What if Scotland vote YES for Independence !

In just over a week’s time, Scottish voters will choose whether Scotland should become an independent country outside the United Kingdom, or remain a devolved part of the UK. It’s a big decision, but they should not think that the referendum vote is the end of the matter. In reality, it is only the beginning. The pro-union parties have long made it clear that a No vote will start the process of delivering a form of enhanced devolution; a Yes vote will trigger a process leading to independence, about which there are few other certainties. A lex Salmond described the referendum as a "process of national empowerment". He also called for an inquiry into what he said was the leaking of sensitive market data by the Treasury involving RBS plans to move its headquarters to London if voters choose independence.This week, we are highlighting the contributions of our fellows to Scotland's Decision: 16 Questions to think about for the referendum on 18 September.  Today’s topic is what happens if Scotland votes yes. The book is available as a free download.

Our experts look at three questions that arise in the event of a Yes vote:

• Nicola McEwen - How long will the independence negotiations take and what will the main challenges be?
• Angus Armstrong and Monique Ebell - How will assets and liabilities be divided?
• Patrick Dunleavy - How long would it take to set up a new Scottish state and how much would it cost?

Nicola McEwen anticipates how the process of negotiating independence might look if Scotland votes Yes. There would be a number of challenges, not least the timetable for negotiations, where“The Scottish Government envisages a timetable for negotiations which would enable it to declare independence on 24 March 2016. This would mean Scotland could assume its status as an independent country in advance of the Scottish elections scheduled for May 2016.”

She notes that: “The Scottish Government’s timetable for negotiations is aspirational. It is not set in stone and cannot be imposed upon the team negotiating for the rest of the UK” and could be affected by the conduct and outcome of the May 2015 UK general election.

Throughout, “both governments will have an obligation to negotiate in good faith, but each will also be keen to get the best outcome for their respective constituents – and be seen to be striving to do so”. There may be packaged discussions in which quite different issues – e.g. currency questions and nuclear missiles – would be considered alongside each other. She concludes:

“…it is impossible to give definitive answers to the questions concerning the process and timing of negotiation. In any negotiation, there is give and take on both sides. Not everything need be agreed before Scottish independence can be formally recognised by the UK Government and the international community. Becoming independent, and renegotiating the relationships between the nations and regions of these isles, would be an evolving process, not a one-off event. But given the inevitable uncertainty that would follow a Yes vote, the attendant risks of such uncertainty on the behaviour of citizens, businesses and investors, and the nervousness which is likely to be felt among other states at the potential repercussions of an independence vote beyond these shores, there would be enormous pressure on both governments to negotiate an agreement on the key issues as quickly and as cleanly as possible.”

Angus Armstrong and Monique Ebell’s main focus is on the division of public sector debt in the event of a Yes vote. Three key questions would need to be clarified: what measure of existing UK debt to use; how it would be divided; and how an independent Scotland would assume its share.

Though there are other, arguably better measures, the UK and Scottish Governments use Public Sector Net Debt (PSND). Armstrong and Ebell note that the UK Office of Budgetary Responsibility forecasts PSND “will reach £1,439 billion at the end of the fiscal year 2015/16, the date at which independence would occur.”

They note that once there is an agreement on which measurement to use for UK debt, that debt could be divided by population or other approaches. The choice of approach could increase or decrease the level of debt of an independent Scotland. “On a population basis, an independent Scotland would be responsible for 8.4% of the outstanding debt. On the narrower PSND measure an independent Scotland’s debt would be £121 billion, or 73% of GDP. The latter ratio is included in the UK Treasury and Scottish Government reports.”

They also note that once a particular division of debt had been agreed, an independent Scotland’s share could assumed in different ways: “The first option is where Scotland pays the full amount of its share at independence, which we call a ‘clean break’ option … The second option, noted in the Scottish Government’s White Paper, is that an independent Scottish Government would commit to paying its share of interest and principal payments as and when they fall due. We call this the ‘IOU’ option.”

Using a population share of PSND they calculate “the total amount of debt to be raised in the first year of independence would be only £16 billion”. For them “a critical question is the cost at which an independent Scotland could borrow this amount.”

