INDEPENDENT SCOTLAND: £34 BLN
Scotland's "Mini-Me" economy is far from an oasis of riches or a pit of despair within the UK. Levels of income, unemployment, labour productivity and inequality are remarkably similar to the combined average for England, Northern Ireland, Scotland and Wales.
Completely integrated after 307 years of union, Scotland shares the economic institutions of the UK, its tax system and its powerful insurance mechanisms that support troubled economic areas such as Northern Ireland and extract money from hotspots like London.
The one big difference is oil. Scotland's public finances would be a mess if it did not receive the vast majority of oil revenues after independence, leaving its initial prosperity and prospects dependent on the terms of divorce. Thereafter, an independent Scotland's economic prospects would hinge on its ability to raise its game. The following five considerations will be paramount.
An independent Scotland should assume the rest of the UK would refuse to enter a formal currency union. Economists think the best available option would be initial unilateral use of sterling – soon followed by the establishment of a Scottish central bank and currency.
Such an option is unquestionably feasible and could bring currency stability if the Scottish central bank pegged the Scots pound against sterling, much as Denmark fixes the krone to the euro. The trade-off would be the requirement for higher foreign exchange reserves necessary to defend a currency peg and a lack of economic flexibility that floating exchange rates can bring.
The main risk is capital flight, from Scotland and its banks, from people who might fear future depreciation and would prefer their financial assets to be denominated in sterling, euros or dollars. As Neville Hill of Credit Suisse has said: "It's not whether Scotland will stay in the pound, but whether the pound stays in Scotland."
To defend a currency peg, an independent Scotland would need foreign exchange reserves substantially in excess of the £15bn that Mark Carney, the Bank of England governor, says would be in the "upper end of the range" the country could reasonably expect to inherit from the UK. To match the level of reserves held by Denmark as a share of national income, Scotland would need £34bn.
Ronald MacDonald, a University of Glasgow professor who has been working with the pro-union campaign, says the need to accumulate reserves would represent "a recipe for austerity" that would result in the end of any pegged currency with sterling. Scotland might be able to borrow the money to build foreign exchange buffers at the cost of creating exchange-rate risk either for the Scottish people or its creditors. Such borrowing might therefore be very expensive.
The division of the UK's assets and liabilities would involve tortuous negotiations. With the UK's public finances already stretched, Angus Armstrong and Monique Ebell write in the latest Oxford Review of Economic Policy that on any reasonable division, an independent Scotland would begin life "with a substantial debt burden", forcing spending cuts or tax increases "for many years" that were more restrictive than the UK has faced since 2010.
Alex Salmond, the SNP leader, would be tempted to carry out a threat not to accept that any UK debt was Scottish, but there would be a price to pay, as Scotland would need the UK's support in matters such as its application to join the EU.
Assuming a division was seen as fair on both sides, Scotland would be likely to face tougher spending cuts and tax rises than England as oil revenues declined into the medium term. The nationalists say official forecasts for oil revenues are too pessimistic, but they have been persistently over-optimistic in recent years.
In the long run, an independent Scotland's prosperity would rest on the nation's ability to raise its growth rates to sustain higher living standards. This would require more productivity – that is more output for every hour worked or capital used than now.
Sustainably raising productivity growth rates is the holy grail for every economy, and is much easier said than done. Scotland's economy currently has a higher dependence on financial services and oil than that of the UK. Both are very high productivity sectors, but they are declining as the dwindling stocks of oil in the North Sea become harder to extract and Britain's overextended financial sector shrinks.
The Scottish government hopes that lower corporate taxes would encourage a new entrepreneurial spirit – arguing that this remains "an important tool for securing competitive advantage". In this, its attitude is similar to that of the Westminster government, which has cut the UK rate. Such a move would need to have a much stronger effect in Scotland than it has for the UK as a whole in order to offset the headwinds the nation already faces from oil and finance.
Scotland's population is set to age more rapidly than that of the UK, adding to public finance pressures and healthcare costs. To raise the Scottish growth rate, it would need to attract more workers and more immigrants. The Scottish government pledges that a new "controlled, transparent and efficient" migration system would attract highly skilled people to boost incomes, employment and public finances.
The risk is that Scotland would not be able to pick and choose its immigrants as easily as the government suggests, especially as it has failed to attract as many migrants in recent years as English regions with similar wage levels.
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