The Economics of Scottish Secession

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scotNot all secessionist movements are created equal, because some secessionist regions are more economically independent than others. In the case of Venice and its region, secession in the medium- to long-term appears rather plausible because of Venice’s long history of economic success, political independence, and its current status as a wealthier region of Italy.

People laugh at Texas when it hints at forming its own republic (again), but the truth is that economically speaking, Texas would be just fine by itself. It’s already a net taxpaying state, which means it pays more to the feds than it gets back (much like the case with Venice and the Italian government). Secession would mean it just keeps more of its own money.

Similar things might also be said of Basque country and Catalonia in Spain, which are among the more wealthy and economically-sound regions.

If the economic points raised by many critics of Scottish secession are correct, however, then the situation with Scotland appears to be different.

In an unsigned editorial, The Economist opines:

On economics, the nationalists say that Scots will be £1,000 a year better-off per head if they go it alone. That number, however, is based on implausible assumptions about the oil price, Scotland’s debt burden, demography and productivity. The British government’s estimate that Scots would be £1,400 a year better off per head if they stay in is based on more realistic assumptions. Scotland’s population is older and sicker than the British average, and productivity 11% lower than that of the rest of Britain. As a result, the state spends around £1,200 more per head on Scots than on the average Briton. Depending on what happens to the oil price, North Sea oil could more or less cover those costs in the short term, but the oil is running out.

It is, of course, possible that independence would cure Scotland’s entitlement culture and revive its entrepreneurial side. If either of its two dominant parties—the SNP and Labour—were disciples of Adam Smith that would be plausible. But their statist philosophies are more likely to drive Edinburgh’s fund managers, Aberdeen’s oil-services engineers and other talented Scots south. Independence would also impose one-off costs: a new Scottish state would have to set up an army, a welfare system, a currency and much else.

If it is indeed true that Scotland is a net tax receiver, then secession appears far less likely. Voters, and especially older voters, often know who butters their bread and vote accordingly.

The whole affair serves as a nice illustration of the political usefulness of welfare states. Once upon a time, states relied on occupying armies to maintain control of territories. In modern times, many states have figured out they can buy a state monopoly in a region and also buy even citizen loyalty by simply handing out freebies to the population. The taxpayers in the wealthier regions may be on the hook to keep the money flowing, but the added territory with its pro-welfare voters provide a nice base of support for the central state.

Relative economic backwardness doesn’t always prevent secession, of course. The proto-United States in the 1770s was an economic backwater (although it had a high standard of living for the time), and Ireland seceded from the UK in spite of its poverty. Maybe Scotland can live off its oil, as many proponents of secession suggest. But the comfy status quo of the welfare state there may be a hard habit to break.

1:00 pm on July 11, 2014
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