Their answer on cost:

“We have estimated that an independent Scottish Government would be likely to pay between 0.72% and 1.65% higher interest rates than would be the case for the UK for borrowing over ten years.” Moreover: “Higher government borrowing costs would also be likely to lead to higher borrowing costs for households and businesses in an independent Scotland compared to the UK. However, the increase might not be as much.”

Patrick Dunleavy looks at the challenges of establishing the institutions of a new state, and their cost. New institutions would include a Scottish Defence Force, a Scottish Security and Intelligence Agency, a Foreign Ministry, a Passport Office and expanded Scottish Government directorates for Finance and Economy and for Welfare. In addition, other government functions in Scotland are currently handled by UK Government bodies, some 206 according to the UK Government.

However “there is a considerable scope for ‘streamlining’ what gets done north of the border, compared to UK practice. In fact, we think that rather than 206 bodies Scotland would need no more than 136 bodies, of which less than 60 would be new and of any significant size at all.”

In a number of areas, including defence, HMRC and the administration of welfare benefits, an independent Scotland would look to share services with the rest of the UK for a transition period.

How much would establishing independence cost? Dunleavy identifies several different types of cost, among them set-up costs: 

“Set-up costs are those incurred by Scotland only, in the early transition period (especially from a Yes vote to March 2016) in duplicating a capacity that already exists in the UK. These costs are unavoidable, one-off costs of transition that create no additional or offsetting welfare gain for Scotland’s citizens. We have estimated the set-up costs for Scottish Government as being in the range from £150 million to £200 million – that is £30 to £40 per person.”

Another important type of cost are investment costs which will “have to be borne by Scotland in order for its policy makers to gain full control over the tax, benefits and defence areas, running all the back-office systems in a self-sufficient way.”

The UK Government has said such costs for the administration of welfare benefits would, over time, be £400 million and for HMRC functions £500 million. Dunleavy notes:

“These estimates are not based on any careful analysis, but given prevailing IT and change costs they do not seem implausible. However, these are not just ‘set-up costs,’ because Scotland would be replacing older and complex legacy IT systems in each case, with newer, modern IT systems that would last for a long time (at least ten years), and could well be cheaper and far more flexible to operate.”

Much of the campaign in the last few weeks has been about creating a different sort of politics, and a different approach to social policy, within Scotland. But at least as important for Scotland as an independent state is the nature of its relations with the remaining part of the United Kingdom (rUK) – its much larger southerly neighbour, its main economic and trading partner, with which the Scottish Government aspires to share a currency, ‘social union’ and much more. All those plans are predicated on a close and amicable relationship with rUK, with Scotland able to enjoy the continuing benefit of a number of services that the UK presently offers to all its citizens.  The question is: can that vision actually be delivered? Even if that model t is the interests of an independent Scotland, why is it in the interests of rUK, if Scotland chooses a future outside it? If it is not, why should rUK comply with independent Scottish wishes – why is it in rUK’s interests to do so?  And, given the differences in interest in securing that outcome, how might an independent Scotland make it happen?

If there is a Yes vote, there will be a complex and messy set of negotiations between referendum day and independence day. Before those negotiations can start, and certainly before the Scottish Government can talk to any entity outside the United Kingdom, a paving bill permitting it to do so would need to be passed by Westminster. At the end, following those negotiations, both UK and Scottish Parliaments will need to approve the resulting deal. Not all the issues that need to be resolved between rUK and an independent Scotland (iScotland) will be resolved by independence day. Indeed, if the Czech-Slovak parallels are anything to go by (and that was a much simpler case), they will not be fully resolved for at least two decades. That does not mean Scotland cannot become ‘independent’, but that independence will indeed be a process not an event, with many issues falling to be resolved only months or years later. However, for an independent Scotland to start functioning as an independent state, some key top-order issues have to be resolved. Prominent among these are:

• the currency the new state will use, and who bears the risks associated with that
• the borders of the new state – particularly its maritime borders, which will affect oil and gas reserves unless a distinct arrangement is made for these.
• the arrangements for movement of persons between rUK and the new state, both at the border and more generally
• whether, when and on what terms the new state will be or become a member of the European Union
• the division of the UK’s current National Debt
• the division of other UK assets and liabilities – ranging from defence infrastructure to museum and gallery collections
• what happens to the existing UK nuclear bases on the Clyde
• if rUK is to continue to administer welfare and pensions payments in Scotland for some transitional period, the basis on which it will do so
• the means by which outstanding issues are resolved, and what happens if the parties cannot reach agreement by negotiation.

