MENU

Mechanics of divorce

Mechanics of divorce, diseconomies of scale

Chapter summary

  • A simple majority voting Yes in September would almost certainly end the Union.
  • The Scottish Government has said the Union will be dissolved on 24 March 2016 following a Yes vote. The SNP anticipate around 18 months of negotiations with the remainder of the British Government. This is an unrealistic target. It took seven years for the Czech and Slovakian Republics to agree.
  • The lack of clarity about the form of the final settlement is in itself a major risk factor. It is extraordinary that politicians, both North and South, have offered so very little clarification. While the negotiating issues would be surmountable, there would be a significant and costly period of uncertainty.
  • A separated Scotland would need to set up its own tax authorities and associated IT systems, its own diplomatic service, defence and security structures, environmental agencies, trading relationships and EU negotiations, amongst others. While all these things could be done, they are very time consuming, very costly, a purposeless duplication, and an indulgence for which taxpayers will have to foot the bill.

Two governments are costlier than one

A simple majority voting Yes in September would almost certainly end the Union. The Scottish Government has said the Union will be dissolved on 24 March 2016 following a Yes vote. The SNP anticipate around 18 months of negotiations with the remainder of the British Government. This is an unrealistic target. The affairs of Scotland are closely intertwined into the fabric of the UK at many levels. For example, it took seven years for the Czech and Slovakian Republics to finally agree all the loose ends. In the Scottish case, agreement could take time.

The long negotiating period clearly adds to uncertainty at the micro and macro level as almost every aspect of Scottish political and economic life is unravelled from the UK. The upside as well as downside risk here lies with investments in Scotland, for the legal status quo would continue to prevail in the rest of the UK, but not in Scotland.

The negotiations would include a very wide range of issues from the profound to the mundane. What would Scotland’s share of the national debt be? Whose oil is it and how will it be split? What currency would Scotland use and on what terms? How would the liabilities of RBS, HBOS and others be allocated? What would be the contingent pension liabilities, how would they be allocated, and how would Scotland meet its share of the cost? What if people and businesses move between the two countries? How will benefits be treated? How will the defence assets be split? There would also be a myriad of other minor discussions from green energy tariffs and subsidies to the arrangements with Royal Mail and universal postage. The Scots are voting on a principle, but separation may not prove smooth – and may not prove achievable at all.

The lack of clarity about the form of the final settlement is in itself a major risk factor. It is extraordinary that politicians both North and South have offered so very little clarification. The final result will be down to negotiation but the key areas are oil, debt and the EU. These risks will negatively impact Scotland’s short term economic performance. Uncertainty harms investment and confidence.

While many of the issues described above are surmountable, there would be a significant period of uncertainty while substantial loose ends were negotiated. These loose ends would impact the entire UK and indeed the EU. However, because Scotland has a population of 5.3m, or just 8.3% of the British total, the gearing impact on Scotland would be commensurately much greater. Scotland would have most to lose from the process of separation. For instance, a theoretical £300bn RBS liability split amongst 60 million people is more manageable than the same liability split amongst 5 million.

A separated Scotland would need to set up its own tax authorities and associated IT systems, its own diplomatic service, defence and security structures, environmental agencies, trading relationships, EU negotiations. While, of course all these things could be done they are very time consuming. They are very costly. They needlessly duplicate effort. Scotland could not hope to match Britain’s military or diplomatic reach, but in both cases establishment and running costs per capita would almost certainly be more costly and less effective than the current arrangements.

Taxation is an area of particular concern. Ignoring the cost of setting up new IT systems, which would run into hundreds of millions of pounds, all sorts of issues like domicile are raised. How will it be decided whether someone is a Scottish or UK taxpayer? Is the criterion where they live, where they work or where they may claim to work? Scotland could not adopt a substantially different tax structure to the rest of the UK, or it would soon be arbitraged away. Unit collection costs will be higher. At the margin there is choice, but only at the margin. Here as in so many other fields, separation would not entail meaningful independence.

Pensions and welfare are also two other areas to which insufficient attention has been given. A split would greatly add to the complexity of benefits. We have seen all too clearly the difficulties that can occur between Scotland and the rest of the UK over their distinct approaches to funding university tuition fees. Without discussing the rights and wrongs of that policy, this is a clear signal that separation only adds to complexity, duplication, benefit arbitrage and tourism, and general dissatisfaction between constituents. Given Scotland’s weak fiscal position, it should also not be assumed that benefits will be higher in Scotland, especially in the medium term. Aspirations often are not met by economic reality.

If Scotland wants to go its own way that is its right, but the establishment and disruption costs will be high. They are surmountable, but bureaucratic infrastructure duplication and diseconomies of scale will harm productivity.

on September 16 | by

Comments are closed.