP), published on September 6th, alarmed both Westminster and the City. On September 10th Cameron, Miliband and Clegg made an emergency visit to Scotland to urge voters to say no to independence, but one place that doesn’t need convincing either way is the financial markets.

The markets are Better Together supporters: after news over a potential Scottish independence, the pound fell to a ten-month low, reaching the lowest levels since November 2013. Nomura had even recommended selling pounds to its clients as well as being cautious over UK bank gilts and swaps until after the Scottish vote. Royal Bank of Scotland, Lloyds Bank, Tesco Bank and Clydesdale have promised to move their headquarters from Edinburgh to London in case of a Yes vote. The IMF warned about uncertainty and volatility related to the transition to independence.

So what may happen to our economy if the Yes camp prevails?

Macro scenario

UK-based economists are sceptical about the macroeconomic benefits of Scotland gaining independence. Indeed, a Centre for Macroeconomic (CFM) survey found that three-quarters of respondents think that Scotland would not be better off with independence. LSE professor John Van Reenen points out volatility as the main risk of a more commodity-based economy, while professor Richard Portes from the same university stresses the issue of transfers: Scotland will lose a substantial amount of them in case of independence. LSE professor Wouter Den argues that a small independent country would be more vulnerable to negative events like industries leaving the country.

Paul Krugman shares this idea: “You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine”. What’s more, uncertainty must not be undervalued: it is likely to weaken the economy, said Mr Wadhwani from Wadhwqani Asset Management.

The growth of an independent Scotland may be affected by the “border effect”, as suggest the e-book ‘Scotland’s decision: 16 questions to think about for the referendum on 18 September”’ by Future of UK and Scotland, The David Hume Institute and The Hunter Foundation. This effect conveys the idea that trade within countries tend to be greater than trade between countries. To mitigate this effect, Scotland should reduce its trade dependence on the UK in favour of expanding its trade with other parts of the world.

Finally, it must not be underestimated the impact of the public sector debt. In case of a division of the UK, Scots would have to accept its population’s share of debt. So even though they would have control over taxes and spending they would not be able to increase public spending until it could demonstrate that it could control and service the debt. This requires spending cuts or tax raises.


GBP may decline to 1.46 against the US dollar (USD) by the end of 2015 (the bearish exchange scenario), say forex strategists at Morgan Stanley. Then there’s the unsolved question of currency union. There are four options for Scotland: keeping the pound with the UK; keeping the pound without an agreement with the UK; adopting the euro; introducing a new Scottish currency. According to Owen Kelly, CEO of Scottish Financial Enterprise, which represents the financial services industry, research from industry institutions of the currency hints that the most likely alternative will be “sterlingisation”, that is using the pound without a formal union. But Bank of England governor Mark Carney strongly rejects this supposition and said that independence is “incompatible” with keeping pound.


SNP’s leader Alex Salmond argues Scotland will enjoy £7 billion revenues from oil; the Office for budget responsibility estimates £3 billions in 2016-2017, that will gradually decrease. According to the e-book “Scotland’s decision.16 questions to think about for the referendum on 18 September”, the vast majority of companies says that independence poses relevant risks to their business operations and strategies.

Only half of the businesses identified opportunities related to a Yes vote and they are less able to identify them in a precise way. Eventually, most of the business leaders believe that costs and risks outweigh benefits and opportunities. The most worried corporations are PLCs headquartered in Scotland.

The costs of transition

Independence would incur five type of transition costs for Scots:

Set-up costs will be incurred by Scotland in the early transition period and they are due to duplicate capacity that exists from Westminster.
Disentangling costs will stem from de-merging data about citizens, taxpayers, business taxpayers, benefit claimants and so on.
Transition costs will occur when Scotland negotiates with the UK to keep doing processes too costly to be changed during the transition period.
Investment costs will be incurred in order to gain control over tax, benefits and defence areas.
• But there will be  Policy cost savings: Scotland would not pay any more for policies decided in London and thus it will save money.

But the most interesting opinion over the Scottish independence issue comes from Brendan Brown, chief economist at Mitsubishi UFJ Securities. Interviewed by Bloomberg over the issue, Mr Brown said: “It’s analogous to when people discuss whether Britain should leave the EU or not. The answer to that question depends on how good a treaty they get once they leave”.

Ultimately, our only certainty is uncertainty.

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