A good deal could be said (and has been) about the merits of each individual issue, and many others besides. (For example, how will benefits or pensions be paid to Scottish claimants or recipients the month after independence? If, as is proposed, rUK continues to provide that service to Scottish citizens, why should it do so?) But resolving each of them, and the relationship between them, which will shape the overall nature of an independent Scottish state, will largely depend on the negotiations with rUK. That is key to the ‘velvet divorce’ the Yes side has suggested would be part of independence. However, successful negotiations depend on each side being able to reach agreement, because each has something the other wants. So how likely is an independent Scotland to secure what it wants from those negotiations? What does it have that rUK would be likely to want? And what does an independent Scotland have that rUK wants?

The common response from the Yes side is to talk about a Scottish ‘mandate’ for independence.  But that is largely irrelevant here, at least on the rUK side. So is referring to Article 30 of the 2012 Edinburgh Agreement which has led to the referendum, and commits the two governments ‘to continue to work together constructively in the light of the outcome, whatever it is, in the best interests of the people of Scotland and of the rest of the United Kingdom.’ A mandate authorises the iScottish side to negotiate; Article 30 means holding negotiations about independence in good faith, and ensuring independence happens – not the terms on which it does so.

If the parties get to a negotiating table, the list of what iScotland has that rUK wants is short. One is continued membership of the United Kingdom – but that is lost if there is a Yes vote. The legitimacy of a UK including Scotland is ended, with no way back.  The obligations of the UK Government toward its citizens living in Scotland are not ended immediately, but they are attenuated, and as Scottish voters will no longer elect MPs, there is no political advantage in being helpful to them.  The act of having a mandate to negotiate means one key potential negotiating point is completely exhausted from the outset.  That card cannot be played again.

A second is that rUK would not want iScotland becoming a failed state. A failed state on the northern border would pose an unacceptable level of risk, in security and other terms. But even if an independent Scotland were significantly less prosperous, inclusive or happy than it is within the UK, that is a far cry from being a failed state. Indeed, the threshold of failing in the way that Afghanistan or Somalia failed is so high that it is almost impossible to imagine what would undermine iScotland so gravely as to make it a failed state. That is therefore not a strong negotiating point.

Third, there is Trident, while the UK/rUK remains committed to nuclear weapons. The thinking until now has been that the Clyde bases were crucial to that, and that might be a strong card. But it is a weaker card if there is a realistic prospect of relocating them elsewhere, as Hugh Chalmers and Malcolm Chalmers of RUSI have recently suggested. In any case, the commitment of the SNP and the wider pro-independence coalition to a Scotland free of nuclear weapons means the Scottish Government has little or no scope to make an offer to rUK for nuclear weapons bases – whether by lease, some sort of carve-out to mean they would not strictly speaking be on Scottish soil, or some other means. The pro-independence side has little room for manoeuvre here, given the commitments of its supporters. All that might be for discussion is the length of the ‘withdrawal period’, suggested in the Scottish Government’s independence white paper as four years (by the 2020 Scottish Parliament elections). There have been suggestions that this might be stretched (and Chalmers and Chalmers suggest removal before 2028 would be very difficult technically). However, any lease less than about 50 years is of limited value if rUK wishes to commission a successor to Trident based in Scotland – with a shorter arrangement, the bases would need to be moved mid-term at considerable cost and with operational implications. So that negotiating point is worth little too, even if rUK is determined to remain a top-tier nuclear power (and is worthless if rUK gives up on that aspiration).

As for other issues like a common travel zone, these are much more marginal to rUK – and much more important to iScotland. The desire to have an arrangement that minimises the border and its impact is much stronger for iScotland than rUK.

