Scotland referendum 2014: the impact of independence on the UK economy

Analysis of the potential impact of a Yes vote in the Scottish independence referendum on the UK economy.

Part of a collection of articles produced by the House of Commons Library which explore the potential impact of a Yes vote on the UK, aiming to inform the debate from an impartial viewpoint.

Scotland makes up less than 10% of the UK economy

Following independence, the structure of the UK economy would remain very similar, but on a smaller scale

Current high levels of trade integration (Scotland is the rest of the UK’s second largest ‘export’ market) would probably be reduced following independence

Over the long-term this effect might be large, though the impact on the UK’s overall economic performance would be small

The impact on the UK’s labour market of Scottish independence is likely to be small

The Scottish economy is generally very similar to the UK economy, with comparable wage levels, labour market structure, living standards and productivity levels.

Economic output in Scotland accounts for less than 10% of the UK total, suggesting that given the similar structures of the two economies, if Scotland became independent the rest of the UK economy would look much like it does now, just on a smaller scale.

Some disruption to businesses trading with, or operating in, Scotland could be seen as a result of the ‘border effect’, as they dealt with additional administrative and transaction costs.

Scotland

The onshore Scottish economy (which excludes North Sea oil and gas) accounted for 7.7% of total UK economic output in 2012 according to the Office for National Statistics’ "Regional Gross Value Added" data.

Including North Sea oil and gas takes the share of the UK total up to 9.3%. This analysis assumes that 90% of North Sea oil and gas output would accrue to an independent Scotland (also referred to as its ‘geographic share’).

The exact share would be determined in the negotiations following a Yes vote.

Adjusting for population, Scotland’s onshore output per head – a measure of living standards – was 6% below that of the UK as a whole in 2012. Including a geographic share of North Sea oil and gas output to Scotland raises its output per head to about 11% above the UK average.

UK

The UK economy after Scottish independence would therefore be roughly 9% smaller than if Scotland remained part of the UK.

This would mean that the UK dropped from the 8th to the 9th largest economy in the world, with France moving up one place, according to data from the International Monetary Fund’s "World Economic Outlook".

Excluding Scotland, the rest of the UK’s output per head was 0.8% lower in 2012 than for the UK as a whole. So, assuming 90% of North Sea oil and gas output went to an independent Scotland, we could expect an immediate small decline in the UK’s output per capita.

Growth rates in Scotland are similar to that of the UK and economic cycles are also broadly in line, with periods of strong growth and recession occurring at about the same time (which is unsurprising considering the degree of integration between the economies).

This suggests that were Scotland to leave the UK, the UK’s growth rate would be much the same, although there might be some additional effects from independence not captured in this static analysis. For example, a strong Scottish economy would be good for UK exports, whilst a weak Scottish economy would probably reduce UK exports.

Excluding North Sea oil and gas, the industrial structure of the Scottish economy is very similar to that of the UK.

The proportion of output in the ‘mining and quarrying’, which includes oil and gas extraction, and ‘public administration, health and education’ sectors is a little higher in Scotland than in the UK, whilst the ‘information and communication’ and ‘finance and insurance’ sectors are proportionately larger in the UK than in Scotland.

Scottish economic structure

By including North Sea oil and gas output and giving Scotland a geographic share (90%), the structure of the Scottish economy changes, with over 20% of total output coming from the ‘mining and quarrying’ sector.

The services sector share of the Scottish economy falls to just over 60%.

Graph 1: Scotland, output by sector (2011) – includes 90% of North Sea oil and gas output

Graph 1: Scotland, output by sector (2011) – includes 90% of North Sea oil and gas output

(link to non-image version of graph 1)

 

UK economic structure without Scotland

On this basis for the UK excluding Scotland, the ‘mining and quarrying’ sector makes up less than 0.5% of total output, with the services sector accounting for 80%.

Were Scotland to become independent, the structure of the UK’s economy would probably not change very much apart from a decline in the importance of the oil and gas industry (which is small anyway).

Graph 2: UK, excluding Scotland, output by sector (2011)

Graph 2: UK, excluding Scotland, output by sector (2011)

(link to non-image version of graph 2)

 

At present, there are high levels of trade integration between Scotland and the rest of the UK. There are common regulations, unified tax and employment rules, and no border controls. This single market allows businesses to trade freely across all parts of the UK.

Evidence of the close ties can be seen in trade data. In 2012, Scottish ‘exports’ to the rest of the UK totalled £48 billion (around two-thirds of total exports), according to the Scottish Government Quarterly National Accounts for Scotland. ‘Exports’ from the rest of the UK to Scotland were worth around £60 billion, about 11% of the total.

This places Scotland as the second largest export destination for the rest of the UK, behind only the US (using data from the ONS assessment of UK Balance of Payments (PDF)). These figures exclude North Sea oil and gas.

