Can Scotland afford to be independent? How much independence from UK would cost - and budget deficit explained

A Scottish independence referendum is likely to be a hotly-debated issue for the foreseeable following Nicola Sturgeon and the SNP’s victory at the Scottish Parliament election 2021

Nicola Sturgeon has repeatedly said Scotland would be able to generate growth after independence (Getty Images)

The issue of Scottish independence dominated the recent Holyrood election.

Now that the SNP have secured a pro-independence majority of MSPs in Parliament, alongside the Scottish Greens, the subject of “indyref2” is likely to be a highly-debated one for the foreseeable future.

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First Minister Nicola Sturgeon, in a phone call with Boris Johnson on Sunday (9 May), said it was a “matter of when, not if” there will be another vote on independence.

But one of the longest-running arguments when it comes to Scotland breaking free from the rest of the UK is whether the country can afford it.

So, can Scotland afford independence?

Here is everything you need to know.

Can Scotland afford to be independent?

Opponents of a second vote often say that Scotland can’t afford to exist as an independent country without the UK.

Recently, the Institute for Fiscal Studies (IFS) predicted that an independent Scotland would begin with a budget deficit “substantially higher than the rest of the UK”.

But IFS director David Phillips said this deficit “doesn’t mean Scotland can’t afford to be independent.

He added: “Scotland’s a relatively rich country”.

It is also difficult to predict what the budget deficit or debt would be on the first day of independence, as it would depend on a deal agreed between Holyrood and Westminster.

The IFS report, published in April of this year, showed that the country’s budget deficit spiked between 22% and 25% of national income for 2020 to 21.

The report credited high levels of public spending per capita (which went largely into public services) and slightly lower than average levels of tax as the main reasons for the deficit.

Researchers advised that, in an independent Scotland, tax rises and spending cuts would be needed to restore balance.

Scotland’s budget deficit has also grown since 2014, and Government Expenditure and Revenue Scotland (GERS) figures show that it increased to 8.6 per cent of GDP in 2019 to 20 - roughly six points higher than the UK average.

But experts have said that there is not enough information about Scotland’s finances to get a full picture of how it would survive as an independent country.

Richard Murphy, a political economist, chartered accountant and professor at City, University of London, recently told Investment Monitor: “There is a lack of high-quality data. There is no information at the present point in time; we don’t know imports to Scotland, we don’t know exports from Scotland. Therefore, we don’t know what the Scottish GDP is.

“We don’t know Scottish national income. We don’t really know what is spent for Scotland. We know what is spent by Scotland – i.e. we know what the Scottish government spends – but we don’t know what is really spent for Scotland.”

Scotland is also forbidden under the terms of devolution to spend more than it receives from Westminster or raises in taxation.

Will Brexit cost Scotland more than independence would?

While the UK as a whole voted to leave the EU by 52 per cent to 48 per cent, Scottish voters backed the Remain camp by an overwhelming 62 per cent to 38 per cent.

After the UK voted Leave, Ms Sturgeon and the SNP began pushing for another referendum, citing that the country should not be forced to leave the EU “against its will” by the UK’s Conservative government.

But a study conducted by Hanwei Huang, Thomas Sampson and Patrick Schneider from the London School of Economics (LSE) found that Scotland’s income per capita is set to decrease by at least 2 per cent from Brexit alone - before independence is even brought into the equation.

The report predicted that Scottish independence would cost two to three times more than Brexit by itself, in terms of income per capita.

But the predictions rely heavily on assuming that the rest of the UK would continue to be Scotland’s most important trade partner.

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What has Nicola Sturgeon said about the financial side of independence?

The First Minister has repeatedly said Scotland would be able to generate growth after independence and offset the challenges faced in balancing the books.

On Sunday (9 May), Nicola Sturgeon hit back at Andrew Marr after he suggested that Scotland could not afford to be independent.

During his BBC show, Marr claimed that Scotland’s finances are “effectively subsidised by English taxpayers” - a set-up which would end if the country voted to leave the UK.

Ms Sturgeon responded: “I don’t accept that characterisation. Scotland pays its taxes in the same way that people in England pay their taxes. What you call the fiscal transfer funded largely by borrowing by the UK Government right now, because the Scottish Government doesn’t have powers to borrow."

Marr then said Scotland receives £1671 or 17% more per person by the UK average and its tax revenues are £308 lower per person.

"If you're pointing to the fiscal position that Scotland has right now, that is a feature of Westminster policies,” the First Minister hit back.

“It's not a reflection of independence. Why should a country like Scotland be in a position of requiring to be subsidised? It's not an argument for staying the same, it's an argument for change."

Would an independent Scotland use the pound?

Ms Sturgeon is yet to detail what currency an independent Scotland would use. She told Marr that an economic plan would only be set out in detail at the time of indyref2.

But the immediate currency plan-post independence would be to continue to use sterling as a transitional step towards creating a stand-alone Scottish currency, as set out in the party's Growth Commission report from 2018.

Whether Scotland would use the pound was one of the most-asked questions during the 2014 referendum and Scottish voters seem to care about the issue a lot.

According to a YouGov poll conducted in 2020, most Scots want to keep the pound and only 18 per cent were in favour of switching to the euro.

However, the SNP has made it clear that it wants to rejoin the EU if it gains independence - and EU institutions remain keen on prospective member states signing up to use the euro.