On the other hand, what does Scotland want or need? Its desire to ‘share the pound’ has been clearly ruled out by the UK Government. What is important for Scottish voters to realise is that a currency union transfers a disproportionate degree of risk to rUK. It is very hard for rUK politicians to justify taking on those risks for what would be another country. There might be a huge advantage to iScotland from a currency union – but what does it offer rUK? The convenience factor of lower transaction costs is of very limited importance for rUK and its citizens and businesses.  The January announcement means there will be no negotiation about this – but even if there were, what does iScotland have to offer to compensate rUK for the potentially huge risks it would incur?

Similarly, free movement across the border, a ‘social union’ or access to the BBC may have strong attractions for iScotland, but what do they offer rUK? An open border needs to be structured in such a way that it does not cause any security threat to rUK – which means at least some control over iScotland’s immigration policy. A key element to making an open border work would also be the nature of citizenship of UK citizens living in Scotland or with Scottish connections – something on which the white paper is strikingly silent. A further issue, given English concerns about immigration, it would also have to include limits on the rights of people immigrating to Scotland to move to rUK – so it would not be as open as the UK-Irish border is, or the UK is to people from other EU member states. Similarly, why should Scotland get access to the services of the BBC?  If it wishes to have the BBC (and the white paper makes a set of detailed criticisms of it), it will need to pay rUK for doing so – and why should rUK offer the full range of BBC services to Scottish listeners and viewers for less than those in rUK?  And Scottish residents would also have to fund the proposed Scottish Broadcasting Service as well.  Deals may be done, but on what terms?  The question in such cases is what does iScotland have to offer rUK for making a concession which matters a great deal to iScotland but just not very much to rUK?

The problem with all these issues is the asymmetry.  They simply matter much more to iScotland, and its citizens, than they do to rUK.  No amount of wishful thinking can change that.  Something has to be put into the balance to switch the way rUK calculates its benefit and disadvantage from making such concessions to iScotland.  This is aggravated by the way almost all ‘default options’ will be to rUK’s benefit and iScotland’s disbenefit.  By seceding from the UK, iScotland has to make a case to change the loss of much of what it presently enjoys through the UK which appeals to more than emotion.

One negotiating point iScotland would not have – or which can only be used at hugely disproportionate cost – is not taking a share of the UK’s current National Debt. There is scope for negotiations about the size of that share, how it is calculated and how it is offset against other UK assets. But threatening to repudiate a share of the UK National Debt – as various pro-independence hot-heads, and more recently John Swinney – have threatened is about as counter-productive as one can imagine. If iScotland acts unilaterally, it will make itself an international pariah. If it is able to borrow on the global markets at all, repudiation of debt will mean it incurs a very hefty premium on its interest rates. An ongoing dispute with rUK will impede or completely block negotiations about membership of the European Union, as well as international organisations like NATO. There will be sour, damaging relations with rUK for bilateral matters as well.

By contrast, rUK could be a valuable ally for iScotland in securing membership of such bodies as the EU and NATO. There would be three options for rUK; actively to assist and persuade, to remain impartial and do nothing, or actively to obstruct iScotland. It can be helpful, unhelpful, or sit on its hands.  Each of those positions would have a material impact – active assistance and a ‘velvet divorce’ would make iScotland’s passage to statehood hugely easier, active opposition would make it much harder (but without triggering the real threat to rUK of a failed state).

About the only card left for Scotland is to string out the negotiating process so that rUK makes concessions out of exhaustion and frustration.  But this would mean abandoning the May 2016 target for independence (problematic though that is in any case), souring relations with rUK, and undermining democracy in both rUK and iScotland.  If Scots want to be in a different state, that wish should be implemented as swiftly as practicable – not postponed to suit the convenience of the Scottish Government.

It may be a bitter truth for advocates of independence, but an independent Scotland would remain heavily dependent on rUK in a large number of ways. These ways are important for iScotland, but not particularly so for its much larger neighbour. To secure an advantageous ongoing arrangement, it has to be able to make convincing proposals to rUK that deliver things rUK wants or needs – and the list of those, once there has been a Yes vote, is small. The upsides of a velvet divorce for Scotland are huge, and the downsides of the opposite – a grinding-wheel divorce? – even larger. But once a divorce is happening, its nature simply does not matter much to rUK. If there are independence negotiations, iScotland will essentially be a supplicant to rUK, so weak that it largely has to accept what rUK offers.  Scottish voters need to bear that in mind when they head to the poll.