UK-owned businesses in Scotland

There are an estimated 2,700 businesses located in Scotland that are ultimately owned in the rest of the UK, according to the Scottish Government’s "Businesses in Scotland". They employ around 340,000 people in Scotland and have a turnover of over £50 billion annually.

Scottish-owned businesses in the UK

The UK Government’s "Scotland analysis: Business and microeconomic framework" (PDF) has estimated that there are 1,000 Scottish-owned enterprises registered in the rest of the UK.

Diverging economies

How the trade relationship would alter between Scotland and the UK after independence would depend on a number of factors, most crucially whether Scotland would be a member of the EU and what currency an independent Scotland would use.

Assuming the least disruptive scenario for trade, of Scotland being part of the EU and joining the UK in a formal currency union, the so-called ‘border effect’ would still probably see weakening of trade integration in the long run.

Differences in regulations, tax rates and rules, and employment regulation, are some of the barriers to trade that might increase the administrative burden on firms operating in both markets.

The historically close business and cultural links will probably minimise the negative impact on trade in the short term.

However, academic evidence, such as the LSE report on costs of a border between an independent Scotland and the rest of the UK, points to the likelihood that these bonds will weaken over the passage of time as the two countries diverge.

The size of the rest of UK economy suggests that the overall negative impact on it will be small. Nevertheless, the UK Government’s "Scotland analysis: Macroeconomic and fiscal performance" (PDF) estimated that exports from the UK to an independent Scotland would be 77% lower 30 years after independence. This is compared to the scenario in which Scotland remained a part of the UK. It also estimated that this would reduce the real income of the rest of the UK by 0.2 percentage points over the same time period.

Scotland has a higher employment rate and lower unemployment rate than the UK, although the differences are not large.

Given Scotland’s relatively small size compared with the UK, the difference in these key labour market indicators between the UK as a whole and the UK excluding Scotland is virtually identical.

Graph 3: Key labour market statistics (January - March 2014)

Graph 3: Key labour market statistics (January - March 2014)

(link to non-image version of graph 3)

 

The industrial structure of the Scottish economy broadly matches that of the UK, with the main differences being that Scotland has a higher share of jobs in agriculture and mining and quarrying, and a slightly lower share of jobs in the service sector, according to the ONS "Labour Market Statistics".

The ONS "Annual Survey of Hours and Earnings" indicates that average earnings in Scotland are also very close to the average for the whole of the UK.

Productivity, a key factor in determining the long-term growth rate of an economy, is similar in Scotland and the UK. Output per hour worked in Scotland was 98% of the UK average in 2012, according to the ONS "Labour Productivity".

Impact on the UK

All of these indicators suggest that the UK labour market after Scottish independence would look much the same as it does now, only on a smaller scale.

For instance, there are currently 27.8 million people in employment in the UK excluding Scotland, with 2.6 million in Scotland.

The smaller size of the domestic market could make it more difficult for UK businesses to hire staff that match required skills levels, while fewer people with high skills in Scotland might seek to migrate and work in the UK.

The extent to which this is the case will depend on how impaired, if at all, labour mobility would be between Scotland and the rest of the UK. This, in turn, will depend on whether Scotland will be a Member State of the EU, and whether it will be part of the Common Travel Area (which reduces border checks on entering and leaving the UK).

A more difficult border crossing might also lead to a reduction in the number of people who regularly commute between England and Scotland, which was estimated to be around 30,000 people in 2011 (17,000 people living in England who work in Scotland and 13,000 from Scotland to England).

The following three graphs are the table versions of the illustrated images which exist higher up the page. The table format has been created to assist those who prefer non-image access to the data.

If you require further assistance or have feedback about accessing this information, please email papers@parliament.uk.

Graph 1: Scotland, output by sector (2011) – includes 90% of North Sea oil and gas output

Sector Proportion of total output
Agriculture 1%
Mining & quarrying 21%
Construction 6%
Manufacturing 9%
Services 61%

Source: ONS, Gross Value Added data

 

Graph 2: UK, excluding Scotland, output by sector (2011)

Sector Proportion of total output
Agriculture 1%
Mining & quarrying 0.4%
Construction 6%
Manufacturing 10%
Services 80%

Source: ONS, Gross Value Added data

 

Graph 3: Key labour market statistics (January - March 2014)

Geography Employment rate Unemployment rate Inactivity rate
Scotland 73.5% 6.4% 21.4%
UK 72.7% 6.8% 21.9%
UK excluding Scotland 72.5% 6.8% 22.0%

Source: ONS, Regional labour market statistics, May 2014

 

Article's author

  • Daniel Harari
  • House of Commons Library

Page published: 12 June 2014

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This article was written in advance of the referendum, looking at the possibility of a Yes vote.

It provides useful context but some details may be overtaken by potential developments following the vote. It is retained for historical interest.